The Oyu Tolgoi ("OT") project is one of the world’s largest new copper-gold mines and is located in the South Gobi region of Mongolia. The project comprises two separate land holdings: the Entrée/Oyu Tolgoi joint venture property ("Entrée/Oyu Tolgoi JV Property") and the Oyu Tolgoi mining licence.
Entrée’s main asset is its interest in the Entrée/Oyu Tolgoi JV Property, which is subject to a partnership between Entrée and Oyu Tolgoi LLC ("OTLLC"). The Entrée/Oyu Tolgoi JV Property covers 39,807 hectares and includes two of the OT project copper-gold deposits:
- Hugo North Extension Copper-Gold Deposit (the northward continuation of the Hugo North Deposit onto the Entrée/Oyu Tolgoi JV Property)
- Heruga Copper-Gold-Molybdenum Deposit (the southernmost deposit at OT, 94% of which occurs on the Entrée/Oyu Tolgoi JV Property)
The Entrée/Oyu Tolgoi JV Property comprises the eastern portion of the Shivee Tolgoi mining licence and all of the Javhlant mining licence, both of which are held by Entrée, and are adjacent on three sides to the Oyu Tolgoi mining licence.
The Oyu Tolgoi mining licence is held by OTLLC (owned 66% by Turquoise Hill Resources Ltd. ("Turquoise Hill") and 34% by the Government of Mongolia). Rio Tinto is the operator of the existing open pit mine on the Oyu Tolgoi mining licence, and is currently managing the construction of Lift 1 of the Hugo North underground block cave on both the Oyu Tolgoi mining licence and the Entrée/Oyu Tolgoi JV Property. Lift 1 underground development is fully financed and is currently in progress.
Entrée also holds a 100% interest in the western portion of the Shivee Tolgoi mining licence ("Shivee West") covering 23,114 hectares. Since 2015 Shivee West has been the subject of a License Fees Agreement between Entrée and OTLLC and may ultimately be included in the Entrée/Oyu Tolgoi JV Property.
Together, the Entrée/Oyu Tolgoi JV Property and Shivee West are referred to as Lookout Hill.
Robert Cinits, P.Geo., Entrée’s Vice President, Corporate Development, approved the scientific and technical information about Lookout Hill on this website. For detailed information regarding Lookout Hill, refer to Entrée’s technical report titled “Lookout Hill Feasibility Study Update” with an effective date of March 29, 2016, available on this website or on SEDAR at www.sedar.com under Entrée’s profile.
The Entrée/Oyu Tolgoi JV Property includes both the Hugo North Extension and Heruga deposits. These deposits form the northernmost and southernmost parts, respectively, of the OT project, which is a series of world-class, porphyry-style deposits containing copper, gold, silver and molybdenum. The mineral resources stretch over 12 kilometres, from the Hugo North Extension deposit on the Entrée/Oyu Tolgoi JV Property in the north, through Hugo North, Hugo South, Oyut, and the northern extension of the Heruga deposit on OTLLC’s Oyu Tolgoi mining licence, to the Heruga deposit on the Entrée/Oyu Tolgoi JV Property in the south.
Under the terms of the Entrée/Oyu Tolgoi JV, Entrée has a 20% carried interest in mineralization extracted below 560 metres elevation, which includes all of the Hugo North Extension and Heruga deposits, and 30% carried interest in mineralization identified above 560 metres elevation. OTLLC has the remaining 80% (or 70%) interest.
Capital Development and Financing
The Entrée/Oyu Tolgoi JV Property is being explored and developed, on behalf of joint venture manager OTLLC, by Rio Tinto, through various agreements among OTLLC, Rio Tinto and Turquoise Hill. Under the terms of the Entrée/Oyu Tolgoi joint venture (the "Entrée/Oyu Tolgoi JV"), any mill, smelters and other processing facilities and related infrastructure are owned exclusively by OTLLC ("OTLLC Facilities") and all costs of constructing and operating OTLLC Facilities are solely for the account of OTLLC.
All other costs of operations on the Entrée/Oyu Tolgoi JV Property, including capital costs, are allocated as follows:
- OTLLC shall bear and pay for 100% of such costs allocated to the Oyu Tolgoi mining licence and all associated liabilities including for environmental compliance; and
- The balance of such costs shall be borne and paid by Entrée and OTLLC in accordance with their respective joint venture interests.
For illustration purposes only, if a shaft is sunk on the Entrée/Oyu Tolgoi JV Property which also provides access to the Oyu Tolgoi mining licence and fifty-five percent (55%) of mineral production is from the Oyu Tolgoi licence and forty-five percent (45%) of mineral production is from the Entrée/Oyu Tolgoi JV Property, Entrée would have responsibility for a share of those costs equal to its twenty percent participating interest (20%) multiplied by forty-five percent (45%).
Underground development of Hugo North (including Hugo North Extension) Lift 1 has been fully financed by a syndicate of banks through OTLLC. Entrée has elected to have OTLLC debt finance its share of costs with interest accruing at OTLLC’s actual cost of capital or prime plus 2%, whichever is less, at the date of the advance.
Debt repayment may be made in whole or in part from (and only from) 90% of monthly available cash flow arising from the sale of Entrée’s share of products. Such amounts will be applied first to payment of accrued interest and then to repayment of principal. Available cash flow means all net proceeds of sale of Entrée’s share of products in a month less Entrée’s share of costs of operations for the month.
Entrée is not responsible for contributing any upfront cash or for sourcing its own debt financing for the development of the Entrée/Oyu Tolgoi JV Property, which is being undertaken by OTLLC in accordance with OTLLC’s 2016 Oyu Tolgoi Feasibility Study ("OTFS16"). Entrée’s Lift 1 capital contribution (expansion and sustaining capital) totals approximately $87 M. Positive free cash flow is achieved for Entrée in the first year after the block cave is initiated on the Entrée/OTLLC JV Property and debt repayment to OTLLC is completed in year three.
Operations and Operating Cash Flow
The Entrée/Oyu Tolgoi JV Property will be managed on behalf of joint venture manager OTLLC by Rio Tinto, through various agreements among OTLLC, Rio Tinto and Turquoise Hill.
Entrée’s share of products will, unless Entrée otherwise agrees, be processed at the OTLLC Facilities by paying milling and smelting charges. The OTLLC Facilities are not intended to be profit centres and therefore, minerals from the Entrée/Oyu Tolgoi JV Property will be processed at cost (using industry standards for calculation of cost including an amortisation of capital costs). The amortisation allowance for capital costs will be calculated in accordance with generally accepted accounting principles determined yearly based on the estimated quantity of minerals to be processed for Entrée’s account during that year relative to the total design capacity of the processing facilities over their useful life.
As defined in the agreement governing the Entrée/Oyu Tolgoi JV, net cash flow resulting from the sale of Entrée’s share of products will be allocated to repayment of debt to OTLLC and operating cash proceeds for Entrée.
OTLLC as manager of the joint venture is responsible for operating activities on behalf of both joint venture participants.
Lookout Hill (The Entrée/Oyu Tolgoi JV Property and Shivee West) is located within the Aimag (province) of Ömnögovi in the South Gobi region of Mongolia, about 570 kilometres south of the capital city of Ulaanbaatar and 80 kilometres north of the border with China.
Road access to Lookout Hill follows well-defined roads directly south from Ulaanbaatar requiring approximately 8-12 hours travel time in a four wheel drive vehicle. OTLLC has constructed a 3.25 kilometre concrete airstrip, partially on the Entrée/Oyu Tolgoi JV Property, which is serviced by charter and scheduled flights to and from Ulaanbaatar. Ulaanbaatar has an international airport, and Tsogt Tsetsii and the aimag capital of Dalanzadgad have regional airports.
In March 2016, Entrée filed a National Instrument 43-101 technical report titled "Lookout Hill Feasibility Study Update" with an effective date of March 29, 2016 ("LHTR16"). LHTR16 is based on a mine plan for Lift 1 using reserves only ("Reserve Case") and derived from the technical, production and cost data in OTLLC's 2014 Oyu Tolgoi Feasibility Study. The Reserve Case is the most likely mining scenario for reserves exploited in the initial (Lift 1) underground block cave mining operation, including Lift 1 of the Hugo North Extension deposit. LHTR16 also discusses several alternative production cases that would include resources from other OT deposits including Hugo North Extension Lift 2 and Heruga, and allow for continuous improvement in plant throughput and potential plant expansions up to 350 thousand tonnes per day.
In October 2016, Turquoise Hill filed an updated technical report ("2016 OTTR") derived from data in OTFS16, which includes an update to the Reserve Case and Preliminary Economic Assessment ("PEA") of potential later phases of OT underground development, which includes Entrée/Oyu Tolgoi JV resources.
Entrée intends to complete an updated technical report which will include a PEA of the Entrée/Oyu Tolgoi JV’s Hugo North Extension Lift 2 and Heruga deposits, as well as an update to the Reserve Case for Hugo North Extension Lift 1. Amec Foster Wheeler has been retained to complete an initial data review to be followed by the updated technical report. Completion of this Technical Report will be an important milestone and help investors understand the underlying value of Entrée’s flagship asset.
Last Updated: July 2017