RE:RE:Long Time ETG Holder The Mongolians may accomplish what the arbitration has not - a trigger on timing for Rio Tinto to resolve the status of ETG under the JV Agreement at Oyu Tolgoi.
Many people may not know that, contrary to an explicit promise of "best efforts" to get ETG covered by a tax stability agreement as good as the Investment Agreement (accomplished in 2009 for OTLLC - Rio Tinto and Mongolia's joint OT operating entity), Rio Tinto, Mongolia, and OTLLC have failed to deliver on this key aspect of the Earn-In Agreement made in 2004. That Earn-In gave them 80% of the JV ground previously 100% held by ETG, but looking at the agreement's fundamental purposes, it preserved 20% for ETG, relieved ETG of any exploration and development expenses, gave non-serviced financing to be repaid only from production proceeds. In other words, it shifted all risks to OTLLC in return for a secure de-risked 20% interest to ETG.
Since 2004 no IA treatment has been secured. The licence transfers contemplated to occur upon formation of the joint venture have not occurred. The Joint Venture Agreement itself has not been finalized and signed. The parties have supposedly been negotiating for fifteen years!
However, following the buyout of TRQ by Rio Tinto (upping their ownership of OTLLC from approx. 33% to 66%) ETG has commenced an arbitration proceeding in respect of the Earn-In and perhaps the implied JV Agreement (since they haven't fully settled it but are operating as if it is in place). The Mongolians this year passed a revised Mineral Law that requires the State to be made 34% owner of any mineral deposit declared to be of strategic importance (OT is a strategic deposit), without compensation for the State's 34% interest - intended to be made part of a new sovereign wealth fund. The State ownership requirement for existing strategic deposits such as OT has a deadline for fulfillment of April 2025.
While the question of burden of the loss of 34% as between ETG and OTLLC is unsettled - under the Earn In it is arguable their "best efforts" might include purchasing 34% of ETG for contribution notwithstanding the new mineral law, the timing imposed appears to set up a deadline of next Spring to resolve the question of licence transfers, IA treatment, and ownership of ETG.
When Mongolia and Rio Tinto were negotiating the final terms of the operation and structure of Oyu Tolgoi as between them as co-owners of OTLLC in 2022, because Rio Tinto had refused to initiate the block caving undercut at Hugo North (once started, it cannot be stopped), Rio Tinto forgave the accumulated debt of Mongolia of $2.4 billion USD which represented their acquisition costs and pro-rata development costs to that time for the 34% of OTLLC owned by Mongolia. Essentially Rio Tinto agreed to the terms of the new mineral law that they would contribute 34% of all of OT to Mongolia for no compensation. But left out was ETG and their 20% carried interest in the JV portion of the project being the land covered by the ETG licences made subject to the JV.
There is one surprisingly simple transaction that absolutely solves all outstanding issues concerning ownership of Oyu Tolgoi, the joint venture, and ETG. Rio Tinto acquires ETG at a negotiated buy-out price, and contributes ETG to OTLLC. Result is all of Ouy Tolgoi is wrapped-up in OTLLC held 66% by Rio Tinto, 34% by Mongolia, covered by the tax stability agreement negotiated in 2009, and the subsequent financing agreements and confirming and amending shareholder agreements made a handful of times since, up to 2022.
Find a price acceptable to HCU and the majority of ETG shareholders, make a deal for cash. HCU is funded to retire its substantial debt to SSL, or to go shopping for new copper stream interests.
As for what price ... there seems to be a flurry of new exploratory or development drilling and in-process restatements of resources at Oyu Tolgoi after years of inaction. Particular targets are Lift 2 HNE and Heruga, both of which are substantial potential mines with decades of production. In addition to the geological certainty of resources there is a substantial optionality in play - the timing of production from those two JV deposits and potential for a large increase in the mill size, thus annual production targets at OT could bring forward production, making ETG increasingly valuable.
Add to that raised expectations of higher copper and gold prices both at present and in the future ... there is scope for a substantial valuation lift. On the liability side, ETG has a proportional share of development costs to be repaid for development on the JV lands, wind-up costs including some modest executive golden parachutes, and then the uncertainty of where the cost of 34% to Mongolia should fall as between the parties, which cries out for some compromise as the situation in 2024 is not what was envisioned in 2004.
But the size and extent of HNE Lifts 1 and 2 (and it appears from the most drilling results the deposit continues at further depth at HNE - widening - meaning there is long term potential for a Lift 3 under Lift 2, or for Lift 2 to be deepened), and Heruga, make OT one of the great new long term copper producing mines globally. The grades are high, the production costs are low. ETG has never been fairly valued in light of its full potential. A substantial premium to current implied market valuation would appear to be likely. Which is probably why ETG is held so tightly and thinly traded at present. It is a special situation and most shareholders are holding tight. The insiders, for example, who hold millions of shares, have no sold shares into the market for several years, notwithstanding a 4x price gain over the past five years.
Looks like HCU holds a key position in the negotiations for the price of a possible buyout of ETG, one of the aspects of the creation of HCU is it appears (and this look deliberate) that by selling their ETG shares (25% of ETG) to HCU, SSL removed an obligation on SSL that was part of their earlier buy-in and private placement with ETG, to vote with ETG management on any major transaction. Now HCU appears to be a free agent, and no deal can be concluded without their participation. One might expect that when and if a buyout deal is revealed to ETG shareholders, it would include a lock-up of HCU and ETG management shareholdings at the agreed proposed price. And it is hard to envision that price would not be a substantial premium to market price for ETG. For HCU it will represent a massive cash infusion relative to their market capitalization and other assets.
Tixk tick tick. If the arbitration ongoing between Rio Tinto and ETG doesn't precipitate a deal, then the April 2025 deadline for Mongolian ownership may.
in the meantime, to see the potential for increased value out of ETG, review the most recent corporate presentation on the company website (August 2024) which highlights that Lift 2 HNE is an open deposit, that OTLLC is working towards a restatement of resources, that there is optionality in increasing the mill size at OT, and moving forward Lift 2 and/or Heruga development. As well, note that the modelled NPV of ETG's JV interests is based on $3.25 CU and $1591 AU - and compare to current spot prices plus your own projected price model for forward copper and gold - both charts looking to be on trend for further price gains due to undercapitalized mining markets, global demands for both metals, and creeping inflation of commodity prices. No small aspect is also the commitments of governments to carbon reduction requiring huge copper consumption, and the probability in the event of a global slowdown that fiscal stimulus and infrastructure spending on green energy and carbon reduction will offset economic slowdown reductions. So too increasing government debt and/or inflationary pressures will continue to push gold prices.
Its convoluted with a complex history at Oyu Tolgoi, with 20 years of unfinished negotiations, but the length and complexity is commensurate with the huge value of a prime long term mining asset. Oyu Tolgoi is absolutely top tier, and ETG has a valuable chunk in hand.
cg