Post by
Countrygent on Jan 05, 2023 7:39pm
Looking Good
A couple of thoughts today as we hit a decade-long trading high @ 1.22 CDN.
First, with compounding inflation factored in, a true economic new high is probably closer to $1.40 or so, but I'll take very penny, the chart and trend looks good.
Copper demands are going to grow whether or not we have to bridge an economic slowdown while the FED fights inflation and China re-boots out of Covid. Maybe 2023 will be a bust, who knows, what we know is long term the world population continues to 1. grow, 2. urbanize, and 3. demand cleaner energy and environment. More copper is required and OT is a top-tier huge resource with the huge added financial insurance of high gold credits in the copper ore. What a great spot to park your wealth, provided you trust the stability of Mongolia and honsety of Rio Tinto (or the ability of ETG to enforce their honesty!). Definitely some major risk considerations.
Second, the underground prodcution numbers are going to be excellent. TRQ was theft at a faked-sincere long term copper-projection of $3.50 us/lb. Give me a break.
Third, we should see the lie of the limit on Lift 2 HNE reserves put to rest eventually - yes there may be a fault offset around 750mN of the JV line at HNE, but we know already the drills hit what looks like the straight on strike continuation of the same ore body and stratigraphy at 1325mN way back in 2006. There is much more high grade ore at HNE, Lift 2 is likely twice the size of current projections, and that lengthens the life of Hugo North, and defers the larger but less valuable ore at Heruga. Higher grade into the mill for longer - higher NPV for ETG.
Fourth, there are excellent exploration targets for shallow gold open pit targets. One of those crops up, whole new ball game - those are "free spins" on this play as long as ETG is still a JV partner. and with a 50% greater interest as shallow deposits are 30% to ETG. Goods in hand, undervalued, free spins on exploration, costs carried by Rio Tinto. Thank you very much.
Fifth, I have been mulling over what the arbitration might be about and why everybody is so closed-mouthed about it, why TRQ put out such an agressive denial last year vowing to fight. My conclusion now (and its only a guess), is that after the Mongolian government released their report in 2021 concluding the costs escalation and delay at Hugo North Lift 1 was due to Rio Tinto incompetence, the ETG Board of Directors realized they could not accept the accounting entries for costs from the JV attributable to ETG. It may only be a few tens of millions cost difference to ETG, but to leave Rio Tinto's accounting unchallneged would be transparently negligent. When the Mongolians pushed that button hard themselves they were given $2.4 billion in debt relief. $25 million or so USD cost relief to ETG is 12 cents a share or so just in costs savings, nothing to sneeze at. I don't believe arbitration is intended to or can solve the other huge elephant in the room, even though it may be leverage to advance the urgency of a buy-out offer.
Sixth, the huge elephant in the room. Who bears the cost of Mongolia getting a 34% share of the carried interests in the JV attributable to ETG? I'm assuming the Mongolians will never agree to a buy-out of ETG by OTLLC that costs them anything (recall when they made the deal in 2022 to start the undercut with Rio Tinto one of the clear conditions was "no additional future debt assumption by Mongolia").
Rio Tinto is obligated under the Earn-in to "use its best efforts" to have ETG brought within the ambit of any stability agreement (what became the IA with Mongolia in 2009), or to conclude a separate agreement on substantially similar terms for ETG. When the Mongolians entered into the "Stability Agreement" the Shareholders Agreement with Mongolia governing OTLLC was a separate agreement - and at the time it was not divulged what the subscription price paid by Mongolia was for its 34% share interest in the assets IVN/TRQ/Rio Tinto (all the same now) put into OTLLC, which were: 100% of the central OT claims formerly held by IVN, and all infrastructure built on the property, and the 80%/or 70% JV interests held by IVN pursuant to the Earn-In Agreement.
It later became apparent they used some kind of book cost price - 34% of their total project expenditures up to that date, which 34% was claculated to be around $750 million or in that ballpark, (it was disclosed a few years later in one of the M&A's for TRQ), always 100% financed by Rio Tinto/TRQ at a pretty pricey interest rate. Mongolia has received lumop sum advances, taxes, royalies, and never advance a penny towards development of OT. That share buy-in plus the proportional costs of the further development after 2009, plus the compounding interest, is what added up to the $2.4 billion forgiven and written-off in 2022 to make the fourth (?) final agreement with Mongolia to govern the project financing.
ETG has always said in its public disclosure regarding IA treatment that it has been negotiating with Mongolia and its partners (TRQ and Rio Tinto) but there should be no diminution of economic value, as in, hey, we already pre-paid any contribution required by Mongolia when we threw in the 80%/70% share of our 100% property that is the JV property now. Whatever inducement is required to get Mongolia to strike an IA agreement with ETG IS YOUR BEST EFFORTS, not for our account.
Then there has been this ridiculously long hiatus on drilling HNE north of the supposed fault around 750mN which changes the net present value calculation for Lift 2 perhaps substantially. At least $1 per share of ETG or more.
It's all good news. Yes they can drag it out, but every month that passes brings HNE production closer and increases the NPV for both HNE Lifts. If like me you believe in the value of copper that it will exceed by a large margin the rate of gobal inflation, again, the price only rises.
I don't believe, just the same as it was with TRQ, there is any other buyer for ETG other than Rio Tinto (or it could bring in a major partner but to ETG it is one and the same), and the pathway to avaoid any political shennanigans in Mongolia is to use OTLLC as the buyer, so the JV just collapses into the existing structure without a need for an IA, there will never be a signed and fully concluded JV Agreement. Horizon can't afford the purchase price and the old SSL insiders want to score a big gain in Horizon sooner rather than later in any event, becasue they would like to go shopping for copper streams around the world.
The only real negotiatiuon is what price for ETG to get managment and Horizon Copper to lock-up their shares in an OTLLC bid. We don't care how Rio finances it, its going to be cash and we are out.
Will they grind on this uncertainty about Mogolian tax stability, or they can try, the worst outcome of that in negotiations is some kind of saw-off. The counter is that the discount rates for NPV calculations and the extent of the reserves at HNE undertstates the true value of ETG. Variability in what long term price of copper is assumed will more than eclipse any of that. The real deal is just a tough negotiation on price and timing.
If the price of copper and gold rises this year, and the arbitration as I believe looks like it will embarass Rio Tinto as having incompetently managed the OT underground build-out, there is lots of reason to believe Rio Tinto will pull the trigger on a buy out sooner rather than later. It would really help that cause if the metals prices jump, because then the ETG valuation can be distanced from the TRQ dissent valuations which are fixed as at the time of that deal - in the rear viuew mirror. When conditions change, the price of copper can change. You know, TD or some other flack investment bankers will come up with any old formula to hit the price acceptable to management. And i do believe in this case the fact that there are many millions of shares held by our management in shares and options is good thing for retail. Horizon might be swayed by other unstated future considerations but once this deal is done, our directors and managers are heading to the golf course or the beach or whatever you do after you screw the pooch for years and then make out like a bandit.
I like it. The chart is looking so much like ETG wants to break up to a new trading level before there is any substantial premium to market offer ... then Rio Tinto and Mongolia will have wrapped up their long campaign to have all of this jewel of a mine, and the upside prospects of the land position not just on the JV but also on ETG's 100% western Shivee West holdings.
Do I dare to predict the final price? Not yet. If the drills at HNE or elsewhere on the JV hit something valuable ... REPRICE UP!!!
And could we face a trading beat-down to try and shake free more retail shares? Oh yes, in fact, they may run the share price up another couple of dimes in a hurry then try and strike fear into ETG retail with rumours of big problems with Mongolia to grab some more of the float. But end of the day its the same old routine. They have to be careul because there are a lot of foreign lenders and as OT cashflow comes on stream in Mongolia the Mongolians are going to be thirsty for new projects and investment - they may want to build a copper smelte, there is still much coal export infrastructure and power infrastructure to be built.
And surely they are going to want to bulk their military spending - don't think Putin's adventures in Ukraine haven't sent a shudder through national security councils of countries like Mongolia, and they will be eyeing the price of HIMARS, Joint Strike Fighters, Patriot Missile systems to have some very sharp teeth that would be cause for real sober reflection by Russia or China looking at them as a plump pigeon to be plucked. The Americans and Europeans will be game to sell them lots of hardware at the right price. We are entering into a new era of conventional arms racing - another reaso n to believe the global economy is about to be goosed and industrial metals in great demand - a lot of military airports and arms factories and all kinds of bunkers and space infrastructure - who knows, burying more power grid and communications assets in hardened shelters. You know how in a prior age of instability they built castles and walls? The new version of that is going to be underground and out of reach of lobbed missiles and artillery - the world will see you can't leave critical infrastructure above ground. And that goes all around the world - everything needs to be re-jigged for the new reality. And lots of wiring and new gizmos like elevators and god only knows required ... copper copper copper.
The days of aggressive piracy have to give way to the appearance of stability. Boom times are coming in Mongolia if they play their cards right and they know it.
Good luck to all, this long long speculation is going to come to a close because end of the day Rio Tinto and Mongolia don't want anybody to see how profitable the OT mine is, nor how much money they frittered away by their games and good cop bad cop routine to supress the value for so long.
Then I can cash out and start building my bunker!
cg