Home » Drill Play » Adriatic Metals: Buying in the heat of the moment

Adriatic Metals (ADT.AX) burst onto the junior resource investor scene on June 11 with results from their first drill hole of 2018, which was an absolute barnburner. The hole, BR-2-18, returned 64m @ 4.6g/t Au, 537g/t Ag, 0.9% Cu, 7.7% Pb, 10.8% Zn, 46% BaSO4. Hard to digest the polymetallic hit, but this is about the equivalent of 64m @ 26g/t Au, which is just ridiculous. In any event, this is a spectacular drill hole, probably the best of the year.

 

PamplonaTrader (via Mineralised) brought the drill news to my attention. He explains his take on the technical details of the exploration program better than I could ever hope to. Check out his posts on HotCopper to read more on the project details.

Adriatic Metals Investor Presentation



Quick notes on the company/structure:

    • Rupice/Veovaca project in Bosnia
    • Drilled several holes at Rupice as a private company in 2017
    • IPO on April 26, 2018
    • Fully funded with $10MM cash in the bank from the IPO. This is significant as there are no warrants out and no need to raise funds any time soon. Sprott, Rosseau and the other whales will have to buy in the open market if they want in, just like the rest of us.
    • 4,250,000 options, exercise price $0.40, expiry July 2021
    • 750,000 options, exercise price $0.60, expiry July 2021
    • 13,500,000 total additional options with a 24 month escrow period


That’s enough background. The real reason of this post is to walk through the process and psychology of buying this stock as the story was unfolding.

I’ve been dabbling in the natural resource juniors space since Summer 2016. I haven’t been around long. I have been around long enough, however, to have witnessed a few golden opportunities that have sprung up. The first and most obvious is Ardea Resources (once again, PamplonaTrader put this on my radar). Ardea is a spinoff of Heron Resources’ nickel laterite/cobalt asset. He recommended the stock at IPO at about 20 cents. Ardea began trading with a fully diluted enterprise value (FDEV) of  just ~$10MM, and they already had a substantial resource. Ardea’s resource was roughly half the size of CleanTeq’s Sunrise project, which had a FDEV of ~$250MM at the time. Both projects were in a great jurisdiction in Australia. Ardea was massively undervalued against its peers any way you sliced it.

 

The gap was obvious. There was no good reason for this other than it used to be a non-core asset of a bloated company. The spinout of this asset and IPO of Ardea set the stage for the market to really examine this project and assign fair value for the first time. This was an absolute must buy, screaming deal slapping you in the face for anyone who was paying attention. Ardea went from $0.18 at IPO to an interim high of $0.92 in just 3 weeks, then went on to an all-time high of $2.20 nine months after IPO.

The investment case for Adriatic is at least as compelling as it was for Ardea. The trick is evaluating these things in real time – much easier said than done. PamplonaTrader posted the Adriatic drill results around 6 PM on a Monday night, about an hour after the Australian market opened. It was a long day at the office. There are a million things to consider when evaluating an exploration company – jurisdiction, management, share structure, grade smearing on drill results, history of the property, is it a scam, etc. etc.

Now, imagine you just read the news of this bonanza drill hole. You know absolutely nothing about this company. You’re watching the stock rocket up ~30%. I think most folks who have survived in this space have an instinct (and/or rule) to NEVER CHASE UP. The issue with this is there are rare circumstances where, for whatever reason, there’s a massive gap (many multiples) between current value and fair value for what the company actually has. This is the rare fat pitch we all hope for. You have to account for the fact that these things actually do exist and come along once in a blue moon. Incorporate it into your worldview as an investor/speculator/trader – you can’t be afraid to pull the trigger just because it’s popped 30%.

 

Adriatic stock closed around $0.26 (up ~30%) on the day of the drill result news. Well, here we are just three trading days later and the stock just closed at $0.41. In order to have jumped on this story from the get-go, you needed to:

  1. Digest the news quickly and quickly research the company and make sure it’s not a dogshit scam etc.
  2. Determine a rough fair valuation for the company
  3. Great, you realized it’s a screaming buy. Now you need to have Australian dollars in your trading account and the ability to buy a newly IPO’d Australian security.

Really not easy to do in real time, when life is happening. Luckily I (more or less) had these pieces in place and got my first tranche at $0.22. After reviewing a few company news releases and looking at the drill results, I immediately had flashbacks of the early days of Ardea, the morning of the Camino discovery hole, etc. I knew I’d be kicking myself if I didn’t just get my foot in the door with at least a small position right then and there. It was too great a hit and the FDEV was way too small. Simple as that. Even when it seems like an obvious buy on the surface, it’s darn difficult to plunk down cash on a company you just heard of for the first time an hour ago. Maybe I’m slightly reckless and that’s at least a small part of why I was able to buy that first tranche. That said, I’ve added to the position every day this week as I’ve continued due diligence and raised my level of conviction. I’m finished buying with an average cost basis of $0.30.

The train hasn’t completely left the station on Adriatic. Yes, it’s doubled since pre-drill results days, but the FDEV is still a paltry ~$50MM. Canadian stocks (think Aurion, GTT, Camino) have consistently run to $100MM++ FDEV on the initial move up, on much LESSER drill holes. Adriatic still has a long way to go to reach fair value for what they’ve currently got. The kicker is this could be an extremely profitable mine if they continue to hit intercepts even half as good as BR-2-18.

I’ve heard many people say the only reason they bother investing in this crappy junior space is because there’s so little analyst coverage, so few eyeballs on these tiny companies, and there are actually opportunities for retail investors to gain a competitive advantage.  Inefficient markets and all that.

Ardea and Adriatic are perfect examples of this.

You need to be ready to pull the trigger when a smoking deal is staring you in the face. It doesn’t happen on a weekend when you’ve got 48 hours to mull it over.



The above references an opinion and is for information purposes only.  It is not intended to be investment advice. As always, do your own research and due diligence and seek a licensed professional for investment advice. 

One thought on “Adriatic Metals: Buying in the heat of the moment

  1. Paul Cronin says:

    This company was created to make retail investors a good return. Most of the seed came from friends of mine who backed me when I came up with the crazy idea of buying a Bosnian mining concession. We welcome institutional investors obviously, but the founders of this company want to see the little guys get a good return too. Follow us on social media and subscribe to our mailing list for regular updates.

    I am about to list another company on the asx so watch this space. Just as good as Adriatic just a little more advanced in terms of development. We’ve been drilling earlier this year and results should be available soon. The company is called Black Dragon Gold. It’s listed on the TSXV but we raised 8.5m in Oz last year to repair the balance sheet and take it forward. It has a beautiful resource with easy growth potential and near term production. I like high grade and this is no different.

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