Entree Resources Ltd T.ETG

Why I believe the arbitration has leverage

[Countrygent]

The company has been coy about what relief they are seeking, but I say make no mistake, the commencement of this arbitration was a calculated move to pressure Rio to act to add value to ETG.

You have to go back to the Earn-In Agreement negotiated with IVN in 2004 when the drills were outlining the Hugo North deposit continuing towards the IVN/ETG property line.

The deal made was, you spend $35 million (? If memory serves) on exploration on our licences, you earn an 80% interest below 525m, (again, if memory serves on the exact number) if shallower, you earn 70%.   BUT, for ETG to give up so much potential, it was key that ETG was relieved of any further outlay expenses - thus a financing by IVN of all pro-rata development expenses by IVN, with principal and interest only to be repaid by recourse to cash flows from production.

And there was an agreement that if the Earn-In was completed, a JV would be formed, there would be an exploration committee and annual consultation and budgeting on exploration of the JV land.  ETG would transfer its licences to the JV partner and retain its 20% or 30% interest in production.

It is in that context that in 2009 ETG shareholders were suprised to discover that ETG was not included in the stability agreement on taxation and government royalties that was to cover OTLLC and Rio.   There was a specific provision in the Earn In whereby IVN had undertaken as deliverable to ETG to use its "best efforts" to secure a stability agreement covering ETG's interests equivalent to or better than that negotiated for IVN.

There is no issue I can see with regard to the assignment of IVN's position under the JV and Earn-In - OTLLC became the successor to the position of IVN.

What appears to have occurred is Mongolia's desire to secure a 34% interest in all of OT at a discount or no cost at all was objected to by ETG.  The company likely took the position the intent of the Earn-In was to secure a 20% or greater carried interest and any cost related to Mongolia taking a portion of that carried interest was not for ETG's account - it should be part of the burden of the "best efforts" to deliver a stability agreement covering ETG.

The likely push-back by Rio was that parity of treatment, or "equivalent" treatment required ETG accepting the burden of contributing to or underwriting the cost of Mongolia acquiring a 34% interest in ETG's JV interests.

My own analysis is when considering the meaning of the "best efforts" obligation assumed by Rio/OTLLC you have to consider the primary intent of the Earn In contract as a whole.  The primary intent was to grant to IVN the ability to earn an 80% interest but to carry all development and financing obligations.  IVN was also to carry the risks inherent in negotiations to procure a stability agreement with Mongolia.  ETG's primary intent under the Earn In was to maintain a specified interest - 20% or 30% carried to production with zero financing risks or cash calls.

In that context it seems counter to the primary intent that a subsidiary clause promising equivalent tax stability treatment would operate to reduce the carried interests of ETG.  They had surrendered 80% of a potentially immensely valuable property (later proved to be so) for a relatively limited exploration commitment.   Although IVN/Rio might argue and no doubt will that 34% of their Earned interests was required to secure stability treatment with Mongolia, the risks of development and securing stability were all on their side of the ledger.  ETG negotiated for a de-risked carried interest.  They pre-paid for IVN's or Rio's best efforts and surely best efforts includes any financial outlay on similar terms as they made outlays for their own stable future cash flows.

So, acknowledging that it isn't clear cut, the Earn In does have some ambiguity, I'm leaning hard towards the conclusion the company has done the right thing by forcing a resolution of the issue at this stage.  Whether they have asked for specific performance or damages, I don't know.  One remedy which would suit me just fine is a declaration that OTLLC will have breached and repudiated the Earn In by failing a key deliverable - we'll gladly take back 100% ownership of the JV and undertake to repay any exploration and development expenses incurred since 2004!

So, very interesting times ahead IF the arbitration proceeds.

At the same time Rio is now treating they are examining the size of Lift 2 with their Order of Magnitude study - which is pretty clearly a major determinant of NPV of the JV property - ETG NR'd in 2006 they believed the drills some 1300m N of the JV line had intersected the top of the same mineralized system as HNE (dipping to the NE) - but TRQ has doggedly since asserted a fault lay immediately N of the 625mN limit hectares Lift 2 PEA resources - Lift 2, especially the possibility it can be advanced to be mined earlier, could be immensely more valuable.

And given the problems associated with ever reopening the IA stability agreement or returning to the Mongolian parliament to secure a similar agreement for ETG, it makes so much sense to just fold the whole JV up into OTLLC which both automatically covers 100% of the JV ground with the existing IA, automatically splits the ownership 66%/34% Rio/Mongolia, and exit, stage right, ETG.   Only issue is the right price and a willingness of Rio and OTLLC to stop pushing the unresolved issues down the road time wise.   Thus very interesting ETG commencing the arbitration when they had played ball for so many years quietly waiting for OT development to advance.  There certainly wasn't any negotiation in good faith with a JV partner to resolve these issues - it has been at least 14 years they have been on the table.

Feeling confident.

cg

[UNKLAL]

Good morning n Happy New Year Counrtygent, great to hear ur thoughts on what might transpire over the coming months, but I sure would like to hear something coming directly from ETG!!! Onward n upward, still holding strong. UNKLAL

[Rock9011]

I believe ETG will be a memory before arbitration occurs. RT won't chance having a decision by arbitration that as 14 years have passed and no decision has been made the joint venture agreement terms have not been acted upon thereby rendering the JV null and void. ETG can then pay their share of exploration expenses plus interest. ETG can't mine the north property without RT's

[Countrygent]

  The stakes are too high for Rio to put ownership of about 53% of all the JV, plus the promise to throw in the 100% ETG ground on similar terms, in jeopardy.  The relative value  of buying out ETG at a fair price is paltry by comparison. Talk of sale of Heruga or any third party coming in over the objection of Rio must be highly unlikely because the Mongolians would never

[raphaelle2]

Just one thing to remember in this whole saga. RT doesn't like to share, and won't hesitate to scr... his mother, not to mention any juniors, to get the lion's share. Like it or not, their track record bears this out. About ETG...don't be naive. Look how TRQ minority was treated! But hoping and praying are free! Good year 2024 to all.

[lumpy13]

Glad to see the discussion on the potential arbitration and thanks to Countrygent for his insights. As I've noted before, if ETG and RIO/OTTLF don't reach an agreement on the purchase price by April '24, it goes to arbitration which - based on the value of OT - could easily be a 2-4x for ETG based on its current market cap. It's clear to me, having spoken to ETG mgmt that they see