Deep below the surface of Mongolia’s southern Gobi desert, men and machinery are laying the foundation for a mining enterprise that will drive the country’s economy for decades to come.
Shaft 2 at Oyu Tolgoi’s underground mine expansion is 1.3 kilometres deep and will provide access to some of the largest stores of copper and gold on Earth. Rio Tinto began mining from the open pit at Oyu Tolgoi in 2012, but an estimated 80% of the mine’s value lies in the high-grade underground. Oyu Tolgoi is 66% owned by Rio-controlled Turquoise Hill Resources and 34% by the Mongolian government.
It’s been quite a journey from the discovery hole drilled 15 years ago by Robert Friedland’s Ivanhoe Mines, the Canadian exploreco that ventured into frontiers other companies found too forbidding. Once Phase 2 underground construction is completed in 5-7 years, Oyu Tolgoi will make up an estimated 30% of Mongolia’s gross domestic product. For Rio Tinto, the company’s chief development officer summed it up best - “It's the biggest and best new project we've got, full-stop, across the group.”
A spider web of tunnels will be used to access the ore, and the dimensions of the mining operation are stunning. The total length of the tunnels will be about 200 kilometres. The passages will be 5.5 metres high and wide enough for two large trucks to pass each other. The ore will be loosened with explosives and bulk-mined using block caving.
The price tag of Oyu Tolgoi’s underground expansion is also somewhat breathtaking, coming in at an estimated US$6.8 billion. In December Oyu Tolgoi announced a US$4.4-billion project financing by a syndicate of international banks and government-backed export credit agencies. The agreement is one of the largest financings in mining history. It’s all the more remarkable coming as it does at a time of depressed commodity prices and a prolonged four-year bear market for the mining sector.
Canadian institutions also played an important role in the financing that will fund the underground expansion. Partners included Export Development Canada and the Canadian Imperial Bank of Commerce.
Oyu Tolgoi isn’t the only significant Canadian investment in Mongolia recently. In December, National Bank paid US$15 million for a 10.5% stake in XacBank, one of Mongolia’s top banks. National Bank’s move was the first strategic investment by a foreign commercial bank into Mongolia’s banking system.
Fifteen years after Hole 150 hit rich copper and gold intercepts for Ivanhoe, another Canadian mineral exploration company is once again in the vanguard of the hunt for buried treasure in Mongolia. Nova Scotia-based Erdene Resource Development (ERD-T) is planning a follow-up drill program at Bayan Khundii (“Rich Valley”), the high-grade gold discovery the company made in the country's southwest in mid-2015.
A 15-hole, 695-metre maiden drill program completed late last year yielded some of the highest intercepts to date in Mongolia, including 7 metres at 27.5 g/t gold, 15m at 9.9 g/t and 12m at 16 g/t, which included 1 metre of 167 g/t. Visible gold was observed in 10 of the 15 holes, which have only tested the mineralization within 50 metres of surface.
The discovery was made by Erdene geologists in May last year through surface sampling and trenching that yielded some bonanza-grade results, including a rock chip sample with a grade of 4,360 g/t Au. In fact, 20% of those surface samples returned values in excess of 3.0 g/t Au. Drilling confirmed gold mineralization over 475 metres, which remains open at depth and along strike. Regional exploration has identified additional gold mineralized zones over a 1.4-kilometre trend that remains open.
The system lies about 20 kilometres south of Erdene’s Altan Nar (“Golden Sun”) gold-polymetallic project that it has been driving forward for the last few years, with intersections like 9 m of 9.2 g/t Au equivalent, 55 m from surface, that it hit in late 2015. While work at Altan Nar in 2016 will be focused on metallurgy and a mining license application, Erdene plans a follow-up drill program at Bayan Khundii in the first half of 2016, with drilling likely in April followed by a maiden resource estimate later in the year.
“Bayan Khundii is quickly developing into an important high-grade gold system,” said Erdene CEO Peter Akerley. “The recent drilling provided exceptional grades and wider intervals than anticipated with good continuity of the high-grade zones and potential to provide a sizeable resource .”
Erdene is in the process of completing metallurgical testing at Bayan Khundii, and with the gold visible and largely free of impurities, Akerley suspects it should be relatively easy to process.
The company’s projects are part of the same Tian Shan mineral belt that hosts Oyu Tolgoi to the east, and spans Russia, Kazakhstan, Mongolia and China. Two privately owned gold mines have gone into production in the neighbourhood in recent months.
At the very least, Bayan Khundii becomes a good complement to a future mine at Altan Nar, according to the CEO. But he believes the high-grade gold discovery has the potential to become much more.
Erdene’s plan is to aggressively advance Altan Nar and Bayan Khundii to a production decision in the near-term, Akerley said.
The Jan. 5 appointment of gold mining executive David Mosher as a strategic advisor to Erdene should help in that regard. Mosher has more than 35 years of mining experience and from 1992 to 2008 served as president and CEO of High River Gold Mines, a TSX-listed producer with operations in Canada, Africa and Russia. High River was taken over by Nordgold in 2013.
“We were very pleased to have Mr. Mosher join the Erdene team and believe we have the right projects to move Erdene towards our goal of becoming a gold producer in the near term,” Akerley said. “With David’s thirty-five years of executive level experience in mine building, project management in foreign jurisdictions and company building, he is extremely well-qualified to help guide the Company both technically and professionally as we advance our core projects.”
On the gold price front, the timing of Erdene’s good fortune may be fortuitous. While a vicious commodity sell-off has sent base metal prices plunging in recent months, the yellow metal has held up remarkably well in U.S. dollar terms and has been a strong performer when priced in virtually any other currency. This month has seen the gold price push through the US$1,100 mark for the first time since early November, shaking off the U.S. Fed’s interest rate hike.
Erdene's projects are virtually on China's doorstep, which increases their desirability. China is the world’s largest gold producer but supply has not kept up with demand in the world’s most populous nation, where gold retains a cultural significance -- as it does throughout Asia. China’s central bank has also been a buyer of gold, announcing last July that its holdings have increased more than 50% from 2009 to 1,658 tonnes, according to a Dec. 10 Wall Street Journal article. The bank’s gold reserves have since climbed another 5% to 1,743 tonnes.
Proximity to China is also a bonus on the infrastructure front. China’s growing middle class and its demand for commodities of all types produced an infrastructure boom that led to development and construction of thousands of kilometres of roads and railroad tracks in the area south of Erdene’s projects.
Talking about the infrastructure buildup brings Akerley back to the issues related to working in Mongolia and the bad wrap the country sometimes gets due to historic high-profile conflicts between mining companies and the government.
Discovering world-class mines is increasingly difficult, forcing companies to seek opportunities further and further afield, said Akerley. Mongolia became a darling of the international mining industry and mainstream media as it emerged from the Soviet system and opened its very prospective and unexplored mineral belts to foreign investors in the mid-1990’s.
Mongolia’s ride to the top of the list of countries receiving foreign investment was very rapid. Along with the success came many issues as its government sought to establish a fair balance for a low-income population of nearly 3 million, while continuing to attract foreign investment, Akerley pointed out.
The long, drawn-out negotiation between the government and Rio Tinto was resolved late last year and ultimately has resulted in one of the fastest developments of any mining project of that scale, along with one of the largest financings in mining history. Following the initial copper-gold exploration and development wave, there was a massive influx of dollars to fund coal development to fuel the China boom next door. With the downturn, these coal projects all suffered tremendously.
As a result of its high profile, the country appears to have received more negative attention than what is reflected on the ground, the CEO says. It’s no picnic to work in any foreign jurisdiction, Mongolia included, but when you compare what the industry has been able to accomplish in Mongolia in the last decade with discoveries and new developments, it rivals or exceeds results from many of the other more mature mining jurisdictions in developing countries.
The Oyu Tolgoi cooperation agreement that paved the way for the US$4.4-billion project financing is just the latest evidence. Other positive developments such as favourable legislative changes including reduced royalties and the re-opening of the mineral licensing system also show the Mongolian government is serious about supporting the mining industry.
The National Bank of Canada’s recent purchase of a 10.5% stake in XacBank represents another major vote of confidence in Mongolia’s investment climate.
“There’s plenty of evidence that Mongolia is committed to attracting foreign investment and exploring and developing its vast mineral potential,” Akerley said.
He recently visited the Oyu Tolgoi mine as part of a diplomatic site visit that included Ed Jager, the Canadian Ambassador to Mongolia, as well as the American and Turkish ambassadors.
For the Erdene CEO, who first visited Mongolia 18 years ago and has worked there since the days of the Oyu Tolgoi discovery, it was a reminder of the value of focus and persistence.
A more light-hearted experience last year during Mongolia’s Lunar New Year festival (Tsagaan Sar) -- which typically includes consultations with the local lama or shaman, who provides insights into the future -- gave Akerley perspective on what the future might hold for Erdene.
"The shaman said my mind was busy, but there was one thing he could not understand -- what was all of this bright yellow material, it’s everywhere. But don’t worry, whatever it is you will be very happy.”
“I hoped I knew what the yellow material was, but with the recent drill results it is becoming more and more apparent,” Akerley said with a laugh.
Erdene Resource Development Corp. (ERD-T)
Shares outstanding: 105 million
Market cap: $14.7 million
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