RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:Entree -Sandstorm stream modificationTo be successful in the uncertain politics of Mongolia, a project needs several sources of support. Because so many politicians also represent the wealthiest families in Mongolia, the support and interest of "sponsoring" domestic investors is needed. Not only because they will use their influence to push the project forward, but also because they are best positioned to negotiate with parties that attempt to block and ransom the project for necessary government and official licence and approvals. It seems the Mongolian motto for public service should be "what is in this for me?". Foreigners cannot do this directly as most of the foreign companies coming to Mongolia come from jurisdictions which will investigate and prosecute bribery or abuse of government position - so local consultants and intermediaries have to insulate the foreign investor from the domestic politics. The dangers of Mongolian policy shifts and an anti-foreign judiciary are more than well illustrated by the Hotel Mongolia debacle of South Gobi.
We have seen: theft of Khan Resources uranium project to satisfy Russian political influence; the disaster of the aggressive "windfall profits" legislation used as a lever during the IA negotiations; the uncertainty of repeated re-drafting of mining and investment laws; the blocking of Chinese investment in South Gobi resulting in the destruction of that company's value; the Hotel Mongolia ransoming of foreign businesspeople as virtual hostages to Mongolian power struggles; the suspension and uncertainty surrounding licences for exploration and mining, including the JV licences held by ETG; and the inexplicable blocking of ETG from participation in an IA, and the uncertainty surrounding the granting of a ROFR over the Shivee West portion of ETG's mining licences, as well as the long delay in completing the joint venture agreement with OTLLC over the JV portion of OT, including the shutting-out of Mongolian ownership of ETG's JV interests, meaning Mongolia doesn't yet have a full 34% interest in the whole OT project. The delays and costs in terms of suspended exploration, delayed development and construction, delayed financing, have cost Mongolia hundreds of millions if not many billions of dollars in lost time and opportunity costs.
Obviously whatever domestic investment and support ETG might have, it has not been strong enough to prevent the long negotiations and delays, as well as the crushing revaluation of the shares of the company on the New York and Toronto stock exchanges, where ETG's trading valuation has lost approzimately 90% of its value in the past five years.
Domestic support hopefully exists and is working behind the scenes to help negotiate a comprehensive settlement of the outstanding ETG issues at OT. That kind of interested support is never publicly acknowledged because of potential political backlash or claims of corruption that could harm interested people. But you are right, M Khan, it would be very strange if during the early years of ETG's formation there was no Mongolian equity interest. It would also be normal and natural that those Mongolians would prefer to have their investment interests kept confidential so that they don't get involved in domestic power struggles over mining policy and treatment of the specific company or project, or be identified with one political faction while political control of the government has been so changeable and volatile.
The project also needs public sanction and overt political support - thus the many politicians who have tried to build public support for the benefits of OT and foreign investment.
On the investment side, OT has had the mix that is typical - high risk capital to start - IVN and ETG raising money on the Toronto Stock exchange for speculators seeking high rate returns for taking high risks sending money to wild Mongolia. Then a solid, international operator to sponsor the project and give it organizational and technical foundations - Rio Tinto, with other major companies like BHP and Freeport Mac watching closely and no doubt willing to squeeze in if given a chance. Finally, and now we are just about seeing the critical next step, solid institutional money lent or invested in equity perceiving lower risk and also negotiating guarantees and security with public and official sanctioned support. The loan syndicate for OTLLC underground is one type; the Sandstorm royalty stream and equity interests in ETG is another, higher risk entry.
Also behind the scenes international and diplomatic support, often tied to either supplier status - such as providing power, or manufactured components, or financing, and on the customer side, as a buyer of the ultimate products. At OT obviously China a major player both in export routing by road and rail, as a purchaser, and as the key power supplier while Mongolia aspires to build and provide sufficient power. The British, the European Union, the Japanese, Canadians and Australians, even the South Africans, all have major stakes in mining engineering and supply, or technology support, or financing or potential downstream purchasing. The Americans have an interest as well, in terms of political and military alliances to offset Mongolia's two great neighbours and invest in the general growth of the economy which will occur as OT pumps more cashflow into the Mongolian economy through all of wages, infrastructure and supply spending, taxes and royalties, and equity profits as a shareholder. The party left out is Russia, and no doubt that has been a cause of much political back room fighting and international intrigue. The Russian concession was to get their uranium investment from Khan and the promise of a Northern railway route to Vladivostock. One can only imagine the intrigues of intelligence agencies, spies, diplomats and Mongolian politicians and negotiators attempting to juggle the competing interests of all the major foreign powers who have strategic goals in Mongolia and building alliances in Mongolia to favour them as trading and investment partners.
Contrary to many media reports that appear to have political, anti-global economy agendas such as environmental pushback, or distrust of multinational companies, the OT structure as negotiated gives Mongolia huge advantages and the majority of free cash that will be generated by OT over the years. It has also followed the "third neighbour" policy so far in keeping Russian and Chinese interests out of primary participation at OT. But Mongolians also have to understand they started with no capital, they did not have the capital to take the very large risks Robert Friedland and IVN took in spending hundreds of millions on exploration and Feasability just proving there was an economic resource. They took 1/3 of the equity in accordance with their Minerals Laws but had to borrow the money to pay for their proportionate share of expenses. And the only source of repayment is downstream earnings. So it will take some time before the full benefits of OT equity are a benefit to Mongolia - but in the meantime wages, taxes, and spin-off economic activity of suppliers and just a larger, more robust economy are going to provide huge immediate benefits to Mongolia.
The foreign investors, in the meantime, have put far more capital into Mongolia building the mine infrastructure than any of the small cashflows from the lower grade open pit mine will justify - the net flow of money has overwhelmingly been into Mongolia. For investors to come to Mongolia obviously they need to see a higher return on capital in the form of free cashflow they can repatriate home then what they could earn putting their money anywhere else in the world. Lucky for Mongolia the build-out of OT is coinciding with historically low rates of return of investment worldwide - because the risks in Mongolia, not only from commodity market price volatility for copper, but mostly because of the instability of parliament and the lack of party discipline within the major political parties, justify a large premium on investment return. When a country has a large percentage of the public and its politicians that promote resource nationalism policies, they can expect to see foreign investment dry up and the cost of attracting investment rise with very large financial premiums. So Mongolia has seen on the past few years.
OT is a very complicated, strategic investment project and it needs domestic support in Mongolia. Some Mongolians can see opportunities, whether by having a direct interest in companies like TRQ or ETG, or being employe, or providing goods or services to support the project, or being the government seeing the tax and royalty cashflows to support domestic social spending.
Overall, it has been a long a so far, disappointing financial speculation. But there are reasons to believe that if the lenders' requirements for the underground expansion loans can be met, it shall represent a new phase of stability in the OT project, and that should include stability in ETG's position, which will not only set-up the potential for additional exploration of the still underexplored JV ground, but expand the known high grade ore zones at Hugo North Extension, accelerate the possibility of Phase 2 underground, and restart exploration of Shivee West, where the highly speculative chance of another ore body on as large a scale as Hugo North or Heruga would be a complete game changer for ETG. How exciting would that be? In the meantime, any Mongolian, or investor from anywhere in the world for that matter, is free to purchase shares of ETG and participate in the potential revaluation of the company as its cashflow from Lift 1 at HNE creeps closer. The implied market cap of ETG at 40 cents CDN is vey low considering the cash in hand, the OT and OT area assets, and the potential at Ann Mason in Nevada if world copper prices do indeed rise in response to the global shortage some we predicting will develop in the next four or five years.
And you are so right - a lot of us who have been involved in OT investments for 12 years do not really have another 12 years before we are getting pretty old, maybe too old to enjoy the return on investment we hope to see. It would be nice after so long to see some substantial progress on the structure and legal rights side, followed by more exploration and good news on the growth of the resources and potential of OT, which many have said over the past 12 years is likely to b even larger than it is already. The best place to find a world class mineral deposit is in close proximity to another one.
cg