It appears one of the great variables and impediments to valuation of ETG is finally off the table.
Note the arbitration panel reserving further awards of "equitable damages". You have to read between the lines but it appears what threw a wrench into the works in 2009 and excluded ETG from IA treatment has been put to rest. You have to go all the way back to the Earn-in Agreement made in 2004 by which ETG surrendered 70/80% of its ownership of the JV ground (now economically significant HNE Lifts 1 and 2 and Heruga). It was promised best efforts to see its interests tax stabilized "as good as" what was negotiated by IVN (later rolled into OTLLC). At that time, IVN made a separate agreement to grant Mongolia 34% of OTLLC, provided they accept a liability to pay book value for those shares and a proportional share of any further capital contributions, and all those loaned amounts to Mongolia to carry compounding interest as well.
By the time of the undercut negotiation with Rio Tinto in 2022 Mongolia was on the hook for $2.4 billion USD. And it appears that ETG balked at being forced to give up any portion of its retained 20/30% interest in the JV in 2009. And you can see the logic in the terms of the Earn-in Agreement, that ETG gave up 70/80% of a huge and promising asset in return for a "de-risked" ownership interest. Financing carried to production repayable from net income, a promise of equal or better tax stability terms. And on the other side, IVN and then Rio Tinto saying, "hang on, we had to throw in for the Mongolians at our cost, you should too". So the question became, if there was av
ater risk of payments or ownership interests being demanded by Mongolia, who was at risk economically - What became OTLLC as successor to IVN, or ETG?
And the Mongolians doubled-down on their demands with the settlement made in 2022 with Rio Tinto - negotiating a $2.4 billion debt forgiveness so they took all their OT interests at zero contribution cost, and then more recently passing the law requiring us-compensated State ownership of 34% of all "strategic mineral deposits" of which OT is THE principal deposit. So, if ETG was obligated to surrender 34% of their retained JV ground interests, should they be reimbursed by OTLLC on the basis that if they had been given IA treatment as promised in 2004, they should be shielded from any later partial expropriation by the government.
Now the ball is most definitely in Rio Tinto's court. If I am interpreting this correctly, on a valuation of ETG they are entitled to a pro-rata 20% of the net mining profits off the JV ground, subject to repaying their share of exploration and development costs, to the same extent as realized by OTLLC in respect of their 80% interest.
How to secure Mongolia's 34% ownership of ETG's JV interests in any event, and have the income subject to the same IA in place over OTLLC's income? Rio Tinto buys out ETG and collapses the JV entirely into OTLLC. We don't care if they can book some capital cost to Mongolia's shareholding or not - given how loudly in 2022 the Mongolian politicians emerging from the settlement and debt forgiveness negotiations said no debt obligation would ever be permitted to impair their full 34% dividend rights ... you have to wonder if Rio Tinto had already promised that if we reached this point they would throw in ETG's JV interests so Mongolia took their 34% for free as well.
Clear as mud but "equitable damages" pending if necessary says a lot. This appears to be a huge win for ETG.
Bow a big valuation variable is off the table. Much easier to find a win-win negotiated price for ETG acceptable to Rio Tinto and ETG shareholders? Several other saw-off issues like predicted metals prices, production predictions, resource expansion, discount rates ... but a very large nut has just been cracked. Pull out your chequebook Rio Tinto, this JV production you don't yet own is more than just a plum asset and copper production expansion for you, it's also trying a bow around all of OT and setting you and Mongolia up for ownership of the finest copper/gold mine to come fully on line in decades.
Nice! Will the market understand? Who knows. The tape will tell its own tale, but I'm happy. Props to Stephen Scott, the BofD and our lawyers and management.
cg