Wednesday April 1, 2015, 4:10pm PDT
By Teresa Matich+ - Exclusive to Copper Investing News
Those who follow the copper space have no doubt heard of the Oyu Tolgoi mine in Mongolia.
The project, which includes an open-pit mine and a series of other deposits all managed by Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO), has been making headlines in recent months over disputes between the company and the Mongolian government that have held up underground development. Market watchers may remember that Oyu Tolgoi was once 66-percent owned by Robert Friedland’s Ivanhoe Mines (TSX:IVN), which became Turquoise Hill Resources (TSX:TRQ) after Rio Tinto assumed control of it in 2012.
However, there’s another company in the mix that not all market watchers may know about: Canada’s Entrée Gold (TSX:ETG). Entrée has been working to develop the massive Ann Mason copper deposit in Nevada, but it also has the Lookout Hill property in Mongolia. Lookout Hill completely surrounds the Oyu Tolgoi mining license, and Entrée has a 20-percent carried joint venture interest in two deposits that cross over the license boundaries. Currently, Rio Tinto is one of Entrée’s largest shareholders and is also the acting manager of the Lookout Hill joint venture.
So how does a junior get involved with a company like Rio Tinto? To find out, Resource Investing News spoke with Gregory Crowe, president, director and CEO of Entrée, about the company’s foray into Mongolia. Crowe also spoke about mining in Mongolia in general and what he thinks the future holds for mineral extraction in the country.
How the partnership came to be
According to Crowe, Entrée’s Oyu Tolgoi story goes all the way back to 2002, when Ivanhoe Mines was still running things at the project. With the famous Friedland heading up Ivanhoe, Entrée took advantage of an opportunity to secure a large land position surrounding the project.
That move paid off quickly. Ivanhoe moved drilling towards the northern boundary of its project — close to Entrée’s Lookout Hill — and soon enough, Friedland wanted to do a deal to secure a portion of Entrée’s property. The papers were signed in 2004, Ivanhoe became Entrée’s largest shareholder and exploration success followed shortly after.
“In the middle of 2005, Ivanhoe intercepted 608 metres of 3.25 percent copper equivalent, which is one of the largest, richest intercepts in a porphyry copper-gold system ever recorded,” said Crowe. “That attracted the attention of Rio Tinto.”
Within a few weeks, Rio had bumped Ivanhoe out of the top shareholder position for Entrée. It started buying up Ivanhoe as well, eventually assuming control in 2012 and changing the company’s name to Turquoise Hill Resources.
Currently, Entrée’s largest shareholder is Sandstorm Gold (TSX:SSL), a royalty company, but Rio Tinto and Turquoise Hill still have significant holdings.
Part of Oyu Tolgoi
It’s a little hard to follow, but Entrée is definitely part of the plan for the massive Oyu Tolgoi mine. The joint venture’s Hugo North Extension copper-gold deposit is the northern continuation of the Hugo Dummet orebody, the bulk of which is on the Oyu Tolgoi license. The other joint venture deposit, the Heruga copper-gold-molybdenum deposit, is the southernmost deposit in the series.
“Hugo North Extension hosts some of the highest-grade mineralization of the entire Oyu Tolgoi project, and it is key to the underground mining development,” Crowe said. “We are part of the mine plan, and we are part of the first lift underground mining at Oyu Tolgoi, once Rio Tinto and the Mongolian government resolve their outstanding issues.”
Caught in a tangle
At the moment, underground development at Oyu Tolgoi is still stalled — neither party appears to want to move forward until the issue of how to pay for the second phase of underground development at the mine is sorted out, and other shareholder issues are resolved.
The first phase of development cost about $6.5 billion. The Mongolian government owns 34 percent of phase 1 of the project, and thus is responsible for 34 percent of those costs. At the end of the day, the government ended up debt financing its share of the costs, and its payout from the project has been pushed further back.
Crowe pointed out that there is the potential, with several of the world’s leading banks, to finance the mine’s underground development, but Mongolia won’t sign off until other issues it sees are taken care of.
For its part, Entrée’s share of underground development costs are taken care of. “Our debt financing package is prime plus 2 percent, which is a pretty good rate,” he said, “and we are carried through to production with absolutely no repayment except out of production.”
Of course, with all that’s going on in the country and with issues surrounding jurisdiction becoming more and more important, one had to ask what drew Entrée to Mongolia in the first place.
The spirit of Crowe’s answer can be summed up in one word: opportunity.
“We moved there because in essence, there was a ground position surrounding Ivanhoe’s license,” he reiterated, “It was an opportunity for a junior resource company to get in early, [and] we decided as a company that it would be worth the risk.”
Crowe reasoned that if nothing had come out of Entree’s foray into Mongolia, the company simply would have been, “another junior resource company that fell by the wayside.”
“But, we decided to take the risk, and we ended up being part of a world class project that attracted the attention of major companies,” he added.
And while Oyu Tolgoi is still tied up at the moment, Crowe expressed optimism about the future of mining in Mongolia. He noted that after several years of a fairly nationalistic government, the implementation of a foreign investment law that was relatively hostile to foreign investors, and the imprisonment of one US resident and two Filipino residents in the wake of issues with coal company South Gobi Resources (TSX:SCQ), things were not looking great as far as investment in the country goes.
Still, the tide could be turning. Mongolia made significant changes to its foreign investment law and recently pardoned those three executives. Crowe also noted that the country has a new prime minister who is committed to resolving issues and moving the country forward.
More recently, Crowe met with Mongolia’s new Minister for Mining and Energy, R. Jigjid, at this year’s PDAC conference in Toronto. Overall, he suggested that the tone of the meeting confirmed this view.
“He’s very optimistic that the attitude of the new government is to get these issues resolved, particularly with respect to Oyu Tolgoi and moving the whole process forward,” he said. Certainly, investors will be keeping a close watch to see how the project plays out.
“I do have faith in Mongolia. I think it’ll change,” said Crowe. “I think this is the year it will turn around. And that’ll be a very important event for Entrée.”
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Entrée Gold is a client of the Investing News Network. This article is not paid-for content.