Technical Report (January 2018)
Entrée’s updated technical report will be filed under the Company’s SEDAR profile at www.sedar.com shortly, and updates Entrée’s 2016 technical report on the Entrée/Oyu Tolgoi JV Project filed in March 2016. The Technical Report discusses two alternative development scenarios, an updated reserve case ("2018 Reserve Case") and a Life-of-Mine ("LOM") Preliminary Economic Assessment ("2018 PEA"). The 2018 Reserve Case is based only on mineral reserves attributable to the Entrée/Oyu Tolgoi JV from Lift 1 of the Hugo North Extension underground block cave. Lift 1 of Hugo North (including Hugo North Extension) is currently in development by project operator Rio Tinto, with first development production from Hugo North Extension expected in 2021. When completed, Oyu Tolgoi will become the world’s third largest copper mine.
The 2018 PEA is an alternative development scenario completed at a conceptual level that assesses the inclusion of the Hugo North Extension Lift 2 and Heruga deposits into an overall mine plan with Hugo North Extension Lift 1. The 2018 PEA includes Indicated and Inferred resources from Hugo North Extension Lifts 1 and 2, and Inferred resources from Heruga. Significant development and capital decisions will be required for the eventual development of the two additional Entrée/Oyu Tolgoi JV deposits (Hugo North Extension Lift 2 and Heruga) once production commences at Hugo North Extension Lift 1.
Life-of-mine highlights of the production and financial results from the 2018 Reserve Case and the 2018 PEA are summarized in the table:
Summary LOM Production and Financial Results
|Entrée/Oyu Tolgoi JV Property|
|Units||2018 Reserve Case||2018 PEA|
|LOM Processed Material|
|Probable Reserve Feed||35 Mt @ 1.59% Cu,
0.55 g/t Au, 3.72 g/t Ag
|Indicated Resource Feed||----||113 Mt @ 1.42% Cu,
0.50 g/t Au, 3.63 g/t Ag
|Inferred Resource Feed||----||708 Mt @ 0.53% Cu,
0.44 g/t Au, 1.79 g/t Ag
(0.82 % CuEq)
|Entrée Attributable Financial Results|
|LOM Cash Flow, pre-tax||US$M||382||2,078|
- Long term metal prices used in the NPV economic analyses are: copper US$3.00/lb, gold US$1,300.00/oz, silver US$19.0/oz
- Mineral reserves and mineral resources are reported on a 100% basis
- Entrée has a 20% interest in the above processed material and recovered metal
- The mineral reserves in the 2018 Reserve Case are not additive to the mineral resources in the 2018 PEA
- The CuEq formula was developed in 2016, and is CuEq16 = Cu + ((Au*AuRev) + (Ag*AgRev) + (Mo*MoRev)) ÷ CuRev; where CuRev = (3.01*22.0462); AuRev = (1250/31.103477*RecAu); AgRev = (20.37/31.103477*RecAg); MoRev = (11.90*0.00220462*RecMo); RecAu = Au recovery/Cu recovery; RecAg = Ag recovery/Cu recovery; RecMo = Mo recovery/Cu recovery. Differential metallurgical recoveries were taken into account when calculating the copper equivalency formula. The metallurgical recovery relationships are complex and relate both to grade and Cu:S ratios. The assumed metal prices are US$3.01/lb for copper, US$1,250.00/oz for gold, US$20.37/oz for silver, and US$11.90/lb for molybdenum. Molybdenum grades are only considered high enough to support potential construction of a molybdenum recovery circuit at Heruga, and hence the recoveries of molybdenum are zeroed out for Hugo North Extension. A net smelter return (NSR) of US$15.34/t would be required to cover costs of US$8.00/t for mining, US$5.53/t for processing, and US$1.81/t for G&A. This translates to a CuEq break-even underground cut-off grade of approximately 0.37% CuEq for Hugo North Extension mineralization.
The economic analysis in the 2018 PEA does not have as high a level of certainty as the 2018 Reserve Case. The 2018 PEA is preliminary in nature and includes Inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that the 2018 PEA will be realized. Mineral resources are not mineral reserves and do not have demonstrated economic viability.
In both development options (2018 Reserve Case and 2018 PEA) Entrée is only reporting the production and cash flows attributable to the Entrée/Oyu Tolgoi JV Property, not production and cash flows for other Oyu Tolgoi project areas owned 100% by OTLLC. Note the production and cash flows from these two development options are not additive.
Both the 2018 Reserve Case and the 2018 PEA are based on information reported within the 2016 Oyu Tolgoi Feasibility Study ("OTFS16"), completed by OTLLC on the Oyu Tolgoi project. OTFS16 discusses the mine plan for Lift 1 of the Hugo North (including Hugo North Extension) underground block cave on both the Oyu Tolgoi mining licence and the Entrée/Oyu Tolgoi JV Property. Rio Tinto is managing the construction and eventual operation of Lift 1 as well as any future development of deposits included in the 2018 PEA.
Figure 1 below shows a north-south oriented, west looking cross section through the 12.4 kilometre long trend of porphyry deposits that comprise the Oyu Tolgoi project. The Entrée/Oyu Tolgoi JV Property is to the right (north) and left (south) of the central portion, the Oyu Tolgoi mining licence, held 100% by OTLLC. The deposits that are included in the mine plans for the two alternative cases, the 2018 Reserve Case and the 2018 PEA, are shown on Figure 1.
Figure 1 – Cross Section Through the Oyu Tolgoi Trend of Porphyry Deposits
Below are some of the key financial assumptions and outputs from the two alternative cases, the 2018 Reserve Case and the 2018 PEA. All figures shown for both cases are reported on a 100% Entrée/Oyu Tolgoi JV basis, unless otherwise noted, where it is for Entrée’s 20% attributable interest. Both cases assume long term metal prices of US$3.00/lb copper, US$1,300.00/oz gold, and US$19.00/oz silver.
2018 Reserve Case Outputs:
- Entrée/Oyu Tolgoi JV Property development production from Hugo North Extension Lift 1 starts in 2021 with initial block cave production starting in 2026
- 14-year mine life (5-years development production and 9-years block cave production; Figure 2)
- Maximum production rate of approximately 24,000 tonnes per day ("tpd"), which is blended with production from OTLLC’s Oyut open pit deposits and Hugo North deposit to reach an average mill throughput of approximately 110,000 tpd
- Total direct development and sustaining capital expenditures of US$262 million (US$52 million attributable to Entrée)
- Entrée LOM average cash cost US$1.25/lb payable copper
- Entrée LOM average cash costs after credits ("C1") US$0.56/lb payable copper
- Entrée LOM average all-in sustaining costs ("AISC") US$1.03/lb payable copper
Figure 2 – 2018 Reserve Case (Lift 1) Mine Production
2018 PEA Outputs:
- Mineralization mined from the Entrée/Oyu Tolgoi JV Property is blended with production from other deposits on the Oyu Tolgoi mining licence to reach a mill throughput of 110,000 tpd
- Development schedule assumes for Entrée/Oyu Tolgoi JV Property (refer to Figure 3):
- 2021 start of Lift 1 development production and in 2026 initial Lift 1 block cave production
- 2028 Lift 2 development production and in 2035 initial Lift 2 block cave production
- 2065 Heruga development production and in 2069 initial block cave production
- Total direct development and sustaining capital expenditures of US$8,637 million (US$1,728 million attributable to Entrée)
- Entrée LOM average cash cost US$1.97/lb payable copper
- Entrée LOM average C1 US$0.68/lb payable copper
- Entrée LOM average AISC US$1.83/lb payable copper
Figure 3 – 2018 PEA Mine Production
Note, the 2018 PEA and the 2018 Reserve Case are not mutually exclusive; if the 2018 Reserve Case is developed and brought into production, the mineralization from Hugo North Extension Lift 2 and Heruga is not sterilized or reduced in tonnage or grades. Heruga could be a completely standalone underground operation, independent of other Oyu Tolgoi project underground development, and provides considerable flexibility for mine planning and development. Although molybdenum is present in the Heruga deposit, the 2018 PEA does not include the construction of a molybdenum circuit for its recovery, but it could be added in the future if economic conditions for molybdenum improve. As noted in the Turquoise Hill Resources Ltd. press release dated October 21, 2016, there are also potential opportunities for increasing the underground mining rate (and mill throughput), which would require further development and sustaining capital and different operating costs, however it would likely result in Lift 2 and Heruga mineralization being mined earlier in the overall Oyu Tolgoi mine plan and potentially improved economics for Entrée.
The cash flows in the 2018 Reserve Case and 2018 PEA are based on data provided by OTLLC, including mining schedules and annual capital and operating cost estimates, as well as Entrée’s interpretation of the commercial terms applicable to the Entrée/Oyu Tolgoi JV, and certain assumptions regarding taxes and royalties. The cash flows have not been reviewed or endorsed by OTLLC. There can be no assurance that OTLLC or its shareholders will not interpret certain terms or conditions, or attempt to renegotiate some or all of the material terms governing the joint venture relationship, in a manner which could have an adverse effect on Entrée’s future cash flow and financial condition.
The cash flows also assume that Entrée will ultimately have the benefit of the standard royalty rate of 5% of sales value, payable by OTLLC under the Oyu Tolgoi Investment Agreement. Unless and until Entrée finalizes agreements with the Government of Mongolia or other Oyu Tolgoi stakeholders, there can be no assurance that Entrée will be entitled to all the benefits of the Oyu Tolgoi Investment Agreement, including with respect to taxes and royalties. If Entrée is not entitled to all the benefits of the Oyu Tolgoi Investment Agreement, it could have an adverse effect on Entrée’s future cash flow and financial condition. For example, Entrée’s share of mineralization could be subject to a surtax royalty which came into effect in Mongolia on January 1, 2011. To become entitled to the benefits of the Oyu Tolgoi Investment Agreement, Entrée may be required to negotiate and enter into a mutually acceptable agreement with the Government of Mongolia or other Oyu Tolgoi stakeholders, with respect to Entrée’s direct or indirect participating interest in the Entrée/Oyu Tolgoi JV or the application of a special royalty (not to exceed 5%) to Entrée’s share of the Entrée/Oyu Tolgoi JV Property mineralization or otherwise.
OT is a very large project that includes four separate deposits. The long-term development of OT would involve the development of the resources on all deposits. Alternative production cases have been developed to provide early-stage analysis of the development flexibility that exists with respect to later phases of the OT project (Heruga, Hugo South, and Lift 2 of Hugo North including Hugo North Extension).
While it is outside of the scope of reserve reporting, as part of the long-term development strategy OTLLC continues to examine the alternative production cases to better define future work plans and prepare for investment decision points. The mine designs developed by OTLLC and considered in the alternative production cases include mineral reserves from the Oyut open pit (Southern Oyu) deposits and Hugo North (including Hugo North Extension) Lift 1, Indicated and Inferred mineral resources from Hugo North (including Hugo North Extension) Lift 2 and Inferred mineral resources from Hugo South and Heruga.
The mine designs noted above that are in the alternative production cases and on the Entrée/Oyu Tolgoi JV Property are:
- Hugo North Extension Lift 1 Block Cave (reserves)
- Hugo North Extension Lift 2 Block Cave (Indicated and Inferred resources)
- Heruga Block Cave (Inferred resources)
Under NI 43-101 guidelines, Inferred mineral resources are considered too speculative geologically to have the economic considerations applied to them that would allow them to be categorised as mineral reserves. There is no certainty that the alternative production cases will be realized.
The mine designs developed by OTLLC and considered in the alternative production cases are shown schematically in the figure below.
Figure by OreWin, 2014
Development of these deposits will require separate development decisions in the future based on the prevailing conditions and the development experience obtained from developing and operating the initial phases of OT.
The figure below shows an example of the decision tree for the possible development options at OT including the Entrée/Oyu Tolgoi JV Property. This has been updated to include options that take advantage of productivity improvements in plant throughput that have begun to be recognized in the process plant. The decision tree shows options assuming that continuous improvements in plant productivity are achieved over the next five years. Then there would be key decision points for plant expansion and the possible development of new mines at Hugo North (including Hugo North Extension) Lift 2, Hugo South, and eventually Heruga. This provides an opportunity as OTLLC will have the benefit of incorporating actual performance of the operating mine into the study before the next investment decisions are required. OTLLC plans to continue to evaluate alternative production cases in order to define the relative ranking and timing requirements for overall development options.
The initial production case, LOM 100, assumes that there is no expansion to the plant, and that Hugo North (including Hugo North Extension) Lift 1 development is followed by production from Hugo North (including Hugo North Extension) Lift 2, Hugo South and Heruga. Three alternative production cases, which assume expansion to the plant capacity, will be part of the strategic planning that is being undertaken by OTLLC. The three alternative production cases are:
- LOM 140 - Continuous improvement of plant throughput of 5.0% per year for five years.
- LOM 260 - LOM 140 plus a 100% plant expansion after approximately 20 years.
- LOM 350 - Progressive expansion of the plant to 350 ktpd.
LOM 140 assumes that there is an increase in plant throughput productivity of 5.0% per year for five years and that the Hugo North (including Hugo North Extension) Lift 1 development is followed by production from Hugo North (including Hugo North Extension) Lift 2, Hugo South and Heruga. The average throughput rate is approximately 140 ktpd or 51 Mtpa.
LOM 260 is an extension of LOM 140 and assumes that the plant capacity is doubled after approximately 20 years to an average throughput rate of 260 ktpd or 95 Mtpa.
LOM 350 assumes that there are progressive plant expansions to an ultimate rate of 350 ktpd or 128 Mtpa. With each successive expansion case there is a reduction of the mine life that would necessitate the success of further exploration to continue production. In LOM 350 this would be required to bring the exploration potential to production in approximately 30 years.
The work on the alternative production cases is not yet at Feasibility Study stage, in particular the definition of the expansion sizes and costing of the cases. OreWin Pty Ltd recommends that the options be studied further and that the timing of the new mines be defined in more detail.
Last updated: January 2018