DPM BH Holdings Limited (ADT) Earnings Call Transcript & Summary

Good morning, afternoon and evening again. Thanks very much for those who continue to join us for this presentation. And just a brief update on how the company is progressing with its build as well as an update on some of our exploration activities. We have been very busy, to say the least. So over the past several months, we've been working through procurement, engineering, design, working with our closing of the financing. But continuing to increase value through exploration, still working very, very cooperatively with government and our local community. And I'll update on a few things that we've achieved there. And again, still constantly communicating as best we can with our shareholders. Recently concluded a roadshow in Australia, where it's really clear that we need to get down there and spend more time explaining to our Australian shareholder base where we were at, having a forced absence of the COVID. So the Vares Silver Project, as you know, from our DFS that we published late last year, is a very positive economic project. DFS indicates the NPV is over $1 billion, with a great internal rate of return. Our initial capital cost of $168 million is largely unchanged. And we are progressing the project rather quickly through that development cycle. I think those of you who have been following this company since its first IPO on the ASX in 2018 probably recognize we like to do things rather quickly. And we are certainly all hands on at the moment on completing that construction on time. The project, obviously, very, very attractive economics where it sits in the cost curve. We don't see that changing. And in fact, I think there are opportunities that we've identified for improvements that we're implementing as part of our current detailed design that will also give us the opportunity to improve those economics as we move through commissioning and into production. Again, on an internal rate of return and capital efficiency curve, the Vares project stands out amongst its peers. And we will continue to look for opportunities to add more value, reduce our costs, look for increases in reserves that will provide further value to shareholders as we progress the project. I think where there has been a lot of investor interest is what is the upside to the Rupice deposit. As we announced last year, we have identified another area of mineralization to the northwest of the main ore body. We are continuing to drill that at the moment. We have 3 rigs currently on site. One is progressing on the Northwest; two, completing resource definition drilling to try and allow us to re-sequence the mine plan, to lower costs and also to increase mine life. We have a number of holes that are being completed this year on the northwest extension and on the main ore body and will be -- those are currently in the lab. And we'll be putting out results in the coming weeks to give shareholders a bit of an update as to where those are going. But ultimately, this will lead to an updated resource and reserve toward the end of the year. On our regional exploration, the team have been very busy doing a lot of survey work over this very large but very significant footprint that we have in and around Vares. We have appointed a new drilling contractor earlier this year. And the advance rates are substantially above what we were achieving last year. We're very pleased with that. We have a healthy exploration budget for 2022. And we are about to bring in another rig to help us advance our exploration, not only along the northwest and southeast extents of Rupice, but also Droskovac areas we referred to as SP1 and SP2. And ultimately, I think at [ Borovica ] and Blue, we will continue to look at drilling opportunities subject to more field mapping geochemical and geophysical results. The project is very much well supported in Bosnia. The government at both the municipal level, canton level and the federal level understand the impact that this will have on the Bosnian economy. Vares, as many of us know, is an old mining community. They've been -- Vares has been mining for over 100 years, and they're looking forward to seeing that recreated there. We've designed this project around integrating the community's aspirations with the project's operations. And I'm very pleased how our environmental and social team have put that together. We have sustainability at our core in everything that we do. And as a result of that, we are able to continue to gain and increase the support that we have from -- not only from our local community, but we're now starting to see that expand into other regions of Bosnia, particularly in the capital Sarajevo, where the company is continuing to be lauded for the work that it is doing. As I said, sustainability is at our core. We have established a sustainability committee at the Board level. We have done a very, very detailed environmental, social and health impact assessment, which is driving the way we're implementing the project. It helps guide us in a number of the decisions that we are making. But as you'll see in our annual report for 2022, we'll be publishing our first sustainability report, where you'll see the number of initiatives that we've done, how we are working on our decarbonization strategy, our net zero strategy, how we're continuing to integrate into our local community so that this project provides joint prosperity across both the community, and our shareholders and government. One of the key features of that has been the Adriatic Foundation. The Adriatic Foundation is now very active, offering scholarships. We've recently advertised for free English lessons. And we were stunned by the number of people that took up that offer to learn English in Vares. We've established a partnership with the health care provider to provide far better medical facilities to the people of Vares, whilst also providing medical facilities that we need from both a legislative perspective but also from a staff retention perspective to our staff who are operating that mine. The Vares Foundation is now working with other groups to look at co-investment opportunities. And we'll start to see the Adriatic Foundation make a huge and very positive impact to the Vares and Kakanj communities. As I said earlier, the project is developing very, very quickly. Where we've come from in May 2018 to where we are today has been rather rapid. We have completed a definitive feasibility study late last year. We announced our financing shortly after that. We've released our ESIA. We commenced construction on time in November. We completed the project financing in January. Our offtake agreements are signed, and we are now [ needy ] in construction of the mine. And in a couple of months, we'll commence the main parts of the construction of the plant itself, with the intent that we commence commissioning late in Q1 in 2023 and commercial production in Q2. Just to give you a few images of what Rupice now looks like. And for those of you who have been to the site will recognize the amount of effort that's probably gone into creating a lot of flat land to build these facilities. We have commenced the lower portal. So the lower portal is now complete ready for the declines to commence in the next days or week or so. We've -- I put a lot of the facilities that we need on site. There are Gen-sets there. We're working to connect the 35 kV transmission line, which will run the crushers when they are installed later this year. You can see from there the amount of work that's been done on the lower portal. We have dozens of people working on site at the moment, advancing that. And our mining contractor has mobilized. A lot of their equipment is now being moved to sites. They have about 56 staff, I believe on site at the moment, living in the town of Vares. And they will commence those declines on the lower decline and then on the upper decline over the next few weeks. That is all being divided into multiple phases. And you'll start to be able to follow the progress of those phases as we release more regular updates as to the progress we're making there. Here's an aerial view of the work that we've done to date. Again, you can see the significance of the operations to date. But over the next month or so, again, you'll see that change quite dramatically. We are getting very, very close to commencing mining operations. And we've got -- it is anticipated that by the end of the year, we'll have the first ore on pad ready to commence commissioning of the processing plant at Tisovci in February, March next year. One of our key achievements recently, I think, has been the opening of the Eurofarm health care facility in Vares. Vares is a town 5,000 people. It used to be 20,000. And that population has declined. And with that decline in population has been the decline in public services. The demographic of Vares is skewed toward retirees who often have to travel over 1.5 hours to see specialists. By working with Eurofarm and an Insurance company in Bosnia and Herzegovina, we've managed to very cost effectively open a new clinic where specialist care will be available, not only to our staff and their families, but also to the community at large. And last week, we did the opening of that facility. And it's the first of its kind in Bosnia, where 2 private companies and an insurance company have teamed up to resolve a public health issue, something we're very proud of. From an exploration standpoint, as I mentioned earlier, we are drilling at Rupice Northwest. We will also be drilling at Rupice Southeast. At the moment, we have 2 rigs doing in-fill and definition drilling in the main part of the ore body, but we're getting some pleasant surprises there as well. And you can expect that there will be an update through those exploration results as those results come back in from the lab in a couple of weeks. As we know in this part of the world, we're really restricted to one or two accessible labs for our size. There is quite a lot of demand on those labs at the moment due to a lot of work, particularly in Serbia. But come later in the year, we'll have our own site lab available to try and turn these things around much faster. So in terms of the project development timeline, we are still on track. We are still on track to commence commissioning in Q1 and complete commissioning in Q2, which means, based on the current mine plan and the amount of ore that we'll have at surface available in the stockpile, we should be able to complete our first shipments of concentrates at the end of Q2 next year. The company is well funded. We have not yet drawn down on our $142.5 million debt package from Orion. We look to draw that down in August or September this year. But at the moment, we're progressing things very successfully on our existing cash balances. The procurement team is managing that exceptionally well. And we're very pleased with the way we've been able to interface with our suppliers to ensure that both delivery times and costs have been kept under control. As I mentioned earlier, we haven't drawn down on our debt package yet. At current projections, we will draw down on our debt package in August or September this year. The first part of that is a $22.5 million copper stream and then followed by $120 million in senior secured debt, which can be drawn down in $30 million increments. We are in a very good position. We have been able to manage costs quite effectively. We've been always rather frugal in terms of our corporate costs and our working capital is being managed very effectively as well. So overall, we're in a good position. We don't see any need for additional funding at this stage. But we're continuing to monitor the situation with inflation very closely. We've seen over the past several months inflation surge. We've seen diesel prices in particular increased by nearly 100%. Steel prices are up over 60%. The team have been very clever in the way they've managed those risks. They've managed to remove as much steel from our plant design as possible and replace it with concrete. We've managed to secure our diesel suppliers. And we are -- we have made significant design changes and timing changes of cash going out the door to ensure that we can deliver this project on time and on budget. So in terms of where we are moving forward, really, we're looking to generate cash flow. That is our key strategy, bring the Vares project into production, get it operating to nameplate capacity, build substantial cash reserves, particularly in its early years of operation. We are actively looking at ways of extending the mine life of Vares. I can say that we will have been successfully doing that from both an exploration and an in-fill and resource definition drilling program. And there will be further details on that to be released in the coming weeks, but also a resource update later in the year. And we have recently expanded our business development team to look at assets that we may be able to acquire, use the skills that we've built within our team in Bosnia, and in the U.K. and Serbia to look at adding value to those assets very, very quickly in a short period of time. A lot of the work that we've done behind the scenes here in terms of training and development, HR management, health and safety and our sustainability approach could be ported to other projects across Europe. And I believe that Adriatic has built a strong platform for growth. And as we continue to generate that cash flow, we'll be in a great position to move on those potential acquisitions very, very quickly. The corporate structure is still largely intact. Our institutional shareholding continues to increase with a number of new shareholders that came in both through the capital raise but have been continuing to accumulate since that time. Share price performance and it has been impacted by global macro factors, including the war in Ukraine as well as the concerns over inflation. But I think as the project continues to get closer and closer to that commissioning date and we continue to demonstrate that we're able to deliver this despite those global factors on time and on budget, I expect that, that share price will increase closer to our expected NAV value, which will obviously change as commodity prices change. And I think most people are aware that we've seen a near 30% increase in zinc prices over the past 6 months. So what I might do now is just open the floor to some questions. I see that some questions have already come through, through the portal. But what I might do is address a few questions that have come through before the meeting.

The first one was, what additional mine life do you think is possible from the northwest extension of Rupice? Do you expect the grade to be similar? It's a bit early to try and predict what that mine life extension will be. But what we are seeing in terms of the geology and the densities is that the grade that we reported in our drilling results in late 2021, we are seeing largely again in 2022. And as I said, we will be putting out updates to those results when the [ SA ] results are received in a few weeks' time. The second question I've got here is, what is the cash burn rate like at the moment? And how protected is the project from a cost inflation standpoint? I have sort of commented on that in the presentation to a certain extent. The cash burn rate is obviously very high. We're in the middle of construction. However, as I mentioned, we don't need to draw down on our debt facilities until Q3. I think we're managing our cash balances very, very effectively, with possibly a little bit of help from some movements in exchange rates. But we are very confident in our ability to deliver the project within our current financing capacity, so our current cash balances and our Orion facility. The third question I've got here is, how is the progress on the application to extend the concession area, especially those extension northwest of Rupice? Once granted, how long will it take to get an exploration license on these new areas? So to extend a concession area, you need both municipal and cantonal approval as well as some approvals from various parts of the federal government. We have been working with Canton on that. The Northwest extension moves into a new municipality called Kakanj. We are actively engaged with the Kakanj municipality. Its council and its community leaders on what we're doing, we recently had a site visit for those counselors to the Rupice underground mine. And I think the feedback has been very, very positive. Our community and our permitting teams are actively engaged there. And we're receiving a lot of support from both the Canton and the federation to extend that concession. We don't need to cross into that concession anytime soon. We've still got a lot of drilling to do within the boundary of our existing concession. But we are very confident that, that will be granted. Once it is granted, there are a number of statutory periods where you've got to wait a little bit of time for public comment and review. However, the exploration license over that area can be issued relatively quickly. And I expect that to occur in Q3 this year. The fourth question I've got here is, what exploration work has been done on Rupice West to date? This is where actively drilling with Rupice Northwest, where we're actively drilling with one rig, and we'll be putting out results shortly. The fifth question is community support for the project is still very strong. Absolutely. We continue to engage with our local community through Public Liaison Committee. We have expanded our community team now to be spending a lot more time in the community. We've got a community development plan that's being rolled out, that's looking at opportunities for new businesses to be created from within the local community to support our project. And we've recently had a joint session with a number of financing companies that will assist local members of the community to start those businesses and to run them successfully. So I think the level of community engagement we've got here is second to none. And I'm very pleased with the way that has been run by our team, including [indiscernible] she's our Head of Sustainability, in terms of how we continue to integrate not just the Vares community but also into the Kakanj community. The sixth question here is, what will be the main driver of increasing stock price in the near term? That's probably happen when you buy more stock, which I'd obviously encourage you to do. I think, like most projects that go through that development phase, post financing, it gets a little bit soft. But as we get closer to production, as I think the risks of development and construction start to be passed, we'll start to see a more active appreciation of the share price. That's the natural Lassonde Curve. However, I think we are starting to see a number of institutions that are already building their positions, and I expect that will continue during the course of the year. So on to the Q&A. Sorry, just going to have to give me a moment to read these. The first question is, have you considered making some acquisitions in the Nordic countries? We're looking at a number of areas throughout Europe for potential acquisitions. Second question is, Sprott have been very positive about the project. Any idea why they've been selling down they're holding recently. Sprott Holdings tend to be across a number of different funds as well as their high net worth group in the U.S. Look, I think like everyone, people deploy their capital where they choose to. Sprott have been a very supportive shareholder and still are a significant shareholder. The next question is from Canaccord Genuity, their analyst, Paul Howard. You mentioned diesel cost escalation. What about freight and energy costs and their impacts? Energy costs in Bosnia have definitely increased. But the energy market in Bosnia is not well connected into the European network. And as such, the pricing adjustments that you've seen in other parts of Europe have yet to manifest themselves in Bosnia. So we've been quite fortunate in that regard. However, we are already looking at ways of implementing more renewable generation capacity that can augment what we draw from the existing grid. What long lead time items have been ordered? Well, we've ordered the crushers, the mills, the thickness, the flotation systems, filtration systems. So everything has been ordered. Yes, there has been a small increase in prices from when we accosted those during the DFS, but it's not significant. The third question from Paul is the relocation of the Railhead to further down the line and new change. What are the impacts on costs here? Yes, we have relocated the Railhead from Droskovac down to Vares Majden. There is no impact on costs associated with that. It is a slightly further drive. It's around an additional 400, 500 meters. But as you'd imagine, that's not a particularly long distance. It does mean there were some legal challenges with respect to a bankrupt company that owns some of the land at Droskovac. We felt that those overcoming those legal challenges would take time within the Bosnian bankruptcy court system, and therefore, we should look at an alternative. However, we're also keeping an open mind about Droskovac. And we'll continue to look at how that situation evolves over the coming months to determine whether we should be moving that facility back up to Droskovac. And the fourth question from Paul is, where are you with barite? Look, whilst we've seen some increases, particularly in Gulf of Mexico lump barite prices, we're obviously producing a fine-grained barite with specific characteristics. Those markets haven't really changed. Shipping costs have not yet stabilized. And as a result, we have still deferred the barite circuit. The third -- the next question is an update on Serbia. Now we have spent the winter consolidating our information in Serbia, doing an internal resource statement. And we are working on a scoping study at the moment. We also have a number of drill targets that we want to drill in the next couple of months on our new license at [indiscernible] which is south. But Serbia is still progressing, although you can imagine that our priority is very much Vares, and we don't want to extend a lot of capital currently into our Serbian operations until we are very comfortable with the delivery of the Vares project on time and on budget. The third question is from our old friend, [ Artem Simicov ]. It's not really a question. He just says we've done an excellent job, and I couldn't agree more [ Artem ]. Thank you very much. Another one from Paul Howard, Canaccord. What are the final approvals, big and small, required for you to start generating cash flow? Well, we need to obviously enter into the final agreements on the offtakes, the export from the port of Ploce, in Croatia, which is being finalized at the moment. In terms of government approvals, most of them are relatively small. So when we finish the detailed design of one part of the project, we submit that for review by the ministry. They typically come back within a week or 2. So there really aren't a lot of approvals still required. Another question is, what is your assessment of the risks from potential political instability in BiH? Look, I think what we are seeing is some malign influences, primarily out of Moscow in Bosnia, However, the Bosnian government and the Bosnian people are very much supportive of their transition into the European Union and their support of the Anglo-European alliance -- of the European-Atlantic alliance. So whilst I think you might see a little bit of fluff and big talk from one or two characters in Bosnia, I think the reality of the situation is the economy and the federation of Bosnia is booming. And that people are looking at that and going, you know what, we like what is happening here. We like what we're seeing from foreign investment. We like the increase in standards that, that brings. And I think you'll continue to see a lot of Western investment into Bosnia and Herzegovina, and that will rapidly change the geopolitical circumstances of the country. And the final question there is actually with regard to Rio Tinto's, Jadar project that was blocked by the Serbian government. Are there any risks that similar things could happen to ADT's projects? Well, firstly, I'd like to say that the Rio Tinto, Jadar project has not been blocked by the Serbian government. The Serbian government have basically asked Rio Tinto to delay the publication of the environmental and social impact assessment whilst further inquiries have made within the local community. I think sometimes, elections in this part of Europe can be quite vitriolic, where someone chooses a company or a group to use for political capital. And I think Rio Tinto were largely used as political capital. I -- ultimately, my personal belief is that Rio Tinto will be successful in developing the Jadar project. But we do not see similar things happening with ADT. Despite the fact that we have elections in Bosnia in October, we are seeing -- we are not seeing any politicians try to use ADT as a political football. I think the company's reputation in the country, its support from both the federation as well as international organizations like [ UBID ] have meant that we've been slightly protected from any attempts to use the company as a political football. So I think I've answered all of the questions there. Unless there are any other questions, I'd like to thank anyone for attending. We're very much appreciative of the support we received from our shareholders. And we look forward to keeping you all updated on our progress quite regularly over the next 12 months as we move through that very critical phase of construction and into production. Thank you very much.