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Msg  18268 of 18455  at  12/6/2023 8:19:41 AM  by


November Presentation

I was travelling in November and have only now read the most recent November 2022 updated corporate presentation. It’s worth reading the risk factors, and particularly Page 12 which sets out the Underground Project Development, HNE.

Very strange operation of a JV - Entree Reports they have not received the 2023 OTFS23 (although it has been submitted to the Government of Mongolia) nor HNE drilling results for 2022 or 2023 “pending”.

Lift 2 drilling reported as “ahead of schedule” and in particular, the drilling first approved is described as the “original in-fill diamond drilling”, with “opportunity to complete additional HNE underground drilling in 2023 to accelerate the Lift 2 program”

“ Drilling will support updated resource model for Hugo North (including HNE) Lifts 1 and 2 (expected Mid-2024) and Lift 2 Order of Magnitude Study.”

The pot is simmering - my assumption is Rio and Mongolia are holding material information and likely discussing how to deal with ETG. The elephant in the room at HNE - the magnitude of Lift 2, which has a large NPV because of the possibility of four factors - it being substantially expanded resource, the production capacity of OT being expanded further, Lift 2 development and production being advanced, and higher mid-term CU and AU prices.

The mid-term metals prices is a huge wild card. Current projected NPV’s for ETG appear to use $3.25 CU and $1591 AU.

The leverage of a potentially much enlarged resource to higher prices, coming into production earlier … obvious valuation lifts.

The timing of the arbitration appears not to accommodate completion of the Lift 2 Order of Magnitude Study, although the drilling to complete the same might be completed and assayed by April.

Will matters come to a head in April? Or will there be an accommodating adjournment? Or maybe Rio doesn’t care if it goes forward - the relief being sought by ETG has never been publicly detailed. Personally, I believe there is an argument OTLLC as successor to IVN has defaulted on a key provision of the Earn-In Agreement - best efforts to procure IA treatment or similar to IA treatment for ETG, a pending (and defaulted) obligation since 2009? Evidence of a lack of best efforts might include the several material negotiations and agreements made with Mongolia and OTLLC since 2009 to benefit Rio Tinto and advancement of OT generally. Is it overly aggressive to suggest when securing a 20/80 split on the JV of certain tax-stabilized cashflow has failed to be achieved, yet Rio has stabilized their cashflows, that recission of the Earn-in Agreement and return to ETG of 100% of the JV interests in return for repayment of all expended costs on the JV is inequitable? Recall the principal object of the Earn-in and JV was for the two parties to secure their proportional interests. Among other things, ETG’s market valuation, its ability to raise capital, have all been impaired by substantial uncertainties caused “arguably” by a failure of best efforts on the part of OTLLC to perform its obligations. Remedy - unwind the deal.

It will never come to that unless Rio and Mongolia are maniacs, but there is substantial risk and leverage towards negotiation and accommodation there. In particular the long-running fictions concerning the extent and value of Lift 2, and potentially additional value from other JV exploration targets not yet included in any resource estimate.

On the other hand, these potential additions to the valuation of ETG are an embarrassment to the TRQ valuation and buy-out in that there was no additional value estimated or given by opinions of value upon which the bid was recommended, and opined upon as to fairness, by any of Rio, TRQ Management, or TD Bank (as I read and understood the disclosure). So Rio may have every reason to wish to drag their feet even if they were willing in conjunction with Mongolia to make an offer to buy-out ETG as a global settlement of all issues outstanding.

If you hypothetically up the metals prices by 40%, advance the development of Lift 2 (and that monster throw-in, Heruga) by several years, and substantially expand the resource estimates of Lift 2 based on its northern continuation along strike …. It is not difficult to model NPV values for ETG in excess of $4 CDN, including an allowance for some partial sharing of the cost of surrender of 34% of the retained 20% JV interests to Mongolia without compensation - which was not the terms upon which IVN procured IA treatment for OTLLC and IVN as a shareholder - they took back debt for at least a full proportion of the capital costs expended in respect of Erdenes OTLLC 34% shareholding as compensation for rolling the full OT asset portfolio into OTLLC. Which set a benchmark for what their “best efforts” on their own behalf could procure.

Why should ETG accept anything less?

Perform the Earn-in and JV in good faith, or unwind the JV and we will find a 100% owner willing to repay all costs expended on the JV licences since 2004. It won’t be difficult. Then Rio and Mongolia can negotiate with them.


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