Post by
Countrygent on Jan 11, 2023 4:58pm
Further Discussion - History of ETG and Oyu Tolgoi
For those taking an interest in ETG and what numerous long-term shareholders are thinking and discussing, have a look at the Investor Village ETG BB.
If you want exposure and leverage to copper from a cusp-of-production, high grade, copper gold deposit, have a good look at ETG. The fundamental argument apart from buy-out probabilities at significant premium to today's market, would be the belief that copper and gold is an excellent asset class to seek leverage in.
As it says above in the SH blurb, ETG holds a significant interests in the Oyu Tolgoi mine project being run by Rio Tinto in Mongolia.
Long story short as I can make it (bear with me, its been 20 years in the making):
BHP drills at Oyu Tolgoi in Mongolia in the late 1990's, then in 2001 reorganizes their corporate focus and sheds Oyu Tolgoi as a priority project. Enter Robert Friedland and Ivanhoe Mines. They aquire the property following agreements with the Mongolian government, and aggressively drill and make a major discovery in 2002 (Friedeland and his geologists are feted by the global mining community for "discovery of the year', various awards and recognition is given that this is a very important mineral deposit ... which over the next five years of aggressive drilling blossoms into one of the premier new copper/gold chain of deposits in the world, with a decades-long (perhaps centuries - exploration potential for expansion remains very good) mine life in multiple phases. Top five copper mines in the world perhaps, without doubt in the top ten by almost any metric
In 2002 a small VSE company is reverse-takeovered for a venture listing, and Entree Gold (now renamed Entree Resources) aquires a huge concession of land encircling the IVN Ouy Tolgoi property. Which immediately becomes very interesting because as IVN is drilling towards the joint property line to the North of their property in 2003-2004, the grades and size of a massive deep copper gold porphyry, suggesting ETG is sitting in a very promising location. They hold so much ground hat might in other juristdictions have been a camp play with dozens of companies staking the area is just a one horse show.
Oyu Tolgoi is a huge chain of epithermal deposits that runs (as far as we know so far), at least 20 km SW to NE in the Southern Gobi Desert. ETG is drilling around the edges and early work develops a number of priority targets in 2003-2004.
In late 2004 EGT surprises its shareholders with an option-in deal with IVN to continue their drilling onto the ETG property. At the time, ETG points out that Robert Friedland has contractually engaged all deep drill exploration rigs then available in central asia. The Earn In Agreement requires IVN to spend about $40 million, after which IVN will be entitled to 80% of any minerals below 540m depth, and 70% above that depth. If they complete the Earn-In, a joint venture will be created over the ETG ground covered by the agreement, and ETG is to be financed fully to production by IVN, with payback only to come from up to 90% of net cashflow to ETG if and when commercial production occurs. It gives up a lot, but does produce a finance free carried interest provided the ore on the ETG ground will justify development.
IVN does drill, and in 2005-2006 hits fantastic grades and an immense deep ore body that stretches from their property about another 725mN onto the ETG JV ground, (this ore body becomes know as Hugo North, and the part on the JV property as Hugo North Extension) at which point, although the ore body is noted as open along strike and to further depth, they cease exploratory drilling by 2007, and begin negotiating with Mongolia for tax stability and an ownership framework to build a massive mine complex, a large mill and concentrator, water sourced from a distant deep aquifer, airport, a 10,000 worker infrastructure during the build-out phases, including an initial open pit on the original OT ground (now operating for about a decade), and an underground block cave that will straddle their ground onto the ETG now JV'd property.
IVN also drills to the South of their OT property, again straddling onto the ETG JV'd ground, and finds another huge deposit now called Heruga - open at strike and on depth, a little lower grade than Hugo North, but with significant Moli credits as well as copper, silver, and gold, again left open at depth and along strike.
In the meantime ETG does a large PP with Rio Tinto, and soon thereafter Rio Tinto becomes a significant ETG shareholder, and eventually the controlling shareholder of IVN, which changes its name to Turquoise Hill (TRQ). Whether Rio Tinto pre-empted a beauty contest and auction Friedland was running, and was the choice of the Mongolian leadership using ETG as a toe-hold, leave to your imagination. Fact of the matter is almost every major global miner had kicked the tires, and Rio Tinto came out as the new manager/operator of choice. Friedland's team did an excellent job pushing development forward, (managed by John Mackin who had been instrumental in the build-out of the Grasberg Mine in Indonesia) but when Rio takes control Friedland exits soon thereafter (at an extremely good price) and reconstitutes IVN as what has become another successful copper and platinum developer in South Africa and the DRC in Africa. There is no further connection with Oyu Tolgoi, although who knows who has held direct or indirect non-insider positions in TRQ and ETG all along.
In 2009 a stability agreement and a shareholder agreement is struck with Mongolia for Rio Tinto through its 51% ownership of Turquoise Hill to manage and develop the whole OT project. All proactive exploration is pretty much suspended. Long time observers cynically conclude they have found enough to justify two huge block cave mines and two open pit mines that will last 50 years or more, any further discoveries will only feed Mongolian anxiety about the project being too rich. At this stage Mongolia had negotiated a 34% ownership of all of TRQ's holdings, which included an 80% interest in the deep Hugo North JV property, BUT NOT any part of ETG's retained 20% interest. The Mongolians are acutely aware they do not yet have a 'true 34%' of all of the OT project so long as ETG holds all of its carried interests.
What occurs in 2009 is extremely interesting. Recall that the drilling of the high grade HNE deposit has petered out about 725mN on to the JV ground. In 2005 a drill set at about another 500 meters further north (1325mN on the JV) intersects approximately 50 meters of copper/gold mineralization that ETG puts out in a NR in January 2006 as being "interpreted as being the top of a continuation of the same mineral body" as the long high grade intersections 500 meters or so to the south. But other holes attempted to be drilled are "said" to be unsuccessful. Gossip at the time suggests Friedland is furious with ETG for publishing a "speculative conclusion" when nothing more was required at the time to justify a Feasability Study and financing and proceed with Phase One (now Lift One) of a block cave mine - because the ore body is dipping northward a Phase Two/Lift 2 portion of the block cave at Hugo North and HNE will mine at a lower level to proceed further North.
To ETG this is a highly significant development becasue it suggests that Lift 2 is a much bigger ore body, and consequently ETG's 20% carried interest much more valuable.
At the same time, from the time the Earn-In is struck in October 2004 to date, coming up on 20 years, the other exploration targets ETG was planning on drilling on the V property have never been drilled. It is a common or typical exploration theme around large porphyry deposits like Oyu Tolgoi that shallower, halo-like precious metals deposits can be found in proximity to the main epithermal mineralization - and you can visualize how heated fluids rising up from a location over geological periods of time might deposit in a spectrum of different minerals and metals contents moving outwards from the core. Recall ETG had a retained 30% interest in anything above 540m depth.
So Mongolia green-lights Oyu Tolgoi and settles taxation and stability with Rio Tinto/Turquoise Hill in October 2009, and to the surpise yet again of ETG shareholders, ETG is left out of the deal. BUT, the wording of the stability agreement extends to any other part of the related mineralized ore body that may become the property of the Oyu Tolgoi operating company, meaning if ETG is purchased into the project it is automatically covered by the existing stability agreement. ETG has also given a ROFR over all of its property. In the interm it has also given a more explicit promise that its 100% gound can be brought into the JV if certain vague events occur - think buy-out.
Now, what happened in 2009? It has been speculated by those of us who were shareholders at the time that the embargo on full exploration of the JV property imposed by IVN to allow negotiations to proceed with Mongolia ended up being a wrench in the works of fairly pricing ETG, which ought to have been bought out and consolodated at the time.
And if you consider the situation at the time, apart from the uncertainty about how far the block cave mine in Lift 2 might some day extend onto the ETG property and the JV, perhaps even doubling or more the highest grade ore in the whole project, a discovery of a shallow precious metals deposit might have been explosive. The reason is simple: IF such a discovery was made, Mongolia would not require the capital financing and the engineering expertise of a deep block cave mine to first exploit such a deposit. Potentially no conessions would be made regarding tax rates and royalties and the rest of Oyu Tolgoi might be put on hold.
In the lead-up to the 2009 agreement Mongolia had already (seriously in the dead of night in secret) had Parliament, the Great Khural, pass a sudden "Windfall Profits Mineral Tax" that was a shot across the bow of IVN/Rio in the negotiations, and caused a down-tools on all development and exploration while negotiations continued.
Probably a buy-out was intended in 2009, but it was impossible to give value for the HNE extension and the exploration targets on the JV which remained undrilled. So ETG spent several tens of millions of dollars drilling their adjoing 100% property they hadn't made subject to the JV, some interesting preliminary results, perhaps suggesting another mineralized corridor parallel to OT, but by 2011 or so they petered out on drill exploration in Mongolia almost completely, as did Rio Tinto on the JV property.
And the strong-arm tactics and ceaseless negotiating for improved standing by Mongolia continued for the next 13 years as well, until, in 2022, the Mongolians finally gained the concession from Rio Tinto that the cost of their buy-in to aquire the 34% equity stake they hopld in Oyu Tolgoi, plus all interest and financing copsts to date for the Mongolian account, would be totally written-off, to the tune of $2.4 billion USD - arguably a complete renege omn the promises made in 2009, but there we are. sveral times it looked as if the whole project might collapse for various resons, and in the meantime ETG absolutely languished and was forgotten by the market - it traded extremely thinly and dropped as low as 20 cents/share while the share float was being progressively diluted by cash-injections required to keep the lights on and shovel out salaries and options to management. Unless there was a very good reason for ETG to remain an independent company, it became a strange public listing - a non-exploring exploration company, that had shed almost all control over any properties itself, and was really just a carried-interest royalty that might have been run off the side of the desk of a company that had active business.
ETG kept saying they were negotiating their stability status with Mongolia and other terms to bring the interest of the company into alignment with other stakeholders. But the real hang up appears to have been an impossibility of fairly valuing the company, and a decision not to dilute the share base any further. AT THE SAME TIME everybody and their dog started to suspect that Rio Tinto would eventually buy out the 49% of the public shareholding of TRQ and take the company private, and any sudden bonus or upvaluation of ETG could only serve to encourage higher valuations for TRQ - as could any sudden discovery of a valuable deposit on the JV ground.
So nothing happened and ETG languished, until, in 2022, Rio and Mongolia made their detente deal with a write down of the $2.4 billion which made Mogolia's 34% of OT (excluding ETG) free to them, with a further promise they would not be saddled with any recourse financing nor would their future dividends be impair4ed by further borrowings! Then Rio did the predictable thing and bought out TRQ, leaving ETG as the last public participation at OT.
Now, TRQ last year, before they were delisted, announced they were doing some exploratory drilling on the JV ground. The bid for TRQ at a premium to market created some revived interest in ETG, which along with rising copper and gold prices in the past two months, is sparking a move of ETG's share price to decade-long highs.
Another footnote to this history. As ETG was waiting for the OT Lift One block cave to be developed, which was clearly going to take a decade or so, it was running out of money. So it turned to Sandstorm Gold and sold them a royalty and a significant private placement. Sandstorm kept increasing their position in ETG until they now own 25% of ETG. Last year Sandstorm announced they were going to create a separate copper royalties streaming company, Horizon Copper, and they spun off the ETG shares into Horizon at a price below 90 cents (87 cents I think), but in the meantime Horizon is not trading pending some additiuonal transactions related only to it and Sandstorm. One curious outcome is it appears the management group of Sandstorm may be more concentrated holders of Horizon shares then they are of Sandstorm shares, which fits with the fact that in a prior PP by ETG, notwithstanding Sandstorm was a shareholder of ETG, a number of them had participated and taken down shares and warrants of ETG in their personal capacities. And to me, given that these people are professional mine and cashflow valuators ... that speaks volumes about their opinion of ETG.
So there you have it. ETG still doesn't have a stability agreement. The undercut has already started on the block caving and commencement of commercial production at Hugo North should occur in the first half this year, and in two years pre-production ore (tunnelling) will be onto the ETG JV. ETG is virtually certain to begin receviving substantial income dependant upon the price of copper and gold, as they owna significant royalty (20%) of a massive, in-process mine.
Rio Tinto now holds about 17% of ETG, Horizon 25%, management maybe 5% or a bit more. Significantly there hasnt been an insider trade from management in over a year, and no sales in abut three or four (?) but they scoop their options and share purchase rights just like monopoly every year when they pass GO.
Does it look like a big kick at the can on potentially fantastic exploration upvaluation? Does it look like a premium to market buy-out candidate? Does it look like great leverage to copper and gold prices?
And for comparison's sakes ... ETG is now trading at about 3% of the implied market cap of Turquise Hill in its buyout by Rio concluded in December, although it has a 20% interest in the highest NSR's that will come out of OT. While there is some risk concerning who will shoulder the cost of the 34% ownership Mongolia will no doubt insist upon before ETG is fully integrated into any full cashflow plan out of OT, there are significant and compelling arguments that Rio Tinto is now on the hook for any such cost, as ETG pre-paid for "same as" treatment as a term of the Earn-In Agreement by contributing 80% of their extremely valuable property rights.
Its all pretty exciting for those of us who have ridden the ups and downs over man many years together. I can say, without question, given how shareholders PM each other and share information over the years, I have never been involved in a speculative ming play first, where i accumulated such a major, and thus risk by single holding position (my position for my personal circumstances is bloated), and seen many other significant individual shareholders who have stuck with the play for so long, indeed doubling down and cost averaging whenever the stock drifted down. As in, I'm not the only one dreaming or drinking kool aid here.
Best of luck to all. By all means do your own DD. This is not a simple play, but it may be an explosive, as in upwardy explosive, one. Dare to dream
cg
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The negotiations with Mongolia are fraught, but after political turmoil in 2009