Directors' Report

Introduction

The Directors of Adriatic Metals PLC ("Adriatic" or "Company") present their interim report and condensed consolidated financial statements of the Group for the six months ended 30 June 2022 ("Period"). This interim financial report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report should be read in conjunction with the most recent annual report and accounts and announcements made by the Company, including details of the Vares Project ("the Project"), which can be found on the website www.adriaticmetals.com.

Business Review

Highlights of the six months ended 30 June 2022

Vares Project, Bosnia & Herzegovina

Vares Project construction activities update:

·      Contracting and mobilisation of the Mining Contractor

·      Upper Decline Portal complete

·      Lower Decline development commenced, with improving ground conditions and advance rates

·      Rupice access roads 65% complete, Section 1 of haul road, stockpile pad and paste & backfill pad under construction

·      Approximately 66% of capital expenditure awarded, pending award or quoted

·      Commencement of foundations at Vares processing plant

·      Potential life of mine increase from both Rupice Northwest exploration drilling and confirmation drilling

·      Staff count at 164 and growing. Contractor count at 158

Inflationary pressures under control, Project remains on time for concentrate production in Q2 2023.

The concession area package around the Project continues to expand with the addition of the Saski Do concession.

Exploration and Drilling results

Recent drilling at Rupice NorthWest ("Rupice NW"), an extension to the existing orebody, continues to intercept thick, high-grade, massive sulphide mineralisation up-dip from previous intersections.

The current exploration drilling campaign at Rupice NW was designed to confirm whether the high-grade mineralisation at the existing Rupice Mineral Resource ("Rupice") continues along strike to the northwest.

The Company announced drill results on 30 June 2022. The intercepts announced are assay results from three exploration holes out of five holes completed in the year to date.

The resource definition and in-fill drilling programmes are also progressing well which, when completed, will

lead to an updated Mineral Resource Estimate planned for Q4 2022. All three drill rigs will then be available to

focus on additional Rupice NW and other planned exploration targets within close proximity to the Rupice

orebody.

With the new drilling contractor delivering results with significantly improved advance rates, the Company plans

to complete approximately 22,000m of exploration and infill drilling by the end of the year, with a continued

focus on adding to the existing 10 years of mine life by systematically exploring around Rupice and the greater

Vares area.

Marketing

The Company has agreed heads of terms ("HoT") with four international commodities trading and smelting companies ("Offtakers") for the purchase of concentrate production from the Vares Project. Subject to final contract confirmations, the concentrates will be allocated to the Offtakers as follows:

·      Zinc concentrate to Boliden AB, Trafigura Pte Ltd, Transamine SA; and

·      Silver-lead concentrate to Glencore International AG and Transamine SA.

The Offtakers have been allocated 82% of the total projected concentrate production over the first 24 months. The remaining 18% of concentrate production has been intentionally reserved either for advantageous spot market sales or additional long-term offtake agreements to be agreed at a later date. This decision will be taken dependent on market terms closer to the commencement of production next year.

All four of the offtake contracts are under final drafting review with the Company's lawyers.

Raska Project, Serbia

The Company made payments totaling €500,000 and allotted 166,000 shares during the Period as deferred consideration payable for the acquisition of RAS Metals d.o.o., as previously announced by the Company on 23 February 2021. The final tranche of 166,000 shares under the agreement were allotted on 22 August 2022.

Financing Activities

On 10 January 2022, the Company advised that further to its project finance package announcement on 13 October 2021, definitive documentation for the $142.5 million debt financing package with Orion Resource Partners (UK) LLP ("Orion") had been executed. The terms of the Orion debt package have not changed since they were originally announced on 13 October 2021 and consist of:

      $120.0 million senior secured debt (the "Senior Secured Debt"); and

      $22.5 million copper stream (the "Copper Stream")

The Company is fully funded to production from the Vares Project, with first production expected in Q2 2023.

Appreciation of $ currency versus EUR during the Period has reduced EUR denominated construction costs in US$ terms and had a mitigating impact on inflationary pressures faced.

Corporate

Cash at 30 June 2022 of $83.4 million (31 December 2021 - $112.5 million).

Adriatic Foundation

The debt financing package includes a donation by Orion to the Adriatic Foundation of $100,000 per annum during the repayment period of the Senior Secured Debt. Tamesis Partners LLP has also contributed $10,000 of its fee to the Adriatic Foundation. The Adriatic Foundation was set up in June 2021 with the objective of supporting the communities around the Vares Project, through initiatives designed to create a positive long-term legacy, as well as alignment between the Company and the communities that the Foundation supports. The Foundation's initiatives are specifically focused on improving local education, healthcare and environmental protection.

Chairman's Statement

I am pleased to report that in the six months ended 30 June 2022 we have continued to make exceptional progress towards our main objective of delivering Europe's new source of strategic metals by building the world class Vares Project for the benefit of all our stakeholders.

Despite the unique obstacles we have faced in this current operating environment, we remain on track to finish construction on time, with a small increase in capital costs covered by our existing cash buffer. This success has been a credit to our growing team, which has worked hard and come up with creative solutions to meet our goals during a historically challenging time for our industry.

Key Milestones

Construction of the Vares Project has gathered momentum with rapid advancements in civil works at Rupice, commencement of the haul road construction, and the processing plant site being prepared for construction activities.  The early erection of the plant buildings over the coming months will allow the remaining construction and installation works for the process facilities to continue uninterrupted through the winter months.

The Company has continued to make a number of key appointments as it builds out the in-house technical capability for the construction and operation of the Project. The Group headcount continues to rise in line with operational activity and is currently tracking the Group's target of 25% female workforce.

The Company has also made a number of key external contractor appointments; Ausenco as the engineering and procurement contractor, Paterson & Cooke (UK) Ltd for the detailed design of the backfill plant and shotcrete plant at the Rupice surface infrastructure site and Çiftay İnşaat Taahhüt ve Ticaret A.Ş., as underground mining contractor, through its Bosnian entity Nova Mining & Construction d.o.o. ("Nova").

Important progress has been made with our concentrate marketing activities, agreeing heads of terms with Offtakers for the purchase of concentrate production from the Vares Project.

Our exploration team is making great progress, further delineating a new Rupice style zone of mineralisation to the northwest of the current orebody, which should add significant mine life to the project.

Corporate Developments

The Company appointed experienced mining executive Mike Norris as the Company´s Chief Financial Officer, with over 30 years of commercial and operational experience in the mining industry.

The Company will benefit from Sanela Karic's increased involvement providing legal expertise to the Group. Whilst providing these services, Ms. Karic can no longer be classified as an independent board member.

Wider Events

The global COVID-19 pandemic required us, like many of our peers, to continue to adapt our operational plans and maintain the strict safety protocols to protect our staff and our local community during the Period that were first implemented in 2020. Our operational productivity continues to be only minimally affected and the Company has been able to continue to deliver on its key milestones. Whilst there are still certain restrictions imposed on our activities by the crisis, we are confident of our ability to adapt to this dynamic situation and continue to deliver the Project on time.

The Company does not consider the conflict in Ukraine which began in February 2022 to have a significant impact on its operations. The conflict is still ongoing at the date of the annual report and management will continue to assess the impact to its operations and seek to mitigate accordingly.

Corporate Governance

The Board is committed to good corporate governance, including the Corporate Governance Code published by the Quoted Company Alliance, of which the Company is a member.  The Board continues to align the skills and experience of the Directors and management with the needs of the Vares Project as it advances toward production.

The rollout of the bespoke "Docebo Talent & Learning" programme continues, with staff completing induction, compliance, individual workspace-specific training, performance management, language assessment and other training. An increasing number of the training modules, including OH&S, are being conducted using Virtual Reality training.

On behalf of the Board, I would like to thank the management and employees for their ongoing determination and hard work, which has resulted in a tremendous number of positive achievements during the Period and we look forward to realising the results of these efforts on a number of these ongoing workstreams during the second half of 2022.

Operational Review

The Company's asset portfolio consists of two polymetallic projects in the Balkan region, which are both situated on the Tethyan Metalogenic Belt. The Company's flagship asset is the Vares Project in Bosnia and Herzegovina, which is currently in development phase. The other is the Raska Zinc-Silver Project in Serbia, which is an exploration project.

The Vares Project

The Company's flagship Vares Project is located approximately 50 km north of Sarajevo, in the municipality of Vares, Bosnia and Herzegovina.

Adriatic, through its wholly owned subsidiary Eastern Mining d.o.o., owns 100% of the Vares Project concession, an area which covers a total of 42km², along a mineralized strike length of 22km. The concession area includes an area between Veovaca and Rupice (Semizova Ponikva & Brezik), as well as an area to the south-east of Veovaca (Vares East) as shown in the diagram below. The concession area package around the Project continues to expand with the addition of the Saski Do concession added during the first quarter of 2022.

The new concession area layout for the Vares Project, including pending new concession applications, is shown below.

Vares Project Construction Activities update

Construction of the Vares Project has gathered momentum. Decline development commenced in June and daily advance rates are improving as the decline moves towards the orebody. Foundation preparation is near completion at the Vares processing plant and Section 1 of the Haul Road development has commenced. Long lead items delivery times have generally come in longer than those provided for within the 2021 DFS.  Nonetheless, first concentrate production is still anticipated at the end of Q2 2023.  While not immune to inflation, particularly of diesel, the Project expenditure to date is under budget. However, the final Project cost estimate is anticipated to be approximately $170m vs a 2021 DFS budget of $168.2m primarily as a result of the increased diesel costs associated with the remaining Rupice civil works and the Haul Road construction.

Definition/Confirmation drilling, targeting the first two years of scheduled production, is proceeding well with indications of a potential re-classification of inferred to indicated resources and the inclusion of previously undeclared additional mineralisation as additional inferred resources.

Key Contractors appointed

The Company has appointed Ausenco as the engineering and procurement contractor. Ausenco delivered both the Project Pre-Feasibility Study and the Definitive Feasibility Study.

Paterson & Cooke (UK) Ltd has been appointed for the detailed design of the backfill plant and shotcrete plant at the Rupice surface infrastructure site.

The Company also awarded the underground mining contract during the Period to Nova Mining & Construction d.o.o., a subsidiary of experienced Turkish mining company Çiftay İnşaat Taahhüt ve Ticaret A.Ş.

Backfill Engineering Testwork

Promising initial results from backfill engineering testwork indicate the opportunity to significantly increase the tailings content used in the backfill. Subject to final test results being successful, this will reduce both mining costs and the quantity of tailings deposited on the dry stack tailings storage facility, further minimising the environmental impact of the Project.

Detailed Design Work Targeting Cost Savings 

Modifications were made to the layout of the Rupice surface infrastructure site, reducing the volume of earthworks required by approximately 50% to 800,000m³. The redesign has both lowered the construction cost of the Rupice surface infrastructure site and improved the efficiency of ore haulage truck movements at the site.

Design of the lower decline access to the Rupice underground mine was modified to further improve the flexibility of ore haulage truck movements that will not only improve the cycle time of the ore haulage trucks, but also greatly improve operational flexibility underground.

Decline Development

During the second quarter, Nova mobilised to site as a locally incorporated operating company and started hiring, inducting and training local staff. In June development of the lower decline commenced. Initially operating on a single day shift, this has now increased to three shifts per day and is averaging 4m of advance per day. The ground conditions immediately following the portal were as expected, and ground support consisting of steel arch sets bolting, meshing and fibre-crete was required. However, as development has advanced away from the weathered, near surface ground, into more competent rock, advance rates have increased and the need for extensive ground support has decreased. It is anticipated that the current ground conditions will continue for the remainder of the decline development. After the end of June the upper decline portal construction was completed and in early August development of this second decline commenced.

Advancing the lower decline first, at 485m compared to the upper decline at 285m in length, allows for the two to reach the ore body simultaneously in late October. The initial development of the orebody footwall drives and the stope cross-cuts in ore will then prepare for the opening of the first stopes towards the end of Q1 2023, which will enable a sufficient stockpile to be established prior to the processing plant commissioning in Q2 2023.  Commissioning of the Rupice crushing facility is planned for late Q1 2023 in preparation for the supply of cement-aggregate-fill (CAF) for the initial support of the mined-out stopes. Thereafter, engineering studies completed in the Period have determined that, after production starts in Q2 2023, only paste-aggregate-fill (PAF) will be required for underground backfill.

Lower Decline Portal and Underground Development (July 2022)

Earthworks

The civil works at Rupice continue, making rapid advancement during the long, dry summer months. Internal access roads are 65% complete, with work now focussing on levelling the locations for the ROM stockpile, backfill plant and the remaining area of the upper portal pad, where the main mining operating services will be located. At the end of the Period there were 48 excavators as well as supporting trucks and ancillary plant equipment working on site.

Haul Road

Construction of Section 1 of the haul road, that is located within the exploitation area boundaries, commenced in June. The construction permit for the remainder of Section 1 has been submitted and approval is expected imminently.

Confirmation/Definition Drilling

The resource definition and in-fill drilling programmes continue to progress well, and once complete, all three drill rigs will then be available to focus on the Rupice NW area and other planned exploration targets within close proximity to the Rupice orebody.

With the new drilling contractor delivering results with significantly improved advance rates, the Company plans to complete approximately 22,000m of exploration and infill drilling by the end of the year, with a continued focus on adding to the existing 10 years of mine life by systematically exploring around Rupice and the greater Vares area.

Update on geo-metallurgical test-work

Continued test-work and analysis, using core from the area of the first planned two years of mine operation, further validates the assumptions made in the DFS; that there is one dominant geological domain at Rupice characterised as high barite with high Pb-Zn-Ag +/- Cu mineralization. This domain makes up the central zone of the resource and contains the majority of the high-grade mineralization. There are peripheral domains that have variable amounts of quartz and carbonate gangue minerals, presumed to represent less altered primary host rock mineralogy. These areas also have Pb-Zn-Ag +/- Cu mineralization, albeit with lower value metal content. The confirmation test-work has validated the robustness of the process flowsheet to handle the expected variability.

Vares processing plant

The Vares processing plant site is being prepared for construction activities. A contract has been executed with Grading KGM d.o.o. for construction of the plant buildings, with design commencing in July and site work commencing in August. The early erection of the plant buildings will allow the remaining construction and installation works for the process facilities to continue uninterrupted through the winter months. 

Long lead time orders

Key capital equipment items have been finalised and awards made, as shown in the table below.

Table: Long lead time delivery dates

Port and infrastructure

A site visit to the deep-water port of Ploce in Croatia took place during the Period.  The Company continues to assess the most practical areas within the port for its use, as well as the available infrastructure in place and any upgrades that may be required. Despite having experienced an increase in activity in comparison to the 2 previous years, the port of Ploce still operates at circa 50% capacity at both its bulk and container terminals. The bulk terminal is currently only used for coal and scrap steel exports. However, in recent history the wharf used to ship bulk cargoes of bauxite, iron ore, lead and zinc concentrates. Therefore, it is not expected that any major upgrades will be required.

The Company has modified its concentrate handling and shipping strategy as a result of advancing offtake discussions. The zinc concentrate will now be shipped in bulk, rather than in lined containers.  The silver-lead concentrate will continue to be shipped in containers. Discussions are ongoing with major global shipping companies regarding the shipment of concentrate in both container and bulk to a number of European and Asian destinations.

Engineering studies on the Vares railhead have been completed by Saraj Engineering of Bosnia & Herzegovina. The site of the Vares railhead had been moved from central Vares to a new location, 1.8 km south in Vares Majden. The new site has a similar capacity to the former site with temporary storage for up to 100 containers, which is approximately 3 full train loads.  The Company continues to coordinate with the railway company of the Federation of Bosnia and Herzegovina.

Exploration, confirmation and definition drilling at Rupice

Drilling performance has improved since the appointment of Drillex, the new drilling contractor, as announced on 28 February 2022.

Recent drilling at Rupice NW, an extension to the existing orebody, continues to intercept thick, high-grade, massive sulphide mineralisation up-dip from previous intersections.

The current exploration drilling campaign at Rupice NW was designed to confirm whether the high-grade mineralisation at the existing Rupice Mineral Resource ("Rupice") continues along strike to the northwest. The intercepts announced on 30 June are assay results from three exploration holes out of five holes completed in the year to date (assays pending).

Plan view map of Rupice and location of recent drilling activity

Drillholes BR-01-22, BR-02-22 and BR-03-22, located 90 metres northwest of the existing Rupice Mineral Resource and drilled up-dip of previously reported holes BR-16-21 (7.1m @ 1,123g/t AgEq) and BR-19-21 (15.8m @ 508g/t AgEq), intercepted:

·      BR-03-22 - 30.9 metres at 851g/t AgEq, 27.4% ZnEq (233g/t Ag, 9.0% Zn, 6.1% Pb, 1.3g/t Au, 0.5% Cu, 67% BaSO4 & 0.1% Sb) from 239.5 metres

o  Including 23.5 metres at 993g/t AgEq, 31.9% ZnEq (269g/t Ag, 11.0% Zn, 7.3% Pb, 1.6g/t Au, 0.6% Cu, 68% BaSO4 & 0.1% Sb) from 245.0 metres

·      BR-01-22 - 24.5 metres at 794g/t AgEq, 25.5% ZnEq (343g/t Ag, 5.5% Zn, 3.7% Pb, 1.4g/t Au, 0.2% Cu, 75% BaSO₄, 0.1% Sb) from 250.5 metres

o  Including 17.5 metres at 915g/t AgEq, 29.4% ZnEq (386g/t Ag, 6.8% Zn, 4.4% Pb, 1.7g/t Au, 0.3% Cu, 77% BaSO4 & 0.1% Sb) from 256.0 metres

·      BR-02-22 - 23.0 metres at 831g/t AgEq, 26.7% ZnEq (281g/t Ag, 8.1% Zn, 5.7% Pb, 1.3g/t Au, 0.8% Cu, 38% BaSO₄, 0.1% Sb) from 229.5 metres

o  Including 15.6 metres at 1,176g/t AgEq, 37.8% ZnEq (408g/t Ag, 11.5% Zn, 8.2% Pb, 1.8g/t Au, 1.1% Cu, 52% BaSO4 & 0.1% Sb) from 233.5 metres

·      BR-01-22 - 7.9 metres at 851g/t AgEq, 27.4% ZnEq (380g/t Ag, 2.9% Zn, 5.5% Pb, 1.5g/t Au, 0.6% Cu, 77% BaSO4 & 0.4% Sb) from 141.4 metres

o  Including 5.0 metres at 1,127g/t AgEq, 36.2% ZnEq (546g/t Ag, 4.4% Zn, 7.0% Pb, 1.9g/t Au, 0.8% Cu, 76% BaSO4 & 0.5% Sb) from 144.0 metres

Cross-section (A-A') through BR-01-22, BR-02-22 and BR-03-22

A further 7,500m of exploration step-out drilling at Rupice NW is scheduled in the remainder of the year, ahead of a planned Mineral Resource Estimate update in Q4 2022.

Health and safety

In parallel with the advances in construction activities the Company has made a number of health and safety appointments and implemented several new initiatives as part of developing its health and safety framework. These include new reporting requirements for contractors, including onboarding of Nova, formal safety walks around construction areas, and increased focus on emergency management with First Aid facilities and ambulance mobilising at Rupice.

In addition, the Company held an inaugural contractor forum. Regular forums will take place with a focus on tackling key issues collaboratively and emphasizing use of innovation and technology to tackle material risks.

Key risks currently being addressed through training, hazard identification and near miss reporting, and improved procedures include vehicle incidents and materials handling.

Sustainability

The Company considers sustainability as a top priority for its activities, including the principles of ESG.  Full details will be covered in the Company inaugural 2022 Sustainability Report which will be released next year. 

Community Development Plan

In consultation with the Mayor of Vares, the Company's focus is on developing a Sustainable Community Development Plan, as part of its commitment to community development and to define the way this commitment will be pursued.

In order to attract funding for the development of small and medium sized enterprises in the region, during the Period an open day for potential donors was organised in Vares by Eastern Mining and the European Bank for Reconstruction and Development. The event was attended by representatives of the following organizations: UNDP, USAID, GIZ, SECO, Mozaik Foundation, microfinance organisations, as well as ESG representatives from Raiffeisen, UniCredit and Sparkasse banks.

Alfa Energy Contract

The Company has signed a contract with Alfa Energy, a UK based energy and sustainability consultancy. Alfa Energy will advise the Company on the development of a Sustainability Framework and Strategy encompassing its emissions reporting for both Scope 1 and Scope 2, as well as its future Net Zero Strategy, Climate Change Strategy, Physical and Transition Risk Management Strategy, and supply chain configuration and optimization.

Opening of New Healthcare Facility in Vares

Eastern Mining has made an agreement with Eurofarm d.o.o., a Bosnia based healthcare company, to provide private medical services for all its staff and family members. As a result, Eurofarm recently opened the first private healthcare facility in Vares. The new facility also be open to local residents and will complement the existing primary healthcare facilities in Vares.  The new facility was opened by Paul Cronin, CEO of Adriatic Metals and Zdarko Marosevic, the Mayor of Vares.

Commitments from ESIA in Local Recruitment

By the end of May, the Company's underground mining contractor, Nova, had mobilised 54 personnel to Vares as part of the initial mobilisation for the development of the declines, the first phase of mining. The second phase of mining is the development of the declines and principal infrastructure, and by the start of the third phase of mining, the ramp up to full production, the total headcount of mining contractor personnel is expected to increase to approximately 220. In line with the commitments made in the Company's Environmental, Social Impact Assessment ("ESIA") for contractors and subcontractors, Nova is obligated to recruit the majority of its staff from within the local area.

Adriatic Foundation and Community Resource Centre

To date over 200 applications for free English lessons have been received under an initiative funded by the Adriatic Foundation which started in June 2022 in the Vares High School, until a Community Resource Centre is established in central Vares.  The Community Resource Centre will be a space open to all members of the community and will be equipped with computers and free wifi. It will be a repurposed and refurbished building with works being managed by local contractor JKP Vares d.o.o., which will be donating its services, as well as the fixtures, fittings and furniture.

Community engagement

The Company hosted a site visit to Rupice for councillors of both the Vares and Kakanj Municipalities to enhance their understanding of the Project. The Company currently had pending applications for the extension of the Project's concession areas within both municipalities.

The Company hosted a visit by geology students from the Zagreb Institute in Croatia and students in Environmental Engineering and Health and Safety at the Tuzla University in Bosnia.

Meetings have been held with residents of local communities Vukanovići (Kakanj), Borovica, Pogar, Osredak, Mir, Stupni Do, Bijelo Borje, Pržići and Daštansko. 

Meetings were also held with representatives of the Employment Bureau and the Mayor of Vareš Municipality regarding cooperation for the "Community Development Initiative" event. Both institutions give support for the sustainable development of the community. 

The Raska Project

The Raska Project in Serbia was attained through the acquisition of Tethyan Resources Corp, which was completed in October 2020. Tethyan had been exploring a highly prospective 130km² land package in Southern Serbia, which contains two historic lead-zinc open pit mining operations called Sastavci and Kizevak. These prospects, like those in the Vares Project sit on the polymetallic Tethyan metallogenic belt, which hosts a number of tier 1 deposits and considerable exploration investment. The two deposits are within 3km of one another and are close to surface, and therefore have further open-pit potential.

Extensive drilling has been completed by the Company in previous years at both Sastavci and Kizevak in order to both confirm historical activity and to step out further to identify additional mineralization. This drilling indicates significant potential for an economically viable operation by mining at both locations simultaneously with a common processing facility. However, given the prospectivity of the Company's increased land package in Raska (with the recent addition of the Kaznovice licence), exploration works in the period have focused on other previously identified anomalies and areas of historic exploration to enable the Company to develop a better understanding of the full regional potential as well as that around the historic open-pit mines. In the increased land package there are additionally a number of copper porphyry targets, which, whilst not the Company's priority at the moment, form part of the longer term strategy for the Project.

Ten thousand metres (10,000m) of ongoing exploration drilling is scheduled for the year, alongside the continued wider area mapping, soil and stream sampling campaigns. Concurrently the Company is advancing its internal feasibility study of the Project, which is currently focused on the resources centered around the historic Sastavci and Kizevak pits. Given the wider area potential the Company's strategy is to develop a detailed understanding of the Project's full potential ahead of a maiden resource statement and formal scoping study.

The Company holds five exploration licences, which in total cover an area of some 130km². All licences are in good standing and in the Period the Company successfully passed a technical audit by the Serbian authorities. The Project team consists of approximately 25 staff, including a dedicated permitting manager, land access manager and the staff at the Project's information centre in Raska town.

Financial Review

The Group made an operating loss of $4,943,792 for the six months ended 30 June 2022 ("Period") compared with an operating loss of $6,328,334 in the comparative prior six months ended 30 June 2021 ("Prior Period").

The reduction in the operating loss in the Period arose primarily as a result of a lower share based payment expense of $305,321 in the Period compared with $1,372,116 in the Prior Period which included non-executive options that vested immediately on the date of grant.

As the Vares Project is in the pre-production phase and the Raska Project is in the exploration and evaluation phase, this financial review is focused on expenditure and balance sheet movements during the Period.

Income Statement Review

General and administrative expenses

General and administrative costs incurred in the year were $4,194,671 (Prior Period: $3,185,079), higher due to increased headcount as Vares Project entered the construction phase.  Wages and salaries and consultancy fees in the Period were $2,233,374, an increase compared to Prior Period ($1,740,118).

Share-based payment expenses of $305,321 (Prior Period: $1,372,116) reflected lower value of share options vesting in the Period compared with the Prior Period.

Amortisation in the Period of $146,468 increased compared to the Prior Period ($43,484) due to equipment delivered as part of the mining services contract as well as several lease agreements for administrative buildings entered into in Bosnia & Herzegovina and Serbia.

Professional fees in the year of $528,734 increased compared to the Prior Period ($325,912), notably due to recruitment fees incurred during the year. Stock exchange fees of $116,638 (Prior Period: $106,973) were broadly equivalent compared to the Prior Period.

Exploration costs

The Group incurred $446,033 of exploration costs in the Period relating to pre-JORC resource stage exploration activities in Serbia (Prior Period: $1,850,759).

Finance costs

The finance expense in the Period was $5,538,696 (Prior Period: $1,570,359), increasing primarily as a result of foreign exchange losses in the year of $4,591,609 (Prior Period: $700,889) predominately from revaluation of cash holdings in Euro depreciating versus the US Dollar. QRC interest expense $850,012 was broadly consistent with Prior Period of $850,000.

Revaluation of derivatives, fair value assets and liabilities

The Group issued $20 million 8.5% convertible bonds to Queens Road Capital on 30 November 2020 which may be converted into equity securities of the Company at the option of the bondholder at any time up until 30 November 2024. The conversion feature of the bonds has been accounted for as a derivative liability. The Black Scholes model was chosen as the most appropriate pricing model to value the Company call options, and the valuation was updated as at 30 June 2022, resulting in a $1,510,000 gain in the Period (Prior Period: $3,363,820 gain).

On 23 February 2021, the Company completed the acquisition of the entire issued share capital of Ras Metals d.o.o., making payment of €1,365k to the sellers and issuing the first 166,000 shares. Subsequently the second and third tranches of 166,000 shares each were issued in line with the agreement as well as payment of €0.5m made, reducing the deferred consideration balance further.. The remaining deferred consideration was estimated as at the balance sheet date resulting in a $156,439 revaluation gain through profit and loss in the Period (Prior Period: Nil)

Cash Flow and Balance Sheet Review

Cash Flow

Net cash used in operating activities during the Period was $11,149,517 compared to $7,202,337 in the Prior Period.

Investing activities included cash outflows for the purchase of property plant and equipment during the Period of $12,384,151, reflecting the ramp up in activities related to construction on the Vares Project. Cash outflows for investing activities of $5,155,568 in the Prior Period mainly comprised $4,942,076 purchase of exploration & evaluation assets.

Net cash outflows from financing activities during the Period were $1,845,307 (Prior Period: $291,937). This included:

·      Settlement of deferred consideration in relation to the acquisition of Ras Metals d.o.o. of $525,786 (Prior Period: $1,635,238).

·      Outflows of $850,000 relating to interest paid on loans and borrowings (Prior Period: $991,667).

·      Transaction costs arising from financing activities in the Period of $46,125(Prior Period $121,783).

·      Proceeds from the exercise of options and performance rights in the year of $2,538 in the Period, a reduction compared to inflows of $2,509,768 in the Prior Period.

·      Capital and interest payments in respect of leases in the Period of $425,935 (Prior Period $53,015), increasing as a result of mining equipment delivered by 30 June 2022 under a five year mining services contract with Nova Mining & Construction d.o.o.

Exchange losses of $3,691,238 (Prior Period gain $1,047,729) arising from revaluation of cash held in Euros and other currencies due to movement in exchange rate versus the US Dollar.

Working capital

The Group's working capital position at 30 June 2022 was $87,899,060 a decrease of $22,508,176 compared to Prior Period, primarily as a result of outflows cash used in operating and investing activities.

Net cash position

The cash balance at 30 June 2022 was $83,436,255, a decrease of $29,070,213 compared to 31 December 2021.

Combined short term and long-term borrowings at 31 December 2022 totaled $17,063,501 (31 December 2021: $18,573,489) which relates to the issue of $20 million in convertible debentures to Queens Road Capital in December 2020.

The net cash position (cash and equivalents minus long and short-term borrowings) at 30 June 2022 was $66,372,754, a decrease of $27,560,225 compared to 31 December 2021, primarily as a result of operating expenditure and capital expenditure as noted in the cash flow commentary.

Non-current assets

Exploration and evaluation asset recognised in respect of the Vares Project were transferred to Mine under Construction at the completion of the Feasibility Study during August 2021. Total non-current assets (excluding right of use assets) increased to $75,281,023 at 30 June 2022 (31 December 2021: $61,779,483) primarily due to the ongoing construction stage of the Vares Project.

Vares Project Funding Developments

During the Period, the Company completed the $244.5 million project finance package which provides the Group with sufficient funding through the production at the Vares Project. The package consists of:

−     $142.5 million project finance debt package from Orion Resource Partners, comprising $120 million in senior secured debt, and a $22.5 million copper stream; and

−     An equity raise of $102 million, which included a $50 million subscription from Orion Resource Partners, by issuing 49.4 million new ordinary shares in total.

The Company had a cash balance at 30 June 2022 of $83.4 million and, subject to satisfaction of customary conditions precedent to financial close, an undrawn debt facility of $142.5 million.

Chief Financial Officer

Principal risks and uncertainties

The principal risks that the Group considers could have the most serious adverse effect on its performance and reputation during the second half of the year are set out below, as well as the risk management and internal controls designed to manage risk.

Risk management and internal controls

The Board is responsible for putting in place a system to manage risk and implement internal controls in order to safeguard shareholders' interests and the Company's assets. In conjunction with the Audit & Risk Committee it is responsible for the regular review of the effectiveness of the systems of internal control, which are designed to manage risk rather than eliminate it. The Board has considered mechanisms by which the business and financial risks facing the Group are managed and reported to the Board. The principal business and financial risks have been identified and control procedures implemented. The Board acknowledges it has the responsibility for reviewing the effectiveness of the systems that are in place to manage risk.

The Board has delegated certain authorities of risk management to the Audit & Risk Committee, which has its own formal terms of reference. The Audit & Risk Committee meets at least twice a year to consider presentations by the Auditor and drafts of the Annual and Interim Financial Statements, and to assess the effectiveness of the Group's system of internal controls. The Audit & Risk Committee is chaired by Sandra Bates who has recent and relevant financial and business experience. All of the members of the Committee are Non-Executive.

The Audit & Risk Committee is responsible, inter alia, for:

−     Reviewing the Company's risk management framework at least annually in order to satisfy itself that the framework continues to be sound and to determine whether there have been any changes in the material business risks the Company faces

−     Ensuring that the material business risks do not exceed the risk appetite determined by the Board; and

−     Overseeing the Company's risk management systems, practices and procedures to ensure effective risk identification and management, and compliance with internal guidelines and external requirements.

Vares Project development risks

The principal risks relating to the development of the Vares Project, which are not uncommon for new mining projects during their ‎construction, are as follows: ‎

·    unforeseen escalation in anticipated costs of development including adverse currency movements;

·    longer than expected delivery times for key equipment and other delays to construction, including the impact of supply chain fragility resulting from the COVID-19 pandemic and/or the geopolitical tensions between Europe and Russia;

·    adverse ground conditions and slow advance rates during the development of the upper and lower declines;

·    haul road land acquisition process becomes protracted;

·    difficulties experienced by the state rail operator of Bosnia and Herzegovina in preparing the railway line for the movement and storage of concentrates from the Vares Railhead to the port of Ploce;

·    adverse developments regarding the infrastructure required at the deep-water port of Ploce in Croatia required for shipping of concentrates to smelters;

·    non-performance by third party consultants and contractors;

·    civil unrest in or around the mine site, processing plant and supply routes; ‎and

·    failure to satisfy the conditions precedent required to draw down on the Orion project financing.

Despite the challenges posed by global macroeconomic conditions, the team has continued to progress the Vares Project to schedule. Elevated diesel prices have caused some project cost variances, but these have been largely offset by design and construction changes where cost saving opportunities were identified by the Project team. Project costs have benefited from the weaker Bosnian Mark and Euro which means local costs are lower in dollar terms, providing a natural hedge against cost pressures. The large majority of capital expenditure is awarded, pending award or recently quoted and the Company therefore sees no reason that the project cannot be delivered on time, and a relatively small increase in construction costs can be funded out of existing treasury.

During the first half of the year the Company did not experience any material disruption to the development due to COVID-19 and does not expect any to occur during the second half.  The Company continues to monitor the situation in Ukraine and the associated energy crisis that is impacting energy costs.  

The ground conditions at the start of the declines were as expected, and support consisting of steel arch sets, bolting, meshing and fibre-crete were required. However, as the mining has advanced away from the weathered, near surface ground into more competent rock, advance rates have increased and the need for such extensive ground support has decreased. It is anticipated that the current ground conditions will continue for the remainder of the decline development.

Following the guidance of EBRD's Performance Requirement 5, the Company commissioned an internationally renowned consultant to assist in drafting its Land Acquisition Resettlement and Compensation Policy. Following this policy and after independent valuation of the private land required for Rupice surface infrastructure, negotiations with private landowners are proceeding well and the majority have already indicated their intention to sell their plots to the Company. No resettlement has been required for the Vares Project, and it is not foreseen that any future resettlement will be required.

A site visit to the deep-water port of Ploce in Croatia took place in the period and in the second half the Company will seek to confirm the most practical areas within the port, as well as evaluate the available infrastructure in place and any upgrades that may be required.  Despite an increase in activity in comparison to the two previous years, the port still operates at about 50% capacity at both its bulk and container terminals. The bulk terminal is currently only used for coal and scrap steel exports. However, in recent history the wharf used to ship bulk cargoes of bauxite, iron ore, lead and zinc concentrates. Therefore, it is not expected that any major upgrades will be required.

The Company continues to work with internationally experienced technical consultants to deliver on its development plan for the Project and to mitigate development risks where possible through the use of industry best practice and the recruitment of capable, experienced staff and contractors.

During the Period, the Company worked on the preparation of the documentation required to satisfy the conditions precedent for the Orion project financing. The Company remains confident of satisfying all conditions precedent during the second half year, enabling it to drawn down on the facility when required.

Exploration

A further 7,500m of exploration step-out drilling at Rupice NW is scheduled in the remainder of the year, ahead of a planned Mineral Resource Estimate update.  Although drilling performance has improved since the appointment of the new drilling contractor, Drillex, a deterioration in drilling conditions or performance in the second half of the year could result in these targets not being achieved in the timeframe anticipated.

Health and Safety

The Group is subject to a variety of health and safety laws and regulations dealing with occupational health and safety. The Company strives to conduct its activities in compliance with all applicable laws and internationally recognised mining safety standards with the objective of zero harm operations. During the first half of the year it has made a number of health and safety appointments and implemented several new initiatives as part of developing its health and safety framework. However, there can be no assurances that these standards and any measures taken by the Company will be successful in preventing accidents and injuries or violations of health and safety laws and regulations, some of which may be beyond the Company's control.

Any failure to maintain safe worksites or any serious health and safety incident could expose the Company to reputational damage and significant financial losses as well as civil and criminal liabilities or loss of rights to operate, any of which could have a material adverse effect on the Company's business, financial condition, results of operations and prospects.

Environmental

The Company's activities are subject to the environmental laws inherent in the mining industry and ‎those specific to Bosnia & Herzegovina and Serbia. The Company intends to conduct its activities in an ‎environmentally responsible manner and in compliance with all applicable laws, as well as the requirements set out in the Company's Project Support Agreement with the European Bank for Reconstruction and Development. However, there can be no assurance that the systems and procedures implemented by the Company will be adequate to manage the environmental impact of its activities, and the ‎Company may be the subject of environmental accidents or unforeseen circumstances that could subject it to extensive liability and damage to its reputation.‎

Concentrate offtake agreements

Terms have been negotiated with offtakers for the sales of concentrates that will be produced in the future from the Vares Project, and final contracts are being prepared. Nonetheless there remains a small risk that changes in the commercial terms ultimately entered into by the Company with offtakers could arise prior to the Company entering into binding offtake agreements and there can be no assurance that the Company will be able to secure binding offtake agreements in a timely manner, on the negotiated terms or on ‎otherwise commercially acceptable terms. These factors could have a detrimental impact on future cash flows generated by the Vares Project and on the Company's business, results of operations and activities, ‎financial condition and prospects.‎

Community/NGO concerns affecting the Company's activities

The Company continues to maintain an active, two-way dialogue with the communities surrounding the Project with the aim of mitigating the risk of potential opposition from environmental groups, local residents or others. This is primarily achieved through three channels: The Public Liaison Committee ("PLC"), the Vares Project Information Centre as well as the many staff that the Company employs from its local communities. The PLC consists of 30 members, was set up in July 2020 and meets on a quarterly basis. The Information Centre is a staffed location, open to the public, located centrally in the town of Vares and has been open since September 2019.

The community of Vares, government stakeholders and the wider audience in Bosnia & Herzegovina remain supportive of the Project. In the second half of the year, as the Project moves towards the end of construction, the Company is very conscious of its requirements to honour commitments made to date, most pressingly levels of employment and opportunity afforded to residents of the near-mine communities. A significant proportion of the Company's staff it employs is  from the local communities of Vares, Breza and Kakanj. Another priority is the importance of carefully managing the contractors and sub-contractors engaged to build the Project to ensure that they also adhere to the highest standards of environmental, social and safety practices, and to rectify any issues arising through sincere and transparent communication and committed, prompt action. These efforts will continue during the second half of the year, in order to mitigate the risk posed by community or NGO concerns. The Company seeks to mitigate these risks through effective engagement with relevant stakeholders including all levels of government and local communities.

Land acquisition

Following the guidance of EBRD's Performance Requirement 5, the Company commissioned an internationally renowned consultant to assist in drafting its Land Acquisition Resettlement and Compensation Policy. Following this policy and after independent valuation of the private land required for the haul road, negotiations with private landowners are proceeding well and the majority have already indicated their intention to sell their plots to the Company.

Political instability and civil unrest

The Company acknowledges the potential impact of political instability and civil unrest in or around the Vares mine site, processing plant or its supply routes, or at its Raska Project, on its ability to advance the projects during the second half of the year. To mitigate this risk the Company closely monitors the national political situation and carefully considers every engagement with politicians (at all levels, including internationally) with each meeting minuted in detail.

In Q4 2021, the political leader of Republika Srpska ("RS"), one of the constituent entities that form Bosnia & Herzegovina, started publicising secessionist rhetoric, which received national and international attention. RS subsequently withdrew temporarily from many of the federal institutions. Since then, however, the situation has calmed, with RS returning to the federal institutions and an increased commitment on the part of the international community towards political and economic stability, most notably the European Union, United Kingdom and the United States of America ahead of general elections which are scheduled to be held in October 2022 in Bosnia & Herzegovina.

National elections in Bosnia are scheduled in October and although the country does not expect significant change in the political landscape after the elections, there is likely to be an increase in nationalist rhetoric ahead of them.  While this may be inflammatory in nature, the Company's previous experience suggests that this will calm after the elections.

The Company does not consider the conflict in Ukraine which began in February 2022 to have a significant impact on its operations. The conflict is still ongoing at the date of the annual report and management will continue to assess the impact to its operations and seek to mitigate accordingly.

Mining concessions in Bosnia & Herzegovina and Serbia

The laws and regulations on mining in Bosnia & Herzegovina and Serbia are still developing and as a result some areas of the laws on mining are unclear. If the Company does not comply with the terms of the agreement it may be in default and the mining concession may be terminated, which would have adverse consequences for the Company's operational and financial performance.

Outcomes in courts in Bosnia & Herzegovina and Serbia may be less predictable than in the United Kingdom, which could affect the enforceability of contracts entered into by the Company or its subsidiaries in Bosnia & Herzegovina and Serbia.

There is no guarantee that the Company will be able to obtain all required approvals, licenses and permits relating to its exploration and subsequent exploitation activities. To the extent that required authorisations are not obtained or are delayed, the Company's operational and financial performance may be materially adversely affected.

Notwithstanding these risks, the Company has made good progress. Construction of Section 1 of the Haul Road, that is located within the Exploitation Area boundaries, commenced in June. The construction permit for the remainder of Section 1 and Section 5a have been submitted and approval is expected shortly.

Results and dividends

The Group results for the six months ended 30 June 2022 are set out in the Consolidated Interim Statement of Financial Position on page 25. The Company's aim is to generate long term value for its stakeholders and design a shareholder distribution policy that reflects the growth prospects and profitability of the Company while maintaining appropriate levels of operational liquidity in due course. However, due to the early-stage nature of the Company and the Vares Project, no final dividend was paid for the year ended 31 December 2021 and no interim dividend is recommended for the 6 months ended 30 June 2022.

Auditor

BDO LLP (Chartered Accountants) have been the auditor of Adriatic Metals PLC since 2020 and were re-appointed at the 2022 Annual General Meeting. Please refer to page 23 for the Auditor Independent Review Report to Adriatic Metals PLC.

Governance Matters

There were no changes to the Board of Directors or composition of the committees of the board during the Period.

Subsequent events

The Company allotted 166,000 shares on 22 August 2022 relating to the deferred consideration payable following the Company's completion of the acquisition of the entire issued share capital of Ras Metals d.o.o. on 23 February 2021.

There were no further events subsequent to 30 June 2022 required to be included in this report.

Directors' Responsibilities Pursuant to DTR4

The Directors confirm to the best of their knowledge the interim consolidated financial statements have been prepared in accordance with:

        DTR4.2.7 of the Disclosure and Transparency Rules in the United Kingdom, being an indication of important events during the first six months of the current financial year and their impact on the half-year financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year and

        DRT4.2.8 of the Disclosure and Transparency Rules in the United Kingdom, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period, and any changes in the related party transactions described in the last annual report that could have such a detrimental effect.

Signed in accordance with a resolution of the directors

Paul Cronin

Managing Director and CEO

9 September 2022

Independent review report to Adriatic Metals PLC

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2022 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2022 which comprises consolidated interim statement of financial position, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flow and the related explanatory notes.

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" ("ISRE (UK) 2410"). A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with UK adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting.

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410, however future events or conditions may cause the group to cease to continue as a going concern.

Responsibilities of directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose.  No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent.  Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

Matt Crane (Senior Statutory Auditor)

BDO LLP

Chartered Accountants

London, UK

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).