Exhibit 99.1
ENTRÉE RESOURCES LTD.
Annual Information Form
FOR THE YEAR ENDED
DECEMBER 31, 2017
DATED March 8, 2018
TABLE OF CONTENTS
| Date of information, DEFINED TERMS AND ABBREVIATIONS |
4 |
| Forward Looking Statement |
4 |
| Currency and Exchange |
6 |
| CANADIAN DISCLOSURE STANDARDS FOR MINERAL RESOURCES AND MINERAL RESERVES |
6 |
| CORPORATE STRUCTURE |
6 |
| Name, Address and Incorporation |
6 |
| Intercorporate Relationships |
9 |
| GENERAL DEVELOPMENT OF THE BUSINESS |
9 |
| Three Year History |
14 |
| DESCRIPTION OF THE BUSINESS |
18 |
| Mineral Resource Business |
18 |
| Business of Entrée |
18 |
| Turquoise Hill, Rio Tinto and OTLLC |
21 |
| Agreements with Sandstorm |
27 |
| Non-Brokered Private Placement |
28 |
| Arrangement |
29 |
| Environmental Compliance |
29 |
| Competition |
30 |
| Specialized Skills and Knowledge |
30 |
| Business Cycles |
30 |
| Economic Dependence |
30 |
| Foreign Operations |
30 |
| Employees |
31 |
| MATERIAL Mineral Property |
31 |
| Entrée/Oyu Tolgoi JV Project, Mongolia |
31 |
| Introduction |
32 |
| Project Area |
33 |
| Mineral Tenure, Royalties and Agreements |
33 |
| Geology and Mineralization |
35 |
| History |
36 |
| Drilling and Sampling |
36 |
| Data Verification |
38 |
| Metallurgical Testwork |
39 |
| Mineral Resource Estimation |
40 |
| Mineral Resource Statement |
41 |
| Mineral Reserve Estimation |
43 |
| Mineral Reserve Statement |
43 |
| Mining Methods |
44 |
| Recovery Methods |
46 |
| Project Infrastructure |
47 |
| Environmental, Permitting and Social Considerations |
48 |
| Markets and Contracts |
49 |
| Capital Cost Estimates |
50 |
| Operating Cost Estimates |
51 |
| Economic Analysis – 2018 Reserve Case |
52 |
| Sensitivity Analysis – 2018 Reserve Case |
55 |
| Preliminary Economic Assessment |
55 |
| Recommendations |
62 |
| NON-MATERIAL PROPERTIES |
64 |
| Risk Factors |
64 |
| DIVIDENDS |
81 |
| CAPITAL STRUCTURE |
81 |
| MARKET FOR SECURITIES |
81 |
| ESCROWED SECURITIES |
84 |
| DIRECTORS AND OFFICERS |
84 |
| PROMOTERS |
91 |
| LEGAL PROCEEDINGS AND REGULATORY ACTIONS |
91 |
| INTEREST IN MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS |
91 |
| TRANSFER AGENTS AND REGISTRARS |
93 |
| MATERIAL CONTRACTS |
93 |
| INTEREST OF EXPERTS |
94 |
| ADDITIONAL INFORMATION |
94 |
APPENDIX
ENTRÉE RESOURCES LTD.
ANNUAL INFORMATION FORM
Date of
information, DEFINED TERMS AND ABBREVIATIONS
Unless otherwise specified in this Annual
Information Form (the “AIF”), the information herein is presented as at December 31, 2017, the last date of the Company’s
most recently completed financial year.
As used in this AIF, the term the “Company”
refers only to Entrée Resources Ltd. The term “Entrée” may include, collectively or individually, one
or more of the direct or indirect subsidiaries of Entrée Resources Ltd.
Forward
Looking Statement
This AIF contains “forward-looking
statements” and “forward looking information” (together the “forward looking statements”) within
the meaning of securities legislation and the United States Private Securities Litigation Reform Act of 1995. These forward-looking
statements are made as of the date of this AIF and the Company does not intend, and does not assume any obligation, to update these
forward-looking statements, except as required by applicable securities laws.
Forward-looking statements include,
but are not limited to, statements with respect to corporate strategies and plans; requirements for additional capital; uses of
funds; the value and potential value of assets and the ability of the Company to maximize returns to shareholders; potential types
of mining operations; construction and continued development of the Oyu Tolgoi underground mine; the expected timing of first development
production from Lift 1 of the Entrée/Oyu Tolgoi joint venture property; anticipated future production and mine life; the
future prices of copper, gold, molybdenum and silver; the estimation of mineral reserves and resources; the realization of mineral
reserve and resource estimates; projected mining and process recovery rates; anticipated future production, capital and operating
costs, cash flows and mine life; capital, financing and project development risk; mining dilution; closure costs and requirements;
discussions with the Government of Mongolia, Rio Tinto, Oyu Tolgoi LLC and Turquoise Hill Resources Ltd. on a range of issues including
Entrée’s interest in the Entrée/Oyu Tolgoi joint venture property, the Shivee Tolgoi and Javhlant mining licences
and certain material agreements; potential actions by the Government of Mongolia with respect to the Shivee Tolgoi and Javhlant
mining licences and Entrée’s interest in the Entrée/Oyu Tolgoi joint venture property; the potential for Entrée
to be included in or otherwise receive the benefits of the Oyu Tolgoi Investment Agreement or another similar agreement; the potential
for the Government of Mongolia to seek to directly or indirectly invest in Entrée’s interest in the Hugo North Extension
and Heruga deposits; the potential application of the Government of Mongolia’s Resolution 81, Resolution 140 and Resolution
175 to the Shivee Tolgoi and Javhlant licences; potential size of a mineralized zone; potential expansion of mineralization; potential
discovery of new mineralized zones; potential metallurgical recoveries and grades; plans for future exploration and/or development
programs and budgets; permitting time lines; anticipated business activities; proposed acquisitions and dispositions of assets;
and future financial performance.
In certain cases, forward-looking statements
and information can be identified by words such as "plans", "expects" or "does not expect", "is
expected", "budgeted", "scheduled", "estimates", "forecasts", "intends",
"anticipates", or "does not anticipate" or "believes" or variations of such words and phrases or
statements that certain actions, events or results "may", "could", "would", "might", "will
be taken", "occur" or "be achieved". While the Company has based these forward-looking statements on its
expectations about future events as at the date that such statements were prepared, the statements are not a guarantee of Entrée’s
future performance and are based on numerous assumptions regarding present and future business strategies, local and global economic
conditions, legal proceedings and negotiations and the environment in which Entrée will operate in the future, including
the price of copper, gold, silver and molybdenum, and the status of Entrée’s relationship and interaction with the
Government of Mongolia, Oyu Tolgoi LLC, Rio Tinto and Turquoise Hill Resources Ltd. With respect to the construction and continued
development of the Oyu Tolgoi underground mine, important risks, uncertainties and factors which could cause actual results to
differ materially from future results expressed or implied by such forward-looking statements and information include, amongst
others, the timing and cost of the construction and expansion of mining and processing facilities; the timing and availability
of a long term power source for the Oyu Tolgoi underground mine; the ability of Oyu Tolgoi LLC to draw down on the supplemental
debt under the Oyu Tolgoi project finance facility and the availability of additional financing on terms reasonably acceptable
to Oyu Tolgoi LLC, Turquoise Hill Resources Ltd. and Rio Tinto to further develop Oyu Tolgoi; delays, and the costs which would
result from delays, in the development of the underground mine; projected copper, gold, silver and molybdenum prices and demand;
and production estimates and the anticipated yearly production of copper, gold, silver and molybdenum at the Oyu Tolgoi underground
mine.
The 2018 PEA (as defined below) is based
on a conceptual mine plan that includes Inferred resources. Numerous assumptions were made in the preparation of the 2018 PEA,
including with respect to mineability, capital and operating costs, production schedules, the timing of construction and expansion
of mining and processing facilities, and recoveries, that may change materially once production commences at Hugo North Extension
Lift 1 and additional development and capital decisions are required. Any changes to the assumptions underlying the 2018 PEA could
cause actual results to be materially different from any future results, performance or achievements expressed or implied by forward-looking
statements and information relating to the 2018 PEA.
Other uncertainties and factors which
could cause actual results to differ materially from future results expressed or implied by forward-looking statements and information
include, amongst others, unanticipated costs, expenses or liabilities; discrepancies between actual and estimated production, mineral
reserves and resources and metallurgical recoveries; the size, grade and continuity of deposits not being interpreted correctly
from exploration results; fluctuations in commodity prices and demand; changing foreign exchange rates; actions by Rio Tinto, Turquoise
Hill Resources Ltd. or Oyu Tolgoi LLC and by government authorities including the Government of Mongolia; the availability of funding
on reasonable terms; the impact of changes in interpretation to or changes in enforcement of laws, regulations and government practices,
including laws, regulations and government practices with respect to mining, foreign investment, royalties and taxation; the terms
and timing of obtaining necessary environmental and other government approvals, consents and permits; the availability and cost
of necessary items such as water, skilled labour, transportation and appropriate smelting and refining arrangements; unanticipated
reclamation expenses; geotechnical or hydrogeological considerations during mining being different from what was assumed; changes
to assumptions as to the availability of electrical power, and the power rates used in operating cost estimates and financial analyses;
changes to assumptions as to salvage values; ability to maintain the social licence to operate; and misjudgements in the course
of preparing forward-looking statements.
In addition, there are also known and
unknown risk factors which may cause the actual results, performance or achievements of Entrée to be materially
different from any future results, performance or achievements expressed or implied by the forward-looking statements and
information. Such factors include, among others, risks related to international operations, including legal and political
risk in Mongolia; risks associated with changes in the attitudes of governments to foreign investment; risks associated with
the conduct of joint ventures; discrepancies between actual and anticipated production, mineral reserves and resources and
metallurgical recoveries; global financial conditions; changes in project parameters as plans continue to be refined;
inability to upgrade Inferred mineral resources to Indicated or Measured mineral resources; inability to convert mineral
resources to mineral reserves; conclusions of economic evaluations; future prices of copper, gold, silver and molybdenum;
failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes and other risks of the mining
industry; delays in obtaining government approvals, permits or licences or financing or in the completion of development or
construction activities; environmental risks; title disputes; limitations on insurance coverage; as well as those factors
discussed in the section entitled “Risk factors” in this AIF. Although the Company has attempted to identify important
factors that could cause actual actions, events or results to differ materially from those described in
forward-looking statements and information, there may be other factors that cause actions, events or results not to be as
anticipated, estimated or intended. There can be no assurance that forward-looking statements and information will prove to
be accurate, as actual results and future events could differ materially from those anticipated in such statements and
information. Except as required under applicable securities legislation, the Company undertakes no obligation to publicly
update or revise forward-looking statements and information, whether as a result of new information, future events, or
otherwise. Accordingly, readers should not place undue reliance on forward-looking statements and information.
Currency
and Exchange
Entrée’s financial statements
are stated in United States dollars and are prepared in conformity with United States Generally Accepted Accounting Principles
(“U.S. GAAP”).
In this AIF, all dollar amounts are expressed
in United States dollars unless otherwise specified. Because Entrée’s principal executive office is located in Canada,
many of its obligations are and will continue to be incurred in Canadian dollars (including, by way of example, salaries, rent
and similar expenses). Where the disclosure is not derived from the annual financial statements for the year ended December 31,
2017, the Company has not converted Canadian dollars to United States dollars for purposes of making the disclosure in this AIF.
CANADIAN
DISCLOSURE STANDARDS FOR MINERAL RESOURCES AND MINERAL RESERVES
Canadian disclosure standards for the terms
“mineral reserve,” “Proven mineral reserve” and “Probable mineral reserve” are Canadian mining
terms as defined in accordance with National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI
43-101”), which adopts the definitions of the terms ascribed by the Canadian Institute of Mining, Metallurgy and Petroleum
(“CIM”) in the CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council
on May 10, 2014, as may be amended from time to time by the CIM.
The definitions of Proven and Probable
reserves used in NI 43-101 differ from the definitions in the United States Securities and Exchange Commission (“SEC”)
Industry Guide 7. Under SEC Guide 7 standards, a “final” or “bankable” Feasibility study is required to
report reserves, the three year historical average price is used in any reserve or cash flow analysis to designate reserves and
the primary environmental analysis or report must be filed with the appropriate governmental authority.
In addition, the terms “mineral resource”,
“Measured mineral resource”, “Indicated mineral resource” and “Inferred mineral resource” are
defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and
normally are not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to
assume that any part or all of the mineral deposits in these categories will ever be converted into reserves. “Inferred mineral
resources” may only be separately disclosed, have a great amount of uncertainty as to their existence, and have great uncertainty
as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred mineral resource will ever
be upgraded to a higher category. Under Canadian rules, estimates of Inferred mineral resources may not form the basis of Feasibility
or Pre-Feasibility studies, except in rare cases.
Accordingly, descriptions in this AIF of
Entrée’s mineral deposits may not be comparable to similar information made public by United States companies subject
to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.
CORPORATE
STRUCTURE
Name, Address and Incorporation
Entrée is an exploration stage company
that has an interest in an advanced project located in Mongolia. The Company’s executive office is located at:
Suite 1650 – 1066 West Hastings Street
Vancouver, British Columbia, Canada V6E
3X1
Phone: 604.687.4777
Fax: 604.687.4770
Website: www.EntreeResourcesLtd.com.
Information contained on the Company’s
website does not form part of this AIF. The Company’s registered and records office is located at 2900-550 Burrard Street,
Vancouver, British Columbia, Canada V6C 0A3 and its agent for service of process in the United States of America is National Registered
Agents, Inc., 1090 Vermont Avenue NW, Suite 910, Washington, DC 20005.
Entrée maintains an administrative
office in Ulaanbaatar, the capital of Mongolia, to support Mongolian operations. The address of the Mongolian office is:
Suite 409
Gurvan Gal office center 8/1, Chinggis
Avenue
Sukhbaatar District 1st County
Ulaanbaatar, Mongolia
Phone: 976.11.318562
Fax: 976.11.319426
The Company was incorporated in British
Columbia, Canada, on July 19, 1995, under the name “Timpete Mining Corporation”. On February 5, 2001, the Company changed
its name to “Entrée Resources Inc.”. On October 9, 2002 the Company changed its name from “Entrée
Resources Inc.” to “Entrée Gold Inc.” and, on January 22, 2003, changed its jurisdiction of domicile from
British Columbia to the Yukon Territory by continuing into the Yukon Territory. On May 27, 2005, the Company changed the governing
jurisdiction from the Yukon Territory to British Columbia by continuing into British Columbia under the Business Corporation
Act (British Columbia) (the “BCBCA”). On May 9, 2017, the Company changed its name to “Entrée Resources
Ltd.”
The Company’s common shares traded
on the TSX Venture Exchange until April 24, 2006. On April 24, 2006, the Company’s common shares began trading on the Toronto
Stock Exchange (“TSX”) under the symbol “ETG”.
At inception the Company’s Memorandum
and Articles authorized it to issue up to 20 million common shares without par value. On September 30, 1997, the Company subdivided
its authorized capital on a two new shares for one old share basis, resulting in authorized capital of 40 million common shares
without par value. On February 5, 2001, the Company subdivided its common shares on a four new shares for one old share basis,
thus increasing its authorized capital to 160 million common shares without par value and simultaneously reduced its authorized
capital to 100 million common shares without par value. On October 9, 2002 the Company consolidated its authorized capital, both
issued and unissued, on the basis of one new share for each two old shares, resulting in authorized capital of 50 million common
shares without par value and simultaneously increased the authorized capital from 50 million common shares without par value to
100 million common shares without par value. On May 20, 2004, the Company received approval from its shareholders to increase its
authorized share capital from 100 million common shares without par value to an unlimited number of common shares, all without
par value. This increase became effective June 16, 2004, the date the Company filed the amendment to its Articles.
At the Company’s Annual General Meeting
of shareholders held on June 27, 2013, shareholders confirmed the alteration of the Company’s Articles by the addition of
advance notice provisions as Part 14B (the “Advance Notice Provisions”). The Advance Notice Provisions provide shareholders,
directors and management of the Company with a clear framework for nominating directors of the Company. Only persons who are eligible
under the BCBCA and who are nominated in accordance with the following procedures set forth in the Advance Notice Provisions shall
be eligible for election as directors of the Company. At any annual general meeting of shareholders, or at any special meeting
of shareholders if one of the purposes for which the special meeting was called is the election of directors, nominations of persons
for election to the Company’s board of directors (the “Board”) may be made only: (a) by or at the direction of
the Board, including pursuant to a notice of meeting; (b) by or at the direction or request of one or more shareholders pursuant
to a “proposal” made in accordance with Part 5, Division 7 of the BCBCA, or pursuant to a requisition of the shareholders
made in accordance with section 167 of the BCBCA; or (c) by any person (a “Nominating Shareholder”): (A) who, at the
close of business on the date of the giving by the Nominating Shareholder of the notice provided for in the Advance Notice Provisions
and at the close of business on the record date for notice of such meeting, is entered in the securities register of the Company
as a holder of one or more shares carrying the right to vote at such meeting or who beneficially owns shares that are entitled
to be voted at such meeting and provides evidence of such ownership that is satisfactory to the Company, acting reasonably; and
(B) who complies with the notice procedures set forth in the Advance Notice Provisions.
On February 28, 2017, the Company announced
that the Board had approved a spin-out of Entrée’s Ann Mason Project in Nevada and Lordsburg property in New Mexico
into a newly incorporated wholly-owned subsidiary, Mason Resources Corp. (“Mason”), through a plan of arrangement under
Section 288 of the BCBCA (the “Arrangement”). The Arrangement closed on May 9, 2017. Entrée shareholders received
common shares of Mason by way of a share exchange, pursuant to which each existing common share of Entrée was exchanged
for one “new” common share of Entrée (a “Common Share”) and 0.45 of a common share of Mason. A total
of 77,805,786 common shares of Mason were distributed to Entrée shareholders. Mason’s common shares commenced trading
on the TSX on May 12, 2017 under the symbol “MNR”, and on the OTCQB Venture Market on November 9, 2017 under the symbol
“MSSNF”.
The Company’s Common Shares also
trade on the NYSE American under the symbol “EGI”.
Intercorporate Relationships
The Company conducts its business and owns
its property interests through the seven subsidiaries set out in the organizational chart below. All of the Company’s subsidiaries
are 100% owned.
*The remaining 71.09% is held by Entrée
Resources International Ltd.
**Entrée LLC holds the Shivee Tolgoi
and Javhlant mining licences in Mongolia. A portion of the Shivee Tolgoi mining licence area and all of the Javhlant mining licence
area are subject to a joint venture with Oyu Tolgoi LLC. Oyu Tolgoi LLC is owned as to 66% by Turquoise Hill Resources Ltd. and
as to 34% by the Government of Mongolia (through Erdenes Oyu Tolgoi LLC). See “Description of the Business” below.
GENERAL
DEVELOPMENT OF THE BUSINESS
Entrée is an exploration stage resource
company with interests in exploration and advanced properties in Mongolia, Australia and Peru.
On February 28, 2017, the Company announced
that the Board had approved a spin-out of Entrée’s Ann Mason Project in Nevada and Lordsburg property in New Mexico
into a newly incorporated wholly-owned subsidiary, Mason, through a court approved plan of arrangement under Section 288 of the
BCBCA. The Arrangement closed on May 9, 2017. The Company’s shareholders received common shares of Mason in proportion to
their shareholdings in the Company by way of a share exchange, pursuant to which each existing common share of the Company held
as of the effective date of the Arrangement was exchanged for one “new” Common Share of the Company and 0.45 of a common
share of Mason. A total of 77,805,786 common shares of Mason were distributed to the Company’s shareholders. There was no
change to shareholders’ interests in the Company.
The Company transferred to Mason all of
the issued and outstanding shares of Entrée U.S. Holdings Inc., which indirectly holds the Ann Mason Project and the Lordsburg
property, along with $8.84 million in cash. The result of the Arrangement is two separate and focused, well-capitalized entities,
each with a high quality advanced project providing new and existing shareholders with optionality as to investment strategy and
risk profile.
Optionholders and warrantholders of the
Company received replacement options and warrants of the Company and options and warrants of Mason which are proportionate to,
and reflective of the terms of, their original options and warrants of the Company.
Mason’s common shares commenced trading
on the TSX on May 12, 2017 under the symbol “MNR”, and on the OTCQB Venture Market on November 9, 2017 under the symbol
“MSSNF”.
Following the Arrangement, Entrée’s
primary asset is its carried 20% joint venture interest in the Entrée/Oyu Tolgoi joint venture property (the “Entrée/Oyu
Tolgoi JV Property”). Entrée’s joint venture partner, Oyu Tolgoi LLC (“OTLLC”), holds the remaining
80% interest. The Entrée/Oyu Tolgoi JV Property comprises a significant portion of the long-life, high-grade Oyu Tolgoi
copper-gold mining project in Mongolia.
The Entrée/Oyu Tolgoi JV Property
includes the Hugo North Extension copper-gold deposit and the Heruga copper-gold-molybdenum deposit. The resources at Hugo North
Extension include a Probable reserve, which is included in the first lift (“Lift 1”) of the Oyu Tolgoi underground
block cave mining operation. Lift 1 is currently in development by project operator Rio Tinto, with first development production
from the Entrée/Oyu Tolgoi JV Property expected in 2021. When completed, Oyu Tolgoi will become the world’s third
largest copper mine.
On January 15, 2018, the Company announced
the results of an updated Technical Report that was completed on its interest in the Entrée/Oyu Tolgoi JV Property. The
updated Technical Report discusses two development scenarios, an updated reserve case (the “2018 Reserve Case”) and
a Life-of-Mine (“LOM”) Preliminary Economic Assessment (“2018 PEA”). The 2018 Reserve Case is based only
on mineral reserves attributable to the Entrée/Oyu Tolgoi joint venture (the “Entrée/Oyu Tolgoi JV”)
from Lift 1 of the Hugo North Extension underground block cave.
The 2018 PEA is an
alternative development scenario completed at a conceptual level that assesses the inclusion of mineral resources from
Hugo North Extension Lift 2 and Heruga into an overall mine plan with mineral resources from Hugo North Extension Lift 1. The
2018 PEA includes Indicated and Inferred resources from Hugo North Extension Lifts 1 and 2, and Inferred resources from
Heruga. Significant development and capital decisions will be required for the eventual development of Hugo North Extension
Lift 2 and Heruga once production commences at Hugo North Extension Lift 1.
LOM highlights of the production and financial
results from the 2018 Reserve Case and the 2018 PEA are summarized in Table 1 below.
Table 1 – Summary LOM Production
and Financial Results – Entrée/Oyu Tolgoi JV Property
| Entrée/Oyu
Tolgoi JV Property |
Units |
2018 Reserve Case |
2018 PEA |
| LOM
Processed Material |
|
|
|
| Probable
Reserve Feed |
|
35 Mt @ 1.59% Cu,
0.55 g/t Au, 3.72 g/t Ag
(1.93% CuEq) |
— |
| Indicated
Resource Feed |
|
— |
113 Mt @ 1.42% Cu,
0.50 g/t Au, 3.63 g/t Ag (1.73% CuEq) |
| Inferred
Resource Feed |
|
— |
708 Mt @ 0.53% Cu,
0.44 g/t Au, 1.79 g/t Ag
(0.82 % CuEq) |
| Copper
Recovered |
Mlb |
1,115 |
10,497 |
| Gold
Recovered |
koz |
514 |
9,367 |
| Silver
Recovered |
koz |
3,651 |
45,378 |
| Entrée
Attributable Financial Results |
|
|
|
| LOM
Cash Flow, pre-tax |
$M |
382 |
2,078 |
NPV@5%,
after-tax |
$M |
157 |
512 |
| NPV@8%,
after-tax |
$M |
111 |
278 |
| NPV@10%,
after-tax |
$M |
89 |
192 |
Notes:
| · | Long term metal prices used in the net
present value (“NPV”) economic analyses are: copper $3.00/lb, gold $1,300.00/oz and silver $19.00/oz. |
| · | Mineral reserves and mineral resources
are reported on a 100% basis. |
| · | Entrée has a 20% interest in the
above processed material and recovered metal. |
| · | The mineral reserves in the 2018 Reserve
Case are not additive to the mineral resources in the 2018 PEA. |
| · | Copper equivalent (“CuEq”) is calculated as shown in the footnotes to Table 2 and Table 3 below. |
The economic analysis in the 2018 PEA does
not have as high a level of certainty as the 2018 Reserve Case. The 2018 PEA is preliminary in nature and includes Inferred mineral
resources that are considered too speculative geologically to have the economic considerations applied to them that would enable
them to be categorized as mineral reserves, and there is no certainty that the 2018 PEA will be realized. Mineral resources are
not mineral reserves and do not have demonstrated economic viability.
In both development options (2018 Reserve
Case and 2018 PEA) the Company is only reporting the production and cash flows attributable to the Entrée/Oyu Tolgoi JV
Property, not production and cash flows for other Oyu Tolgoi project areas owned 100% by OTLLC. Note the production and cash flows
from these two development options are not additive.
Below are some of the key financial assumptions
and outputs from the two alternative cases, the 2018 Reserve Case and the 2018 PEA. All figures shown for both cases are reported
on a 100% Entrée/Oyu Tolgoi JV basis, unless otherwise noted, where it is for Entrée’s 20% attributable interest.
Both cases assume long term metal prices of $3.00/lb copper, $1,300.00/oz gold and $19.00/oz silver.
2018 Reserve Case Outputs:
| · | Entrée/Oyu Tolgoi JV Property development production from Hugo North Extension Lift 1 starts
in 2021 with initial block cave production starting in 2026. |
| · | 14-year mine life (5-years development production and 9-years block cave production; Figure 1). |
| · | Maximum production rate of approximately 24,000 tonnes per day (“tpd”), which is blended
with production from OTLLC’s Oyut open pit deposits and Hugo North deposit to reach an average mill throughput of approximately
110,000 tpd. |
| · | Total direct development and sustaining capital expenditures of approximately $262 million ($52
million attributable to Entrée). |
| · | Entrée LOM average cash cost $1.25/lb payable copper. |
| · | Entrée LOM average cash costs after credits (“C1”) $0.56/lb payable copper. |
| · | Entrée LOM average all-in sustaining costs (“AISC”) $1.03/lb payable copper. |
Figure 1 – 2018 Reserve Case (Lift
1) Mine Production
2018 PEA Outputs:
| · | Mineralization mined from the Entrée/Oyu Tolgoi JV Property is blended with production from
other deposits on the Oyu Tolgoi mining licence to reach a mill throughput of 110,000 tpd. |
| · | Development schedule assumes for Entrée/Oyu Tolgoi JV Property (refer to Figure 2): |
| - | 2021 start of Lift 1 development production and in 2026
initial Lift 1 block cave production |
| - | 2028 Lift 2 development production and in 2035 initial
Lift 2 block cave production |
| - | 2065 Heruga development production and in 2069 initial
block cave production |
| · | Total direct development and sustaining capital expenditures of approximately $8,637 million ($1,727
million attributable to Entrée). |
| · | Entrée LOM average cash cost $1.97/lb payable copper. |
| · | Entrée LOM average C1 $0.68/lb payable copper. |
| · | Entrée LOM average AISC $1.83/lb payable copper. |
Figure 2 – 2018 PEA Mine Production
The 2018 PEA and the 2018 Reserve
Case are not mutually exclusive; if the 2018 Reserve Case is developed and brought into production, the mineralization from
Hugo North Extension Lift 2 and Heruga is not sterilized or reduced in tonnage or grades. Heruga could be a completely
standalone underground operation, independent of other Oyu Tolgoi project underground development, and provides considerable
flexibility for mine planning and development. Although molybdenum is present in the Heruga deposit (refer to Table 3), the
2018 PEA does not include the construction of a molybdenum circuit for its recovery, but it could be added in the future if
economic conditions for molybdenum improve. As noted in the Turquoise Hill Resources Ltd. (“Turquoise Hill”)
press release dated October 21, 2016, there are also potential opportunities for increasing the underground mining rate
(and mill throughput), which would require further development and sustaining capital and different operating costs, however
it would likely result in Lift 2 and Heruga mineralization being mined earlier in the overall Oyu Tolgoi mine plan
and potentially improved economics for Entrée.
The updated Technical Report has been filed
on SEDAR and is available for review under the Company’s profile on SEDAR (www.sedar.com) or on www.EntreeResourcesLtd.com.
Three Year History
The following is a timeline summarizing
the general development of Entrée’s business over the last three completed financial years:
| January – March 2015 |
The Company reports the assay results from its 40-hole Pre-Feasibility infill drill program at the Ann Mason Project in Nevada. |
| May 2015 |
Turquoise Hill, OTLLC, Rio Tinto International Holdings Ltd.
(“Rio Tinto”) and the Government of Mongolia execute an Underground Mine Development and Financing Plan (the “Mine
Plan”), which signals the firm commitment of the parties to move forward with underground development of the Oyu Tolgoi copper-gold
project. The Mine Plan resolves a number of issues between the parties and provides a pathway forward to the eventual restart of
Phase 2 underground development, including Lift 1 of the Entrée/Oyu Tolgoi JV's Hugo North Extension deposit. |
| July 2015 |
Anna Stylianides is appointed to the Board. |
| September 2015 |
The Company announces the results of an updated Preliminary Economic Assessment (“2015 PEA”) for its 100%-owned Ann Mason copper-molybdenum porphyry deposit in Nevada. The 2015 PEA incorporates the results of Entrée’s infill drill program and a new resource estimate. Approximately 95% of the mineralization constrained within the ultimate Phase 5 pit is now classified as either Measured or Indicated resources with the remaining 5% as Inferred resources. The 2015 PEA also includes preliminary results of a detailed metallurgical program, designed to better characterize the metallurgical processes and recoveries in the 2015 PEA and to support a future Pre-Feasibility study. |
| October 2015 |
The Company files a NI 43-101 Technical Report entitled “Updated Preliminary Economic Assessment on the Ann Mason Project, Nevada, U.S.A.”, with an effective date of September 9, 2015. |
| November 2015 |
Stephen Scott is appointed interim Chief Executive Officer of the Company. |
| December 2015 |
OTLLC signs a $4.4 billion finance facility (with provision for up to $6 billion) for underground mine development at the Oyu Tolgoi project, including Lift 1 of the Entrée/Oyu Tolgoi JV’s Hugo North Extension deposit. The facility is being provided by a syndicate of international financial institutions and export credit agencies representing the governments of Canada, the United States and Australia, along with 15 commercial banks. |
| January 2016 – current |
Entrée takes significant steps to reduce its cash burn rate ensuring that it is positioned to meet all challenges as they emerge and at the same time identify strategic growth opportunities with the potential to deliver value to the Company and its shareholders. |
| March 2016 |
The Company announces it has entered into an agreement with Sandstorm Gold Ltd. (“Sandstorm”) to amend its February 14, 2013 Equity Participation and Funding Agreement. The Agreement to Amend provides for a 17% reduction in the metal credits that Entrée is required to sell and deliver to Sandstorm. Concurrently Entrée will refund 17% of the refundable deposit by paying $5.5 million in cash and issuing $1.3 million of common shares of the Company. At closing, the parties enter into an Amended and Restated Equity Participation and Funding Agreement. |
| The Company files a NI 43-101 Technical Report entitled “Lookout Hill Feasibility Study Update”, with an effective date of March 29, 2016. The Technical Report aligns the mine plan for the Entrée/Oyu Tolgoi JV Property with Turquoise Hill’s Technical Report entitled “Oyu Tolgoi 2014 Technical Report”, filed on October 28, 2014. |
| Stephen Scott is appointed President, Chief Executive Officer and a director of the Company. |
| April 2016 |
Duane Lo is appointed interim Chief Financial Officer of the Company. |
| The Company announces that it has received an approved Waters of the United States/Wetlands jurisdictional determination from the U.S. Army Corps of Engineers, that the water drainages on the Ann Mason Project are considered “isolated waters with no apparent interstate or foreign commerce connection” and as a result, no permit under Section 404 of the Clean Water Act is required for Ann Mason. |
| May 2016 |
Turquoise Hill and Rio Tinto announce that formal ‘notice to proceed’ approval was given for the next stage of development of the Oyu Tolgoi mine by the boards of OTLLC, Turquoise Hill and Rio Tinto. This was the final requirement for the re-start of underground development at the Hugo North Lift 1 block cave, including Lift 1 of the Entrée/Oyu Tolgoi JV’s Hugo North Extension deposit. The announcements also noted that an updated Oyu Tolgoi Feasibility Study has been completed including a re-estimate of capital, and all necessary permits have been granted. Underground construction is expected to re-commence in mid-2016. |
| August 2016 |
Turquoise Hill announces that OTLLC has drawn down approximately $4.3 billion of the project finance facility and has signed an engineering, procurement and construction management services contract with Jacobs Engineering Group, which paves the way for underground construction to begin. Shaft 2 has approximately 100 metres of development remaining and is expected to be completed in 2016. OTLLC signed a contract with mining services provider Thiess and Mongolian contractor Khishig Arvin for development of twin declines, incorporating both a service and conveyor tunnel. |
| October 2016 |
The Company announces it is evaluating options to potentially restructure its business, which may include splitting synergistic assets into two separate publicly traded companies. |
| Turquoise Hill announces that work has begun for Shaft 5 sinking and the convey-to-surface box cut excavation. OTLLC had signed an additional underground mining and support services contract with Dayan Contract Mining for the sinking of Shafts 2 and 5. The underground workforce has reached approximately 1,600 people. |
| Turquoise Hill announces it has filed an updated NI 43-101 Technical Report relating to the Oyu Tolgoi project. The Technical Report includes a Preliminary Economic Assessment of potential later phases of the Oyu Tolgoi deposits utilizing four Alternative Production Cases. Two of these deposits, Hugo North (including Hugo North Extension) Lift 2 and Heruga include Entrée/Oyu Tolgoi JV resources. The Alternative Production Cases take advantage of productivity improvements in plant throughput that have begun to be recognized in the process plant and evaluate plant capacity expansions as high as 120 million tonnes per annum. Variations in operating and capital costs are also evaluated. |
| December 2016 |
The Company announces a non-brokered private placement of up to 17,000,000 units at a price of C$0.41 per unit. Each unit consists of one common share and one-half of one transferable common share purchase warrant. Each whole warrant entitles the holder to purchase one additional common share at a price of C$0.65 for five years. The proceeds of the private placement will support the restructuring of Entrée’s business into two well-funded, separately traded companies. The private placement, which closed in January 2017, was over-subscribed. The Company issued 18,529,484 units for gross proceeds of C$7,597,088. |
| January 2017 |
Turquoise Hill announces that by the close of 2016, the underground Oyu Tolgoi project workforce had ramped up to over 2,000 people and progress was made in key areas including Shafts 2 and 5 related activities and construction of critical on-site facilities while the bulk excavation component for the convey-to-surface work stream was completed. Turquoise Hill also advised that lateral development rates are progressing well with a further increase expected in 2017 when additional underground crushing capacity is added. |
| February 2017 |
The Company announces its Board has approved a strategic reorganization of its business. Pursuant to the Arrangement, Entrée’s Ann Mason Project in Nevada and Lordsburg property in New Mexico and $8.84 million will be transferred to a newly incorporated company, Mason Resources Corp. Shareholders of the Company will receive common shares of Mason in proportion to their shareholdings in the Company. There will be no change to shareholders’ existing interests in the Company. The Arrangement is expected to result in two separate and focused, well-capitalized, debt-free entities, each with a high quality advanced project providing new and existing shareholders with optionality as to investment strategy and risk profile. |
| May 2017 |
The Company announces that its shareholders voted 97.93% in favour of approving the spin-out of Mason, subject to final court approval and TSX acceptance. The Arrangement closes on May 9, 2017. Concurrent with the closing, the Company changes its name from “Entrée Gold Inc.” to “Entrée Resources Ltd.”. On May 12, 2017, Mason’s shares commence trading on the TSX under the symbol “MNR”. |
| |
Turquoise Hill reports that the focus of underground development activities continues to be lateral development, sinking of Shafts 2 and 5, support infrastructure and the convey-to-surface system. Sinking of Shaft 2 is expected to reach its final depth of 1,284 metres later in 2017. Completion of Shaft 5 sinking is likely in early 2018. Supporting infrastructure progressed with Oyut II Camp construction activities increasing. The new development crusher and dewatering system are on target to enable an additional development crew to be added in the third quarter of 2017. Development of the convey-to-surface decline continued to progress following completion of bulk excavation at the end of 2016. The convey-to-surface system is the eventual route of the full 95,000 tonne per day underground ore delivery system to the concentrator. Turquoise Hill expects production from the first draw bell on the Oyu Tolgoi mining licence in mid-2020. |
| August 2017 |
The Company announces that it has engaged Amec Foster Wheeler Americas Limited (“Amec Foster Wheeler”) to complete an initial data review to be followed up by an updated Technical Report which will include a Preliminary Economic Assessment of the Entrée/Oyu Tolgoi JV’s Hugo North Extension Lift 2 and Heruga. The Company also announces that development of the Oyu Tolgoi project continues to advance. Sinking of Shaft 4, which Entrée expects to commence in 2018 based on the anticipated completion date, will be the first physical development on the Entrée/Oyu Tolgoi JV Property. Turquoise Hill has previously announced that Shaft 4 should be complete in 2021. Turquoise Hill and the Company expect first development production from the Entrée/Oyu Tolgoi JV Property in approximately 2021. |
| October 2017 |
The Company announces that Amec Foster Wheeler has completed its initial data review, and has commenced work on an updated NI 43-101 Technical Report relating to Entrée’s 20% participating interest in the Entrée/Oyu Tolgoi JV. The Technical Report is expected to be completed by January 2018. Following a visit by management to the Oyu Tolgoi underground development project in September 2017, the Company reports that project development, including both direct production and supporting infrastructure, appears to be on track and is being completed to the highest safety and operating standards. The site visit provides Company management with an opportunity to tour some of the main surface infrastructure, including the concentrator and tailings facilities and to also go underground to observe some of the development work completed to date. In addition, management was able to review plans with OTLLC for the immediate and medium-term future. |
| November 2017 |
Turquoise Hill announces that since the re-start of development, a total of 5.4 equivalent kilometres of lateral development has been completed. During the third quarter of 2017, the third development crew was deployed. Crews four and five are in training and are expected to be deployed during the fourth quarter of 2017. Also during the third quarter of 2017, commissioning of the new 3,500 tonne per day development crusher was completed. With the deployment of crews four and five, a step up in lateral development rates is expected to begin in the fourth quarter of 2017. |
| January 2018 |
The
Company announces the results of an updated Technical Report that was completed on its interest in the Entrée/Oyu
Tolgoi JV Property. The updated Technical Report discusses two development scenarios, an updated reserve case and a LOM
Preliminary Economic Assessment. The 2018 Reserve Case is based only on mineral reserves attributable to the
Entrée/Oyu Tolgoi JV from Lift 1 of the Hugo North Extension underground block cave. The 2018 PEA is an alternative
development scenario completed at a conceptual level that assesses the inclusion of mineral resources from Hugo North
Extension Lift 2 and Heruga into an overall mine plan with mineral resources from Hugo North Extension Lift 1. |
| Turquoise Hill announces the sinking of Shaft 5 is expected to be complete in the first quarter of 2018. In December 2017, the fifth development crew became fully operational. OTLLC has completed the sinking of Shaft 2, including reaching final depth, shaft bottom mass excavation and concrete floor installation, marking an early milestone in the development progress of Lift 1. The fit out of Shaft 2 will take place throughout 2018. Turquoise Hill continues to expect the first draw bell in mid-2020 and sustainable first production from the Oyu Tolgoi mining licence in 2021. |
| February 2018 |
The Company announces that Lord Howard has retired from his positions as director and Non-Executive Chairman of the Board. Mark Bailey has been appointed Non-Executive Chairman and Michael Price has been appointed to the Board to fill the vacancy created by Lord Howard’s retirement. |
DESCRIPTION
OF THE BUSINESS
Mineral Resource Business
Entrée is in the mineral resource
business. This business generally consists of three stages: exploration, development and production. Mineral resource companies
that are in the exploration stage have not yet found mineral resources in commercially exploitable quantities, and are engaged
in exploring land in an effort to discover them. Mineral resource companies that have located mineral resources in commercially
exploitable quantities and are preparing to extract them are in the development stage, and the properties are referred to as being
“advanced”. Companies engaged in the extraction of those mineral resources are in the production stage. Entrée
has interests in exploration and advanced properties in Mongolia, Australia and Peru.
Mineral resource exploration can consist
of several stages. The earliest stage usually consists of the identification of a potential prospect through either the discovery
of a mineralized showing on that property or as the result of a property being in proximity to another property on which exploitable
resources have been identified, whether or not they are or have in the past been extracted.
After the identification of a property
as a potential prospect, the next stage would usually be the acquisition of a right to explore the area for mineral resources.
This can consist of the outright acquisition of the land and mineral rights or the acquisition of specific, but limited mineral
rights to the land (e.g. a licence, lease or concession). After acquisition, exploration typically begins with a surface examination
by a professional geologist with the aim of identifying areas of potential mineralization, followed by detailed sampling and mapping
of rock exposures along with possible geophysical and geochemical grid surveys over un-exposed portions of the property (i.e. underground),
and possibly trenching in these covered areas to allow sampling of the underlying rock. Exploration also commonly includes systematic
regularly-spaced drilling in order to determine the extent and grade of the mineralized system at depth and over a given area,
and in sufficiently-advanced properties, gaining underground access by ramping or shafting in order to obtain bulk samples that
would allow one to determine the ability to recover various commodities from the rock.
A mineral resource may be identified and
estimated through detailed exploration, drilling and sampling to establish geological and grade continuity followed by a geostatistical
analysis of the data. The results are supported by a Technical Report prepared in accordance with NI 43-101. A mineral resource
company may then choose to have a Preliminary Economic Assessment (“PEA”) prepared, based on the mineral resource estimate.
Once exploration is sufficiently advanced,
and if the resource estimate is of sufficient quality (i.e. with mineralization classified in the Indicated and/or Measured categories),
the next step would be to undertake a Pre-Feasibility study followed by a Feasibility Study.
Business of Entrée
Entrée’s principal asset is
its joint venture interest in the Entrée/Oyu Tolgoi JV Property in Mongolia, which forms a significant portion of the overall
Oyu Tolgoi project area. The Entrée/Oyu Tolgoi JV Property comprises the eastern portion of the Shivee Tolgoi mining licence
and all of the Javhlant mining licence, and hosts:
| · | The
Hugo North Extension copper-gold porphyry deposit (Lift 1 and Lift 2): |
| - | Lift
1 is the upper portion of the Hugo North Extension copper-gold porphyry deposit and forms the basis of the 2018 Reserve Case.
It is the northern portion of the Hugo North Lift 1 underground block cave mine plan that is currently in development on the Oyu
Tolgoi mining licence. Starting in approximately 2021, the development will cross north onto the Entrée/Oyu Tolgoi JV Property.
Hugo North Extension Lift 1 Probable reserves include 35 million tonnes (“Mt”) grading 1.59% copper, 0.55 grams per
tonne (“g/t”) gold, and 3.72 g/t silver. Lift 1 mineral resources are also included in the alternative development
scenario, as part of the mine plan for the 2018 PEA. |
| - | Lift
2 is immediately below Lift 1 and is the next potential phase of underground mining, once Lift 1 mining is complete. Lift 2 is
currently included as part of the alternative, 2018 PEA mine plan. Hugo North Extension Lift 2 resources included in the 2018
PEA mine plan are: 78 Mt (Indicated), grading 1.34% copper, 0.48 g/t gold, and 3.59 g/t silver; plus 88.4 Mt (Inferred), grading
1.34% copper, 0.48 g/t gold, and 3.59 g/t silver. |
| · | The Heruga copper-gold-molybdenum
porphyry deposit is at the south end of the Oyu Tolgoi Trend of porphyry deposits. Approximately 94% of the Heruga deposit
occurs on the Entrée/Oyu Tolgoi JV Property. The 2018 PEA includes Heruga as the final deposit to be mined, as two
separate block caves, one to the south and a slightly deeper block cave to the north. The portion of the Heruga mineral
resources that occur on the Entrée/Oyu Tolgoi JV Property and are part of the alternative, 2018 PEA mine plan include
620 Mt (Inferred) grading 0.42% copper, 0.43 g/t gold, and 1.53 g/t silver. |
| · | A
large prospective land package. |
Entrée has a 20% or 30% (depending
on the depth of mineralization) participating interest in the Entrée/Oyu Tolgoi JV with OTLLC holding the remaining 80%
(or 70%) interest. OTLLC has a 100% interest in other Oyu Tolgoi project areas, including the Oyut open pit, which is currently
in production, and the Hugo North and Hugo South deposits on the Oyu Tolgoi mining licence.
Entrée also has a 100% interest
in the western portion of the Shivee Tolgoi mining licence, which is referred to as the “Shivee West Property”. The
Shivee West Property is subject to a License Fees Agreement between Entrée and OTLLC and may ultimately be included in the
Entrée/Oyu Tolgoi JV Property.
The Entrée/Oyu Tolgoi JV Property
and the Shivee West Property, known together as the “Entrée/Oyu Tolgoi JV Project” or the “Project”,
are shown on Figure 3. This figure also shows the main mineral deposits that form the Oyu Tolgoi Trend of porphyry deposits and
several priority exploration targets, including Castle Rock and Southwest IP.
Figure 3 – Entrée/Oyu Tolgoi
JV Project
Notes:
| · | *The Shivee West Property is subject to
a License Fees Agreement between Entrée and OTLLC and may ultimately be included in the Entrée/Oyu Tolgoi JV Property. |
| · | ** Outline of mineralization projected
to surface. |
| · | Entrée has a 20% participating
interest in the Hugo North Extension and Heruga resources and reserves. |
For further details regarding the Entrée/Oyu
Tolgoi JV Project, see the “Material Mineral Properties” section below.
Aside from its principal asset, Entrée
has royalty and other interests in properties in Australia and Peru. See the “Non-Material Properties” section for
more information.
Entrée’s exploration activities
are under the supervision of Robert Cinits, P.Geo., Entrée's Vice President, Corporate Development. Mr. Cinits is a qualified
person (“QP”) as defined in NI 43-101. Mr. Cinits has approved all scientific and technical information in this AIF.
Turquoise Hill, Rio Tinto and OTLLC
In October 2004, the Company entered into
an arm’s-length Equity Participation and Earn-In Agreement (the “Earn-In Agreement”) with Turquoise Hill. Under
the Earn-In Agreement, Turquoise Hill agreed to purchase equity securities of the Company, and was granted the right to earn an
interest in the Entrée/Oyu Tolgoi JV Property. The Earn-In Agreement was amended in November 2004, to append the form of
joint venture agreement (the “Entrée/Oyu Tolgoi JVA”) that the parties are required to enter into at such time
as the earn-in obligations are completed. Most of Turquoise Hill’s rights and obligations under the Earn-In Agreement, including
its right of first refusal on the Shivee West Property, were subsequently assigned by it to what was then its wholly-owned subsidiary,
OTLLC. OTLLC is also the title holder of the Oyu Tolgoi mining licence, illustrated in Figure 3 above.
OTLLC undertook an exploration
program which established the presence of two significant mineral deposits on the Entrée/Oyu Tolgoi JV Property: the
Hugo North Extension deposit and the Heruga deposit. These deposits form the northernmost and southernmost parts of the Oyu
Tolgoi project, which is a series of porphyry deposits containing copper, gold, silver and molybdenum. The deposits stretch
over 12 kilometres, from the Hugo North Extension deposit on the Entrée/Oyu Tolgoi JV Property in the north,
through the Hugo North and Hugo South deposits and Oyut deposit on OTLLC’s Oyu Tolgoi mining licence, to the Heruga
deposit in the south, the majority of which occurs on the Entrée/Oyu Tolgoi JV Property (Figure 4).
Figure 4 – Cross Section Through
the Oyu Tolgoi Trend of Porphyry Deposits
Additional information regarding the Entrée/Oyu
Tolgoi JV Property is discussed under “Material Mineral Properties” below.
On June 30, 2008, OTLLC gave notice to
Entrée that it had completed its earn-in obligations by expending a total of $35 million on exploration on the Entrée/Oyu
Tolgoi JV Property. As a consequence, OTLLC earned an 80% interest in all minerals extracted below a sub-surface depth of
560 metres from the Entrée/Oyu Tolgoi JV Property and a 70% interest in all minerals extracted from surface to a depth of
560 metres from the Entrée/Oyu Tolgoi JV Property, and the parties were required to enter into the Entrée/Oyu Tolgoi
JVA. While the parties have not formally executed the Entrée/Oyu Tolgoi JVA, the Entrée/Oyu Tolgoi JV is operating
under those terms.
Under the terms of the Entrée/Oyu
Tolgoi JVA, Entrée elected to have OTLLC debt finance Entrée’s share of costs with interest accruing at OTLLC’s
actual cost of capital or prime plus 2%, whichever is less, at the date of the advance. Debt repayment may be made in whole or
in part from (and only from) 90% of monthly available cash flow arising from the sale of Entrée’s share of products.
Such amounts will be applied first to payment of accrued interest and then to repayment of principal. Available cash flow means
all net proceeds of sale of Entrée’s share of products in a month less Entrée’s share of costs of operations
for the month. The debt financing and repayment provisions limit dilution of Entrée’s interest as the project progresses.
Since formation, and as of December 31, 2017, the Entrée/Oyu Tolgoi JV has expended approximately $30.1 million to advance
the Entrée/Oyu Tolgoi JV Property. As of December 31, 2017, OTLLC has contributed on Entrée’s behalf the required
cash participation amount equal to 20% of the $30.1 million incurred to date, plus accrued interest at prime plus 2%, for a total
of $7.8 million.
At December 31, 2017, Turquoise Hill owned
approximately 7.95% of the Company’s issued and outstanding Common Shares acquired pursuant to the Earn-In Agreement. In
addition, Rio Tinto, Turquoise Hill’s majority shareholder, owned approximately 9.54% of the Company’s issued and outstanding
Common Shares as at December 31, 2017.
Execution of Oyu Tolgoi Investment
Agreement, Heads of Agreement and Memorandum of Agreement
The
Minerals Law of Mongolia, which became effective on August 26, 2006, defines a mineral deposit of strategic importance (a “Strategic
Deposit”) as a mineral resource that may have the potential to impact national security, or the economic and social development
of the country, or that is generating or has the potential to generate more than five percent (5%) of Mongolia’s gross domestic
product in any given year. Under Resolution No 57 dated July 16, 2009 of the State Great Khural, the Oyu Tolgoi series of deposits
were declared to be Strategic Deposits.
The Minerals Law of Mongolia provides that
the State may be an equity participant with any private legal entity, up to a 34% equity interest, in the exploitation of any Strategic
Deposit where the quantity and grade of the deposit have been defined by exploration that has not been funded from the State budget.
On October 6, 2009, Turquoise Hill, its wholly-owned subsidiary OTLLC, and Rio Tinto signed an investment agreement (the “Oyu
Tolgoi Investment Agreement”) with the Mongolian Government, which regulates the relationship among the parties and stabilizes
the long-term tax, legal, fiscal, regulatory and operating environment to support the development of the Oyu Tolgoi project. The
Oyu Tolgoi Investment Agreement specifies that the Government of Mongolia will own 34% of the shares of OTLLC (and by extension,
34% of OTLLC’s interest in the Entrée/Oyu Tolgoi JV Property) through its subsidiary Erdenes Oyu Tolgoi LLC. A shareholders’
agreement was concurrently executed to establish the Government’s 34% ownership interest in OTLLC and to govern the relationship
among the parties.
On December 8, 2010, Rio Tinto
and Turquoise Hill entered into a Heads of Agreement (the “Heads of Agreement”), which provides for the
management structure of OTLLC and the project management structure of the Oyu Tolgoi project, among other things. Under the
Heads of Agreement, Rio Tinto is entitled to appoint three of the nine directors of OTLLC (with Turquoise Hill appointing
three and Erdenes Oyu Tolgoi LLC appointing three (as directed within the Amended and Restated Shareholders Agreement among
the parties (the “Shareholders Agreement”) dated June 8, 2011)) and Rio Tinto assumes management of the building
and operation of the Oyu Tolgoi project, which includes the Hugo North Extension and Heruga deposits on the Entrée/Oyu
Tolgoi JV Property.
On April 18, 2012, Rio Tinto announced
that it had signed a memorandum of agreement (the “MOA”) with Turquoise Hill, under which Rio Tinto agrees to support
and provide certain elements of a comprehensive funding package that will underpin the development of the Oyu Tolgoi project. In
accordance with the MOA, Rio Tinto assumed responsibility for all exploration operations on behalf of OTLLC, including exploration
on the Entrée/Oyu Tolgoi JV Property.
Oyu Tolgoi Development and Funding
As reported by Turquoise Hill, overall
construction of the first phase of the Oyu Tolgoi project (OTLLC’s Oyut open pit) was essentially complete at the end of
2012. First ore was processed through the concentrator on January 2, 2013 and production of the first copper-gold concentrate followed
on January 31, 2013. The first shipment of copper concentrate was sent to customers in China on July 9, 2013. On October 14, 2013,
Turquoise Hill reported that the concentrator was operating at name-plate capacity of approximately 100,000 tonnes of ore processed
per day.
As reported by Turquoise Hill, on April
17, 2013, Rio Tinto signed commitment letters with 15 global banks that locked in pricing and terms for long-term project financing
for Oyu Tolgoi. On July 28, 2013, following receipt of notification from the Government of Mongolia that project financing for
the Oyu Tolgoi underground mine would require approval by the Mongolian Parliament, Turquoise Hill announced that funding and all
work on the underground development of Oyu Tolgoi would be delayed. On August 12, 2013, development of the underground mine, including
Lift 1 of the Entrée/Oyu Tolgoi JV’s Hugo North Extension deposit, was suspended. The commitments from the commercial
bank consortium formally expired on September 30, 2014.
On May 18, 2015, the Government of Mongolia,
OTLLC, Turquoise Hill and Rio Tinto signed the Mine Plan addressing certain key Oyu Tolgoi shareholder issues, including tax matters,
a 2% NSR royalty held by Turquoise Hill, the Oyu Tolgoi 5% sales royalty calculation, management services payments and the sourcing
of power for Oyu Tolgoi from within Mongolia. The Mine Plan states that the principles of a comprehensive financing plan including
for the underground stage have been agreed on and include that up to $6 billion of external funding will be raised through third
party project financing (including for the underground stage) and other bank finance, product off-take arrangements or other forms
of financing.
On December 14, 2015, Turquoise Hill announced
that OTLLC had signed a $4.4 billion project finance facility (with provision for up to $6 billion) provided by a syndicate
of international financial institutions and export credit agencies. This was followed by formal ‘notice to proceed’
approval from the boards of Rio Tinto, Turquoise Hill and OTLLC in May 2016, which was the final requirement for the re-start of
underground development at the Hugo North Lift 1 block cave, including Lift 1 of the Entrée/Oyu Tolgoi JV’s Hugo North
Extension deposit. OTLLC drew down approximately $4.3 billion of the project finance facility and underground construction re-commenced
in the second half of 2016.
As reported by Turquoise Hill:
| · | The main focus of underground development
programs during 2017 was underground lateral development, sinking of Shafts 2 and 5, support infrastructure and the convey-to-surface
system. |
| · | By the end of 2017, five development crews
had been deployed, and the commissioning of a new 3,500 tonne per day development crusher was completed in the third quarter of
2017. |
| · | Shaft 5 is expected to be complete in
the first quarter of 2018. When completed, Shaft 5 will be dedicated to ventilation thereby increasing the capacity for underground
activities. |
| · | The sinking of Shaft 2 has been completed,
including reaching final depth, shaft bottom mass excavation and concrete floor installation, marking an early milestone in the
development progress of Lift 1. The fit out of Shaft 2 will take place throughout 2018. Shaft 2 will be used for access, production
and ventilation. |
| · | Turquoise Hill continues to plan for first
draw bell on the Oyu Tolgoi mining licence in mid-2020 and sustainable first production from the Oyu Tolgoi mining licence in 2021.
|
In August 2014, Turquoise Hill
announced that OTLLC had signed a Power Sector Cooperation Agreement (“PSCA”) with the Government of Mongolia for
the exploration of a Tavan Tolgoi-based independent power provider. Participation in the PSCA met OTLLC’s obligation in
the Oyu Tolgoi Investment Agreement to establish a long-term power supply within Mongolia within four years from the
commencement of commercial production. Signing of the PSCA reset the four year period while the opportunity for the
establishment of an independent power provider at Tavan Tolgoi was studied. Subsequent to the effective date of the updated
Technical Report, Turquoise Hill announced that OTLLC had received notification the Government of Mongolia has canceled the
PSCA, indicating that the Tavan Tolgoi power project is no longer a viable option. As a result of the Government’s
cancellation, effective February 15, 2018 long-term power for Oyu Tolgoi must be domestically sourced within four years.
Turquoise Hill stated that OTLLC, Turquoise Hill and Rio Tinto are committed to fulfilling all requirements under the Oyu
Tolgoi Investment Agreement and are continuing to evaluate all viable power options, including construction of an Oyu Tolgoi
based power plant. A final decision on the outcome, cost or financing of a permanent domestic power supply has not been
concluded. The cost of a power solution for Oyu Tolgoi is not included in the capital cost estimate under
“Material Mineral Property – Entrée Oyu/Tolgoi JV Project, Mongolia – Capital Cost
Estimates” below.
Oyu Tolgoi Investment Agreement and
Entrée
The contract area defined in the Oyu Tolgoi
Investment Agreement includes the Javhlant and Shivee Tolgoi mining licences, including the Shivee West Property, which is 100%
owned by Entrée and not currently subject to the Entrée/Oyu Tolgoi JV. The conversion of the original Shivee Tolgoi
and Javhlant exploration licences into mining licences was a condition precedent to the Oyu Tolgoi Investment Agreement coming
into effect. The Shivee Tolgoi and Javhlant mining licences were issued on October 27, 2009, and the Oyu Tolgoi Investment Agreement
took legal effect on March 31, 2010.
The Ministry of Mining has advised Entrée
that it considers the deposits on the Entrée/Oyu Tolgoi JV Property to be part of the series of Oyu Tolgoi deposits, which
were declared to be Strategic Deposits under Resolution No 57 dated July 16, 2009 of the State Great Khural. However, at the time
of negotiation of the Oyu Tolgoi Investment Agreement, Entrée was not made a party to the Oyu Tolgoi Investment Agreement,
and as such does not have any direct rights or benefits under the Oyu Tolgoi Investment Agreement.
OTLLC agreed, under the terms of the Earn-In
Agreement, to use its best efforts to cause Entrée to be brought within the ambit of, made subject to and to be entitled
to the benefits of the Oyu Tolgoi Investment Agreement or a separate stability agreement on substantially similar terms to the
Oyu Tolgoi Investment Agreement. Entrée has been engaged in discussions with stakeholders of the Oyu Tolgoi project, including
the Government of Mongolia, OTLLC, Erdenes Oyu Tolgoi LLC, Turquoise Hill and Rio Tinto, since February 2013. The discussions to
date have focussed on issues arising from Entrée’s exclusion from the Oyu Tolgoi Investment Agreement, including the
fact that the Government of Mongolia does not have a full 34% interest in the Entrée/Oyu Tolgoi JV Property; the fact that
the mining licences integral to future underground operations are held by more than one corporate entity; and the fact that Entrée
does not benefit from the stability that it would otherwise have if it were a party to the Oyu Tolgoi Investment Agreement. In
order to receive the benefits of the Oyu Tolgoi Investment Agreement, the Government of Mongolia may require Entrée to agree
to certain concessions, including with respect to the ownership of the Entrée/Oyu Tolgoi JV, Entrée LLC or the economic
benefit of Entrée’s interest in the Entrée/Oyu Tolgoi JV Property, or the royalty rates applicable to Entrée’s
share of the Entrée/Oyu Tolgoi JV Property mineralization. No agreements have been finalized.
Entrée/Oyu Tolgoi JV Property
and the Mongolian Government
In June 2010, the Government of Mongolia
passed Resolution 140, the purpose of which is to authorize the designation of certain land areas for “state special
needs” within certain defined areas, some of which include or are in proximity to the Oyu Tolgoi project. These state special
needs areas are to be used for Khanbogd village development and for infrastructure and plant facilities necessary in order to implement
the development and operation of the Oyu Tolgoi project. A portion of the Shivee Tolgoi licence is included in the land area that
is subject to Resolution 140.
In June 2011, the Government of Mongolia
passed Resolution 175, the purpose of which is to authorize the designation of certain land areas for “state special needs”
within certain defined areas in proximity to the Oyu Tolgoi project. These state special needs areas are to be used for infrastructure
facilities necessary in order to implement the development and construction of the Oyu Tolgoi project. Portions of the Shivee Tolgoi
and Javhlant licences are included in the land area that is subject to Resolution 175.
It is expected, but not yet formally confirmed
by the Government, that to the extent that a consensual access agreement exists or is entered into between OTLLC and an affected
licence holder, the application of Resolution 175 to the land area covered by the access agreement will be unnecessary. OTLLC has
existing access and surface rights to the Entrée/Oyu Tolgoi JV Property pursuant to the Earn-In Agreement. If Entrée
is unable to reach a consensual arrangement with OTLLC with respect to the Shivee West Property, Entrée’s right to
use and access a corridor of land included in the state special needs areas for a proposed power line may be adversely affected
by the application of Resolution 175. While the Mongolian Government would be responsible for compensating Entrée in accordance
with the mandate of Resolution 175, the amount of such compensation is not presently quantifiable.
The Oyu Tolgoi Investment Agreement contains
provisions restricting the circumstances under which the Shivee Tolgoi and Javhlant licences may be expropriated. As a result,
Entrée considers that the application of Resolution 140 and Resolution 175 to the Entrée/Oyu Tolgoi JV Property will
likely be considered unnecessary.
In March 2014, the Government of Mongolia
passed Resolution 81, the purpose of which is to approve the direction of the railway line heading from Ukhaa Khudag deposit located
in the territory of Tsogttsetsii soum, Umnugobi aimag, to the port of Gashuunshukhait and to appoint the Minister of Roads and
Transportation to develop a detailed engineering layout of the base structure of the railway. On June 18, 2014, Entrée was
advised by the Mineral Resources Authority of Mongolia (“MRAM”) that the base structure overlaps with a portion of
the Javhlant licence. By Order No. 123 dated June 18, 2014, the Minister of Mining approved the composition of a working group
to resolve matters related to the holders of licences through which the railway passes. The Minister of Mining has not yet responded
to a request from Entrée to meet to discuss the proposed railway, and no further correspondence from MRAM or the Minister
of Mining has been received. It is not yet clear whether the State has the legal right to take a portion of the Javhlant licence,
with or without compensation, in order to implement a national railway project, and if it does, whether it will attempt to exercise
that right. While the Oyu Tolgoi Investment Agreement contains provisions restricting the circumstances under which the Javhlant
licence may be expropriated, there can be no assurances that Resolution 81 will not be applied in a manner that has an adverse
impact on Entrée.
Investment by Rio Tinto in Entrée and Turquoise
Hill
In June 2005, following the announcement
in May 2005 of the discovery of high grade mineralization at Hugo North Extension, Rio Tinto indirectly took part in a private
placement in the Company and became its then largest shareholder.
Following Rio Tinto’s investment
in the Company in June 2005, Rio Tinto acquired, through a series of transactions, approximately 49% of Turquoise Hill’s
issued and outstanding shares. On January 24, 2012, Rio Tinto announced that it had increased its ownership interest in Turquoise
Hill to approximately 51%. At that time, Rio Tinto was deemed to have acquired beneficial ownership over the Common Shares of the
Company owned by Turquoise Hill. At December 31, 2017, Rio Tinto directly owned approximately 9.54% of the Company’s issued
and outstanding Common Shares. When combined with the Common Shares owned by Turquoise Hill, at December 31, 2017 Rio Tinto beneficially
owned approximately 17.43% of the Company’s issued and outstanding Common Shares (17.43% as at March 8, 2018).
Legislation
On November 1, 2013, an Investment Law
came into effect in Mongolia. The law was aimed at reviving foreign investment by easing restrictions on investors (including foreign
and domestic) in key sectors such as mining and by providing greater certainty on the taxes they must pay and certain guarantees
in relation to their investments in Mongolia. The law replaced two previous laws, including the Law of Mongolia on the Regulation
of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance (“SEFIL”), which were restrictive
in nature and had proven to be a deterrent to foreign investment in Mongolia. Most importantly, the Investment Law stabilizes the
tax environment by way of issuing “stabilization certificate(s)” to investors who meet the criteria stated in the law.
Within the scope of tax stabilization, the following four taxes will be stabilized: (i) legal entity income tax; (ii) customs duties;
(iii) value added tax; and (iv) mineral royalties. The Investment Law also provides for the ability of investors in major projects
to enter into an investment agreement with the Government of Mongolia, which can provide additional protections to an investor
beyond those covered by a tax stabilization certificate. The full impact of the Investment Law is still not yet known.
On January 16, 2014, the Mongolian Parliament
adopted a new State Minerals Policy until 2025. The main focus of the policy is to establish a stable investment environment; improve
the quality of mineral exploration, mining and processing; encourage the use of environmentally friendly and modern technology;
and strengthen the competitiveness of the Mongolian mining sector on the international market. The State Minerals Policy is also
intended to serve as the basis for amendments to the existing Minerals Law and other laws relating to the mining sector.
The State Minerals Policy contemplates
the establishment of a “Policy Council” with representatives of the State, investors, professional associations and
the public, to make recommendations and support the implementation of the State Minerals Policy. The State Minerals Policy sets
out a broad timetable for implementation of its objectives, with legislative reform to be implemented in 2014 and 2015, implementation
of the principles of the State Minerals Policy to take place between 2014 and 2025, and assessment of the implementation of the
Minerals Policy to occur between 2020 and 2025.
On July 1, 2014, the Mongolian Parliament
passed the Law on the Amendments to the Minerals Law which amends the 2006 Minerals Law (the “2014 Amendments”). In
addition, the Mongolian Parliament also passed a separate law which repealed the 2010 statute which imposed a moratorium on the
granting of new exploration licences and the transfer of existing licences. The 2014 Amendments extend the maximum period for an
exploration licence from 9 years to 12 years (although it ended the three year pre-mining period sometimes given to licence holders
upon the expiration of their exploration rights), extend the requirement for holders of mining licences to ensure that 90% of their
workforce is comprised of Mongolian nationals to the mining licence holder’s subcontractors as well, make clearer the roles
and responsibilities of government ministries and departments with respect to mineral matters, modify the definition of Strategic
Deposit to reflect its impact on the national economy and not regional economy, and provide for some instances where a tender may
not be required to obtain minerals licences where state funding has been used if related to compensation for declaring a special
needs area, among other changes.
On February 18, 2015, the Mongolian Parliament
adopted the Amendment Law to the Minerals Law of 2006 (the “2015 Amendment”), which permits a licence holder to negotiate
with the Government of Mongolia with respect to an exchange of the Government’s 34% (50% in cases where exploration has been
funded by the State budget) equity interest in a licence holder with a Strategic Deposit for an additional royalty payable to the
Government. The amount of the royalty payment would vary depending on the particulars of the Strategic Deposit but cannot exceed
5 percent. The rate of this royalty payment shall be approved by the Government of Mongolia. The full impact of the 2015 Amendment
is not yet known.
On November 10,
2016, the Mongolian Parliament adopted the Amendment Law to the Minerals Law of 2006 (the “2016 Amendment”), which
introduces the term “derivative deposit” and applicable regulations for mining/exploitation of derivative deposits.
Mining/exploitation of a derivative deposit by a licence holder or any other contracted third party (with the licence holder) is
subject to licence. Further, the 2016 Amendment sets the royalty payment for mining/exploitation of a derivative deposit at 2.5%
of the sales value, with an additional royalty of between 0% and 5% for gold if it is sold other than to the Central Bank of Mongolia.
The Ministry of Mining is currently working
on a draft mining law, aimed at regulating the mining sector in greater detail in Mongolia. If adopted, the draft mining law could
adversely affect Entree’s interests. It is not possible to determine when, if ever, this draft law will be adopted and in
what form.
The Ministry of Finance and certain Members
of Parliament have released draft laws and draft amendments to the tax legislation of Mongolia which include provisions related
to the taxation of foreign legal entities operating in Mongolia and minerals companies in general. If certain provisions of
these amendments were adopted by Parliament as currently drafted, they could adversely affect Entree's interests. It is not
possible to determine when, if ever, these amendments would be adopted and in what form.
On December 9, 2017, the Parliament
of Mongolia amended the General Tax Law, the Corporate Income Tax Law, the Personal Income Tax Law, the Minerals Law, the Land
Law and the Legal Entities Registration, to introduce the concept of an “ultimate holder” of a legal entity for tax
purposes. Any change of an ultimate holder of a legal entity that maintains a minerals licence is deemed to be a sale of the minerals
licence and is subject to a 30% corporate income tax on the total income earned. The legal entity holding the minerals licence
bears the tax obligation, not the person who earns the income from the transaction. In general, taxable income will be assessed
based on the value of the minerals licence, pro-rated to the number or percentage of shares transferred from the ultimate holder.
On December 25, 2017, the Ministry of Finance passed Decree No. 380 setting out the methodology to determine the value of minerals
licences. The full impact of the amendments is not yet known. There is no assurance that the amendments will not adversely affect
the Company and its share price.
Agreements with Sandstorm
Amended and Restated Equity Participation
and Funding Agreement
On February
14, 2013, the Company entered into an Equity Participation and Funding Agreement (the “2013 Agreement”) with Sandstorm.
Pursuant to the 2013 Agreement, Sandstorm provided an upfront refundable deposit (the “Deposit”) of $40 million to
the Company. The Company will use future payments that it receives from its mineral property interests to purchase and deliver
metal credits to Sandstorm. The amount of metal credits that the Company is required to purchase and deliver to Sandstorm,
and the timing of such deliveries, are determined with reference to Entrée’s share of production and receipt of payments
from the sale of product from the Entrée/Oyu Tolgoi JV Property. Upon the delivery of metal
credits, Sandstorm will also make the cash payment outlined below. In addition, the 2013 Agreement provides for a partial refund
of the Deposit and a pro rata reduction in the number of metal credits deliverable to Sandstorm in the event of a partial expropriation
of Entrée’s economic interest, contractually or otherwise, in the Entrée/Oyu Tolgoi JV Property.
On February
23, 2016, the Company and Sandstorm entered into an Agreement to Amend the 2013 Agreement, pursuant to which the Company refunded
17% of the Deposit ($6.8 million) (the “Refund”) thereby reducing the Deposit to $33.2 million for a 17% reduction
in the metal credits that the Company is required to deliver to Sandstorm. The Refund was paid with $5.5 million in cash
and the issuance of $1.3 million of Common Shares. At closing on March 1, 2016, the parties entered
into an Amended and Restated Equity Participation and Funding Agreement (the “Amended Funding Agreement”). Under the
terms of the Amended Funding Agreement, the Company will purchase and deliver gold, silver and copper credits equivalent to:
| · | 28.1% of Entrée’s share of
gold and silver, and 2.1% of Entrée’s share of copper, produced from the Shivee Tolgoi mining licence (excluding the
Shivee West Property); and |
| · | 21.3% of Entrée’s share of
gold and silver, and 2.1% of Entrée’s share of copper, produced from the Javhlant mining licence. |
Upon the delivery
of metal credits, Sandstorm will make a cash payment to the Company equal to the lesser of the prevailing market price and $220
per ounce (“/oz”) of gold, $5/oz of silver and $0.50 per pound (“/lb”) of copper (subject to inflation
adjustments). After approximately 8.6 million ounces of gold, 40.3 million ounces of silver and 9.1 billion pounds of copper have
been produced from the entire Entrée/Oyu Tolgoi JV Property (as currently defined), the cash payment will be increased to
the lesser of the prevailing market price and $500/oz of gold, $10/oz of silver and $1.10/lb of copper (subject to inflation adjustments).
To the extent that the prevailing market price is greater than the amount of the cash payment, the difference between the two will
be credited against the Deposit (the net amount of the Deposit being the “Unearned Balance”).
This arrangement
does not require the delivery of actual metal, and the Company may use revenue from any of its assets to purchase the requisite
amount of metal credits.
Under the Amended
Funding Agreement, Sandstorm has a right of first refusal, subject to certain exceptions, on future production-based funding agreements.
The Amended Funding Agreement also contains other customary terms and conditions, including representations, warranties, covenants
and events of default. The initial term of the Amended Funding Agreement is 50 years, subject to successive 10-year extensions
at the discretion of Sandstorm.
In addition, the
Amended Funding Agreement provides that the Company will not be required to make any further refund of the Deposit if Entrée’s
economic interest is reduced by up to and including 17%. If there is a reduction of greater than 17% up to and including 34%, the
Amended Funding Agreement provides the Company with the ability to refund a corresponding portion of the Deposit in cash or Common
Shares or any combination of the two at the Company’s election, in which case there would be a further corresponding reduction
in deliverable metal credits. If the Company elects to refund Sandstorm with Common Shares, the value of each Common Share will
be equal to the volume weighted average price (“VWAP”) for the five (5) trading days immediately preceding the 90th
day after the reduction in Entrée’s economic interest. In no case will Sandstorm become a “control person”
under the Amended Funding Agreement. In the event an issuance of Common Shares would cause Sandstorm to become a “control
person”, the maximum number of Common Shares will be issued, and with respect to the value of the remaining Common Shares,
50% will not be refunded (and there will not be a corresponding reduction in deliverable metal credits) and the remaining 50% will
be refunded by the issuance of Common Shares in tranches over time, such that the number of Common Shares that Sandstorm holds
does not reach or exceed 20%. All Common Shares will be priced in the context of the market at the time they are issued.
In the event of
a full expropriation, the remainder of the Unearned Balance after the foregoing refunds must be returned in cash.
Securities Held By Sandstorm
On March 1, 2013, Sandstorm purchased 17,857,142
common shares of the Company at a price of C$0.56 per common share for gross proceeds of approximately C$10 million.
On March 1, 2016, the Company issued 5,128,604
common shares to Sandstorm at a price of C$0.3496 per common share pursuant to the Agreement to Amend described under “Amended
and Restated Equity Participation and Funding Agreement” above. The price was calculated using the VWAP of the Company’s
common chares on the TSX for the 15 trading days preceding February 23, 2016, the effective date of the Agreement to Amend.
On January 11, 2017, Sandstorm acquired
914,634 units of the Company at a price of C$0.41 per unit as part of a larger non-brokered private placement. See “Description
of the Business – Non-Brokered Private Placement” below.
As at December 31, 2017, Sandstorm held
23,900,380 Common Shares, or approximately 13.77% of the outstanding Common Shares of the Company (March 8, 2018 – 13.72%),
and Replacement Warrants (as defined below) to purchase an additional 457,317 Common Shares.
Under the Amended Funding Agreement, Sandstorm
is required to vote its Common Shares of the Company as the Company’s Board specifies with respect to any proposed acquisition
of the Company, provided the potential acquirer agrees to execute and deliver to Sandstorm a deed of adherence to the Amended Funding
Agreement.
Non-Brokered Private Placement
On January 11, 2017, the Company closed
the first of two tranches of a non-brokered private placement of units at a price of C$0.41 per unit (the “Private Placement”).
The Company issued 17,309,971 units for gross proceeds of C$7,097,088. A second tranche of 1,219,513 units closed on January 13,
2017 for additional gross proceeds of C$500,000.
Each unit (a “Unit”) consisted
of one common share of the Company and one-half of one transferable common share purchase warrant. Each whole warrant entitled
the holder to acquire one additional common share of the Company for a period of five years at a price of C$0.65. No commissions
or finders’ fees were payable in connection with the Private Placement.
As part of the
Arrangement, warrantholders of the Company received Mason common share purchase warrants (“Mason Warrants”) which
were proportionate to, and reflective of the terms of, their existing warrants of the Company. In exchange for each
existing warrant, the holder was issued one replacement Common Share purchase warrant of the Company (a
“Replacement Warrant”) and 0.45 of a Mason Warrant. On May 23, 2017, warrantholders of the Company received an
aggregate 4,169,119 Mason Warrants each with an exercise price of C$0.23, and an aggregate 9,264,735 Replacement Warrants
each with an exercise price of C$0.55. The exercise prices assigned to the Replacement Warrants and the Mason Warrants
reflect the allocation of the original exercise price of the existing warrants between the Replacement Warrants and the Mason
Warrants issued, based on the relative market value of Mason and the Company following completion of the Arrangement.
Net proceeds from the Private Placement
were used to support the restructuring of the Company’s business into two well-funded, separate publicly traded companies,
for the advancement of Entrée’s core assets in Mongolia, and for general corporate purposes.
Directors and officers of the Company and
their associates acquired an aggregate 1,144,902 Units on the same terms and conditions as other subscribers. Other insiders of
the Company and their associates acquired an aggregate 5.5 million Units, including 914,634 Units acquired by Sandstorm. See “Description
of the Business – Agreements with Sandstorm – Securities Held by Sandstorm” above and “Interest in Management
and Others in Material Transactions – Non-Brokered Private Placement” below.
Arrangement
On May 9, 2017, the Company completed a
spin-out of Entrée’s Ann Mason Project in Nevada and Lordsburg property in New Mexico into a newly incorporated wholly-owned
subsidiary, Mason, through a court approved plan of arrangement under Section 288 of the BCBCA. The Company’s shareholders
received common shares of Mason in proportion to their shareholdings in the Company by way of a share exchange, pursuant to which
each existing common share of the Company held as of the effective date of the Arrangement was exchanged for one “new”
Common Share of the Company and 0.45 of a common share of Mason. A total of 77,805,786 common shares of Mason were distributed
to the Company’s shareholders. There was no change to shareholders’ interests in the Company.
The Company transferred to Mason all of
the issued and outstanding shares of Entrée U.S. Holdings Inc., which indirectly holds the Ann Mason Project and the Lordsburg
property, along with $8.84 million in cash. The result of the Arrangement is two separate and focused, well-capitalized entities,
each with a high quality advanced project providing new and existing shareholders with optionality as to investment strategy and
risk profile.
Optionholders and warrantholders of the
Company received replacement options and Replacement Warrants of the Company and Mason Warrants and options of Mason which are
proportionate to, and reflective of the terms of, their original options and warrants of the Company.
Mason’s common shares commenced trading
on the TSX on May 12, 2017 under the symbol “MNR”, and on the OTCQB Venture Market on November 9, 2017 under the symbol
“MSSNF”.
Environmental Compliance
Any current and future exploration and
development activities, as well as future mining and processing operations, if warranted, are subject to various federal, state
and local laws and regulations in the countries in which Entrée and its partners conduct their activities. These laws and
regulations govern the protection of the environment, prospecting, development, production, taxes, labour standards, occupational
health, mine safety, toxic substances and other matters. Entrée expects that it and its partners will be able to comply
with these laws and does not believe that compliance will have a material adverse effect on its competitive position. Entrée
intends to obtain all licences and permits required by all applicable regulatory agencies in connection with its operations and
activities. Entrée intends to maintain standards of compliance consistent with contemporary industry practice.
Holders of an exploration or mining licence
in Mongolia must comply with environmental protection obligations established in the Environmental Protection Law of Mongolia,
Law of Environmental Impact Assessment and the Minerals Law. These obligations include: preparation of an Environmental Impact
Assessment for exploration and mining proposals; submitting an annual environmental protection plan; posting an annual bond against
completion of the protection plan; and submitting an annual environmental report.
Environmental bonds have been paid to the
local governments, Khanbogd and Bayan-Ovoo soums, together equal to approximately 3,049,000 tugriks (approximately $1,230). These
bonds cover current environmental liabilities for exploration work undertaken at the Shivee West Property. These amounts
are refundable to Entrée on request once all environmental work has been completed to the satisfaction of the local soums.
Entrée also pays to the local soums annual fees for water, land and road usage.
Development and exploration on the Entrée/Oyu
Tolgoi JV Property is controlled and managed by Rio Tinto on behalf of OTLLC, which is responsible for all environmental compliance.
Competition
Entrée operates in a very competitive
industry and competes with other companies, many of which have greater financial resources and technical facilities for the identification,
acquisition and development of mineral properties and assets, as well as for the recruitment and retention of qualified employees
and consultants.
Specialized Skills and Knowledge
Entrée’s business requires
specialized skills and knowledge in the areas of geology, financial modelling, logistical planning, geophysics, metallurgy and
mineral processing, mining, engineering and accounting and compliance, among others. To date, Entrée has been able to locate
and retain such professionals, employees and consultants and believes it will continue to be able to do so.
Business Cycles
The mining business is subject to
mineral price cycles. The marketability of minerals and mineral concentrates is also affected by worldwide economic cycles.
If the global economy stalls and commodity prices decline as a result, a continuing period of lower prices could
significantly affect the economic potential of Entrée’s current property interests and result in Entrée
or its partners determining to cease work on, or drop their interests in, some or all of such properties. In addition to
commodity price cycles and recessionary periods, activity may also be affected by seasonal and irregular weather conditions
in the areas where Entrée has property interests.
Economic Dependence
Entrée is heavily dependent upon
the results obtained under agreements, including the Entrée/Oyu Tolgoi JVA, for the exploration and extraction of minerals.
Foreign Operations
Entrée’s property interests
are all located in foreign countries.
Employees
At December 31, 2017, Entrée had
six full-time employees and two part-time consultants based in Vancouver, British Columbia and two full-time employees based in
Ulaanbaatar, Mongolia. Following the Arrangement, the Company and Mason entered into an Administrative Services Agreement pursuant
to which the Company provides office space, furnishings and equipment, communications facilities and personnel necessary for Mason
to fulfill its basic day-to-day head office and executive responsibilities on a pro-rata cost-recovery basis.
MATERIAL
Mineral Property
Entrée/Oyu Tolgoi JV Project, Mongolia
The Company engaged Amec
Foster Wheeler to prepare an independent NI 43-101 Technical Report which summarizes the results of an updated reserve case,
based only on mineral reserves attributable to the Entrée/Oyu Tolgoi JV from Lift 1 of the Hugo North Extension
underground block cave, and a LOM PEA, which is an alternative development scenario completed at a conceptual level that
assesses the inclusion of mineral resources from Hugo North Extension Lift 2 and Heruga into an overall mine plan with mineral
resources from Hugo North Extension Lift 1.
Information set out below of
a scientific or technical nature regarding the Entrée/Oyu Tolgoi JV Project is derived from the NI 43-101
Technical Report with an effective date of January 15, 2018, titled “Entrée/Oyu Tolgoi Joint Venture
Project, Mongolia, NI 43-101 Technical Report” prepared by Amec Foster Wheeler (the “2018 Technical
Report”). Readers are cautioned that the information below is a summary only. For additional information regarding the
assumptions, qualifications and procedures associated with the scientific and technical information regarding the
Entrée/Oyu Tolgoi JV Project, reference should be made to the full text of the 2018 Technical Report, which is
available for review on SEDAR located at www.sedar.com or on www.EntreeResourcesLtd.com.
Introduction
The Project consists of two contiguous mining
licences, Shivee Tolgoi (ML 15226A) and Javhlant (ML 15225A), and completely surrounds the Oyu Tolgoi mining licence held by OTLLC.
The Shivee Tolgoi mining licence hosts the Hugo North Extension copper-gold deposit, and the Javhlant mining licence hosts the
majority of the Heruga copper-gold-molybdenum deposit. The Shivee Tolgoi mining licence and Javhlant mining licence are held by
Entrée’s wholly-owned Mongolian subsidiary, Entrée LLC.
The Entrée/Oyu Tolgoi JV Project is
currently divided into two contiguous areas, referred to as “properties”. Entrée is in joint venture with OTLLC
over the eastern portion of the Shivee Tolgoi mining licence and all of the Javhlant mining licence. This is referred to as the
Entrée/Oyu Tolgoi JV Property. The western portion of the Shivee Tolgoi mining licence forms the Shivee West Property, where
Entrée currently has a 100% interest. The Shivee West Property is the subject of a License Fees Agreement with OTLLC, and
may ultimately become part of the Entrée/Oyu Tolgoi JV Property.
Entrée’s joint venture partner,
OTLLC, is jointly owned by the Mongolian Government and Turquoise Hill. Rio Tinto, which holds the majority interest in Turquoise
Hill, is the operator for both the Oyu Tolgoi mining licence and the Entrée/Oyu Tolgoi JV Property.
The Hugo North Extension deposit is
at the north end of the 12.4 km long Oyu Tolgoi series of porphyry copper-gold deposits, and the Heruga deposit is at the
south end (Figures 3 and 4 above). OTLLC’s Oyu Tolgoi mining licence contains the Oyut, Hugo North and Hugo South
deposits, and the northern portion of the Heruga deposit. OTLLC is currently mining the Oyut deposit by open pit methods, and
the first lift (Lift 1) of the Hugo North/Hugo North Extension deposits are under development to be mined from
underground.
The Oyu Tolgoi mining operation is being developed
by OTLLC in two phases. Phase 1 was designed to treat open pit material mined from the Oyut pit, and was completed with concentrator
commissioning in 2013.
Phase 2 is under construction. It
will consist of Lift 1 of the Hugo North/Hugo North Extension deposits, which will be mined by panel caving, a variant of the
block caving mining methods. Phase 2 will include construction of infrastructure to support the underground mining
operations such as shafts and conveyors, and modifications to the process plant such as addition of a fifth ball mill, and
additional roughing and column flotation, and concentrate dewatering and bagging capacity. The Phase 2 mine plan is at
Feasibility level and is based on mineral reserves only. The evaluation of the mine plan for Hugo North Extension Lift 1
within the Entrée/Oyu Tolgoi JV Property is referred to by Entrée as the 2018 Reserve Case. In the
2018 Technical Report, the portion of the 2018 Reserve Case that pertains to Entrée is referred to as
Entrée’s 20% attributable interest.
OTLLC has conceptually proposed a
second lift (Lift 2) for the Hugo North/Hugo North Extension area, in conjunction with mining of the Hugo South and Heruga
deposits, as potential future development phases. A mine plan, at a PEA level, has been prepared for the Hugo North Extension
Lift 1, Lift 2, and Heruga mineralization within the Entrée/Oyu Tolgoi JV Property. This PEA is referred to by
Entrée as the 2018 PEA. The 2018 PEA is based upon Indicated and Inferred mineral resources only. In the 2018
Technical Report, portion of the 2018 PEA that pertains to Entrée is referred to as Entrée’s 20%
attributable interest.
The 2018 Technical Report presents the
mine plan and financial analysis for the mineral reserves (Entrée’s 2018 Reserve Case) and the 2018 PEA.
Entrée’s 20% attributable interest in production is provided for the mineral reserves and for the 2018 PEA. To
meet Form 43-101F1 requirements, the Oyu Tolgoi mine facilities that the mineral reserves and the 2018 PEA rely upon
are summarized in the 2018 Technical Report, even though the majority of the facilities are located on the Oyu Tolgoi
mining licence that Entrée has no ownership interest in. However, Entrée does have access to these facilities
for processing its share of production through the Entrée/Oyu Tolgoi JVA. The 2018 Technical Report does not discuss
the mineral resources or mineral reserves on the Oyu Tolgoi mining licence where Entrée does not have an
attributable interest.
Project Area
The Entrée/Oyu Tolgoi JV Project is
located in the South Gobi region of Mongolia, 570 kilometres (“km”) south of the capital city of Ulaanbaatar and 80
km north of the Mongolian border with China. The Project can be accessed by road and air. A railway route is under construction
by the Government of Mongolia and will pass through the southwest corners of the Shivee Tolgoi and Javhlant mining licences. OTLLC
will make use of the Port of Tianjin in China for freight.
The South Gobi region has a continental, semi-desert
climate. Mining operations are conducted year-round. Exploration activities can see short curtailments during storm activity.
Mineral Tenure, Royalties and Agreements
Amec Foster Wheeler did not independently review
ownership of the Project area and any underlying property agreements, mineral tenure, surface rights, or royalties. Amec Foster
Wheeler fully relied upon information derived from Entrée and legal experts retained by Entrée for this information.
Mineral Tenure
The Shivee Tolgoi and Javhlant mining licences
cover a total of about 62,920 hectares (“ha”) and completely surround the Oyu Tolgoi mining licence. The Shivee Tolgoi
and Javhlant mining licences are valid until 2039, assuming statutory payments and reporting obligations are met, and can be extended
for two subsequent 20 year terms. The Shivee Tolgoi and Javhlant mining licences are currently divided as follows:
| - | Entrée/Oyu
Tolgoi JV Property: 39,807 ha consisting of the eastern portion of the Shivee Tolgoi mining licence and all of the Javhlant mining
licence are subject to a joint venture between Entrée and OTLLC. The Entrée/Oyu Tolgoi JV Property is contiguous
with, and on three sides (to the north, east, and south) surrounds OTLLC’s Oyu Tolgoi mining licence. The Entrée/Oyu
Tolgoi JV Property hosts the Hugo North Extension deposit and the majority of the Heruga deposit, and several exploration targets.
OTLLC is the manager of the Entrée/Oyu Tolgoi JV. Through various agreements, Rio Tinto has assumed management of the building
and operation of Oyu Tolgoi, including access to and exploitation of the Hugo North Extension deposit. Rio Tinto will also manage
any development of the portion of the Heruga deposit on the Entrée/Oyu Tolgoi JV Property. Exploration operations on behalf
of OTLLC, including exploration on the Entrée/Oyu Tolgoi JV Property, are conducted under the supervision of Rio Tinto. |
| - | Shivee
West Property: 23,114 ha comprising the western portion of the Shivee Tolgoi mining licence. While the Shivee West Property is
currently 100% owned by Entrée, since 2015 it has been subject to a License Fees Agreement between Entrée and OTLLC
and may ultimately be included in the Entrée/Oyu Tolgoi JV Property. OTLLC also has a first right of refusal with respect
to any proposed disposition by Entrée of an interest in the Shivee West Property. |
Joint Venture Agreement
On October 15, 2004, Entrée entered
into the Earn-In Agreement with Ivanhoe Mines Ltd. (now Turquoise Hill). On November 9, 2004, Turquoise Hill and Entrée
entered into an Amendment to Equity Participation and Earn-In Agreement, which appended the form of joint venture agreement that
the parties were required to enter into on the date upon which the aggregate earn-in expenditures incurred by Turquoise Hill equalled
or exceeded the amount of earn-in expenditures required in order for Turquoise Hill to earn the maximum participating interest
available (80%). On March 1, 2005, Turquoise Hill and Entrée entered into an Assignment Agreement, pursuant to which Turquoise
Hill assigned most of its rights and obligations under the Earn-In Agreement, as amended, to Ivanhoe Mines Mongolia Inc. (now OTLLC).
On June 30, 2008, OTLLC gave notice to Entrée
that it had completed the earn-in expenditures required in order to earn the maximum participating interest available. As a consequence,
a joint venture was formed. OTLLC has an initial joint venture participating interest of 80% in the Entrée/Oyu Tolgoi JV,
and Entrée has an initial joint venture participating interest of 20%. In respect of products extracted from the Entrée/Oyu
Tolgoi JV property pursuant to mining carried out at depths from surface to 560 metres (“m”) below surface, the OTLLC
has an initial participating interest of 70% and Entrée has an initial participating interest of 30%.
On October 1, 2015, Entrée and Entrée
LLC entered into a License Fees Agreement with OTLLC, pursuant to which the parties agreed to negotiate in good faith to amend
the Entrée/Oyu Tolgoi JVA to include the Shivee West Property in the definition of the Entrée/Oyu Tolgoi JV Property.
In addition, under the Entrée/Oyu Tolgoi JVA, OTLLC has a right of first refusal with respect to any proposed disposition
by Entrée of an interest in the Shivee West Property.
Strategic Deposits
Under Resolution No 57 dated July 16, 2009
of the State Great Khural, the Oyu Tolgoi series of deposits were declared to be Strategic Deposits. The Ministry of Mining has
advised Entrée that it considers the deposits on the Entrée/Oyu Tolgoi JV Property to be part of the series of Oyu
Tolgoi deposits.
Investment Agreement
On October 6, 2009, Turquoise Hill, its wholly-owned
subsidiary OTLLC, and Rio Tinto signed the Oyu Tolgoi Investment Agreement with the Mongolian Government, which regulates the relationship
among the parties and stabilizes the long-term tax, legal, fiscal, regulatory and operating environment to support the development
of the Oyu Tolgoi project. The Oyu Tolgoi Investment Agreement took legal effect on March 31, 2010.
The Oyu Tolgoi Investment Agreement specifies
that the Government of Mongolia will own 34% of the shares of OTLLC (and indirectly by extension, 34% of OTLLC’s interest
in the Entrée/Oyu Tolgoi JV Property) through its subsidiary Erdenes Oyu Tolgoi LLC. A shareholders’ agreement was
concurrently executed to establish the Government’s 34% ownership interest in OTLLC and to govern the relationship among
the parties.
Although the contract area defined in the Oyu
Tolgoi Investment Agreement includes the Javhlant and Shivee Tolgoi mining licences, Entrée is not a party to the Oyu Tolgoi
Investment Agreement, and does not have any direct rights or benefits under the Oyu Tolgoi Investment Agreement.
OTLLC agreed, under the terms of the Earn-In
Agreement, to use its best efforts to cause Entrée to be brought within the ambit of, made subject to and to be entitled
to the benefits of the Oyu Tolgoi Investment Agreement or a separate stability agreement on substantially similar terms to the
Oyu Tolgoi Investment Agreement. Entrée has been engaged in discussions with stakeholders of the Oyu Tolgoi project, including
the Government of Mongolia, OTLLC, Erdenes Oyu Tolgoi LLC, Turquoise Hill and Rio Tinto, since February 2013. The discussions to
date have focused on issues arising from Entrée’s exclusion from the Oyu Tolgoi Investment Agreement, including the
fact that the Government of Mongolia does not have a full 34% interest in the Entrée/Oyu Tolgoi JV Property; the fact that
the mining licences integral to future underground operations are held by more than one corporate entity; and the fact that Entrée
does not benefit from the stability that it would otherwise have if it were a party to the Oyu Tolgoi Investment Agreement. No
agreements have been finalized.
Royalties
The Minerals Law of Mongolia provides for the
payment of a royalty for exploitation of a mineral resource (the regular royalty). In general, the regular royalty is calculated
on the basis of the sales value of all extracted products sold or loaded to be sold, and of all products utilized. Depending on
the type of mineral, the regular royalty ranges from a base rate of 2.5% to 5%. The applicable regular royalty rate for copper,
silver, molybdenum and exported gold is 5%. In addition, an additional royalty amount may be payable depending on the market value
in excess of a designated base value of the relevant product (the surtax royalty).
If the State is an equity participant in the
exploitation of a Strategic Deposit, the licence holder is permitted to negotiate with the Government of Mongolia to exchange the
Government’s equity interest in the licence holder for an additional royalty payable to the Government (a special royalty),
the percentage of which would vary depending on the particulars of the Strategic Deposit, but which cannot exceed 5%. The special
royalty would be paid in addition to the regular royalty and, if applicable, a surtax royalty.
Geology and Mineralization
The Oyu Tolgoi deposits, including those within
the Entrée/Oyu Tolgoi JV Property, host copper-gold porphyry and related high-sulphidation copper-gold deposit styles. Mineralization
identified in the Shivee West Property consists of low-sulphidation epithermal mineralization styles.
The Oyu Tolgoi porphyry deposits are hosted
within the Palaeozoic Gurvansayhan Terrane. Lithologies identified to date in the Gurvansayhan Terrane include Silurian to Carboniferous
terrigenous sedimentary, volcanic-rich sedimentary, carbonate, and intermediate to felsic volcanic rocks. The sedimentary and volcanic
units are intruded by Devonian granitoids and Permo-Carboniferous diorite, monzodiorite, granite, granodiorite, and syenite bodies,
which can range in size from dykes to batholiths.
The Hugo Dummett deposits (Hugo North/Hugo
North Extension and Hugo South) contain porphyry-style mineralization associated with quartz monzodiorite intrusions, concealed
beneath a sequence of Upper Devonian and Lower Carboniferous sedimentary and volcanic rocks. The deposits are highly elongated
to the north-northeast and extend over at least 3 km. The Hugo North/Hugo North Extension deposits occur within easterly-dipping
homoclinal strata contained in a north-northeasterly elongated, fault-bounded block. The northern portion of this block is cut
by several northeast-striking faults near the boundary between the Oyu Tolgoi mining licence and the Shivee Tolgoi mining licence.
Deformation is dominated by brittle faulting.
Host rocks at Hugo North/Hugo North Extension
deposits consists of an easterly-dipping sequence of volcanic and volcaniclastic strata correlated with the lower part of the Devonian
Alagbayan Group, and quartz monzodiorite intrusive, rocks that intrude the volcanic sequence, and a large post-mineral biotite
granodiorite. The highest-grade copper mineralization in the Hugo North/Hugo North Extension deposits is related to a zone of intensely
stockworked to sheeted quartz veins. The high-grade zone is centred on thin, east-dipping quartz monzodiorite intrusions or within
the apex of the large quartz monzodiorite body, and extends into adjacent basalt. Bornite is dominant in the highest-grade parts
of the deposit (3-5% copper) and is zoned outward to chalcopyrite (2% copper). At grades of <1% copper, pyrite-chalcopyrite
dominates. Elevated gold grades in the Hugo North/Hugo North Extension deposits occur within the up-dip (western) portion of the
intensely-veined, high-grade core, and within a steeply-dipping lower zone cutting through the western part of the quartz monzodiorite.
The Hugo North Extension occurs within moderately
east dipping (65° to 75°) strata contained in a north-northeasterly-elongate fault-bounded block. The deposit is cut by
several northeast-striking faults and fault splays near the boundary with the Oyu Tolgoi mining licence. Other than these northeasterly
faults, the structural geometry and deformation history of the Hugo North Extension is similar to that of Hugo North.
The Heruga deposit is the most southerly of
the currently known deposits within the Oyu Tolgoi Trend. The deposit is a copper-gold-molybdenum porphyry deposit and is zoned
with a molybdenum-rich carapace at higher elevations overlying gold-rich mineralization at depth. The top of the mineralization
starts 500-600 m below the present ground surface. Quartz monzodiorite bodies intrude the Devonian augite basalts as elsewhere
in the district. Non-mineralized dykes, comprising about 15% of the volume of the deposit, cut all other rock types. The deposit
is transected by a series of north-northeast-trending vertical fault structures that step down 200 m to 300 m at a time to the
west and have divided the deposit into at least two structural blocks.
High-grade copper and gold intersections show
a strong spatial association with contacts of the mineralized quartz monzodiorite porphyry intrusion in the southern part of the
deposit. At deeper levels, mineralization consists of chalcopyrite and pyrite in veins and disseminated within biotite-chlorite-albite-actinolite-altered
basalt or sericite-albite-altered quartz monzodiorite. The higher levels of the orebody are overprinted by strong quartz-sericite-tourmaline-pyrite
alteration where mineralization consists of disseminated and vein-controlled pyrite, chalcopyrite and molybdenite.
A number of prospects have been identified
in the Entrée/Oyu Tolgoi JV Project through reconnaissance evaluation, geochemical sampling and geophysical surveys. Some
targets have preliminary drill testing. The Entrée/Oyu Tolgoi JV Project retains exploration potential for porphyry and
epithermal-style mineralization.
History
Entrée’s interest in the Project
commenced in 2002, when an option agreement was signed with a private Mongolian company over the Shivee Tolgoi and Javhlant exploration
licences. Entrée subsequently purchased the licences in 2003, and they were converted to mining licences in 2009. The details
of the Entrée/Oyu Tolgoi JV are summarized above under “Material Mineral Property – Entrée/Oyu Tolgoi
JV Project, Mongolia – Mineral Tenure, Royalties and Agreements – Joint Venture Agreement”.
Work completed in the Project area has included:
surface reconnaissance mapping; geochemical sampling (trenching, conventional and mobile metal ion soil sampling, rock chip and
grab sampling, and stream sediment and pan concentrate sampling); geophysical surveys (induced polarization, regional magnetic,
ground magnetometer, and high-resolution magnetotelluric surveys); interpretation of satellite imagery; reverse circulation (“RC”),
polycrystalline (“PCD”), and core drilling; metallurgical testwork; mining, geotechnical, and hydrogeological studies;
and social and environmental studies.
Drilling and Sampling
Approximately 250,000 m of drilling in approximately
250 holes has been completed within the Shivee Tolgoi and Javhlant mining licences since 2004. Core drill holes are the principal
source of geological and grade data. A small percentage of the drilling total comes from RC or combined RC/core drilling and from
PCD drilling.
Core drilling includes 71 drill holes totalling
97,252 m on the Hugo North Extension deposit and 46 drill holes totalling 67,844 m on the Heruga deposit. Entrée has completed
65 core holes totalling 38,244 m and 34 RC holes totalling 4,145 m within the Shivee West Property.
There has been no drilling within the Shivee
West Property since 2011. There has been no drilling on the Entrée/Oyu Tolgoi JV Property since 2016.
Entrée/Oyu Tolgoi JV Property Drilling
Most holes at Hugo North and Hugo North Extension
were collared with PQ drill rods (85 millimetre (“mm”) core diameter) and were reduced to HQ size drill rods (63.5
mm) at depths of around 500 m prior to entering the mineralized zone. A small percentage were reduced to NQ size (47.6 mm) and
a few holes have continued to depths of about 1,300 m using PQ diameter. Many of the deeper holes were drilled as “daughter”
holes (wedges) from a PQ diameter “parent” drill hole. Collar survey methods were similar for core and RC drill holes.
Proposed drill hole collars and completed collars are surveyed by a hand-held global positioning system (“GPS”) unit
for preliminary interpretations. After the hole is completed, it is re-surveyed using a Nikon theodolite instrument.
RC drill holes were typically not down-hole
surveyed. In general, most RC holes are less than 100 m in depth and therefore unlikely to experience excessive deviations in the
drill trace. OTLLC uses down-hole survey instruments to collect the azimuth and inclination at specific depths of the core drill
holes for most of the diamond drilling programs. Six principal types of survey method have been used over the duration of the drilling
programs, including Eastman Kodak, Flexit, Ranger, gyro, and north-seeking gyro methods.
Recovery data were not collected for the RC
drill programs. OTLLC’s geology staff measure core recovery and rock quality designation (“RQD”) during core
drilling programs. In general, OTLLC reports that core recoveries obtained by the various drilling contractors have been very good,
averaging between 97% and 99% for all of the deposits. RQD was not recorded for Heruga core, nor was geotechnical logging undertaken.
The logging comprised capture of geological,
alteration, and mineralization data. In August 2010, OTLLC implemented a digital logging data capture using the acQuire system,
replacing the earlier paper logging.
Density data have been collected using water
immersion methods, with a calliper method used as a quality assurance/quality control check.
Entrée/Oyu Tolgoi JV Property Sampling
Drill core was halved using a saw, and sampled
on 2 m intervals.
Independent analytical laboratories used during
the analytical programs have included SGS, ALS (primary laboratories) and Bondar Clegg, Chemex, Genalysis, and Actlabs (secondary
laboratories). ALS and SGS currently act as the secondary laboratories for each other. The on-site sample preparation facility
has been managed by SGS and its predecessor companies since 2002.
Sample preparation protocols were in line with
industry norms, consisting of crushing to a nominal 90% at 3.35 mm, and pulverizing to a nominal 90% at 75 micrometres (“µm”)
(200 mesh).
Until September 2011, all samples submitted
to SGS (Mongolia) were routinely assayed for gold, copper, iron, molybdenum, arsenic and silver. Copper, molybdenum, silver, and
arsenic were determined by acid digestion followed by an atomic absorption spectroscopy (“AAS”) finish. Gold was determined
using a 30 gram (“g”) fire assay fusion. After 2011, fluorine assays were requested. ALS (Vancouver) was appointed
the primary laboratory for the high-resolution multi-element inductively-coupled plasma-mass spectroscopy (ICP-MS) suite, and LECO
sulphur and carbon analyses. A trace element composites (“TEC”) program was undertaken in addition to routine analyses.
The composites were subject to multi-element analyses comprising a suite of 47 elements determined by inductively-coupled plasma
optical emission spectroscopy/mass spectrometry (“ICP-OES/MS”). Additional element analyses included mercury by cold
vapour AAS, fluorine by KOH fusion/specific ion electrode, and carbon/sulphur by LECO furnace.
All programs since 2003 have included submission
of QA/QC samples, consisting of blank samples, standard reference materials (“SRMs”), duplicate samples, and check
samples. For most of the drill programs, OTLLC has maintained a check assay program sending approximately 5% of assayed pulps to
secondary laboratories.
Samples were always attended or locked in a
sample dispatch facility. Sample collection and transportation have always been undertaken by company or laboratory personnel using
company vehicles. Chain-of-custody procedures consisted of filling out sample submittal forms that were sent to the laboratory
with sample shipments to make certain that all samples were received by the laboratory.
Shivee West Property Drilling
Core holes were either completely drilled at
PQ or HQ sizes, although some holes were PQ reduced to HQ, and others PQ reduced to HQ to NQ.
Drill hole collars were surveyed at the end
of each field season by Geocad Co. Ltd., a surveying company based in Ulaanbaatar, using differential GPS equipment. Entrée
downhole-surveyed all core holes at approximately 50 m intervals using a Sperry Sun instrument. No downhole surveys were undertaken
for RC holes. Most RC holes are shallow and vertical, and unlikely to have significant deviation. Core recoveries obtained by the
drilling contractor were very good, except in localized areas of faulting or fracturing.
Core was logged for lithology, mineralization
and alteration, and geological structures.
Shivee West Property Sampling
The 2011 RC holes were sampled on 1 m intervals
from collar to planned depth.
Drill core was halved using a saw, and sampled
on 2 m intervals.
Independent analytical laboratories used during
the analytical programs included SGS for the core drilling, and Actlabs for RC samples.
Sample preparation of drill core consisted
of crushing to 85% passing 3.35 mm, followed by pulverizing to 90% passing 75 μm. Gold analysis was undertaken using a 30 g
fire assay method. Copper, silver, and molybdenum were determined by AA.
RC samples were pulverized to at least 95%
passing 75 µm. Gold and silver analyses were undertaken using a 30 g fire assay method.
Field blank, commercial SRMs, and quarter-core
duplicate samples (for RC programs, field duplicates) were included in the sample submissions.
Unsampled core was never left unattended at
the rig; boxes are transported to the core logging facility at the camp site twice daily under a geologist or geologist-technician’s
supervision. Sampled core was immediately sealed and stored in a fenced facility at the camp site. Samples were delivered under
lock and key by Entrée personnel directly to the laboratory in Ulaanbaatar on an approximate weekly basis and using a chain-of-custody
form to record transport and receipt of samples.
Data Verification
OTLLC and its predecessor Ivanhoe Mines reviewed
assay quality control sample results supporting drill hole sample assaying on a monthly basis and prepared monthly and quarterly
QA/QC reports. These reports describe a systematic monitoring and response to identified issues. In 2011 Ivanhoe Mines reported
on an internal review, including laboratory audits, quality assurance procedures, quality control monitoring,
and database improvements at Oyu Tolgoi for the period 2008 to 2010. Recommendations from this review were implemented or under
advisement. No material issues were identified in these reports.
A number of data reviews have been undertaken
by independent consultants as part of preparation of technical reports on the Project.
Amec Foster Wheeler reviewed drilling, sampling,
and QA/QC procedures, and inspected drill core, core photos, core logs, and QA/QC reports during 2011 site visits. During this
period, the QP also led the preparation of updated geological models related to the Oyut and Hugo North deposits, including the
Hugo North Extension.
The data verification completed by OTLLC and
its predecessor companies, and the independent data verification completed by others, including the current QP, are sufficient
to conclude the drill hole database is reasonably free of errors and suitable to support mineral resource estimation.
Metallurgical Testwork
Detailed metallurgical testwork has been completed
on the Oyut (within the Oyu Tolgoi mining licence) and Hugo North/Hugo North Extension deposits, and includes flotation, comminution,
locked cycle and mineralogical studies. Metallurgical studies for Heruga include liberation analysis, and bulk flotation and open
circuit cleaning testwork. Included in the flotation testwork program was some work on ore hardness and grindability.
The first phase of the development of the Oyu
Tolgoi mine process facilities was completed with concentrator commissioning in 2013. Testwork results and operations data have
been used to develop and update the throughput models and metallurgical predictions, as well as to guide designs for the second
development phase. The second phase will include a concentrator conversion, consisting of additional equipment required to process
the changing semi-autogenous grind (“SAG”):ball mill power ratio and higher-grade Hugo North/Hugo North Extension ore.
Throughput algorithms were developed during
comminution modelling. The volumetric capacity limit in base data template 31 (“BDT31”) that was used in OTLLC’s
2014 Oyu Tolgoi Feasibility Study was 5.5 kilotonnes per hour (“kt/h”) (121 kilotonnes per day (“kt/d”),
44.3 million tonnes per annum (“Mt/a)). After a review of the volumetric capacity in OTLLC’s 2016 Oyu Tolgoi Feasibility
Study, this was reduced to 5.0 kt/h (110 kt/d, 40 Mt/a). As a result, for the preparation of the 2016 Oyu Tolgoi Feasibility Study
production schedule for the Oyu Tolgoi operation, the plant throughput volumetric limit was changed from 5.5 kt/h to 5.0 kt/h and
the instantaneous throughput was increased by 2.2%. Further elevation and revision of the limit is quite likely as de-bottlenecking
and optimization of the plant continues. The 2016 Oyu Tolgoi Feasibility Study limit has already been reached and may be exceeded
as the Oyut ore is treated. For Heruga, throughput is not modeled, but instead is limited to 33.25 Mt/a.
Hugo North/Hugo North Extension recoveries
for copper, gold, and silver are based on BDT31, and derived equations. For Heruga, copper recoveries are based on the KM2133 testwork
results with recoveries ranging up to 86.5% copper and producing concentrate grades of 25% by weight copper. The gold and silver
recoveries are based on the Hugo North/Hugo North Extension projections.
Copper assays vary with higher-grade Hugo North/Hugo
North Extension production and increased bornite content early in the block cave. The peak grades from underground bornite-bearing
ores are moderated by simultaneous treatment of large amounts of Oyut ore in 2022-2026. The high copper content, especially with
a high copper:sulphur ratio, is attractive to most smelters as it provides high copper yield while not taxing acid recovery and
handling systems. The peak anticipated concentrate grades of 30%-35% copper are projected from 2022 through 2030. The average grades
presented in the 2016 Oyu Tolgoi Feasibility Study after concentrator conversion are expected to be competitive with other imports
to the Chinese market at 28% copper. The significant variability in precious metals content may require shifts in concentrate allocations
to smelters.
Arsenic and fluorine are the only penalty elements
that have been identified in the Oyut, Hugo North/Hugo North Extension deposits. Enargite is the primary arsenic carrier in these
deposits, although tennantite is locally important. For arsenic in copper concentrate, the production model assigns a rate of $2/t/1,000
parts per million (“ppm”) above a 3,000 ppm threshold up to the rejection level of 5,000 ppm. For fluorine, the production
model assigns a rate of $2/t/100 ppm above a 300 ppm threshold up to the rejection level of 1,000 ppm. The penalties are in line
with terms from custom smelters. It has been reported that no fluorine penalties have been applied under the contract terms in
operation since sales commenced in late 2013, so some conservatism is inherent in the NSR estimates.
Bismuth and fluorine were present at penalty
levels for testwork concentrates generated for the Heruga mineralization.
Mineral Resource Estimation
The database used for the estimation of mineral
resources for the Hugo North Extension deposit consists of samples and geological information from 37 drill holes, including wedge
(daughter) holes, totalling approximately 54,546 m. The database was closed for estimation purposes as of February 14, 2014. The
database used to estimate the mineral resources for the Heruga deposit consists of samples and geological information from 43 drill
holes, including wedge holes, totalling 58,276 m. The database was closed for estimation purposes as of June 21, 2009.
OTLLC produced three-dimensional (“3D”)
geological models of the major structures and lithological units. The lithological shapes and faults, together with copper and
gold grade shells and deposit zones, constrain the grade analysis and interpolation. Typically, the faults form the first order
of hard boundaries constraining the lithological interpretation.
Drill hole assay composites of 5 m lengths
were used for both Hugo North/Hugo North Extension and Heruga. Bulk density values were composited into 5 m fixed-length downhole
values for Heruga. A straight composite was used for Hugo North/Hugo North Extension.
A strategy of soft, firm, and hard (“SFH”)
boundaries was implemented to account for domain boundary uncertainty (dilution) and to reproduce the input grade sample distribution
in the block model. Variographic analysis was completed. Both copper and gold in the Hugo North/Hugo North Extension area displayed
short ranges for the first variogram structure and moderate to long ranges for the second variogram structure (where modelled).
The nugget variance tended to be low to moderate in all the domains assessed. At Heruga, copper, gold, and molybdenum showed relatively
short first variogram structures and long second variogram structures of 250-300 m. Copper and gold showed relatively low nuggets,
whereas molybdenum was moderate to high.
The block caving method envisioned for the
Hugo North/Hugo North Extension area does not allow for consideration of selectivity. A sub-celled model with parent block dimensions
equal to 15 m x 15 m x 15 m and minimum sub-block dimensions down to 5 m x 5 m x 5 m was used for resource estimation. The actual
sub-block sizes in the Hugo North/Hugo North Extension model vary as necessary to fit the specified boundaries of the wireframes
used to tag the block model. The block models were coded according to zone, lithological domain, and grade shell. For Hugo North/Hugo
North Extension, sub-celling was used to honour lithology, grade, and structural contacts. Blocks above topography were removed
from the block model. Non-mineralized units were flagged using a lithology code and were excluded during the interpolation process.
Blocks in the Hugo North/Hugo North Extension model were assigned an estimation domain using a combination of grade shells or alteration
and lithology.
Modelling of Hugo North/Hugo North Extension
consisted of grade interpolation by ordinary kriging (“OK”), except for bulk density, which was interpolated using
a combination of simple kriging and inverse distance weighting to the second power (“ID2”). Restricted and unrestricted
grades were interpolated to allow calculation of the metal removed by outlier restriction. Grades were also interpolated using
nearest-neighbour (“NN”) methods for validation purposes. Blocks and composites were matched on estimation domain.
Three estimation passes were used.
The Heruga block model was coded according
to zone, lithological domain, and grade shell. Modelling consisted of grade interpolation by OK. As part of the model validation,
grades were also interpolated using NN, inverse distance weighting to the third power (“ID3”), and OK of uncapped composites.
Density was interpolated by ID3. Three estimation passes were used.
Measured, Indicated, and Inferred confidence
classifications were assigned to blocks at Hugo North/Hugo North Extension using a combination of a preliminary block classification
using a script based on distance to a drill hole and number of drill holes used to estimate a block, generation of probability
model for the three confidence categories, and manual cleaning using polygons generated in sectional view.
There are no Measured or Indicated mineral
resources at Heruga. Interpolated cells were classified as Inferred mineral resources if they fell within 150 m of a drill hole
composite. All mineralization at Heruga is currently classified as Inferred mineral resources.
Once the underground 3D constraining shapes
were generated, mineral resources were stated for those model cells within the constraining underground stope-block shapes that
met a given copper equivalent cut-off grade. The optimized block cave shape used for the considerations of reasonable prospects
for eventual economic extraction was created in 2012, using assumptions contained in base data template 29 (“BDT29”),
comprising metal prices of $3.00/lb copper and $970/oz gold. The current mineral resource estimate uses pricing developed in BDT31
during 2014. BDT31 has not been updated. The BDT31 copper equivalent formula incorporates copper, gold, silver, and molybdenum.
The assumed metal prices are $3.01/lb for copper, $1,250/oz for gold, $20.37/oz for silver and $11.90/lb for molybdenum. Metallurgical
recoveries for gold, silver, and molybdenum are expressed as percentages relative to copper recovery. Different metallurgical recovery
assumptions lead to slightly different copper equivalent formulas for each of the deposits. In all cases, the metallurgical recovery
assumptions are based on metallurgical testwork. All elements included in the copper equivalent calculation have a reasonable potential
to be recovered and sold except for molybdenum. Molybdenum grades are only considered high enough to potentially support construction
of a molybdenum recovery circuit at Heruga, and hence the recoveries of molybdenum are zeroed out for Hugo North Extension.
Cut-off grades were determined using BDT31
assumptions. The NSR per tonne of mill feed material was required to be equal to or exceed the production cost of a tonne of mill
feed for an operation to break even or make money. For the underground mine, the break-even cut-off grade needs to cover the costs
of mining, processing, and general and administrative (“G&A”). A NSR of $15.34/t would be required to cover costs
of $8.00/t for mining, $5.53/t for processing and $1.81/t for G&A. This translates to a CuEq break-even underground cut-off
grade of approximately 0.37% CuEq for Hugo North Extension mineralization. Inferred mineral resources at Heruga have been constrained
using a CuEq cut-off of 0.37%.
Mineral Resource Statement
Mineral resources are reported using
the 2014 CIM Definition Standards for Hugo North Extension in Table 2 below and for Heruga in Table 3. OTLLC staff prepared
the estimates. The QP responsible for the estimates is Mr. Peter Oshust, P.Geo., an Amec Foster Wheeler employee.
Mineral resources are reported for the Entrée/Oyu Tolgoi JV Property inclusive of those mineral resources that have
been converted to mineral reserves, and on a 100% basis. Mineral resources that are not mineral reserves do not have
demonstrated economic viability. The estimates have an effective date of January 15, 2018.
Areas of uncertainty that could materially
affect the mineral resource estimates include the following: commodity pricing; interpretations of fault geometries; effect of
alteration as a control on mineralization; lithological interpretations on a local scale, including dyke modelling and discrimination
of different quartz monzodiorite phases; geotechnical assumptions related to the proposed block cave design and material behaviour;
metal recovery assumptions; additional dilution considerations that may be introduced by a block cave mining method; assumptions
as to operating costs used when assessing reasonable prospects of eventual economic extraction; and changes to drill spacing assumptions
and/or the number of drill hole composites used to support confidence classification categories.
Table 2 – Mineral Resource
Summary Table, Hugo North Extension
| Classification |
CuEq Cut-Off
(%) |
Tonnage
(Mt) |
Grade Cu
(%) |
Grade Au
(g/t) |
Grade Ag
(g/t) |
Grade CuEq
(%) |
| Indicated |
0.37 |
122 |
1.68 |
0.57 |
4.21 |
2.03 |
| Inferred |
0.37 |
174 |
1.00 |
0.35 |
2.73 |
1.21 |
| Classification |
CuEq Cut-Off
(%) |
Tonnage
(Mt) |
Contained Cu
(Mlb) |
Contained Au
(koz) |
Contained Ag
(koz) |
| Indicated |
0.37 |
122 |
4,515 |
2,200 |
16,500 |
| Inferred |
0.37 |
174 |
3,828 |
2,000 |
15,200 |
Notes to
accompany Hugo North Extension mineral resource table:
| 1. | Mineral resources have an effective date of January 15, 2018. Mr. Peter Oshust, P. Geo, an Amec
Foster Wheeler employee, is the QP responsible for the mineral resource estimate. |
| 2. | Mineral resources are reported inclusive of the mineral resources converted to mineral reserves.
Mineral resources that are not mineral reserves do not have demonstrated economic viability. |
| 3. | Mineral resources are constrained within three-dimensional shapes and above a CuEq grade. The CuEq
formula was developed in 2016, and is CuEq16 = Cu + ((Au*AuRev) + (Ag*AgRev) + (Mo*MoRev)) ÷ CuRev; where CuRev = (3.01*22.0462);
AuRev = (1250/31.103477*RecAu); AgRev = (20.37/31.103477*RecAg); MoRev = (11.90*0.00220462*RecMo); RecAu = Au recovery/Cu recovery;
RecAg = Ag recovery/Cu recovery; RecMo = Mo recovery/Cu recovery. Differential metallurgical recoveries were taken into account
when calculating the copper equivalency formula. The metallurgical recovery relationships are complex and relate both to grade
and copper:sulphur ratios. The assumed metal prices are $3.01/lb for copper, $1,250.00/oz for gold, $20.37/oz for silver, and $11.90/lb
for molybdenum. Molybdenum grades are only considered high enough to support potential construction of a molybdenum recovery circuit
at Heruga, and hence the recoveries of molybdenum are zeroed out for Hugo North Extension. A NSR of $15.34/t would be required
to cover costs of $8.00/t for mining, $5.53/t for processing and $1.81/t for G&A. This translates to a CuEq break-even underground
cut-off grade of approximately 0.37% CuEq for Hugo North Extension mineralization. |
| 4. | Considerations for reasonable prospects for eventual economic extraction included an underground
resource-constraining shape that was prepared on vertical sections using economic criteria that would pay for primary and secondary
development, block-cave mining, ventilation, tramming, hoisting, processing, and G&A costs. A primary and secondary development
cost of $8.00/t and a mining, process, and G&A cost of $12.45/t were used to delineate the constraining shape cut-off. |
| 5. | Mineral resources are stated as in situ with no consideration for planned or unplanned external
mining dilution. The contained copper, gold, and silver estimates in the mineral resource table have not been adjusted for metallurgical
recoveries. |
| 6. | Mineral resources are reported on a 100% basis. OTLLC has a participating interest of 80%, and
Entrée has a participating interest of 20%. Notwithstanding the foregoing, in respect of products extracted from the Entrée/Oyu
Tolgoi JV Property pursuant to mining carried out at depths from surface to 560 m below surface, the participating interest of
OTLLC is 70% and the participating interest of Entrée is 30%. |
| 7. | Figures have been rounded as required by reporting guidelines, and may result in apparent summation
differences. |
Table 3 – Mineral
Resource Summary Table, Heruga
Inferred
Classification |
CuEq Cut-Off
(%) |
Tonnage
(Mt) |
Cu Grade
(%) |
Au Grade
(g/t) |
Ag Grade
(g/t) |
Mo Grade
(g/t) |
CuEq Grade
(%) |
| Heruga within the Entrée/Oyu Tolgoi JV Property |
0.37 |
1,700 |
0.39 |
0.37 |
1.39 |
113.2 |
0.64 |
Inferred
Classification |
CuEq Cut-Off
(%) |
Tonnage
(Mt) |
Contained Cu
(Mlb) |
Contained Au
(koz) |
Contained Ag
(koz) |
Contained Mo
(Mlbs) |
| Heruga within the Entrée/Oyu Tolgoi JV Property |
0.37 |
1,700 |
14,604 |
20,410 |
75,932 |
424 |
Notes to
accompany Heruga mineral resource table:
| 1. | Mineral resources have an effective date of January 15, 2018. Mr. Peter Oshust, P. Geo, an Amec
Foster Wheeler employee, is the QP responsible for the mineral resource estimate. |
| 2. | Mineral resources are constrained within three-dimensional shapes and above a CuEq grade. The CuEq
formula was developed in 2016, and is CuEq16 = Cu + ((Au*AuRev) + (Ag*AgRev) + (Mo*MoRev)) ÷ CuRev; where CuRev = (3.01*22.0462);
AuRev = (1250/31.103477*RecAu); AgRev = (20.37/31.103477*RecAg); MoRev = (11.90*0.00220462*RecMo); RecAu = Au recovery/Cu recovery;
RecAg = Ag recovery/Cu recovery; RecMo = Mo recovery/Cu recovery. Differential metallurgical recoveries were taken into account
when calculating the copper equivalency formula. The metallurgical recovery relationships are complex and relate both to grade
and copper:sulphur ratios. The assumed metal prices are $3.01/lb for copper, $1,250.00/oz for gold, $20.37/oz for silver and $11.90/lb
for molybdenum. A NSR of $15.34/t would be required to cover costs of $8.00/t for mining, $5.53/t for processing and $1.81/t for
G&A. This translates to a CuEq break-even underground cut-off grade of approximately 0.37% CuEq for Heruga mineralization. |
| 3. | Mineral resources are stated as in situ with no consideration for planned or unplanned external
mining dilution. The contained copper, gold, silver, and molybdenum estimates in the mineral resource table have not been adjusted
for metallurgical recoveries. |
| 4. | Mineral resources are reported on a 100% basis. OTLLC has a participating interest of 80%, and
Entrée has a participating interest of 20%. Notwithstanding the foregoing, in respect of products extracted from the Entrée/Oyu
Tolgoi JV Property pursuant to mining carried out at depths from surface to 560 m below surface, the participating interest of
OTLLC is 70% and the participating interest of Entrée is 30%. |
| 5. | Figures have been rounded as required by reporting guidelines, and may result in apparent summation
differences. |
Mineral Reserve Estimation
The mineral reserve for the Entrée/Oyu
Tolgoi JV Property is contained within the Hugo North Extension Lift 1 block cave mining plan. The Hugo North/Hugo North Extension
underground deposit is to be mined by a variant of the block cave method, panel caving. This approach is to manage the risk of
drift and pillar damage associated with high abutment stresses and the high fractured rock mass (orebody). The mine planning work
conducted by OTLLC was completed using industry-standard mining software and techniques, and smelter terms as set forth in the
2016 Oyu Tolgoi Feasibility Study.
The mineral reserve estimate is based on what
is deemed minable when considering factors such as the footprint cut-off grade, the draw column shut-off grade, maximum height
of draw, consideration of planned dilution and internal barren rock. Key assumptions used by OTLLC in estimation included:
| · | Metal prices used for calculating the
Hugo North/Hugo North Extension underground NSR are $3.01/lb copper, $1,250.00/oz gold, and $20.37/oz silver, based on long-term metal
price forecasts. |
| · | The NSR has been calculated with assumptions
for smelter refining and treatment charges, deductions and payment terms, concentrate transport, metallurgical recoveries and royalties. |
| · | A footprint cut-off of $46.00/t NSR and column
height shut-off of $17.00/t NSR were used to maintain grade and productive capacity. It is anticipated that further mine planning
will examine lower shut-offs scenarios. |
Mineral Reserve Statement
Mineral reserves for Hugo North
Extension Lift 1 were estimated by OTLLC personnel during 2014, reviewed by OTLLC as part of the 2016 Oyu Tolgoi Feasibility
Study, and summarized in the 2016 OTLLC Competent Person’s Annual Report (OTLLC, 2016g).
The QP has reviewed the estimate, and notes
that there has been no depletion or additional drilling or engineering that would affect the mineral reserve estimate for the Hugo
North Extension Lift 1, and therefore the effective date of the mineral reserve estimate is the date of finalization of the QP
review, which is January 15, 2018.
The mineral reserves for Hugo North
Extension Lift 1 are summarized in Table 4
below.
Factors that may affect the mineral reserve
estimates include commodity market conditions and pricing; unknowns with respect to the overall interpretation of the Hugo North/Hugo
North Extension geology, including faulting and lithology; assumptions related to the design and geotechnical behaviour of the
cave mining system, including, but not limited to, the flow of material (ore and dilution) relative to the upward progression and
lateral advance of the cave and assumptions of the long-term performance of the mine infrastructure (both support and production);
and assumptions related to the metal recovery in the mill and downstream processing, including, but not limited to, metal recovery,
mill throughput, contaminant elements (particularly arsenic and fluorine).
Table 4 – Mineral
Reserves Statement, Hugo North Extension Lift 1
| Classification |
Tonnage (Mt) |
Cu (%) |
Au (g/t) |
Ag (g/t) |
| Probable |
35 |
1.59 |
0.55 |
3.72 |
| Total Entrée/Oyu Tolgoi JV Property |
35 |
1.59 |
0.55 |
3.72 |
Notes to accompany mineral reserves
table:
| 1. | Mineral reserves were estimated by OTLLC personnel, and have an effective date of January 15, 2018.
Dr. Ian Loomis, P.E., an Amec Foster Wheeler employee, is the QP who reviewed the mineral reserve estimate. |
| 2. | For the underground block cave, all mineral resources within the cave outline have been converted
to Probable mineral reserves. No Proven mineral reserves have been estimated. This includes low-grade Indicated mineral resource,
and Inferred mineral resource assigned zero grade that is treated as dilution. |
| 3. | A footprint cut-off NSR of $46.00/t and column height shut-off NSR of $17.00/t were used define the footprint
and column heights. An average dilution entry point of 60% of the column height was used. The NSR calculation assumed metal prices
of $3.01/lb copper, $1,250.00/oz gold, and $20.37/oz silver. The NSR was calculated with assumptions for smelter refining and treatment
charges, deductions and payment terms, concentrate transport, metallurgical recoveries, and royalties using base data template
31. Metallurgical assumptions in the NSR include recoveries of 90.6% for copper, 82.3% for gold, and 87.3% for silver. |
| 4. | Mineral resources are reported on a 100% basis. OTLLC has a participating interest of 80%, and
Entrée has a participating interest of 20%. Notwithstanding the foregoing, in respect of products extracted from the Entrée/Oyu
Tolgoi JV Property pursuant to mining carried out at depths from surface to 560 m below surface, the participating interest of
OTLLC is 70% and the participating interest of Entrée is 30%. |
| 5. | Figures have been rounded as required by reporting guidelines, and may result in apparent summation
differences. |
Mining Methods
The weak, massive nature of the Hugo
North/Hugo North Extension deposits and the location between 700 m and 1,400 m below surface make it well suited, both
geotechnically and economically, to large-scale cave mining methods. Caving methods require large, early capital investment
but are generally highly productive with relatively low operating costs. The long operating life of the mine is supportive of
the initial capital investment and results in a very low total cost on a production basis.
Hugo North/Hugo North Extension Lift 1, which
has high copper and gold grades, will be mined as three panels. A panel is a defined contiguous portion of the overall cave footprint
that is treated as a more-or-less independent and sequenced mining/production area. The Hugo North Extension area is located at
the northern portion of Panel 1.
Production will ramp up to an average of 95,000
t/d of ore to the mill during the planned peak production period for the combined Hugo North/Hugo North Extension Lift 1 from 2027
through 2035. Overall production from the combined Hugo North/Hugo North Extension Lift 1 is planned to ramp down from 2035 to
completion in 2039. During the production life of the Hugo North Extension portion of Lift 1, the pre-production period is planned
to begin in 2021 with the first drawbell in 2026, and production is to be completed in 2034.
The majority of the mine infrastructure required
to support the successful extraction of the mineral reserves within the Entrée/Oyu Tolgoi JV Property will be located within
the Oyu Tolgoi mining licence; however, the mining method is consistent across both Hugo North Lift 1 and Hugo North Extension
Lift 1. The primary life-of-mine material handling system (conveyor to surface) will transport ore to the surface by means of a
series of conveyors.
To support overall mining of Hugo North/Hugo
North Extension Lift 1, five shafts, approximately 203 km of lateral development, 6.8 km of vertical raising (raisebore and drop-raise)
and 137,000 m3 of mass excavations will be undertaken. The Lift 1 levels are approximately 1,300 m below surface. Of the 2,231
drawpoints planned for Hugo North/Hugo North Extension Lift 1 and accessed from 52 extraction drifts, 238 drawpoints are located
within the Hugo North Extension area. For Hugo North Extension portion of Lift 1, approximately 15.4 km of lateral development
and approximately 781 m of vertical raising will be required.
From the geotechnical perspective, Hugo North/Hugo
North Extension is considered highly suitable for cave mining methods, and the risks associated with caveability and propagation
are considered to be low. Fine fragmentation is expected with all geotechnical domains, thus secondary breakage requirements are
not expected to pose a risk to the production schedule ramp-up or full production rates. The Hugo North Extension portion of Lift
1 is anticipated to have a higher proportion of ‘Good’ ground conditions relative to Hugo North/Hugo North Extension
Lift 1 as a whole. The costing of the underground has used a 60% Good ground and 40% Poor ground assumption as a more conservative
estimate of ground control costs. The mine shafts and permanent infrastructure are all planned to be located outside of, or under,
the predicted facture limits and “subsidence cone”.
The mining layout will include:
| · | Apex and undercut levels to provide access
drifts for production drills, blasting and mucking for the purpose of undercutting the ore deposit on the associated lift. The
undercut drifts are planned to be spaced on 28 m intervals, situated 17 m above and half-way between the extraction drifts. The
apex drifts will be situated 34 m above the extraction drifts at the top of the major apex pillars. |
| · | Extraction drifts and drawbells for efficient
load-haul-dump (“LHD”) operation to draw ore from the associated drawpoints, using an El Teniente-style (straight-through)
drawbell layout on a 15 m spacing. The extraction drifts are planned to be spaced 28 m apart, on centre. The overall drawbell spacing
layout is 28 m x 15 m. Within the drawbells, a drawcone centroid spacing of 10 m is used to promote interactive draw from the cave. |
| · | Haulage levels to collect development
and production ore material from the extraction and undercut levels, and transport it, using road trains, to crushers for size
reduction. The haulage level will be located 44 m below the extraction level. |
| · | Intake ventilation system to provide fresh
air to the mining footprint levels, main travel ways, mine working areas and to underground fixed facilities. Fresh air to the
footprint levels is planned to be supplied through two sets of twin intake tunnels to the extraction fringe (perimeter) drifts. |
| · | Exhaust ventilation system to remove vitiated
air from the mine. Exhaust drifts in the exhaust level will run the length of the deposit along the centre of the deposit axis. |
Road trains will haul from the loading chutes
to the primary crushers on the west side of the mining footprint. Crushed material will be transferred by a series of conveyors
directly to the surface or to the Shaft 2 hoisting system. Shaft 2 is intended to serve as the initial material handling route
to surface until the conveyor-to-surface is commissioned.
Overall vertical development will include shaft
development, ore/waste passes and ventilation raises. With the exception of the shafts, vertical development is planned to use
several methods, including raise bore, boxhole, and drop-raise.
The underground mine requires a number of surface
facilities to support the underground operations. At Hugo North/Hugo North Extension Lift 1 these include: Shaft 1 area, production
shaft farm, Shaft 4 area, and conveyor-to-surface portal area. For the purposes of the 2018 Technical Report, Shaft 4 was anticipated
to be sunk on the Entrée/Oyu Tolgoi JV Property, to a depth below surface of 1,149 m. To reach the Hugo North Lift 1 exhaust
gallery, approximately 1,020 m of lateral development will be required on the Entrée/Oyu Tolgoi JV Property. A batch plant
may also be constructed within the property area.
The underground mobile equipment fleet is classified
into seven broad categories, including: mucking (LHDs); haulage (road trains and articulated haul trucks); drilling (jumbos, production
drills and bolting equipment); raise bore and boxhole; utilities and underground support (flatbeds, boom trucks, fuel and lube
trucks, explosive carriers, shotcrete transmixers and sprayers, etc.); surface support; and light vehicles (personnel transports,
“jeeps”, tractors, etc.).
Major fixed equipment will include: material
handling (crushing and conveying); fans and ventilation equipment; pumping and water handling equipment; power distribution equipment;
data and communications equipment; and maintenance equipment (fixed shop furnishing).
The overall processing schedule was balanced
to meet the available mill hours. The forecast production schedule for Hugo North Extension Lift 1 is included in Figure 5.
Figure 5 – Hugo North Extension Lift
1 – Underground Material Movement and Average Grade
Note: Figure prepared by Amec Foster Wheeler,
2017. Hugo North EJV refers to Hugo North Extension Lift 1 within the Entrée/Oyu Tolgoi JV Property. Year 6 = 2021.
Recovery Methods
Entrée’s share of products will,
unless Entrée otherwise agrees, be processed at the OTLLC facilities by paying milling and smelting charges. The OTLLC facilities
are not intended to be profit centres and therefore, minerals from the Entrée/Oyu Tolgoi JV Property will be processed at
cost. OTLLC will also make the OTLLC facilities available to Entrée at the same terms if spare processing capacity exists
to process other suitable mill feed.
The Phase 1 concentrator was commissioned in
early 2013. The nameplate processing capacity of 96 kt/d was achieved in August 2013. The process plant employs a conventional
SAG mill/ball mill/grinding circuit (“SABC”) followed by flotation.
Phase 1 uses two grinding lines (Lines 1 and
2), each consisting of a SAG mill, two parallel ball mills, and associated downstream equipment to treat up to 100 kt/d of ore
from the Oyut open pit. Operating data have been used in Phase 2 design, which addresses the delivery of Hugo North/Hugo North
Extension underground plant feed via Lift 1 in conjunction with open pit mining.
The intent of Phase 2 is to treat all the high-value
Hugo North/Hugo North Extension Lift 1 ore delivered by the mine, supplemented by OTLLC’s open pit ore to fill the mill to
its capacity limit. The Phase 2 concentrator development program will optimize the concentrator circuit to enable it to maximise
recovery from the higher-grade Hugo North/Hugo North Extension Lift 1 ore and to allow it to handle higher tonnage throughput.
Components that require upgrading to accommodate the gradual introduction of ore from underground include: the ball mill; rougher
flotation circuit; flotation columns; concentrate filtration, thickening, and bagging areas; and bagged storage facilities.
Reagents and media required will include lime,
primary collector, secondary collector, frother, tailings flocculant, water treatment chemicals, and grinding media. With the addition
of the concentrator conversion loads, the peak operating load demand from the existing 220 kilovolt (“kV”) concentrator
substation will increase by an estimated 20 megawatts (“MW”) (from 116-136 MW), and the nominal operating (diversified)
load will increase by an estimated 19 MW (from 106-125 MW). The concentrator raw water demand varies seasonally. Annual average
raw water demand is projected to be 0.45 cubic metre per tonne (“m3/t”) ore processed.
Project Infrastructure
Infrastructure required for Phase 1 of the
Oyu Tolgoi project has been completed, and includes: access roads, airport, accommodation, open pit and quarries, tailings and
waste rock storage facilities, process plant, batch plants, administration, warehousing, emergency, and maintenance facilities,
power and water supply and related distribution infrastructure, water and waste management infrastructure, heating and fuel storage.
Additional infrastructure that will be required
to support Phase 2, or modifications to the Phase 1 infrastructure, includes: construction of conveyor decline and shafts; construction
of permanent underground facilities including crushing and materials handling, workshops, services, and related infrastructure;
concentrator conversion; modifications to the electrical shaft farm substation, and upgrades to some of the distribution systems;
expanded logistical and accommodations infrastructure; underground maintenance and fuel storage facilities; expanded water supply
and distribution infrastructure; and expanded tailings storage (“TSF”) capacity.
OTLLC has a power purchase agreement with the
Inner Mongolia Power Corporation to supply power to the Oyu Tolgoi project. The term of this agreement covers the commissioning
of the business, plus the initial four years of commercial operations. In August 2014, Turquoise Hill announced that OTLLC had
signed the PSCA with the Government of Mongolia for the exploration of a Tavan
Tolgoi-based independent power provider. Participation in the PSCA met OTLLC’s obligation in the Oyu Tolgoi Investment Agreement
to establish a long-term power supply within Mongolia four years from the commencement of commercial production. Signing of the
PSCA reset the four years obligation while the opportunity for the establishment of an independent power provider at Tavan Tolgoi
was studied.
Environmental, Permitting and Social
Considerations
Environmental Considerations
OTLLC has completed a comprehensive Environmental
and Social Impact Assessment (“ESIA”) for the Oyu Tolgoi project, including the Entrée/Oyu Tolgoi JV Property.
The ESIA is a summary of several research programs and reports, including the following baseline studies: climate and climate change;
air quality; noise and vibration; topography, geology, and topsoil; water resources; biodiversity and ecosystems; population and
demographics; employment and livelihoods; land use; transport and infrastructure; archaeology; cultural heritage; and community
health, safety, and security. The ESIA also sets out measures through all project phases to avoid, minimise, mitigate, and manage
potential adverse impacts to acceptable levels established by Mongolian regulatory requirements and good international industry
practice, as defined by the requirements of the Equator Principles, and the standards and policies of the International Finance
Corporation (“IFC”), European Bank for Reconstruction and Development (“EBRD”), and other financing institutions.
In addition to the project elements identified
above, certain other activities and facilities are expected to be developed over time, either as part of or in support of the project,
that do not constitute part of the project for the purposes of the ESIA. These include project expansion to support an increase
in plant feed throughput from 100,000 t/d to 160,000 t/d and the long-term power supply. While the impacts of these project elements,
and their mitigation and management, are not directly addressed in the ESIA they are considered in the cumulative impact assessment
of the ESIA.
OTLLC has posted environmental bonds to the
Mongolian Ministry of Environment, Green Development and Tourism (“MEGDT”) in accordance with the Minerals Law of Mongolia
for restoration and environmental management work required for exploration and the limited development work undertaken at the site.
OTLLC has implemented and audited an environmental
management system (“EMS”) that conforms to the requirements of ISO 14001:2004.
The management plans developed for the Oyu
Tolgoi project address the management of health, safety, environment, and social aspects associated with the project. The management
plans form part of the mine’s Integrated Health, Safety, Environment and Community Management System (“HSECMS”).
The HSECMS has been audited and is certified to ISO 14001 and OHSAS 18001.
Tailings Storage Facility
The existing TSF is located 2 km east of the
Oyut open pit, about 5 km southeast of the process plant, and within the Oyu Tolgoi mining licence. Conventional thickened tailings
are currently deposited.
For the first 18 years of production, the TSF
will consist of two cells, each approximately 4 km2 in size, to store a total of 670 Mt of tailings. The facility will
be constructed in two stages, starting with Cell 1 and then continuing with Cell 2. Conventional thickened tailings are currently
deposited in Cell 1.
The TSF receives thickened (60% to 64% solids
density) tailings from the tailings thickeners at the Oyu Tolgoi concentrator. A floating barge pump station returns all supernatant
reclaim water to the main process water pond at the concentrator for reuse. The TSF embankment is raised each year using a downstream
methodology to ensure that sufficient storage capacity for ongoing tailings deposition, with flood storage and freeboard, is retained
at all times.
Water Management
The Gunii Hooloi basin extends 35 km to 70
km north of the Oyu Tolgoi site, and is the source of raw water for the mining operations. Water demand for the Oyu Tolgoi facilities
has been calculated at between 588 litres per second (“L/s”) and 785 L/s, with an average yearly demand of 696 L/s,
to meet a production rate of 100,000 t/d. The Gunii Hooloi aquifer can meet the mine water requirements. Updated hydrogeological
modelling, completed in 2013, demonstrates that the Gunii Hooloi aquifer is capable of providing 1,475 L/s.
Water management and conservation were given
the highest priority in all aspects of the Oyu Tolgoi project design. The current water budget is based on the use of 550 L/s and
operating performance of the concentrator suggests this is a reasonable estimate. The water consumption compares favourably with
other large operations in similar arid conditions.
Due to its proximity to the Oyut open pit,
the Undai River has been diverted. The river diversion system consists of three components: a dam, diversion channel, and subsurface
diversion
Closure and Reclamation Planning
Current closure planning is based on a combination
of progressive rehabilitation and closure planning. The Oyu Tolgoi Mine Closure Plan for OTLLC was completed in June 2012, updated
in 2014, and is based on the design status at that time.
Permitting Considerations
The Minerals Law of Mongolia (2006) and Mongolian
Land Law (2002) govern exploration, mining, and land use rights for the Oyu Tolgoi project. Water rights are governed by the Mongolian
Water Law and the Minerals Law. OTLLC has studied and continues to study the permitting and approval requirements for the development
of the Oyu Tolgoi project including the Entrée/Oyu Tolgoi JV Property, and maintains a permit and licencing register. OTLLC
personnel, working with the Mongolian authorities, have developed descriptions of the permitting processes and procedures for the
Oyu Tolgoi project, including the underground development of the Entrée/Oyu Tolgoi JV Property. OTLLC has stated that permits
have been obtained for underground mining.
Social Considerations
A social analysis was completed through the
commissioning of a Socio-Economic Baseline Study and the preparation of a Social Impact Assessment (“SIA”) for the
Oyu Tolgoi project. The cumulative impact assessment examined geographical areas, communities, and regional stakeholders that could
be subject to cumulative impacts from further developments at Oyu Tolgoi together with other existing or planned projects, trends,
and developments within the South Gobi region.
Community and social management plans, procedures
and strategies have been developed. The surrounding community (predominantly herders) and local government are kept fully informed
about mine developments and provide input and review of implementation of plans, procedures and strategies that directly affect
them.
Markets and Contracts
Commodity pricing is based on pricing from
the Turquoise Hill’s October 2016 Technical Report titled “2016 Oyu Tolgoi Technical Report”, which uses the
2016 Oyu Tolgoi Feasibility Study as a basis, and which in turn is based on reviews of long-term consensus estimates reported in
public reports.
OTLLC has developed a marketing strategy for
the Oyu Tolgoi project, including their portion of the mineralization within the Entrée/Oyu Tolgoi JV Property.
Under the terms of the Entrée/Oyu Tolgoi
JVA (Article 12), Entrée retains the right to take the product in kind. For the purposes of the 2018 Technical Report, it
has been assumed that Entrée takes control of its portion of the bagged concentrate and that the sales of concentrate will
use the same approximate smelter terms, transport and other marketing costs as for the OTLLC concentrate.
Amec Foster Wheeler did not review contracts,
pricing studies, or smelter terms developed by OTLLC or its third-party consultants as these were considered by OTLLC to be confidential
to OTLLC. Instead, Amec Foster Wheeler relied on summary pricing and smelting information provided by OTLLC within the 2016 Oyu
Tolgoi Feasibility Study and OTLLC’s BDT31. Based on the review of this summary information, the OTLLC smelter terms are
similar to smelter terms that Amec Foster Wheeler is familiar with, and the metal pricing is in line with Amec Foster Wheeler’s
assessment of industry-consensus long-term pricing estimates.
Capital Cost Estimates
Phase 2 capital cost and sustaining cost estimates were prepared as separate and independent estimates.
The overall Phase 2 capital cost and sustaining cost estimates are from the Phase 2 estimates in the 2016 Oyu Tolgoi Feasibility
Study.
The capital cost estimate represents the overall
development for the Hugo North/Hugo North Extension Lift 1 underground mine, supporting shafts, the concentrator conversion project,
and the infrastructure expansion project. The capital estimate also includes the costs associated with the engineering, procurement
and construction management (“EPCM”) and owner’s project costs. Costs include value-added tax (“VAT”)
and duties. The overall estimated capital cost to design, procure, construct, and commission the complete expansion, inclusive
of an underground block cave mine, supporting shafts, concentrator conversion, and supporting infrastructure expansion, is $5.093
billion. Table 5 provides a summary of the overall capital cost estimate.
Sustaining capital costs were estimated for
Hugo North/Hugo North Extension Lift 1 in the 2016 Oyu Tolgoi Feasibility Study for tailings, processing and underground mining,
and infrastructure/other. Table 6 provides the overall sustaining capital cost estimate for each area on a dollar-per-tonne processed
basis.
Amec Foster Wheeler reviewed the 2016
Oyu Tolgoi Feasibility Study overall capital and sustaining capital cost estimate, and then apportioned the estimates between
the Oyu Tolgoi mining licence and the Entrée/Oyu Tolgoi JV Property and derived Entrée’s 20% attributable
portion based on the Entrée/Oyu Tolgoi JVA. The resulting attributable portion of the capital cost/sustaining capital
cost estimates are discussed below in “Material Mineral Property – Entrée Oyu/Tolgoi JV Project, Mongolia
– Economic Analysis – 2018 Reserve Case”.
Table 5 – Overall
Capital Cost Estimate Summary
| $ Millions |
Total |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
| Concentrator expansion |
145 |
— |
— |
— |
29.2 |
62.6 |
53.0 |
— |
| Mine Shaft #2 |
194 |
31.7 |
85.5 |
46.9 |
30.2 |
— |
— |
— |
| Mine Shaft #3 |
209 |
— |
9.7 |
46.3 |
69.8 |
66.8 |
16.8 |
— |
| Mine Shaft #4 |
246 |
— |
6.0 |
75.5 |
66.6 |
80.3 |
17.1 |
— |
| Mine Shaft #5 |
63 |
11.4 |
28.2 |
23.2 |
— |
— |
— |
— |
| Hugo North/Hugo North Extension Lift #1 U/G construction |
1,730 |
159.0 |
358.1 |
428.0 |
440.9 |
224.3 |
97.3 |
22.2 |
| Infrastructure and CHP |
404 |
50.1 |
93.5 |
76.8 |
70.1 |
78.6 |
33.8 |
1.5 |
| Misc Indirects |
902 |
44.1 |
159.6 |
191.0 |
224.3 |
171.5 |
84.7 |
26.6 |
| Detailed engineering |
79 |
28.0 |
22.9 |
21.5 |
1.9 |
2.5 |
1.3 |
0.6 |
| PMC / EPCM |
295 |
35.1 |
57.4 |
62.8 |
58.7 |
45.9 |
28.4 |
6.5 |
| Owners PM |
501 |
71.9 |
53.1 |
98.9 |
88.5 |
98.7 |
54.6 |
34.9 |
Total expansion capital cost
(excluding VAT and duty and cont.) |
4,767 |
431.3 |
874.0 |
1,070.9 |
1,080.3 |
831.2 |
387.1 |
92.4 |
| VAT and duties |
326 |
27.2 |
70.2 |
71.5 |
60.1 |
64.2 |
29.1 |
3.5 |
| Expansion capital costs total expansion capital cost (including VAT and Duty and Cont.) |
5,093 |
458.5 |
944.2 |
1,142.4 |
1,140.4 |
895.3 |
416.2 |
95.8 |
Notes:
| 1. | The overall capital cost estimate presented is for Hugo
North/Hugo North Extension Lift 1. |
| 2. | Capital costs include only direct project costs and exclude interest expense, capitalized interest,
debt repayments, tax pre-payments and forex adjustments. |
| 3. | The 2016 Oyu Tolgoi Feasibility Study Reserves Case total capital cost above includes capital costs
for the year 2016. |
| 4. | Misc = miscellaneous, UG = underground, CHP = central heating plant, PMC = project management and
construction, EPCM = engineering, procurement and construction management, EPMC = engineering project management and construction,
PM = project management, VAT = value-added tax, cont. = contingency. |
Table 6 – Overall
Sustaining Capital Cost Estimate
| Description |
Unit |
Value |
| Tailings storage facility construction |
$/t processed |
0.91 |
| Concentrator |
$/t processed |
0.12 |
| Underground mining |
$/t processed |
6.69 |
| Infrastructure |
$/t processed |
0.18 |
| Total |
$/t processed |
7.90 |
Note:
| 1. | The overall sustaining capital cost estimate presented
is for Hugo North/Hugo North Extension Lift 1. |
Operating Cost Estimates
The overall operating costs are based on a
mine plan that consists of both the Oyut open pit material and Hugo North/Hugo North Extension Lift 1 underground ore in the 2016
Oyu Tolgoi Feasibility Study. The Oyut open pit supplies the initial source of ore to the mill at a nominal capacity of 100 kt/d.
Once production from underground commences,
the open pit feed to the mill is continually displaced by the higher-grade ore from Hugo North/Hugo North Extension Lift 1. Production
of ore from Hugo North/Hugo North Extension Lift 1 ramps up from 2020 until 2027 when it reaches a steady-state production level.
Feed from the underground mine is planned to
commence from 2020 and then ramp up to the full underground design tonnage of 95 kt/d. The mill operating rate at that time will
be a nominal 110 kt/d, due to the softer and higher processing throughput rate of the Hugo North/Hugo North Extension Lift 1 ore.
Operating costs for the concentrator and infrastructure
represent a combined open pit and underground mining operation post-2015, assuming the Phase 2 underground operation is undertaken
in conjunction with open pit mining.
The overall operating cost estimates includes
all expenses to operate and maintain the Oyu Tolgoi plant plus the sustaining capital required to keep the plant running at its
design capacity. Escalation is excluded from the operating costs per Rio Tinto guidelines. No cost of financing is included. No
royalties or joint venture fees are included. Power has been treated as a purchased utility from a third-party provider.
Table 7 provides a summary of the overall operating
cost estimate. The operating costs for the Entrée/Oyu Tolgoi JV Property, and Entrée’s 20% attributable portion
of the operating cost estimate, is discussed below in “Material Mineral Property – Entrée Oyu/Tolgoi JV Project,
Mongolia – Economic Analysis – 2018 Reserve Case”.
Table 7 – Overall Phase
2 Operating Cost Estimate Summary
| Description |
Unit |
Item |
| Mining |
$/t processed |
6.19 |
| Processing |
$/t processed |
8.41 |
| Infrastructure |
$/t processed |
2.04 |
| Total |
$/t processed |
16.64 |
Note:
| 1. | The
overall operating cost estimate presented is for Hugo North/Hugo North Extension Lift 1. |
Economic Analysis – 2018
Reserve Case
The results of the economic analyses discussed
below and in “Material Mineral Property – Entrée Oyu/Tolgoi JV Project, Mongolia – Preliminary Economic
Analysis – Economic Analysis – 2018 PEA constitute forward-looking statements that are based on Entrée’s
expectations about future events as at the date that such statements were prepared. The statements are not a guarantee of Entrée’s
future performance, and they are based on numerous assumptions and are subject to numerous risks and uncertainties which are more
fully described under the “Forward Looking Statement” and “Risk Factors” sections in this AIF. There can
be no assurance that such forward-looking statements will prove to be accurate, as actual results and future events could differ
materially from those anticipated in such statements.
The cash flows are based on data provided by
OTLLC, including mining schedules and annual capital and operating cost estimates, as well as Entrée’s interpretation
of the commercial terms applicable to the Entrée/Oyu Tolgoi JV, and certain assumptions regarding taxes and royalties. The
cash flows have not been reviewed or endorsed by OTLLC. There can be no assurance that OTLLC or its shareholders will not interpret
certain terms or conditions, or attempt to renegotiate some or all of the material terms governing the joint venture relationship,
in a manner which could have an adverse effect on Entrée’s future cash flow and financial condition.
The cash flows also assume that Entrée
will ultimately have the benefit of the standard royalty rate of 5% of sales value, payable by OTLLC under the Oyu Tolgoi Investment
Agreement. Unless and until Entrée finalizes agreements with the Government of Mongolia or other Oyu Tolgoi stakeholders,
there can be no assurance that Entrée will be entitled to all the benefits of the Oyu Tolgoi Investment Agreement, including
with respect to taxes and royalties. If Entrée is not entitled to all the benefits of the Oyu Tolgoi Investment Agreement,
it could have an adverse effect on Entrée’s future cash flow and financial condition. For example, Entrée could
be subject to the surtax royalty which came into effect in Mongolia on January 1, 2011. To become entitled to the benefits of the
Oyu Tolgoi Investment Agreement, Entrée may be required to negotiate and enter into a mutually acceptable agreement with
the Government of Mongolia or other Oyu Tolgoi stakeholders, with respect to Entrée’s direct or indirect participating
interest in the Entrée/Oyu Tolgoi JV or the application of a special royalty (not to exceed 5%) to Entrée’s
share of the Entrée/Oyu Tolgoi JV Property mineralization or otherwise.
Amec Foster Wheeler apportioned the overall capital and sustaining capital costs for Phase 2 of the Oyu Tolgoi project according to Entrée’s interpretation of the terms of the Entrée/Oyu Tolgoi JVA
for use in the economic assessment. This interpretation includes:
| · | OTLLC is responsible for 80% of all capital
expenditures incurred on the Entrée/Oyu Tolgoi JV Property for the benefit of the Entrée/Oyu Tolgoi JV and Entrée
is responsible for the remaining 20%. |
| · | Any mill, smelter and other processing
facilities and related infrastructure will be owned exclusively by OTLLC and not by Entrée. Mill feed from the Entrée/Oyu
Tolgoi JV Property will be transported to the concentrator and processed at cost (using industry standards for calculation
of cost including an amortization of capital costs). |
| · | Underground infrastructure on the Oyu
Tolgoi mining licence is also owned exclusively by OTLLC, although the Entrée/Oyu Tolgoi JV will eventually share usage
once underground development crosses onto the Entrée/Oyu Tolgoi JV Property. |
| · | Entrée recognizes those capital
costs incurred by OTLLC on the Oyu Tolgoi mining licence (facilities and underground infrastructure) as an amortization charge
for capital costs that will be calculated in accordance with Canadian generally accepted accounting principles determined yearly
based on the estimated tonnes of concentrate produced for Entrée’s account during that year relative to the estimated
total life-of-mine concentrate to be produced (for processing facilities and related infrastructure), or the estimated total life-of-mine
tonnes to be milled from the relevant deposit(s) (in the case of underground infrastructure). The charge is made to Entrée’s
operating account when the Entrée/Oyu Tolgoi JV mine production is actually milled. |
| · | For direct capital cost expenditures on
the Entrée/Oyu Tolgoi JV Property, Entrée will recognize its proportionate share of costs at the time of actual expenditure.
|
| · | Entrée has elected to have OTLLC
debt finance Entrée’s share of costs for approved programs and budgets, with interest accruing at OTLLC’s actual
cost of capital or prime +2%, whichever is less, at the date of the advance. Debt repayment may be made in whole or in part from
(and only from) 90% of monthly available cash flow arising from the sale of Entrée’s share of products. Available
cash flow means all net proceeds of sale of Entrée’s share of products in a month less Entrée’s share
of costs of Entrée/Oyu Tolgoi JV activities for the month that are operating costs under Canadian generally-accepted
accounting principles. |
The Entrée/Oyu Tolgoi JV
Property total capital and sustaining capital cost is estimated at $261.7 million. The total amortized capital cost is
estimated at $395.7 million.
Entrée’s 20% attributable portion
of the Hugo North Extension Lift 1 development/sustaining and amortized capital cost is $52.3 million and $79.1 million respectively.
The Entrée/Oyu Tolgoi JV Property total
operating costs average $37.08/t processed, and are inclusive of the amortized capital, refining and smelting charges, and a 2%
administrative fee.
Entrée’s 20% attributable portion
of the operating costs for Hugo North Extension Lift 1 on a per tonne milled basis averages $37.08 over the LOM.
Based on the above inputs, Amec Foster Wheeler
completed an economic analysis for Entrée’s 20% attributable portion of the Entrée/Oyu Tolgoi JV Property using
both pre-tax and after-tax discounted cash flow analyses. The economic analysis was prepared using the following long-term metal
price estimates: copper at $3.00/lb; gold at $1,300.00/oz and silver at $19.00/oz.
Entrée’s 20% attributable
portion of pre-tax cash flow is $382 million and after-tax cash flow is $286 million. Entrée’s 20% attributable
portion of after-tax cash flow using a discount rate of 8% (“NPV@8%”) is $11 million. A summary of the financial
results is shown in Table 8. Internal rate of return (“IRR”) and payback are not presented, because, with 100%
financing, neither is applicable.
Mine site cash costs, total cash costs
(C1) and all-in sustaining costs are shown in Table 9 for Entrée’s 20% attributable portion. Cash costs are
those costs relating to the direct operating costs of the mine site including:
| · | On site operating costs (direct mining,
processing, and tailings). |
| · | Capital carrying costs (amortization charge). |
| · | Refining, smelting, and transportation
costs. |
Total cash costs (C1 costs) are the cash costs
less by product credits for gold and silver. All-in sustaining costs after credits are the total cash costs plus mineral royalties,
reclamation accrual costs, and sustaining capital charges.
Table
8 – Summary Production and Financial Results for Entrée’s 20% Attributable Portion (basecase
is bolded)
| |
Units |
Value |
|
|
| LOM processed material (Entrée/Oyu Tolgoi JV Property) |
|
| Probable mineral reserve feed |
|
34.8 Mt grading 1.59% Cu, 0.55 g/t Au, 3.72 g/t Ag
(1.93% CuEq) |
|
| Copper recovered |
Mlb |
1,115 |
|
|
| Gold recovered |
koz |
514 |
|
|
| Silver recovered |
koz |
3,651 |
|
|
| Entrée 20% attributable portion financial results |
|
|
| LOM cash flow, pre-tax |
$M |
382 |
|
|
| NPV@5%, after-tax |
$M |
157 |
|
|
| NPV@8%, after-tax |
$M |
111 |
|
|
| NPV@10%, after-tax |
$M |
89 |
|
|
Notes:
| 1. | Long-term metal prices used in the NPV economic analyses are: copper $3.00/lb, gold $1,300.00/oz and
silver $19.00/oz. |
| 2. | The mineral reserves within
Hugo North Extension Lift 1 are reported on a 100% basis. OTLLC has a participating interest of 80%, and Entrée has a participating
interest of 20%. Notwithstanding the foregoing, in respect of products extracted from the Entrée/Oyu Tolgoi JV Property
pursuant to mining carried out at depths from surface to 800 m below surface, the participating interest of OTLLC is 70% and the
participating interest of Entrée is 30%.
|
| 3. | Figures have been rounded. |
Table 9 – Mine Cash and All-in Sustaining Costs for Entrée’s 20% Attributable Portion
| Description |
Unit |
LOM Average |
| Mine site cash cost |
$/lb payable copper |
0.95 |
| TC/RC, royalties and transport |
$/lb payable copper |
0.29 |
| Total cash costs before credits |
$/lb payable copper |
1.25 |
| Gold credits |
$/lb payable copper |
0.62 |
| Silver credits |
$/lb payable copper |
0.06 |
| Total cash costs after credits |
$/lb payable copper |
0.56 |
| Total all-in sustaining costs after credits |
$/lb payable copper |
1.03 |
Note: TC/RC = treatment and refining
charges.
Sensitivity Analysis – 2018
Reserve Case
Entrée’s 20% attributable portion
was evaluated for sensitivity to variations in capital costs, operating costs, copper grade, and copper price. Entrée’s
20% attributable portion is most sensitive to changes in copper price and grade and less sensitive to changes in operating and
capital costs.
Figure 6 is an after-tax NPV sensitivity
graph for Entrée’s 20% attributable portion. The copper grade sensitivity mirrors the copper price and plots on
the same line.
Figure 6 – After-Tax NPV@8% Sensitivity
Analysis for Entrée’s 20% Attributable Portion
Note: Figure prepared by Amec Foster Wheeler,
2018.
Preliminary Economic Assessment
Introduction
The PEA that follows is an alternative development
option done at the conceptual level based on mineral resources, which assesses the inclusion of Hugo North Extension Lift 2
and the portion of the Heruga deposit within the Javhlant mining licence into an overall mine plan with Hugo North Extension Lift
1.
The mine plan is partly based on Inferred mineral
resources that are considered too speculative geologically to have the economic considerations applied to them that would enable
them to be categorized as mineral reserves, and there is no certainty that the PEA based on these mineral resources will be realized.
The sections “Material Mineral Property
– Entrée Oyu/Tolgoi JV Project, Mongolia – Introduction” through to “Material Mineral Property –
Entrée/Oyu Tolgoi JV Project, Mongolia – Mineral Resource Statement” and “Material Mineral Property –
Entrée/Oyu Tolgoi Project, Mongolia – Recommendations also apply to the 2018 PEA. Years presented in the 2018 PEA
are for illustrative purposes only.
Mineral
Resource Subset within the 2018 PEA Mine Plan
The 2018 PEA is based on the subset of mineral
resources in Table 10. Mineral resources that are not mineral reserves do not have demonstrated economic viability.
Table 10 – Subset of Mineral
Resources within the 2018 PEA Mine Plan
| |
|
|
Grades |
| Classification by Deposit |
NSR
($/t) |
Tonnage
(kt) |
CuEq
(%) |
Cu
(%) |
Au
(g/t) |
Ag
(g/t) |
Mo
(ppm) |
| Hugo North Extension, Lift 1 |
| Indicated |
100.57 |
34,800 |
1.93 |
1.59 |
0.55 |
3.72 |
— |
| Hugo North Extension, Lift 2 |
| Indicated |
83.80 |
78,400 |
1.64 |
1.34 |
0.48 |
3.59 |
— |
| Inferred |
83.80 |
88,400 |
1.64 |
1.34 |
0.48 |
3.59 |
— |
| Heruga – Javhlant ML |
| Inferred |
32.19 |
619,718 |
0.71 |
0.42 |
0.43 |
1.53 |
124 |
Note: The
tabulation was derived by Amec Foster Wheeler at a conceptual level from data supplied by OTLLC. Mineral resources that are not
mineral reserves do not have demonstrated economic viability.
Mine Plan
For planning purposes, the 2016 Oyu Tolgoi
Feasibility Study assumes that the overall underground production is capped at approximately 33 Mt/a for the foreseeable mine life,
and that this cap is based on the mill capacity; this capping assumption is used in the 2018 PEA.
Since the subset of the mineral resources within
the Entrée/Oyu Tolgoi JV Property is planned to be mined as part of an overall strategy for the mineralization within the
Oyu Tolgoi mining licence combined with that in the Entrée/Oyu Tolgoi JV Property, there are gaps in the planned production
periods. Figure 7 shows the production forecast for the subset of the mineral resources within the 2018 PEA mine plan.
The subset of the mineral resource in the mine
plan is separated into three mining areas within the Entrée/Oyu Tolgoi JV Property: Hugo North Extension Lift 1, Hugo North
Extension Lift 2, and the portion of the Heruga deposit within the Javhlant mining licence. The current level of knowledge regarding
these areas suggests that panel cave mining is appropriate for all three areas.
Mineralized material delivery from Hugo North
Extension Lift 1 is anticipated to begin in 2021, when development commences within this area. Production from the cave is expected
in 2026 when the first drawbelling occurs. Production is projected to occur for nine years (2026 to 2034) with a peak production
(8.3 Mt/a) occurring in 2031.
The Hugo North mine planning and optimization
indicated that the ideal elevation for the second lift (Lift 2) is approximately 400 m below Lift 1. The mine plan assumes that
723 drawpoints will be constructed between 2035 and 2046 in the Hugo North Extension Lift 2 area.
Figure 7 – 2018 PEA Production
Forecast for the Subset of Mineral Resources within the 2018 PEA Mine Plan
Note: Figure prepared by Amec
Foster Wheeler, 2017. Abbreviations: HN1-EJV = Hugo North Extension Lift 1 within the Entrée/Oyu Tolgoi JV Property;
HN2-EJV = Hugo North Extension Lift 2 within the Entrée/Oyu Tolgoi JV Property; Heruga-EJV = Heruga within the
Entrée/Oyu Tolgoi JV Property.
Initial mill feed delivery from
Hugo North Extension Lift 2 is assumed to begin in 2028 when development commences in the Hugo North Extension Lift 2 area.
Production from Hugo North Extension Lift 2 is anticipated to begin in 2035 with the completion of the first drawpoints. The
peak production from Hugo North Extension Lift 2 is expected to be approximately 41,500 t/d in 2046, and the average
production rate (2028–2053) is planned at about 17,800 t/d. Access to the Lift 2 mining horizon will be by extension of
the Lift 1 facilities, including extending the conveyor decline system for mineralized material and waste haulage, and
providing a service decline for personnel, equipment and material. The main ventilation shafts would be extended down to the
Lift 2 horizon. Given the overall similarities to Lift 1, the overall layout and support facilities will be, likewise,
similar to Lift 1.
A 2014 study separated Heruga into a north
and south zone for mine planning purposes, and assumed that these would be at separate elevations (-20 metres above sea level (“masl”)
and -350 masl respectively). The 2018 Technical Report considers a total of 2,606 drawpoints to be included for both caves; of
these 2,265 would be within the Entrée/Oyu Tolgoi JV Property, while the remainder would be within the Oyu Tolgoi mining
licence.
Mineralized material will be removed by means
of a conveyor to surface. Four shafts will be needed to accommodate the ventilation requirements and access for personnel, material
and equipment into/out of the mine. The production rate from Heruga is considered to be the same as the Hugo North/Hugo North Extension
complex (~95,000 t/d) to meet the capacity of the mill. Hence, the overall scale of the underground and surface infrastructure
will be similar to that associated with Hugo North/Hugo North Extension. In the 2018 PEA mine plan, development in mill feed material
would begin from the southern Heruga zone in 2065. The first drawbell would be fired in 2069, and the mine would achieve rated
capacity in 2083.
Production from the Entrée/Oyu Tolgoi
JV Property would cease in 2097. Average production from the Entrée/Oyu Tolgoi JV Property between 2069 and 2097 (inclusive)
would be approximately 59,200 t/d.
All three mines in the 2018 PEA case are anticipated
to use a similar equipment fleet based on the requirements of the common block cave technique. The following equipment will be
required: mucking (LHDs); haulage (road trains and articulated haul trucks); drilling (jumbos, production drills and bolting equipment);
raise bore and boxhole; utilities and underground support (flatbeds, boom trucks, fuel and lube trucks, explosive carriers, shotcrete
transmixers and sprayers, etc.); surface support; and light vehicles.
Major fixed equipment will include: material
handling (crushing and conveying); fans and ventilation equipment; pumping and water handling equipment; power distribution equipment;
data and communications equipment; and maintenance equipment (fixed shop furnishing).
Recovery Methods
The 2018 PEA assumes that no changes will be
required to the process plant from those contemplated in the Phase 2 concentrator development program (see “Material Mineral
Property – Entrée/Oyu Tolgoi JV Project, Mongolia – Recovery Methods”), and that the same mill throughput
will be maintained.
Project Infrastructure
The majority of the primary infrastructure
and facilities required for the Oyu Tolgoi project were completed during Phase 1. The 2018 PEA assumes that the infrastructure
in place for Hugo North/Hugo North Extension Lift 1 will be available for Hugo North/Hugo North Extension Lift 2, and that a similar
design will be employed for the underground mining operation. For the purposes of the 2018 PEA mine plan, it was assumed that Heruga
will be a completely new mine that does not take account of pre-existing mine and support infrastructure associated with the Hugo
North/Hugo North Extension Lift 1 and Lift 2 mines.
Key additional infrastructure assumptions that
would be needed to support the 2018 PEA mine plan in addition to that contemplated in Phase 2 include:
| · | Electrical substation and power distribution
line (Heruga). |
| · | Construction of conveyor decline and shafts
(Heruga). |
| · | Construction of permanent underground
facilities including crushing and materials handling, workshops, services, and related infrastructure (Hugo North Extension Lift
2 and Heruga). |
| · | Modifications to the electrical shaft
farm substation, and upgrades to some of the distribution systems (Hugo North Extension Lift 2 and Heruga). |
| · | Expanded logistical and accommodations
infrastructure (Hugo North Extension Lift 2 and Heruga). |
| · | Underground maintenance and fuel storage
facilities (Hugo North Extension Lift 2 and Heruga). |
| · | Expanded water supply and distribution
infrastructure (Hugo North Extension Lift 2 and Heruga). |
| · | Expanded TSF capacity (Hugo North Extension
Lift 2 and Heruga). |
Market Studies
and Contracts
For the purposes of the 2018 PEA, it was
assumed that the marketing provisions and contracts entered into for Hugo North Extension Lift 1 production would be
maintained (see
“Material Mineral Property – Entrée/Oyu Tolgoi JV Project, Mongolia – Markets and Contracts”
).
Commodity pricing for the 2018 PEA estimate
is based on pricing from Turquoise Hill’s 2016 Oyu Tolgoi Technical Report, which uses the 2016 Oyu Tolgoi Feasibility Study
as a basis, and incorporates a long-term industry-consensus estimate derived from public reports.
The smelter terms used were from the 2016
Oyu Tolgoi Feasibility Study as reported in Turquoise Hill’s 2016 Oyu Tolgoi Techical Report and OTLLC’s BDT31.
Environmental, Permitting and Social Considerations
Information relating to environmental studies,
permitting, and social or community impact remain the same for the 2018 PEA as discussed for Hugo North Extension Lift 1 (see
“Material Mineral Property – Entrée/Oyu Tolgoi JV Project, Mongolia, – Environmental, Permitting and Social Considerations”
above).
Tailings Considerations
The 2018 PEA assumes that additional tailings
cells that have a similar design and capacity to the operating Cell 1 would be used for deposition of conventional thickened tailings:
| · | Future cells to support the 2018 PEA case
are assumed to use similar embankment configurations as in the current TSF design. |
| · | The same concepts for tailings deposition
and reclaim water return will continue to be used. |
| · | Improvements to water reclaim mechanisms
to recycle as much water as practicable will continue. |
These additional cells would have the capacity
to contain the life-of-mine tailings under the 2018 PEA assumptions. However, the cost of constructing additional cells may increase
as the haul distances for mine waste and other embankment materials increase.
Closure Considerations
No closure considerations were evaluated as
part of the 2018 PEA plan, due to the long timeframe envisaged before closure would be needed. It was anticipated that the closure
planning would be similar to that proposed for the 2014 OTLLC closure plan.
Capital Costs
The 2016 Oyu Tolgoi Feasibility Study
initial capital cost estimate to develop Hugo North/Hugo North Extension Lift 1 and design, procure, construct, and
commission the complete Phase 2 expansion, inclusive of an underground block cave mine, supporting shafts, concentrator
conversion, and supporting infrastructure expansion is $5.093 billion (see “Material Mineral Property – Entrée/Oyu Tolgoi JV Project,
Mongolia – Capital Cost Estimates”). The additional capital to develop Hugo North/Hugo
North Extension Lift 2 and the entire Heruga deposit is estimated at $1.801 billion and $2.541 billion respectively.
Table 11 provides a summary of the overall capital cost projections for Hugo North/Hugo North Extension Lift 1, Hugo
North/Hugo North Extension Lift 2 and the entire Heruga deposit.
Overall sustaining capital costs are
based on extrapolations from the 2016 Oyu Tolgoi Feasibility Study costs (see “Material Mineral Property –
Entrée/Oyu Tolgoi JV Project, Mongolia – Capital Cost Estimates”) with adjustments made for:
| · | Tailings management facility costs that
were increased to account for longer hauling distances; and a higher contingency due to lack of designs. |
| · | Hugo North/Hugo North Extension Lift 2
and Heruga development costs that were increased by approximately 8% and 10% respectively compared to Hugo North/Hugo North Extension
Lift 1 only. |
Table 12 provides an overview of the
overall sustaining capital cost estimate for Hugo North/Hugo North Extension Lift 1, Hugo North/Hugo North Extension Lift 2
and the entire Heruga deposit.
Amec Foster Wheeler apportioned the capital cost and
sustaining capital cost estimates to the Entrée/Oyu Tolgoi JV Property and to Entrée’s 20% attributable
portion based on Entrée’s interpretation of the Entrée/Oyu Tolgoi JVA (see “Material Mineral
Property – Entrée/Oyu Tolgoi JV Project, Mongolia – Economic Analysis”). Entrée’s
20% attributable portion of the capital cost and sustaining capital cost estimates is discussed in “Material
Mineral Property – Entrée/Oyu Tolgoi JV Project, Mongolia – Preliminary Economic Assessment –
Economic Analysis”.
Table 11 – Overall Capital
Costs
| Area |
Units |
Value |
| Hugo North/Hugo North Extension Lift 1 and concentrator expansion |
$ |
5,093 |
| Hugo North/Hugo North Extension Lift 2 |
$ |
1,801 |
| Heruga |
$ |
2,541 |
| Total capital cost (including VAT and duty and contingency) |
$ |
9,434 |
Note:
| 1. | The overall
capital cost presented is for Hugo North/Hugo North Extension Lift 1, Hugo North/Hugo
North Extension Lift 2 and the entire Heruga deposit. |
Table 12 – Overall
Sustaining Capital Costs
| Description |
Unit |
Value |
| Tailings storage facility construction |
$/t processed |
1.09 |
| Concentrator |
$/t processed |
0.10 |
| Underground mining |
$/t processed |
7.40 |
| Infrastructure |
$/t processed |
0.18 |
| Total |
$/t processed |
8.76 |
Note:
| 1. | The overall
sustaining capital cost presented is for Hugo North/Hugo North Extension Lift 1, Hugo North/Hugo
North Extension Lift 2 and the entire Heruga deposit. |
Operating Costs
Table 13 provides a breakdown of the projected
operating costs for Hugo North/Hugo North Extension Lift 1, Hugo North/Hugo North Extension Lift 2 and the entire Heruga deposit.
Anticipated operating costs on a per tonne milled basis averages $17.07. Entrée’s 20% attributable
portion of the operating cost estimate is discussed in “Material
Mineral Property – Entrée/Oyu Tolgoi JV Project, Mongolia – Preliminary Economic Assessment – Economic
Analysis”.
Table 13 – Overall Operating
Costs
| Description |
Unit |
Value |
| Mining |
$/t processed |
5.67 |
| Processing |
$/t processed |
9.37 |
| Infrastructure |
$/t processed |
2.04 |
| Total |
$/t processed |
17.07 |
Note:
| 1. | The overall operating cost presented is for Hugo North/Hugo North Extension Lift 1, Hugo North/Hugo
North Extension Lift 2 and the entire Heruga deposit. |
Economic Analysis – 2018 PEA
This Section provides the results of
the 2018 PEA See “Material Mineral Property – Entrée/Oyu Tolgoi JV Project, Mongolia – Economic
Analysis” above regarding cautionary statements, which also applies to this section.
The PEA mine plan is partly based on Inferred
mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would
enable them to be categorized as mineral reserves, and there is no certainty that the 2018 PEA based on these mineral resources
will be realized. Mineral resources that are not mineral reserves do not have demonstrated economic viability.
The PEA that follows
is an alternative development option done at the conceptual level based on mineral resources, which assesses the inclusion of
Hugo North Extension Lift 2 and the portion of the Heruga deposit within the Entrée/Oyu Tolgoi JV Property into an overall
mine plan with Hugo North Extension Lift 1.
Amec Foster Wheeler apportioned the
capital and sustaining capital costs according to Entrée’s interpretation of the Entrée/Oyu Tolgoi JVA
(summarized in “Material Mineral Property – Entrée/Oyu Tolgoi JV Project, Mongolia –
Economic Analysis” above) for use in the 2018 PEA. The Entrée/Oyu Tolgoi JV Property total capital and
sustaining capital cost for the 2018 PEA is estimated at $8,637.3 million. The total amortized capital cost is estimated at
$1,846.7 million. Entrée’s 20% attributable portion of the development/sustaining and amortized capital
cost is $1,723.4 million and $369.3 million respectively.
The Entrée/Oyu Tolgoi JV Property
operating costs used in the 2018 PEA average $23.35/t processed and are inclusive of the amortized capital, refining and
smelting charges, and a 2% administrative fee. Entrée’s 20% attributable portion of the operating costs on a per
tonne milled basis averages $23.35 over the LOM.
Based on the above inputs, Amec Foster Wheeler
completed an economic analysis for Entrée’s 20% attributable portion of the Entrée/Oyu Tolgoi JV Property using
both pre-tax and after-tax discounted cash flow analysis. The economic analysis has been prepared using the following long-term
metal price estimates: copper at $3.00/lb; gold at $1,300.00/oz and silver at $19.00/oz.
Entrée’s 20% attributable portion of pre-tax cash flow is $2,078 million and after-tax cash
flow is $1,522 million. Entrée’s 20% attributable portion of after-tax cash flow using NPV@8% is $278 million. A summary
of the production and financial results for Entrée’s 20% attributable portion are shown in Table 14. Mine site cash
costs, C1 cash costs, and all-in sustaining costs for Entrée’s 20% attributable portion are shown in Table 15. IRR
and payback are not presented because with 100% financing, neither is applicable.
The NPV@8% pre-tax and after-tax sensitivity
to Heruga for Entrée’s 20% attributable portion is relatively small, since Heruga’s NPV@8% pre-tax and after-tax
is approximately $1.8 million and $1.5 million respectively.
Table 14 – 2018 PEA Production
and Financial Results for Entrée’s 20% Attributable Portion (basecase is bolded)
| |
Units |
Item |
|
| LOM processed material (Entrée/Oyu Tolgoi JV Property) |
|
Subset of Indicated mineral resources
in the 2018 PEA mine plan |
|
113 Mt grading 1.42% Cu, 0.50 g/t Au, 3.63 g/t Ag (1.73% CuEq) |
|
Subset of Inferred mineral resources
in the 2018 PEA mine plan |
|
708 Mt grading 0.53% Cu, 0.44 g/t Au, 1.79 g/t Ag (0.82 % CuEq) |
|
| Copper recovered |
Mlb |
10,497 |
|
|
| Gold recovered |
koz |
9,367 |
|
|
| Silver recovered |
koz |
45,378 |
|
|
| Entrée attributable portion financial results |
|
|
| LOM cash flow, pre-tax |
$M |
2,078 |
|
|
| NPV@5%, after-tax |
$M |
512 |
|
|
| NPV@8%, after-tax |
$M |
278 |
|
|
| NPV@10%, after-tax |
$M |
192 |
|
|
Notes:
| 1. | Long-term metal prices used in the NPV economic analyses are: copper $3.00/lb, gold $1,300.00/oz and
silver $19.00/oz. |
| 2. | The Mineral resources are reported on a 100% basis. OTLLC has a participating interest of
80%, and Entrée has a participating interest of 20%. Notwithstanding the foregoing, in respect of products extracted
from the Entrée/Oyu Tolgoi JV Property pursuant to mining carried out at depths from surface to 560 m below surface,
the participating interest of OTLLC is 70% and the participating interest of Entrée is 30%. |
| 3. | Figures have been rounded. |
Table 15 – 2018 PEA Mine
Cash and All-in Sustaining Costs for Entrée’s 20% Attributable Portion
| Description |
Unit |
LOM Average |
| Mine site cash cost |
$/lb payable copper |
1.66 |
| TC/RC, royalties and transport |
$/lb payable copper |
0.32 |
| Total cash costs before credits |
$/lb payable copper |
1.97 |
| Gold credits |
$/lb payable copper |
1.22 |
| Silver credits |
$/lb payable copper |
0.08 |
| Total cash costs after credits |
$/lb payable copper |
0.68 |
| Total all-in sustaining costs after credits |
$/lb payable copper |
1.83 |
Sensitivity Analysis
Entrée’s 20% attributable
portion is most sensitive to changes in copper price and grade and less sensitive to changes in operating and capital costs.
Figure 8 shows the after-tax sensitivity results for NPV@8% for Entrée’s 20% attributable portion. The copper
grade sensitivity generally mirrors the copper price.
Figure 8 – 2018 PEA After-Tax
NPV@8% Sensitivity Analysis for Entrée’s 20% Attributable Portion
Note: Figure prepared by Amec Foster Wheeler,
2017.
Recommendations
The QPs were not given
access by OTLLC to information on the portions of the Oyu Tolgoi project that Entrée does not have an ownership interest
in, with the exception of:
| · | Information on, and site visits to the
process plant, TSF, and underground access development. |
| · | Access to OTLLC operations site personnel
to discuss information relevant to Entrée’s joint venture interest in the Entrée/Oyu Tolgoi JV Property. |
The QPs are therefore not in a position to
make meaningful recommendations for further work for areas other than exploration and strategic planning expansion scenarios.
A work program is recommended for the
Entrée/Oyu Tolgoi JV Property in the area of the Castle Rock and Southeast IP targets, and is termed the Phase 1 work
program. Drilling should be considered for Hugo North Extension Lift 2 (Phase 2 work program). Strategic planning expansion
scenario evaluations should also be conducted during the Phase 2 work program. The Phase 2 work program is independent of the
Phase 1 work program, and the two work program phases could be conducted concurrently.
In the Phase 1 work program, eight widely-spaced
core holes for each of the Castle Rock and Southeast IP targets drilled to depths averaging about 400 m, for a total program of
16 core holes totaling 6,400 m, are recommended to test these targets. The exact locations and depths of the holes should be determined
through a detailed review of the existing exploration results, and access considerations. Assuming an all-in drilling cost of $275/m,
the proposed program is estimated at $1.75 million.
For the Phase 2 work program, Amec Foster Wheeler
recommends an infill drill campaign be conducted within Lift 2 of the Hugo North Extension deposit with the objective of potentially
converting the Inferred mineral resources to higher confidence categories. A drill program could also be conducted to investigate
a potential further northern continuation of the mineralized zone. These targets are best tested from underground drill stations.
Access to any such suitable underground drill stations will not be available until 2021 at the earliest. Therefore, it is not considered
to be currently feasible to provide a meaningful drill layout or budget for such programs.
Turquoise Hill’s 2016 Oyu Tolgoi Technical
Report published multiple development options for Oyu Tolgoi including a plant expansion to 50 Mt/a, 100 Mt/a, and 120 Mt/a. Amec
Foster Wheeler recommends that Entrée independently complete strategic planning expansion scenarios as part of the Phase
2 work program in order to understand the impact to value that these scenarios could bring to Entrée. This work could be
completed at a cost of approximately $150,000 to $200,000.
NON-MATERIAL
PROPERTIES
Entrée has interests in other non-material
properties in Australia and Peru as follows. For additional information regarding these non-material properties, including Entrée’s
ownership interest and obligations, see the Company’s Management’s Discussion and Analysis for the financial year
ended December 31, 2017, which is available on SEDAR at www.sedar.com.
| · | Blue Rose Joint
Venture, Australia. The Blue Rose silver-iron-gold-copper property is located in the Olary Region of South Australia, 300
kilometres northeast of Adelaide and 130 kilometres west-southwet of Broken Hill. Entrée (operator) has a 56.53%
interest in a joint venture to explore for minerals (other than iron ore) on the
property, with Giralia Resources Pty Ltd., now a subsidiary of Atlas Iron Limited, retaining a 43.47% interest. The property
consists of one exploration licence, EL6006, totalling 257 square kilometres, expiring on July 18, 2019. |
The Braemar Iron Formation
is the host rock to magnetite mineralization on both EL6006 and Magnetite Mines Limited’s Razorback Iron project, located
immediately west of EL6006. Aeromagnetic anomalies coincident with the outcropping and sub-cropping magnetite units extend from
Razorback into EL6006. The mineralization within the Braemar Iron Formation forms a simple dipping tabular body with only minor
faulting, folding and intrusives. Grades, thickness, dip, and outcropping geometry remain very consistent over kilometres of strike.
While the bedded magnetite has the highest iron content, the tillitic unit is diluted by the inclusion of lithic fragments, such
as iron-poor granite and metasedimentary dropstones.
On April 18, 2017, the Blue
Rose joint venture partners entered into a Deed of Consent, Sale and Variation (the “Deed”) with Lodestone Equities
Limited and Fe Mines Limited (formerly Braemar Iron Pty Ltd) (“FML”). FML has certain rights in respect of the exploration
for, and development of, iron ore on EL6006 pursuant to a prior agreement.
In accordance with
the Deed, the Blue Rose joint venture partners transferred title to EL6006 and assigned their native title agreements
to FML, and agreed to vary a payment required to be made to the Blue Rose joint venture partners under the prior agreement.
FML paid to the Blue Rose joint venture partners an aggregate A$100,000 at completion, and granted to
them (a) the right to receive an additional payment(s) upon completion of an initial or subsequent iron ore resource estimate
on EL6006, to a maximum of A$2 million in aggregate; and (b) a royalty equal to 0.65% of the free on board value of iron
ore product extracted and recovered from EL6006. Under the Deed, an additional A$285,000 must also be paid to the Blue Rose
joint venture partners upon the commencement of Commercial Production (as such term is defined in the Deed).
The Blue Rose joint venture
partners retain their existing rights to explore for, develop and mine all minerals other than iron ore on EL6006.
| · | Cañariaco
Royalty, Peru. The Company has a 0.5% NSR royalty on the Cañariaco project
in Peru. The Cañariaco project includes the Cañariaco Norte copper-gold-silver
porphyry deposit, as well as the adjacent Cañariaco Sur and Quebrada Verde porphyry prospects, located
within the western Cordillera of the Peruvian Andes in the Department of Lambayeque,
Northern Peru. |
Risk
Factors
This AIF contains forward-looking statements,
and any assumptions upon which they are based are made in good faith and reflect Entrée’s current judgment regarding
the direction of its business. Actual results will almost always vary, sometimes materially, from any estimates, predictions,
projections, assumptions or other future performance suggested in this AIF. Except as required by applicable law, including the
securities laws of the United States, Entrée does not intend to update any of the forward-looking statements to conform
these statements to actual results.
An investment in the Company’s Common
Shares involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition
to other information in this AIF in evaluating Entrée and its business before purchasing the Company’s Common Shares.
Entrée’s business, operating results and financial condition could be seriously harmed due to any of the following
risks. The risks described below are not the only ones facing Entrée. Additional risks not presently known to Entrée
may also impair its business operations. You could lose all or part of your investment due to any of these risks.
Legal and Political Risks
Entrée may have to
make certain concessions to the Government of Mongolia.
The Minerals Law of
Mongolia provides that the State may be an equity participant with any private legal entity, up to a 34% equity interest, in the
exploitation of any Strategic Deposit where the quantity and grade of the deposit have been defined by exploration that has not
been funded from the State budget. Under Resolution No 57. dated July 16, 2009 of the State Great Khural, the Oyu Tolgoi series
of deposits were declared to be Strategic Deposits.
The Ministry of Mining
has advised Entrée that it considers the deposits on the Entrée/Oyu Tolgoi JV Property to be part of the Oyu Tolgoi
series of deposits. Entrée has been in discussions with stakeholders of the Oyu Tolgoi project, including the Government
of Mongolia, OTLLC, Erdenes Oyu Tolgoi LLC, Turquoise Hill and Rio Tinto, since February 2013. The discussions to date have focussed
on issues arising from Entrée’s exclusion from the Oyu Tolgoi Investment Agreement, including the fact that the Government
of Mongolia does not have a full 34% interest in the Entrée/Oyu Tolgoi JV Property; the fact that the mining licences integral
to future underground operations are held by more than one corporate entity; and the fact that Entrée does not benefit
from the stability that it would otherwise have if it were a party to the Oyu Tolgoi Investment Agreement. In order to receive
the benefits of the Oyu Tolgoi Investment Agreement, the Government of Mongolia may require Entrée to agree to certain
concessions, including with respect to the economic benefit of Entrée’s interest in the Entrée/Oyu Tolgoi
JV Property, or the royalty rates applicable to Entrée’s share of the Entrée/Oyu Tolgoi JV Property mineralization.
No agreements have been finalized.
If the parties fail
to reach mutually acceptable agreements in a timely manner, there is a risk that the Government of Mongolia may resort to measures
which, whether legitimate or not, could have an adverse effect on the business, assets and financial condition of Entrée
as well as the Company’s share price. Such measures could include suspending, revoking, cancelling or withdrawing the Shivee
Tolgoi and Javhlant mining licences; attempting to invalidate, confiscate, expropriate or rescind the Entrée/Oyu Tolgoi
JV or Entrée’s interest in the Entrée/Oyu Tolgoi JV Property; and filing legal proceedings against Entrée.
Entrée is subject to
legal and political risk in Mongolia.
Entrée’s
interest in the Entrée/Oyu Tolgoi JV Project is not covered by the Oyu Tolgoi Investment Agreement. Government policy may
change to discourage foreign investment, nationalization of the mining industry may occur and other government limitations, restrictions
or requirements may be implemented. There can be no assurance that Entrée’s assets will not be subject to nationalization,
requisition, expropriation or confiscation, whether legitimate or not, by any authority or body. In addition, there can be no
assurance that neighbouring countries’ political and economic policies in relation to Mongolia will not have adverse economic
effects on the development of Entrée’s assets, including with respect to ability to access power, transport and sell
products and access construction labour, supplies and materials. The political, social and economic environment in Mongolia presents
a number of serious risks, including: uncertain legal enforcement; invalidation, confiscation, expropriation or rescission of
governmental orders, permits, licences, agreements and property rights; the effects of local political, labour and economic developments,
instability and unrest; corruption, requests for improper payments or other corrupt practices; and significant or abrupt changes
in the applicable regulatory or legal climate.
There
is no assurance that provisions under Mongolian law for compensation and reimbursement of losses to investors under such circumstances
would be effective to restore the full value of Entrée’s original investment or to compensate for the loss of the
current value of its assets. Entrée may be affected in varying degrees by, among other things, government regulations with
respect to restrictions on foreign ownership, state ownership of Strategic Deposits, royalties, production, price controls, export
controls, income and other taxes, expropriation of property, employment, land use, water use, environmental legislation, mine
safety and annual fees to maintain mining licences in good standing. The regulatory environment is in a state of continuing change,
and new laws, regulations and requirements may be retroactive in their effect and implementation. There can be no assurance that
Mongolian laws protecting foreign investments will not be amended or abolished or that existing laws will be enforced or interpreted
to provide adequate protection against any or all of the risks described above.
The
legal framework in Mongolia is, in many instances, based on recent political reforms or newly enacted legislation, which may not
be consistent with long-standing local conventions and customs. There may be ambiguities, inconsistencies and anomalies in the
agreements, licences and title documents through which Entrée holds its assets, or the underlying legislation upon which
those assets are based, which are atypical of more developed legal systems and which may affect the interpretation and enforcement
of Entrée’s rights and obligations. Mongolian institutions and bureaucracies responsible for administering laws may
lack a proper understanding of the laws or the experience necessary to apply them in a modern business context. Many laws have
been enacted, but in many instances they are neither understood nor enforced and may be applied in an inconsistent, arbitrary
and unfair manner, while legal remedies may be uncertain, delayed or unavailable. In addition, Entrée’s licences,
permits and assets are often affected in varying degrees, by political instability and governmental regulations and bureaucratic
processes, any one or more of which could preclude Entrée from carrying out business activities fairly in Mongolia. Legal
redress for such actions, if available, is uncertain and can often involve significant delays.
Entrée is not presently
a party to the Oyu Tolgoi Investment Agreement, and there can be no assurance that Entrée will be entitled to all of the
benefits of the Oyu Tolgoi Investment Agreement.
Entrée is not presently a party
to the Oyu Tolgoi Investment Agreement. Although OTLLC agreed under the terms of the Earn-In Agreement to use its best efforts
to cause Entrée to be brought within the ambit of, made subject to and be entitled to the benefits of the Oyu Tolgoi Investment
Agreement or a separate stability agreement on substantially similar terms to the Oyu Tolgoi Investment Agreement, unless and
until Entrée finalizes agreements with the Government of Mongolia and other Oyu Tolgoi stakeholders, there can be no assurance
that Entrée will be entitled to all of the benefits of the Oyu Tolgoi Investment Agreement, including stability with respect
to taxes payable. If Entrée is not entitled to all of the benefits of the Oyu Tolgoi Investment Agreement, it could be
subject to the surtax royalty which came into effect in Mongolia on January 1, 2011. The rates of the surtax royalty vary from
1% to 5% for minerals other than copper. For copper, the surtax royalty rates range between 22% and 30% for ore, between 11% and
15% for concentrates, and between 1% and 5% for final products. No surtax royalty is charged on any minerals below a certain threshold
market price, which varies depending on the type of minerals. This is in addition to the standard royalty rates of 2.5% for coal
sold in Mongolia and commonly occurring minerals sold in Mongolia, and 5% for all other minerals.
Even if Entrée does finalize agreements
with the Government of Mongolia and other Oyu Tolgoi stakeholders, there can be no assurance that the present or future Parliament
will refrain from enacting legislation that undermines such agreements or the Oyu Tolgoi Investment Agreement or that the present
or a future government will refrain from adopting government policies or seeking to renegotiate the terms of such agreements or
the Oyu Tolgoi Investment Agreement (which was threatened in both 2011 and 2012) in ways that are adverse to Entrée’s
interests or that impair OTLLC’s ability to develop and operate the Oyu Tolgoi project on the basis currently contemplated,
which may have a material adverse impact on Entrée and the Company’s share price.
Recent and future amendments
to Mongolian laws could adversely affect Entrée’s interests.
The Government of Mongolia has put in
place a framework and environment for foreign direct investment. However, there are political constituencies within Mongolia that
have espoused ideas that would not be regarded by the international mining community as conducive to foreign investment if they
were to become law or official government policy. This was evidenced by revisions to the Minerals Law in 2006 as well as by the
2012 passage of legislation to control foreign direct investment in strategic sectors of the Mongolian economy, including mining.
In October 2011, Prime Minister Batbold
stated in his 2012 budget speech that the Government of Mongolia is revisiting all treaties for the avoidance of double taxation,
including the 2002 convention between Canada and Mongolia for the avoidance of double taxation and the prevention of fiscal evasion
with respect to taxes on income and on capital (the “Canadian Double Tax Treaty”).
On November 1, 2013, an Investment Law
came into effect in Mongolia. The law was aimed at reviving foreign investment by easing restrictions on investors (including
foreign and domestic) in key sectors such as mining and by providing greater certainty on the taxes they must pay and certain
guarantees in relation to their investments in Mongolia. The full impact of the Investment Law is still not yet known.
On January 16, 2014, the Mongolian Parliament
adopted a new State Minerals Policy. The main focus of the policy is to establish a stable investment environment; improve the
quality of mineral exploration, mining and processing; encourage the use of environmentally friendly and modern technology; and
strengthen the competitiveness of the Mongolian mining sector on the international market. The State Minerals Policy is also intended
to serve as the basis for amendments to the existing Minerals Law and other laws relating to the mining sector. On July 1, 2014,
the Mongolian Parliament passed the 2014 Amendments to the Minerals Law. In addition, the Mongolian Parliament also passed a separate
law which repeals the 2010 statute which imposed a moratorium on the granting of new exploration licences and the transfer of
existing licences. The 2014 Amendments extend the maximum period for an exploration licence from 9 years to 12 years (although
it ended the three year pre-mining period sometimes given to licence holders upon the expiration of their exploration rights),
extend the requirement for holders of mining licences to ensure that 90% of their workforce is comprised of Mongolian nationals
to the mining licence holder’s subcontractors as well, make clearer the roles and responsibilities of government ministries
and departments with respect to mineral matters, modify the definition of Strategic Deposit to reflect its impact on the national
economy and not regional economy, and provide for some instances where a tender may not be required to obtain minerals licences
where state funding has been used if related to compensation for declaring a special needs area, among other changes.
On February 18, 2015, the Mongolian Parliament
adopted the 2015 Amendment, which permits a licence holder to negotiate with the Government of Mongolia with respect to an exchange
of the Government’s 34% (50% in cases where exploration has been funded by the State budget) equity interest in a licence
holder with a Strategic Deposit for an additional royalty payable to the Government. The amount of the royalty payment would vary
depending on the particulars of the Strategic Deposit but cannot exceed 5%. The rate of this royalty payment shall be approved
by the Government of Mongolia. The full impact of the 2015 Amendment is not yet known.
On November 10,
2016, the Mongolian Parliament adopted the 2016 Amendment, which introduces the term “derivative deposit” and applicable
regulations for mining/exploitation of derivative deposits. Mining/exploitation of a derivative deposit by a licence holder or
any other contracted third party (with the licence holder) is subject to licence. Further, the 2016 Amendment sets the royalty
payment for mining/exploitation of a derivative deposit at 2.5% of the sales value, with an additional royalty of between 0% and
5% for gold if it is sold other than to the Central Bank of Mongolia.
The Ministry of Mining is currently working
on a draft mining law, aimed at regulating the mining sector in greater detail in Mongolia. If adopted, the draft mining law could
adversely affect Entree’s interests. It is not possible to determine when, if ever, this draft law will be adopted and in
what form.
The Ministry of Finance and certain Members
of Parliament have released draft laws and draft amendments to the tax legislation of Mongolia which include provisions related
to the taxation of foreign legal entities operating in Mongolia and minerals companies in general. If certain provisions of
these amendments were adopted by Parliament as currently drafted, they could adversely affect Entree's interests. It is
not possible to determine when, if ever, these amendments would be adopted and in what form.
On December 9, 2017, the Parliament
of Mongolia amended the General Tax Law, the Corporate Income Tax Law, the Personal Income Tax Law, the Minerals Law, the Land
Law and the Legal Entities Registration (collectively, the “2017 Amendments”) to introduce the concept of an “ultimate
holder” of a legal entity for tax purposes. Any change of an ultimate holder of a legal entity that maintains a minerals
licence is deemed to be a sale of the minerals licence and is subject to a 30% corporate income tax on the total income earned.
The legal entity holding the minerals licence bears the tax obligation, not the person who earns the income from the transaction.
In general, taxable income will be assessed based on the value of the minerals licence, pro-rated to the number or percentage of
shares transferred from the ultimate holder. On December 25, 2017, the Ministry of Finance passed Decree No. 380 setting out the
methodology to determine the value of minerals licences. The full impact of the 2017 Amendments is not yet known.
If the Government of Mongolia revises,
amends or cancels the Canadian Double Tax Treaty; if the Investment Law, State Minerals Policy, 2014 Amendments, 2015 Amendment,
2016 Amendment, 2017 Amendments or new mining law are implemented or interpreted in a manner that is not favourable to foreign
investment or Entrée’s interests; or if new tax laws or amendments to tax laws are adopted that are not favourable
to foreign investment or Entrée’s interests, it could have an adverse effect on Entrée’s operations
in Mongolia and future cash flow, earnings, results of operations and financial condition as well as the Company’s share
price.
Entrée may experience
difficulties with its joint venture partners; Rio Tinto controls the development of the Oyu Tolgoi project, including the Entrée/Oyu
Tolgoi JV Property.
While the Entrée/Oyu Tolgoi JV
is operating under the terms of the Entrée/Oyu Tolgoi JVA, the Entrée/Oyu Tolgoi JVA has not been formally executed
by the parties. There can be no assurance that OTLLC or its shareholders will not attempt to renegotiate some or all of the material
terms governing the joint venture relationship in a manner which could have an adverse effect on Entrée’s future
cash flow, earnings, results of operations and financial condition as well as the Company’s share price.
OTLLC has earned either a 70% or 80% interest
in mineralization extracted from the Entrée/Oyu Tolgoi JV Property, depending on the depth at which minerals are extracted,
and has effective control of the Entrée/Oyu Tolgoi JV. Rio Tinto, which beneficially owns approximately 17.43% of the Company’s
issued and outstanding shares, exerts a significant degree of control over the business and affairs of Turquoise Hill and OTLLC.
Pursuant to the various agreements among Turquoise Hill, OTLLC and Rio Tinto, Rio Tinto is responsible for the management of the
building and operation of the Oyu Tolgoi project (which includes the Heruga and Hugo North Extension deposits on the Entrée/Oyu
Tolgoi JV Property); is responsible for all exploration operations on behalf of OTLLC, including exploration on the Entrée/Oyu
Tolgoi JV Property; and prepares all programs and budgets for approval by the OTLLC board. The interests of Rio Tinto, Turquoise
Hill and OTLLC and the interests of the Company’s other shareholders are not necessarily aligned and there can be no assurance
that Rio Tinto, Turquoise Hill or OTLLC will exercise their rights or act in a manner that is consistent with the best interests
of the Company’s other shareholders.
Entrée
is and will be subject to the risks normally associated with the conduct of joint ventures, which include disagreements as to
how to develop, operate and finance a project, inequality of bargaining power, incompatible strategic and economic objectives
and possible litigation between the participants regarding joint venture matters. These matters may have an adverse effect on
Entrée’s ability to realize the full economic benefits of its interest in the property that is the subject of a joint
venture, which could affect its results of operations and financial condition as well as the Company’s share price.
Entrée may be subject
to risks inherent in legal proceedings.
In
the course of its business, Entrée may from time to time become involved in various claims, arbitration and other legal
proceedings, with and without merit. The nature and results of any such proceedings cannot be predicted with certainty. Any potential
future claims and proceedings are likely to be of a material nature. In addition, such claims, arbitration and other legal proceedings
can be lengthy and involve the incurrence of substantial costs and resources by Entrée, and the outcome, and Entrée’s
ability to enforce any ruling(s) obtained pursuant to such proceedings, are subject to inherent risk and uncertainty. The initiation,
pursuit and outcome of any particular claim, arbitration or legal proceeding could have a material adverse effect on Entrée’s
financial position and results of operations, and on Entrée’s business, assets and prospects. In addition, if Entrée
is unable to resolve any existing or future potential disputes and proceedings favourably, or obtain enforcement of any favourable
ruling, if any, that may be obtained pursuant to such proceedings, it is likely to have a material adverse impact on Entrée’s
business, financial condition and results of operations and Entrée’s assets and prospects as well as the Company’s
share price.
On February 27, 2013, Entrée
received notice from MRAM regarding the Entrée/Oyu Tolgoi JV’s mining licences.
On February 27, 2013, notice was delivered
to Entrée by MRAM advising that any transfer, sale or lease of the Shivee Tolgoi and Javhlant mining licences is temporarily
restricted. While Entrée was subsequently advised that the temporary transfer restriction on the joint venture mining licences
will be lifted, it has not received official notification of the lifting of the restriction. Any future action by the Government
of Mongolia to suspend, revoke, withdraw or cancel the Shivee Tolgoi and Javhlant mining licences, whether legitimate or not,
would have an adverse effect on the business, assets and financial condition of Entrée as well as the Company’s share
price.
The Earn-In Agreement requires OTLLC to
enter into the Entrée/Oyu Tolgoi JVA, which bestows upon OTLLC certain powers and duties as manager of the Entrée/Oyu
Tolgoi JV, including the duty to cure title defects, the duty to prosecute and defend all litigation or administrative proceedings
arising out of operations, and the duty to do all acts reasonably necessary to maintain the Entrée/Oyu Tolgoi JV Property
assets, including the mining licences. Pursuant to the Assignment Agreement dated March 1, 2005 between the Company, Turquoise
Hill and OTLLC, the Company is also entitled to look to Turquoise Hill for the performance of OTLLC’s obligations under
the Earn-In Agreement, which is governed by British Columbia law. In addition, the Shivee Tolgoi and Javhlant mining licences
are included in the contract area of the Oyu Tolgoi Investment Agreement. The Oyu Tolgoi Investment Agreement restricts the grounds
upon which the Mongolian State administrative authority in charge of geology and mining may revoke a mining licence covered by
the Oyu Tolgoi Investment Agreement. The Oyu Tolgoi Investment Agreement also includes a dispute resolution clause that requires
the parties to resolve disputes through international commercial arbitration procedures. Entrée is not a party to the Oyu
Tolgoi Investment Agreement and does not have any direct rights under the Oyu Tolgoi Investment Agreement. In the event that the
Government of Mongolia suspends, revokes, withdraws or cancels the Shivee Tolgoi and Javhlant mining licences, there can be no
assurance that OTLLC, Turquoise Hill or Rio Tinto will invoke the international arbitration procedures, or that Entrée
will be able to enforce the terms of the Earn-In Agreement or the Entrée/Oyu Tolgoi JVA to cause OTLLC or Turquoise Hill
to do all acts reasonably necessary to maintain the Entrée/Oyu Tolgoi JV Property assets, including by invoking the international
arbitration procedures under the Oyu Tolgoi Investment Agreement. There may also be limitations on OTLLC, Turquoise Hill and Rio
Tinto’s ability to enforce the terms of the Oyu Tolgoi Investment Agreement against the Government of Mongolia, which is
a sovereign entity, regardless of the outcome of an arbitration proceeding. Without an effective means of enforcing the terms
of the Entrée/Oyu Tolgoi JVA, the Earn-In Agreement or the Oyu Tolgoi Investment Agreement, Entrée could be deprived
of substantial rights and benefits with little or no recourse for fair and reasonable compensation. This would have an adverse
effect on the business, assets and financial condition of Entrée as well as the Company’s share price.
Entrée may be unable
to enforce its legal rights in certain circumstances.
In the event of a dispute arising at or
in respect of Entrée’s foreign operations, Entrée may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the jurisdiction of courts in Canada or other jurisdictions.
Entrée may also be hindered or prevented from enforcing its rights with respect to a governmental entity or instrumentality
because of the doctrine of sovereign immunity. Any adverse or arbitrary decision of a court, arbitrator or other governmental
or regulatory body, or Entrée’s inability to enforce its contractual rights, may have a material adverse impact on
Entrée’s business, assets, prospects, financial condition and results of operation as well as the Company’s
share price.
Entrée’s rights
to use and access certain land area could be adversely affected by the application of Mongolia’s Resolution 81, Resolution
140 or Resolution 175.
In June 2010, the Government of Mongolia
passed Resolution 140, the purpose of which is to authorize the designation of certain land areas for “state special
needs” within certain defined areas, some of which include or are in proximity to the Oyu Tolgoi project. These state special
needs areas are to be used for Khanbogd village development and for infrastructure and plant facilities necessary to implement
the development and operation of the Oyu Tolgoi project. A portion of the Shivee Tolgoi licence is included in the land area that
is subject to Resolution 140.
In
June 2011, the Government of Mongolia passed Resolution 175, the purpose of which is to authorize the designation of certain land
areas for “state special needs” within certain defined areas in proximity to the Oyu Tolgoi project. These state special
needs areas are to be used for infrastructure facilities necessary to implement the development and construction of the Oyu Tolgoi
project. Portions of the Shivee Tolgoi and Javhlant licences are included in the land area that is subject to Resolution 175.
It is expected but not yet formally confirmed
by the Government that to the extent that a consensual access agreement exists or is entered into between OTLLC and an affected
licence holder, the application of Resolution 175 to the land area covered by the access agreement will be unnecessary. OTLLC
has existing access and surface rights to the Entrée/Oyu Tolgoi JV Property pursuant to the Earn-In Agreement. If Entrée
is unable to reach a consensual arrangement with OTLLC with respect to the Shivee West Property, Entrée’s right to
use and access a corridor of land included in the state special needs areas for a proposed power line may be adversely affected
by the application of Resolution 175. While the Mongolian Government would be responsible for compensating Entrée in accordance
with the mandate of Resolution 175, the amount of such compensation is not presently quantifiable.
While the Oyu Tolgoi Investment Agreement
contains provisions restricting the circumstances under which the Shivee Tolgoi and Javhlant licences may be expropriated, which
may make the application of Resolution 140 and Resolution 175 to the Entrée/Oyu Tolgoi JV Property unnecessary, there can
be no assurances that the Resolutions will not be applied in a manner that has an adverse impact on Entrée.
In March 2014, the Government of Mongolia
passed Resolution 81, the purpose of which is to approve the direction of the railway line heading from Ukhaa Khudag deposit located
in the territory of Tsogttsetsii soum, Umnugobi aimag, to the port of Gashuunshukhait and to appoint the Minister of Roads and
Transportation to develop a detailed engineering layout of the base structure of the railway. On June 18, 2014, Entrée
was advised by MRAM that the base structure overlaps with a portion of the Javhlant licence. By Order No. 123 dated June 18, 2014,
the Minister of Mining approved the composition of a working group to resolve matters related to the holders of licences through
which the railway passes. The Minister of Mining has not yet responded to a request from Entrée to meet to discuss the
proposed railway, and no further correspondence from MRAM or the Minister of Mining has been received. It is not yet clear whether
the State has the legal right to take a portion of the Javhlant licence, with or without compensation, in order to implement a
national railway project, and if it does, whether it will attempt to exercise that right. While the Oyu Tolgoi Investment Agreement
contains provisions restricting the circumstances under which the Javhlant licence may be expropriated, there can be no assurances
that Resolution 81 will not be applied in a manner that has an adverse impact on Entrée.
Changes in, or more aggressive
enforcement of, laws and regulations could adversely impact Entrée’s business.
Mining operations and exploration activities
are subject to extensive laws and regulations. These relate to production, development, exploration, exports, imports, taxes and
royalties, labour standards, occupational health, waste disposal, protection and remediation of the environment, mine decommissioning
and reclamation, mine safety, toxic substances, transportation safety and emergency response and other matters.
Compliance with these laws and regulations
increases the costs of exploring, drilling, developing, constructing, operating and closing mines and other facilities. It is
possible that the costs, delays and other effects associated with these laws and regulations may impact the decision of Entrée
or one of its partners as to whether to continue to operate in a particular jurisdiction or whether to proceed with exploration
or development of properties. Since legal requirements change frequently, are subject to interpretation and may be enforced to
varying degrees in practice, Entrée is unable to predict the ultimate cost of compliance with these requirements or their
effect on operations. Changes in governments, regulations and policies and practices could have an adverse impact on Entrée’s
future cash flows, earnings, results of operations and financial condition, which may have a material, adverse impact on Entrée
and the Company’s share price.
Risks Associated With The Development
of the Oyu Tolgoi Project
The Entrée/Oyu Tolgoi JV Property
forms part of the Oyu Tolgoi project. As a result, certain risk factors associated with the development of the Oyu Tolgoi project
are also applicable to Entrée and may adversely affect Entrée, including the following.
There can be no assurance that OTLLC
will be capable of raising the additional funding that it needs to continue the development of the Oyu Tolgoi project, including
Hugo North Extension Lift 2 and Heruga.
Further development of the Oyu Tolgoi
project depends upon OTLLC’s ability to obtain and service the funding requirements of the project. Volatility in capital
markets and commodity prices and other macroeconomic factors may adversely affect OTLLC’s ability to secure project financing.
In addition, OTLLC operates in a region
of the world that is prone to economic and political upheaval and instability, which may make it more difficult to obtain sufficient
debt financing from project lenders for future phases of the Oyu Tolgoi project.
The actual cost of developing
the Oyu Tolgoi project may differ materially from estimates and involve unexpected problems or delays.
OTLLC’s estimates regarding the
cost of development and operation of the Oyu Tolgoi project are estimates only. The estimates and the assumptions upon which they
are based are subject to a variety of risks and uncertainties and other factors that could cause actual expenditures to differ
materially from those estimated. If these estimates prove incorrect, the total capital expenditures required to complete development
of the Oyu Tolgoi project underground mine, including Entrée’s share of Entrée/Oyu Tolgoi JV capital expenditures
being debt financed by OTLLC, may increase, which may have a material adverse impact on Entrée, its results of operations,
financial conditions, and the Company’s share price.
There are a number of uncertainties inherent
in the development and construction of any new or existing mine, including the Oyu Tolgoi project underground mine. These uncertainties
include: the timing and cost, which can be considerable, of the construction of mining and processing facilities; the availability
and cost of skilled labour, the impact of fluctuations in commodity prices, process water, power and transportation, including
costs of transport for the supply chain for the Oyu Tolgoi project, which requires routing approaches which have not been fully
tested; the annual usage costs to the local province for sand, aggregate and water; the availability and cost of appropriate smelting
and refining arrangements; and the need to obtain necessary environmental and other government permits, such permits being on
reasonable terms, and the timing of those permits. The cost, timing and complexities of mine construction and development are
increased by the remote location of the Oyu Tolgoi project.
It is common in new mining operations
and in the development or expansion of existing facilities to experience unexpected problems and delays during development, construction
and mine start-up, which may cause delays in commencement or expansion of mineral production. Any delays could impact disclosed
project economics. Accordingly, there is no assurance that the future development, construction or expansion activities will be
successfully completed within cost estimates, on schedule or at all and, if completed, there is no assurance that such activities
will result in profitable mining operations.
The Oyu Tolgoi Investment
Agreement and Mine Plan include a number of future covenants that may be outside of the control of the investors to perform.
The
Oyu Tolgoi Investment Agreement and Mine Plan commit Turquoise Hill and Rio Tinto to perform many obligations in respect of the
development and operation of the Oyu Tolgoi project. While performance of many of these obligations is within the effective control
of Turquoise Hill and Rio Tinto, the scope of certain obligations may be open to interpretation. Further, the performance of other
obligations may require co-operation from third parties or may be dependent upon circumstances that are not necessarily within
the control of Turquoise Hill and Rio Tinto. Non-fulfillment of any obligation may result in a default or breach under the Oyu
Tolgoi Investment Agreement and the Mine Plan. Such a default could result in a termination of the Oyu Tolgoi Investment Agreement
and the Mine Plan, which may have a material adverse impact on Entrée and the Company’s share price.
The
Oyu Tolgoi Investment Agreement commits OTLLC to utilize only Mongolian power sources. Such sources of power may not be available
or may be available upon commercial terms that are less advantageous than those available from other potential power suppliers.
Despite Turquoise Hill and Rio Tinto’s best efforts, such an obligation is not necessarily within their control and non-fulfillment
of such requirement may result in a default under the Oyu Tolgoi Investment Agreement.
Risks Associated With the Amended
Funding Agreement
In certain circumstances the Company
may be required to return a portion of the Deposit to Sandstorm.
The
2013 Agreement provided for a partial refund of the Deposit and a pro rata reduction in the number of metal credits deliverable
to Sandstorm in the event of a partial expropriation of Entrée’s economic interest, contractually or otherwise, in
the Entrée/Oyu Tolgoi JV Property. The Amended Funding Agreement provides that the Company will not be required to make
any further refund of the Deposit if Entrée’s economic interest is reduced by up to and including 17%. If there is
a reduction of greater than 17% up to and including 34%, the Amended Funding Agreement provides the Company with greater flexibility
and optionality in terms of how the Company will refund a corresponding portion of the Deposit, including not requiring Entrée
to refund cash. To the extent there is an expropriation of greater than 34%, which is not reversed during the abeyance period
provided for in the Amended Funding Agreement with Sandstorm, the Company will be required to return a portion of the Deposit
in cash (the amount of the repayment not to exceed the amount of the Unearned Balance).
Certain events outside of Entrée’s
control may be an event of default under the Amended Funding Agreement.
If an
event of default occurs under the Amended Funding Agreement, the Company may be required to immediately pay to Sandstorm a default
fee, which it may not have sufficient funds to cover. Some potential events of default may be outside of Entrée’s
control, including a full expropriation of Entrée’s economic interest, contractually or otherwise, in the Entrée/Oyu
Tolgoi JV Property which is not reversed during the abeyance period provided for in the Amended Funding Agreement. If an event
of default occurs and the Company is required to pay a default fee to Sandstorm, it may have a material adverse impact on Entrée’s
business, financial condition, assets and prospects, and on the Company’s share price.
Short term fluctuations in mineral
prices may expose the Company to trading losses.
Under the Amended Funding Agreement, the
Company agrees to use future cash flows from its mineral property interests to purchase and deliver metal credits to Sandstorm.
The Amended Funding Agreement does not require the Company to deliver actual metal production, therefore the Company will have
to use revenue it receives from the sale of its share of metal production to purchase the requisite amount of metal credits for
delivery to Sandstorm. To the extent metal prices on the day on which the Company’s production is sold are different from
metal prices on the day on which the Company purchases metal credits for delivery to Sandstorm, the Company may suffer a gain
or loss on the difference.
Risks Associated With Mining
Resource and reserve estimates,
including estimates for the Hugo North Extension and Heruga deposits, are estimates only, and are subject to change based on a
variety of factors.
The estimates of reserves and resources,
including the anticipated tonnages and grades that will be achieved or the indicated level of recovery that will be realized,
are estimates only and no assurances can be given as to their accuracy. Such estimates are, in large part, based on interpretations
of geological data obtained from drill holes and other sampling techniques, and large scale continuity and character of the deposits
will only be determined once significant additional drilling and sampling has been completed and analyzed. Actual mineralization
or formations may be different from those predicted. It may also take many years from the initial phase of drilling before production
is possible, and during that time the economic feasibility of exploiting a deposit may change. Reserve and resource estimates
are materially dependent on prevailing market prices and the cost of recovering and processing minerals at the mine site. Market
fluctuations in the price of metals or increases in the costs to recover metals may render the mining of ore reserves uneconomical
and materially adversely affect operations. Moreover, various short-term operating factors may cause a mining operation to be
unprofitable in any particular accounting period.
Prolonged declines in the market price
of metals may render reserves containing relatively lower grades of mineralization uneconomic to exploit and could reduce materially
reserves and resources. Should such reductions occur, the discontinuation of development or production might be required. The
estimates of mineral reserves and resources attributable to a specific property are based on accepted engineering and evaluation
principles. The estimated amount of contained metals in probable mineral reserves does not necessarily represent an estimate of
a fair market value of the evaluated property.
There
are numerous uncertainties inherent in estimating quantities of mineral reserves and resources. The estimates in the Company’s
disclosure documents are based on various assumptions relating to commodity prices and exchange rates during the expected life
of production, mineralization, the projected cost of mining, and the results of additional planned development work. Actual future
production rates and amounts, revenues, taxes, operating expenses, environmental and regulatory compliance expenditures, development
expenditures, and recovery rates may vary substantially from those assumed in the estimates. Any significant change in the assumptions
underlying the estimates, including changes that result from variances between projected and actual results, could result in material
downward revision to current estimates, which may have a material adverse impact on Entrée and the Company’s share
price.
Mineral prices are subject
to dramatic and unpredictable fluctuations.
Entrée expects to derive revenues,
if any, from the extraction and sale of base and precious metals such as copper, gold, silver and molybdenum. The price of those
commodities has fluctuated widely in recent years, and is affected by numerous factors beyond Entrée’s control, including
international economic and political trends, expectations of inflation, global and regional demand, currency exchange fluctuations,
interest rates, global or regional consumptive patterns, speculative activities, increased production due to improved extraction
and production methods and economic events, including the performance of Asia’s economies. Ongoing worldwide economic uncertainty
could lead to prolonged recessions in many markets which may, in turn, result in reduced demand for commodities, including base
and precious metals.
The effect of these factors on the price
of base and precious metals, and, therefore, the economic viability of any of Entrée’s property interests, cannot
accurately be predicted. Should prevailing metal prices remain depressed, there may be a curtailment or suspension of mining,
development and exploration activities. Entrée would have to assess the economic impact of any sustained lower metal prices
on recoverability and, therefore, the cut-off grade and level of reserves and resources. These factors could have an adverse impact
on Entrée’s future cash flows, earnings, results of operations, stated reserves and financial condition, which may
have an adverse impact on Entrée and the Company’s share price.
Entrée has interests
in properties that are not in commercial production. There is no assurance that the existence of mineral reserves will be established
in commercially exploitable quantities.
Mineral reserves have been established
on Lift 1 of the Hugo North Extension deposit in Mongolia. Mineral resources have been outlined on Hugo North Extension Lift 2
and the Heruga deposit. Unless and until mineral reserves are established in economically exploitable quantities on a deposit,
and it is brought into commercial production, Entrée cannot earn any revenues from operations on that deposit.
Mineral exploration and development involves
substantial expenses and a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not
be able to adequately mitigate. There is no assurance that commercial quantities of ore will be discovered or that, even if commercial
quantities of ore are discovered, a mineral property will be brought into commercial production. The discovery of mineral deposits
is dependent upon a number of factors, not the least of which is the technical skill of the exploration personnel involved. The
commercial viability of a mineral deposit, once discovered, is also dependent upon a number of factors, some of which are the
particular attributes of the deposit, such as size, grade and proximity to infrastructure, metallurgical recoveries, metal prices
and government regulations, including regulations relating to taxation, royalties, allowable production, importing and exporting
of minerals, and environmental protection. Most of the above factors are beyond the control of Entrée.
The probability of an individual prospect
ever having mineral reserves that meet the requirements of the definition is extremely remote.
There can be no assurance that Entrée
or its partners will be able to obtain or maintain any required permits.
Both mineral exploration and extraction
require permits from various foreign, federal, state, provincial and local governmental authorities and are governed by laws and
regulations, including those with respect to prospecting, mine development, mineral production, transport, export, taxation, labour
standards, water rights, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety
and other matters. There can be no assurance that Entrée or any of its partners, including OTLLC, will be able to obtain
or maintain any of the permits required for the continued exploration of mineral properties in which Entrée has an interest
or for the construction and operation of a mine on those properties at economically viable costs. If required permits cannot be
obtained or maintained, Entrée or its partners may be delayed or prohibited from proceeding with planned exploration or
development of the mineral properties in which Entrée has an interest and Entrée’s business could fail.
Entrée’s property interests
are subject to substantial environmental and other regulatory requirements and such regulations are becoming more stringent. Non-compliance
with such regulations could materially adversely affect Entrée.
Entrée’s property interests
are subject to environmental regulations in the various jurisdictions in which they are located. Failure to comply with applicable
laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory
or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures,
installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate
those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for
violations of applicable laws or regulations.
Environmental legislation is evolving
in a manner which will likely require stricter standards and enforcement, increased fines and penalties for non-compliance, more
stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers,
directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect
Entrée’s operations. Environmental hazards may exist on the properties in which Entrée holds interests which
are presently unknown to Entrée and which have been caused by previous or existing third-party owners or operators of the
properties. Government approvals and permits are also often required in connection with various aspects of operations on the properties
in which Entrée has an interest. To the extent that such approvals are required and not obtained, Entrée or its
partners may be delayed or prevented from proceeding with planned exploration or development of the mineral properties, which
may have a material, adverse impact on Entrée and its share price.
In Mongolia, Entrée is required
to deposit 50% of its proposed reclamation budget with the local Soum Governor’s office (a soum is the local Mongolian equivalent
of a township or district) which will be refunded only on acceptable completion of land rehabilitation after mining operations
have concluded. Even if Entrée relinquishes its licences, Entrée will still remain responsible for any required
reclamation.
There can be no assurance that title
to licences and concessions is free from defects.
While Entrée has investigated title
to the exploration and mining licences and concessions held by it and its partners, title may be challenged by third parties or
the licences that permit Entrée or its partners to explore, develop or mine properties may expire if Entrée or its
partners fail to timely renew them and pay the required fees.
Entrée cannot guarantee that its
rights will not be revoked or altered to its detriment as a result of actions by the Mongolian Ministry of Mining, MRAM, Mongolia’s
Resolution 81, 140 and/or 175 or otherwise. The ownership and validity of exploration and mining licences and concessions are
often uncertain and may be contested.
In Mongolia, should a third party challenge
to the boundaries or registration of ownership arise, the Government of Mongolia may declare the property in question a special
reserve for up to three years to allow resolution of disputes or to clarify the accuracy of its mining licence register.
Entrée is not aware of any third
party challenges to the location or area of any of the licences or concessions in any of the jurisdictions in which it operates.
There is, however, no guarantee that title to the licences and concessions will not be challenged or impugned in the future. If
Entrée or its partners fail to pay the appropriate annual fees or timely apply for renewal, then these licences or concessions
may expire or be forfeit.
Mineral exploration and development
is subject to extraordinary operating risks. Entrée does not currently insure against these risks.
Mineral exploration and development involves
many risks which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Entrée’s
operations will be subject to all of the hazards and risks inherent in the exploration and development of resources, including
liability for pollution or hazards against which Entrée cannot insure or against which Entrée may elect not to insure.
Any such event could result in work stoppages and damage to property, including damage to the environment. Entrée does
not currently maintain any insurance coverage against all of these operating hazards. The payment of any liabilities that arise
from any such occurrence would have a material, adverse impact on Entrée.
The mining industry is highly
competitive and there is no assurance that Entrée will continue to be successful in acquiring property interests or in
the recruitment or retention of qualified employees. If Entrée cannot continue to acquire property interests or recruit
qualified personnel, its financial condition could be adversely affected.
There is aggressive competition within
the mining industry for the identification and acquisition of property interests considered to have commercial potential, as well
as the necessary labour and supplies required to develop such properties. Entrée competes with other companies, many of
which have greater financial resources, operational experience and technical capabilities than Entrée, for the acquisition
of property interests as well as for the recruitment and retention of qualified employees and other personnel. Entrée may
not be able to maintain or acquire attractive property interests on terms it considers acceptable, or at all. Consequently, its
financial condition could be materially adversely affected.
Risks Related To Entrée
Entrée can provide
investors with no assurances that it will generate any operating revenues or ever achieve profitable operations.
Although Entrée has been in the
business of exploring mineral resource properties since 1995, Entrée has never had any revenues from its operations. In
addition, its operating history has been restricted to the acquisition and exploration of its mineral properties. Entrée
anticipates that it will continue to incur operating costs without realising any revenues until such time as the Entrée/Oyu
Tolgoi JV Property or one of the properties in which Entrée has a royalty interest is brought into production. Entrée
expects to continue to incur losses into the foreseeable future. Entrée recognises that if it is unable to generate revenues
from mining operations and any dispositions of its interests in properties, Entrée will not be able to earn profits or
continue operations. Entrée can provide investors with no assurance that it will generate any operating revenues or ever
achieve profitable operations.
Entrée may be forced
to raise funds for operating expenses from outside sources.
Entrée has not generated any revenue
from operations since its incorporation. Entrée anticipates that it will continue to incur operating expenses without revenues
unless and until it is able to generate cash flows from the Entrée/Oyu Tolgoi JV or one of its royalty interests. As at
December 31, 2017, Entrée had working capital of approximately $7.2 million. Entrée’s average monthly operating
expenses in 2017 were approximately $258,000, including general and administrative expenses and investor relations expenses. Entrée
has a carried interest in the Entrée/Oyu Tolgoi JV Property. As a result, Entrée believes that it will not have
to raise any additional funds to meet its currently budgeted operating requirements for the next 12 months. If these funds are
not sufficient, or if Entrée does not begin generating revenues from operations sufficient to pay its operating expenses
when Entrée has expended them, Entrée will be forced to raise necessary funds from outside sources. While Entrée
may be able to raise funds through strategic alliances, joint ventures, product streaming or other arrangements, it has traditionally
raised its operating capital from sales of equity, but there can be no assurance that Entrée will continue to be able to
do so.
Recent global financial conditions
may adversely impact operations and the value and price of the Company’s Common Shares.
Recent global financial and market conditions
have been subject to increased volatility. This increased volatility may impact the ability of Entrée to obtain equity
or debt financing in the future and, if obtained, on terms favourable to Entrée. If these increased levels of volatility
and market turmoil continue, Entrée’s operations could be adversely impacted and the value and the price of the Company’s
Common Shares could be adversely affected.
As a result of their existing
shareholdings and agreements with Entrée, Sandstorm, Rio Tinto, Turquoise Hill and OTLLC potentially have the ability to
influence Entrée’s business and affairs.
Sandstorm’s beneficial shareholdings
in the Company, totalling approximately 13.72% of the Company’s outstanding Common Shares, and Rio Tinto’s beneficial
shareholdings in the Company, totalling approximately 17.43% of the Company’s outstanding Common Shares, potentially give
Sandstorm and Rio Tinto the voting power to influence the policies, business and affairs of Entrée and the outcome of any
significant corporate transaction or other matter, including a merger, business combination or a sale of all, or substantially
all, of Entrée’s assets. In addition, Rio Tinto (on behalf of OTLLC) has operational control over the Entrée/Oyu
Tolgoi JV Property. OTLLC and Sandstorm also have certain rights in the event of a proposed disposition by Entrée of its
interest in the Entrée/Oyu Tolgoi JV and OTLLC has a right of first refusal with respect to any proposed disposition by
Entrée of an interest in the Shivee West Property, which is not currently subject to the Entrée/Oyu Tolgoi JV. The
share position in the Company of each of Sandstorm, Rio Tinto and Turquoise Hill may have the effect of delaying, deterring or
preventing a transaction involving a change of control of the Company in favour of a third party that otherwise could result in
a premium in the market price of the Company’s Common Shares in the future. In the case of Sandstorm, the risk is mitigated
to some extent by the requirement in the Amended Funding Agreement for Sandstorm to vote its shares as the Board specifies with
respect to any potential acquisition of the Company, provided the potential acquirer agrees to execute and deliver to Sandstorm
a deed of adherence to the Amended Funding Agreement.
The Company’s Articles
and indemnity agreements between the Company and its officers and directors indemnify its officers and directors against costs,
charges and expenses incurred by them in the performance of their duties.
The Company’s Articles contain provisions
requiring the Company to indemnify Entrée’s officers and directors against all judgements, penalties or fines awarded
or imposed in, or an amount paid in settlement of, a legal proceeding or investigative action in which such party, by reason of
being a director or officer of Entrée, is or may be joined. The Company also has indemnity agreements in place with its
officers and directors. Such limitations on liability may reduce the likelihood of derivative litigation against the Company’s
officers and directors and may discourage or deter the Company’s shareholders from suing its officers and directors based
upon breaches of their duties to Entrée, though such an action, if successful, might otherwise benefit Entrée and
the Company’s shareholders.
Investors' interests in the
Company will be diluted and investors may suffer dilution in their net book value per Common Share if the Company issues stock
options or bonus shares or if the Company issues additional Common Shares to finance its operations.
Entrée has never generated revenue
from operations, and it is currently without a source of revenue. The Company may be required to issue additional
Common Shares to finance Entrée’s operations or to acquire additional property
interests.
The Company may also in the future grant
to Stephen Scott, the Company’s President and Chief Executive Officer, up to 400,000 Common Shares of the Company, issuable
at the discretion of the Board, based on the achievement of certain performance criteria. The Company may also in the future grant
to some or all of Entrée’s directors, officers, consultants, and employees additional options to purchase Common
Shares as non-cash incentives to those persons. Such options may be granted at prices equal to market prices, or at prices as
allowable under the policies of the TSX and the Company’s Stock Option Plan, when the public market is depressed. The issuance
of any options could, and the issuance of any additional Common Shares will, cause the Company’s existing shareholders to
experience dilution of their ownership interests.
If the Company issues additional Common
Shares, investors’ interests in the Company will be diluted and investors may suffer dilution in their net book value per
Common Share depending on the price at which such securities are sold. As at December 31, 2017 Entrée had outstanding options
exercisable into 9,175,000 Common Shares (March 8, 2018 – 7,685,000 Common Shares) which, if exercised as at March
8, 2018 would represent approximately 5.3% (March 8, 2018 – 4.4%) of its issued and outstanding Common Shares. If all of
these options are exercised and the underlying Common Shares are issued, such issuance will cause a reduction in the proportionate
ownership and voting power of all other shareholders. The dilution may result in a decline in the market price of the Company’s
Common Shares.
There can be no assurance
that the Company will ever have sufficient earnings to declare and pay dividends.
The Company has no earnings or dividend
record. The Company has not paid dividends on its Common Shares since incorporation and does not anticipate doing so in the foreseeable
future. The Company’s current intention is to apply any future net earnings to increase its working capital. Prospective
investors seeking or needing dividend income or liquidity should, therefore, not purchase the Company’s Common Shares. The
Company currently has no revenue and a history of losses, so there can be no assurance that the Company will ever have sufficient
earnings to declare and pay dividends to the holders of Common Shares.
Certain associations may give
rise to conflicts of interest.
Some of the directors and officers of
the Company are also directors, officers or employees of other companies that are similarly engaged in the business of acquiring,
exploring and developing natural resource properties. In addition, certain individuals also serve as directors or officers of
Mason and are subject to the Administrative Services Agreement. Such associations may give rise to conflicts of interest from
time to time. Entrée’s directors and officers are required by law to act honestly and in good faith with a view to
its best interests and to disclose any interest which they may have in any of its projects or opportunities. In general, if a
conflict of interest arises at a meeting of a board of directors, any director in a conflict will disclose his or her interest
and abstain from voting on such matter or, if he or she does vote, his or her vote does not count.
There can be no assurance
that Entrée will be able to attract and retain key management personnel.
Entrée’s ability to continue
its exploration and development activities and to develop a competitive edge in the marketplace depends, in large part, on its
ability to attract and maintain qualified key management personnel. Competition for such personnel is intense, and there can be
no assurance that Entrée will be able to attract and retain such personnel. Its development now, and in the future, will
depend on the efforts of key management figures. The loss of any of these key people could have a material adverse effect on Entrée’s
business. Entrée currently only maintains key-man life insurance on its President & Chief Executive Officer.
Fluctuations in currency exchange
rates may impact Entrée’s financial position and results.
Fluctuations in Canadian and United States
currency exchange rates may significantly impact Entrée’s financial position and results.
Future negative effects due
to changes in tax regulations cannot be excluded.
Entrée
runs its business in different countries and strives to run its business in as tax efficient a manner as possible. The tax systems
in certain of these countries are complicated and subject to change. For this reason, the possibility of future negative effects
on the results of the Company due to changes in tax regulations cannot be excluded. Repatriation of earnings to Canada from other
countries may be subject to withholding taxes. Entrée has no control over withholding tax rates.
The Company is subject to
anti-corruption legislation.
The
Company is subject to the U.S. Foreign Corrupt Practices Act and other similar legislation, such as Canada’s Corruption
of Foreign Officials Act (collectively, “Anti-Corruption Legislation”), which prohibits
Entrée or any officer, director, employee or agent of Entrée or any shareholder of the Company on its behalf from
paying, offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff
member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person
working in an official capacity. Anti-Corruption Legislation also requires public companies to make and keep books and records
that accurately and fairly reflect their transactions and to devise and maintain an adequate system of internal accounting controls.
Entrée’s international activities create the risk of unauthorized payments or offers of payments by its employees,
consultants or agents, even though they may not always be subject to its control. Entrée prohibits these practices by its
employees and agents. However, Entrée’s existing safeguards and any future improvements may prove to be less than
effective, and its employees, consultants and agents may engage in conduct for which it might be held responsible. Any failure
by Entrée to adopt appropriate compliance procedures and ensure that its employees and agents comply with Anti-Corruption
Legislation and applicable laws and regulations in foreign jurisdictions could result in substantial penalties or restrictions
on Entrée’s ability to conduct business in certain foreign jurisdictions, which may have a material adverse impact
on Entrée and the price of the Company’s Common Shares.
The Company believes that
it was a passive foreign investment company during 2017, which may have a material effect on U.S. holders.
The Company believes it was a “passive
foreign investment company” (“PFIC”) during the year ended December 31, 2017 and may be a PFIC for subsequent
tax years, which may have a material effect on United States shareholders (“US Holders”). United States income tax
legislation contains rules governing PFICs, which can have significant tax effects on US Holders of foreign corporations. A US
Holder who holds stock in a foreign corporation during any year in which such corporation qualifies as a PFIC is subject to United
States federal income taxation under one of two alternative tax regimes at the election of each such US Holder. The United States
federal income tax consequences to a US Holder of the acquisition, ownership, and disposition of Common Shares will depend on
whether such US Holder makes an election to treat the Company as a “qualified electing fund” or “QEF”
under Section 1295 of the Code (“QEF Election”) or a mark-to-market election under Section 1296 of the Code (“Mark-to-Market
Election”). Additional adverse rules would apply to US Holders for any year the Company is a PFIC and Entrée owns
or disposes of shares in another corporation which is a PFIC. However, US Holders should be aware that there can be no assurance
that the Company will satisfy the record keeping requirements that apply to a QEF, or that the Company will supply US Holders
with information that such US Holders require to report under the QEF election rules, in the event that the Company is a PFIC
and a US Holder wishes to make a QEF election. Thus, US Holders may not be able to make a QEF Election with respect to their Common
Shares.
It may be difficult to enforce judgements
or bring actions outside the United States against the Company and certain of its directors.
The Company is a Canadian corporation
and certain of its directors are neither citizens nor residents of the United States. A substantial part of the assets of several
of these persons are located outside the United States. As a result, it may be difficult or impossible for an investor to enforce
in courts outside the United States judgements obtained in United States courts based upon the civil liability provisions of United
States federal securities laws against these persons and the Company; or to bring in courts outside the United States an original
action to enforce liabilities based upon United States federal securities laws against these persons and the Company.
Entrée may be subject to
increased costs and compliance risks as a result of being a public company.
Legal, accounting and other expenses associated
with public company reporting requirements have increased significantly over time. The Company anticipates that general and administrative
costs associated with regulatory compliance will continue to increase with ongoing compliance requirements under the Sarbanes-Oxley
Act of 2002, as amended (“Sarbanes-Oxley”), the Dodd-Frank Wall Street Reform and Consumer Protection Act,
as well as any new rules implemented by the SEC, Canadian Securities Administrators, the NYSE American and the TSX in the future.
These rules and regulations have significantly increased the Company’s legal and financial compliance costs and made some
activities more time-consuming and costly. There can be no assurance that the Company will continue to effectively meet all of
the requirements of these rules and regulations, including Sarbanes-Oxley Section 404, National Instrument 52-109 – Certification
of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators (“NI 52-109”),
and the continued listing standards of the NYSE American and the TSX. Any failure to effectively implement internal controls,
or to resolve difficulties encountered in their implementation, could harm the Company’s operating results, cause the Company
to fail to meet reporting obligations or result in management being required to give a qualified assessment of the Company’s
internal controls over financial reporting or the Company’s independent auditors providing an adverse opinion regarding
management’s assessment. Any such result could cause investors to lose confidence in the Company’s reported financial
information, which could have a material adverse effect on the trading price of the Company’s Common Shares. Any failure
to comply with the continued listing standards of the NYSE American or the TSX, including by maintaining a minimum listing price,
could result in, among other things, the initiation of delisting proceedings. Ongoing compliance requirements have also made it
more difficult and more expensive for the Company to obtain director and officer liability insurance, and the Company may be required
to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage in the
future. As a result, it may be more difficult for the Company to attract and retain qualified individuals to serve on its Board
or as executive officers. If the Company fails to maintain the adequacy of its internal control over financial reporting, the
Company’s ability to provide accurate financial statements and comply with the requirements of Sarbanes-Oxley and NI 52-109
could be impaired, which could cause the price of the Company’s Common Shares to decrease.
Internal controls cannot provide
absolute assurance with respect to the reliability of financial reporting and financial statement preparation.
Internal
controls over financial reporting are procedures designed to provide reasonable assurance that transactions are properly authorized,
assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. A control system,
no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability
of financial reporting and financial statement preparation.
Entrée’s operations
depend on information technology (“IT”) systems.
These IT systems could be subject to network
disruptions caused by a variety of sources, including computer viruses, security breaches and cyberattacks, as well as disruptions
resulting from incidents such as cable cuts, damage to physical plants, natural disasters, terrorism, fire, power loss, vandalism
and theft. Entrée’s operations also depend on the timely maintenance, upgrade and replacement of networks, equipment,
IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could
result in information system failures, delays or increase in capital expenses. The failure of information systems or a component
of information systems could, depending on the nature of any such failure, adversely impact Entrée’s reputation and
results of operations. Although to date Entrée has not experienced any material losses relating to cyber attacks or other
information security breaches, there can be no assurance that Entrée will not incur such losses in the future. Entrée’s
risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats.
As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect
systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority. As cyber threats
continue to evolve, Entrée may be required to expend additional resources to continue to modify or enhance protective measures
or to investigate and remediate any security vulnerabilities.
DIVIDENDS
The Company has not declared any dividends
on its Common Shares since its inception on July 19, 1995. There is no restriction in the Company’s Articles that will limit
its ability to pay dividends on its Common Shares. However, the Company does not anticipate declaring and paying dividends to
its shareholders in the near future.
CAPITAL
STRUCTURE
The Company is authorized to issue
an unlimited number of Common Shares without par value, of which 173,573,572 were issued and outstanding at December 31, 2017
and 174,221,796 were issued and outstanding at March 8, 2018. Each Common Share is entitled to one vote. All Common Shares
of the Company rank equally as to dividends, voting power and participation in assets. No Common Shares have been issued
subject to call or assessment. There are no pre-emptive or conversion rights and no provision for exchange, exercise,
redemption and retraction, purchase for cancellation, surrender or sinking or purchase funds. Provisions as to modification,
amendments or variation of such rights or such provisions are contained in the BCBCA and the Company’s Articles.
MARKET
FOR SECURITIES
The Company’s shares were traded
on the TSX Venture Exchange until April 24, 2006. On April 24, 2006 the Company began trading on the TSX. The Company’s
symbol is “ETG” and its CUSIP number is 29384J 10 3. The Company’s Common Shares are also traded on the NYSE
American under the symbol “EGI”.
Trading History
The following tables sets forth, for each
month of the most recently completed financial year, the price range and volumes traded or quoted on the TSX (as reported by TSX
Infosuite) and the NYSE American (as reported by NYSE Data & Analytics):
TSX
Trading Data
2017 |
| |
High
Cdn$ |
Low
Cdn$ |
Close
Cdn$ |
Volume |
| January |
0.80 |
0.40 |
0.69 |
5,035,899 |
| February |
0.94 |
0.63 |
0.75 |
1,696,918 |
| March |
0.84 |
0.58 |
0.65 |
1,559,057 |
| April |
0.73 |
0.56 |
0.64 |
1,660,604 |
| May |
0.66 |
0.49 |
0.59 |
1,700,900 |
| June |
0.60 |
0.46 |
0.49 |
1,365,498 |
| July |
0.66 |
0.45 |
0.66 |
1,714,628 |
| August |
0.65 |
0.52 |
0.58 |
963,920 |
| September |
0.60 |
0.50 |
0.55 |
1,269,594 |
| October |
0.59 |
0.50 |
0.56 |
1,513,285 |
| November |
0.79 |
0.55 |
0.60 |
2,726,561 |
| December |
0.78 |
0.55 |
0.77 |
2,067,292 |
NYSE American
Trading Data
2017 |
| |
High
$ |
Low
$ |
Close
$ |
Volume |
| January |
0.61 |
0.30 |
0.52 |
4,718,059 |
| February |
0.72 |
0.49 |
0.56 |
3,707,920 |
| March |
0.63 |
0.42 |
0.49 |
2,060,417 |
| April |
0.54 |
0.41 |
0.46 |
1,217,737 |
| May |
0.48 |
0.22 |
0.44 |
1,574,844 |
| June |
0.44 |
0.35 |
0.38 |
1,163,308 |
| July |
0.55 |
0.36 |
0.52 |
2,527,117 |
| August |
0.52 |
0.41 |
0.45 |
2,294,078 |
| September |
0.50 |
0.40 |
0.45 |
3,300,253 |
| October |
0.46 |
0.40 |
0.43 |
2,385,472 |
| November |
0.61 |
0.40 |
0.47 |
4,178,828 |
| December |
0.63 |
0.43 |
0.60 |
2,610,598 |
The closing price of the Company’s
Common Shares as reported by the TSX on December 29, 2017 (the last trading day of the year) was C$0.77.
The Company’s Common Shares are
issued in registered form. Computershare Investor Services Inc. is the registrar and transfer agent for the Company’s Common
Shares.
On December 31, 2017, the shareholders'
list for the Company’s Common Shares showed 1,204 registered shareholders and 173,573,572 Common Shares outstanding.
As part of the
Arrangement, optionholders of the Company received Mason incentive stock options (“Mason Options”) which were
proportionate to, and reflective of the terms of, their existing incentive stock options of the Company. In exchange for each
existing incentive stock option, the holder was issued one fully vested replacement option to purchase a Common Share of the
Company (a “Replacement Option”) and 0.45 of a fully vested Mason Option. On May 23, 2017, Mason awarded a total
of 3,708,000 Mason Options to the Company’s optionholders in accordance with its Stock Option Plan, which was approved
by the Company’s shareholders at the Annual and Special Meeting of Securityholders held to approve the Arrangement.
The Mason Options were awarded with exercise prices ranging from C$0.07 per share to C$0.27 per share and expiry dates
ranging from September 2017 to November 2021. On May 23, 2017, the Company’s optionholders also received an aggregate
8,240,000 Replacement Options with exercise prices ranging from C$0.18 per share to C$0.61 per share and expiry dates ranging
from September 2017 to November 2021. The exercise prices assigned to the Replacement Options and the Mason Options reflect
the allocation of the original exercise price of the existing options between the Replacement Options and the Mason
Options issued, based on the relative market value of Mason and the Company following completion of the Arrangement.
Subsequent to completion of the Arrangement,
the Company awarded 65,000 stock options to a consultant of the Company at an exercise price of C$0.62, a total of 1,835,000 stock
options to directors, officers, employees and consultants of the Company at an exercise price of C$0.52, and 100,000 stock options
to a director of the Company at an exercise price of C$0.63.
The following table outlines the details
of each award of Replacement Options and other incentive stock options of the Company made since January 1, 2017:
| Number of Options |
Exercise Price C$ |
Award Date |
Expiry Date |
| 100,000 |
$0.47 |
May 23, 2017 |
September 7, 2017 |
| 65,000 |
$0.26 |
May 23, 2017 |
September 7, 2017 |
| 75,000 |
$0.18 |
May 23, 2017 |
September 7, 2017 |
| 50,000 |
$0.28 |
May 23, 2017 |
September 7, 2017 |
| 65,000 |
$0.36 |
May 23, 2017 |
September 7, 2017 |
| 100,000 |
$0.61 |
May 23, 2017 |
September 21, 2017 |
| 230,000 |
$0.47 |
May 23, 2017 |
September 21, 2017 |
| 5,000 |
$0.47 |
May 23, 2017 |
October 6, 2017 |
| 1,925,000 |
$0.47 |
May 23, 2017 |
March
15, 2018(1) |
| 50,000 |
$0.28 |
May 23, 2017 |
April 9, 2018 |
| 150,000 |
$0.28 |
May 23, 2017 |
June 27, 2018 |
| 100,000 |
$0.36 |
May 23, 2017 |
November 13, 2018 |
| 715,000 |
$0.26 |
May 23, 2017 |
December
19, 2018(2) |
| 935,000 |
$0.18 |
May 23, 2017 |
December
22, 2019(3) |
| 100,000 |
$0.32 |
May 23, 2017 |
July 12, 2020 |
| 500,000 |
$0.28 |
May 23, 2017 |
November 15, 2020 |
| 770,000 |
$0.28 |
May 23, 2017 |
December
3, 2020(4) |
| 100,000 |
$0.33 |
May 23, 2017 |
March 31, 2021 |
| 2,205,000 |
$0.36 |
May 23, 2017 |
November
21, 2021(5) |
| 65,000 |
$0.62 |
May 23, 2017 |
May 22, 2022 |
| 1,835,000 |
$0.52 |
October 16, 2017 |
October 15, 2022 |
| 100,000 |
$0.63 |
February 5, 2018 |
February 4, 2023 |
Total: 10,240,000
| (1) | Of these, 55,000 expired on August 21, 2017 following termination of employment of the optionholder. |
| (2) | Of these, 30,000 expired on August 21, 2017 following termination of employment of the optionholder. |
| (3) | Of these, 75,000 expired on August 21, 2017 following termination of employment of the optionholder. |
| (4) | Of these, 50,000 expired on August 21, 2017 following termination of employment of the optionholder. |
| (5) | Of these, 65,000 expired on August 21, 2017 following termination of employment of the optionholder. |
On January 11, 2017, the Company issued
8,654,979 common share purchase warrants in connection with the Private Placement. As part of the Arrangement, warrantholders
of the Company received Mason Warrants which were proportionate to, and reflective of the terms of, their existing warrants of
the Company. In exchange for each existing warrant, the holder was issued one Replacement Warrant and 0.45 of a Mason Warrant.
On May 23, 2017, warrantholders of the Company received an aggregate 4,169,119 Mason Warrants each with an exercise price of C$0.23,
and an aggregate 9,264,735 Replacement Warrants each with an exercise price of C$0.55. The exercise prices assigned to the Replacement
Warrants and the Mason Warrants reflect the allocation of the original exercise price of the existing warrants between the Replacement
Warrants and the Mason Warrants issued, based on the relative market value of Mason and the Company following completion of the
Arrangement. See “Description of the Business – Non-Brokered Private Placement” above.
| Number of Replacement Warrants |
Exercise Price C$ |
Expiry Date |
| 8,654,979 |
0.55 |
January 10, 2022 |
| 609,756 |
0.55 |
January 12, 2022 |
The Company has no outstanding securities
not listed on a marketplace other than incentive stock options and Replacement Warrants.
ESCROWED
SECURITIES
There were no escrowed securities at December
31, 2017.
DIRECTORS
AND OFFICERS
The Company’s Board consisted of
six directors as at December 31, 2017. On February 5, 2018, Lord Howard retired as Non-Executive Chairman and a director of the
Company and Mark Bailey was appointed Non-Executive Chairman. Also on February 5, 2018, Michael Price was appointed to the Board
to fill the vacancy created by Lord Howard’s retirement.
The term of office for each director expires
at the next annual general meeting following his or her election or appointment. The following is a brief account of the education
and business experience of each director and executive officer, indicating each person’s principal occupation during the
last five years.
Mark Bailey, Non-Executive Chairman
and Director
Mr. Bailey has been a director of the
Company since June 28, 2002. On February 5, 2018, Mr. Bailey was appointed Non-Executive Chairman of the Company.
Mr. Bailey is a mining executive and registered
professional geologist with 40 years of industry experience. Between 1995 and 2012, he was the President and Chief Executive Officer
of Minefinders Corporation Ltd. (“Minefinders”), a precious metals mining company that operated the multi-million
ounce Dolores gold and silver mine in Mexico before being acquired by Pan American Silver Corp. Before joining Minefinders, Mr.
Bailey held senior positions with Equinox Resources Inc. and Exxon Minerals. Since 1984, Mr. Bailey has worked as a consulting
geologist with Mark H. Bailey & Associates LLC. Mr. Bailey is currently a director of Mason, Fiore Gold Ltd. and Core Gold
Inc.
James Harris, Director
Mr. Harris has been a director of the
Company since January 29, 2003, served as the Company’s Non-Executive Chairman between March 15, 2006 and June 27, 2013
and served as the Company’s Non-Executive Deputy Chairman between June 27, 2013 and February 28, 2015.
Mr. Harris was formerly a corporate, securities
and business lawyer with over 30 years’ experience in Canada and internationally. He has extensive experience with the acquisition
and disposition of assets, corporate structuring and restructuring, regulatory requirements and corporate filings, and corporate
governance. Mr. Harris was also a Founding Member of the Legal Advisory Committee of the former Vancouver Stock Exchange. Mr.
Harris has completed the Directors’ Education Program of the Institute of Corporate Directors and is an Institute accredited
Director. Mr. Harris has also completed a graduate course in business at the London School of Economics. Mr. Harris is currently
a director of Mason.
Alan Edwards, Director
Mr. Edwards has been a director of the
Company since March 8, 2011.
Mr. Edwards has more than 35 years of
diverse mining industry experience. He is a graduate of the University of Arizona, where he obtained a Bachelor of Science Degree
in Mining Engineering and an MBA (Finance). Mr. Edwards is currently the President of AE Resources Corp., an Arizona based company.
Mr. Edwards is a director of Americas Silver Corporation, Orvana Minerals Corp. and is the Chairman of the Board of Mason and
Rise Gold Corp. He served as the non-executive Chairman of the Board of AQM Copper Inc. from October 2011 to January 2017 and
AuRico Gold Inc. (Alamos Gold Inc. following its combination with AuRico Gold in July 2015) from July 2013 to November 2015. Mr.
Edwards served as the Chief Executive Officer of Oracle Mining Corporation, a Vancouver based company, from 2012 to 2013. He also
previously served as President and Chief Executive Officer of Copper One Inc. and Frontera Copper Corporation, and as Executive
Vice President and Chief Operating Officer of Apex Silver Mines Corporation, where he directed the engineering, construction and
development of the San Cristobal project in Bolivia. Mr. Edwards has also worked for Kinross Gold Corporation, P.T. Freeport Indonesia,
Cyprus Amax Minerals Company and Phelps Dodge Mining Company, where he started his career.
Anna Stylianides, Director
Ms. Stylianides has been a director of
the Company since July 13, 2015.
Ms. Stylianides
has over 20 years of experience in global capital markets and has spent much of her career in investment banking, private equity,
and corporate management and restructuring. She began her career in corporate law by joining the firm of Webber Wentzel Attorneys
in 1990 after graduating from the University of the Witwatersrand in Johannesburg, South Africa. In 1992, she joined Investec
Merchant Bank Limited where she specialized in risk management and gained extensive experience in the areas of corporate finance,
structured finance, mergers and acquisitions, structuring, specialized finance and other banking and financial services transactions.
She was also involved in designing and structuring of financial products for financial institutions and corporations.
Ms. Styliandes was most recently the Executive
Chairman of Eco Oro Minerals Corp. (“Eco Oro”), a precious metals exploration and mining development company with
a portfolio of projects in northeastern Colombia, and is currently a director of Eco Oro, Sabina Gold & Silver Corp., Capfin
Partners, LLC, Altius Minerals Corporation and the Fraser Institute.
Michael Price, Director
Dr. Price has been a director of the Company
since February 5, 2018.
Dr. Price has over 35 years of experience
in mining and mining finance. He is currently a Non-Executive Director of Eldorado Gold Corp. and Asanko Gold Inc., and is the
London Representative of Resource Capital Funds. During his career, Dr. Price has served as Managing Director, Joint Global Head
of Mining and Metals, Barclays Capital, Managing Director, Global Head of Mining and Metals, Societe Generale and Head of Resource
Banking and Metals Trading, NM Rothschild and Sons. Dr. Price has B.Sc. and Ph.D. qualifications in Mining Engineering from University
College Cardiff.
Stephen Scott, President, Chief
Executive Officer and Director
Mr. Scott was appointed to the position
of Interim Chief Executive Officer on November 16, 2015. He was appointed to the positions of President, Chief Executive Officer
and director on April 1, 2016.
Mr. Scott has thirty years of global experience
in all mining industry sectors. Before joining Entrée, he was the President of Minenet Advisors, a capital markets and
management advisory consultancy providing a broad range of advice and services to clients relating to planning and execution of
capital markets transactions, strategic planning, generation and acquisition of projects, and business restructuring. Between
2000 and 2014, Mr. Scott held various global executive positions with Rio Tinto including General Manager Commercial, Rio Tinto
Copper and President and Director of Rio Tinto Indonesia. He is an experienced public company director having served as an independent
director on the boards of a number of TSX and AIM listed public mining companies. Mr. Scott holds a Bachelor of Business and Graduate
Certificate in Corporate Secretarial Practises from Curtin University in Western Australia. Mr. Scott is also currently the President,
Chief Executive Officer and a director of Mason.
The Rt. Honourable Lord Howard of
Lympne, Former Non-Executive Chairman and Director
The Rt. Honourable Lord Howard of Lympne
was a director of the Company from May 16, 2007 to February 5, 2018, served as the Company’s Non-Executive Deputy Chairman
between May 16, 2007 and June 27, 2013 and was appointed Non-Executive Chairman on June 27, 2013. Lord Howard retired as Non-Executive
Chairman of the Company on February 5, 2018.
Lord Howard is the former leader of the
Conservative Party in Britain, a distinguished lawyer, and served as a Member of Parliament in Britain for 27 years. He filled
many government posts, including Home Secretary, Secretary of State for Employment and Secretary of State for the Environment,
as well as Shadow Foreign Secretary and Shadow Chancellor. After his retirement from the House of Commons at the 2010 General
Election, Lord Howard was created a Life Peer. He was created a Companion of Honour in the Queen’s Birthday Honours List,
2011. Lord Howard was awarded the Altan Gadas (Order of the Polar Star) in January 2013, the highest honour that can be bestowed
on a non-citizen of Mongolia. Lord Howard is also senior non-executive director of Watchstone Group plc and Chairman of Soma Oil
& Gas Holdings Limited.
Duane Lo, Chief Financial Officer
Mr. Lo was appointed to the position of
Interim Chief Financial Officer on April 1, 2016 and was appointed to the position of Chief Financial Officer on November 1, 2016.
Mr. Lo has almost 20 years of experience
in accounting and financial management, the majority of which has been spent in the financing, management and administration of
mining operations and development projects in Brazil, Africa and other jurisdictions. Mr. Lo is currently also the Chief
Financial Officer of Mason. He was previously the Executive Vice President and Chief Financial Officer of Luna Gold Corp. and
Corporate Controller for First Quantum Minerals Ltd. Mr. Lo was also employed at Deloitte in the assurance and advisory practice.
He holds a Chartered Professional Accountant, Chartered Accountant (CPA, CA) designation from the Institute of Chartered Accountants
of British Columbia. Mr. Lo is currently a director of Fengro Industries Corp.
Susan McLeod, Vice President, Legal
Affairs and Corporate Secretary
Ms. McLeod joined the Company as Vice
President, Legal Affairs on September 22, 2010 and was appointed Corporate Secretary on November 22, 2010.
Ms. McLeod is currently also the Chief
Legal Officer and Corporate Secretary of Mason. Prior to joining Entrée, Ms. McLeod was in private practise in Vancouver,
Canada since 1997, most recently with Fasken Martineau DuMoulin LLP (from 2008 to 2010) and P. MacNeill Law Corporation (from
2003 to 2008). She has worked as outside counsel to public companies engaged in international mineral exploration and mining.
She has advised clients with respect to corporate finance activities, mergers and acquisitions, corporate governance and continuous
disclosure matters, and mining-related commercial agreements. Ms. McLeod holds a B.Sc. and an LLB from the University of British
Columbia, and is a member of the Law Society of British Columbia.
Robert Cinits, Vice President, Corporate
Development
Mr. Cinits has been the Company’s
Vice President, Corporate Development since January 1, 2014. Prior to that, he was the Company’s Vice President, Technical
Services from June 27, 2013 to December 31, 2013, and the Company’s Director of Technical Services from July, 2011 to June
26, 2013.
Mr. Cinits has extensive experience in
project management and development and geological consulting. He is currently also the Chief Operating Officer of Mason.
Prior to joining the Company, Mr. Cinits was the Chief Operating Officer for MinCore Inc., a private, Toronto-based exploration
company with projects in Sinaloa, Mexico, from 2007 to 2011. From 2003 through 2006, Mr. Cinits worked for AMEC as the Manager
of Geology and Mining for the Lima Peru office. He was involved in numerous feasibility and prefeasibility studies, as well
as PEAs, resource estimates and mine and project audits/reviews throughout South America and other locations worldwide.
Mr. Cinits has also worked for several consulting groups and junior mining companies since 1985. Mr. Cinits holds a Bachelor
of Science degree in Geology from the University of Toronto and is a member of Engineers and Geoscientists, British Columbia and
the Society of Economic Geologists.
The table below sets out the municipality
of residence and securities held by directors and executive officers as at December 31, 2017.
| Name
and municipality of residence |
No.
of Common Shares beneficially owned, directly or indirectly, or controlled(1). |
No.
of securities held on a fully-
diluted basis |
|
| Mark
Bailey(2) |
|
Common
Shares: |
576,136 |
|
| Arizona |
576,136 |
Replacement
Warrants: |
50,000 |
|
| U.S.A. |
|
Stock
options: |
830,000 |
|
| |
|
Total: |
1,456,136 |
|
| James Harris(3) |
|
Common
Shares: |
653,062 |
|
| British Columbia |
653,062 |
Replacement
Warrants: |
67,500 |
|
| Canada |
|
Stock
options: |
930,000 |
|
| |
|
Total: |
1,650,562 |
|
| Rt. Honourable
Lord Howard of Lympne |
|
Common
Shares: |
431,239 |
|
| London, UK(4) |
431,239 |
Replacement
Warrants: |
101,219 |
|
| |
|
Stock
options: |
1,030,000 |
|
| |
|
Total: |
1,562,458 |
|
| Name
and municipality of residence |
No.
of Common Shares beneficially owned, directly or indirectly, or controlled(1). |
No.
of securities held on a fully-
diluted basis |
|
| Alan
Edwards(5) |
|
Common
Shares: |
429,951 |
|
| Arizona |
429,951 |
Replacement
Warrants: |
60,975 |
|
| U.S.A |
|
Stock
options: |
830,000 |
|
| |
|
Total: |
1,320,926 |
|
| Anna Stylianides(6) |
|
Common
Shares: |
73,171 |
|
| British Columbia |
73,171 |
Replacement
Warrants: |
36,585 |
|
| Canada |
|
Stock
options: |
525,000 |
|
| |
|
Total: |
634,756 |
|
| Stephen Scott(7) |
|
Common
Shares: |
332,561 |
|
| British Columbia |
332,561 |
Replacement
Warrants: |
48,780 |
|
| Canada |
|
Stock
options: |
1,225,000 |
|
| |
|
Total: |
1,606,341 |
|
| Duane Lo(8) |
|
Common
Shares: |
626,300 |
|
| British Columbia |
626,300 |
Replacement
Warrants: |
122,000 |
|
| Canada |
|
Stock
options: |
550,000 |
|
| |
|
Total: |
1,298,300 |
|
| Robert Cinits(9) |
|
Common
Shares: |
48,780 |
|
| British Columbia |
48,780 |
Replacement
Warrants: |
24,390 |
|
| Canada |
|
Stock
Options: |
1,260,000 |
|
| |
|
Total: |
1,333,170 |
|
| Susan McLeod(10) |
|
Common
Shares: |
271,500 |
|
| British Columbia |
271,500 |
Replacement
Warrants: |
61,000 |
|
| Canada |
|
Stock
options: |
1,285,000 |
|
| |
|
Total: |
1,617,500 |
|
| (1) | Meaning
an officer of the issuer, or a director or senior officer that has direct or indirect
beneficial ownership of, control or direction over, or a combination of direct or indirect
beneficial ownership of and control or direction over securities of the issuer carrying
more than 10% of the voting rights attached to all the issuer’s outstanding securities. |
| (2) | Member
of the Compensation Committee (chair), Audit Committee and Technical Committee. As at
March 8, 2018, Mr. Bailey held 611,627 Common Shares, 50,000 Replacement Warrants
and 600,000 stock options. |
| (3) | Member
of the Corporate Governance and Nominating Committee (chair), Audit Committee and Compensation
Committee. As at March 8, 2018, Mr. Harris held 908,062 Common Shares, 67,500
Replacement Warrants and 675,000 stock options. |
| (4) | Lord Howard
retired as a director and Non-Executive Chairman of the Board on February 5, 2018. On
February 5, 2018, Michael Price was appointed to the Board to fill the vacancy created
by Lord Howard’s retirement. As at March 8, 2018, Mr. Price held 100,000
stock options. |
| (5) | Member
of the Technical Committee (chair), Compensation Committee and Corporate Governance and
Nominating Committee. As at March 8, 2018, Mr. Edwards held 457,783 Common
Shares, 60,975 Replacement Warrants and 600,000 stock options. |
| (6) | Member
of the Audit Committee (chair) and Corporate Governance and Nominating Committee. |
| (7) | Member
of the Technical Committee. |
| (8) | As at
March 8, 2018, Mr. Lo held 726,300 Common Shares, 122,000 Replacement Warrants
and 550,000 stock options. |
| (9) | As at
March 8, 2018, Mr. Cinits held 131,805 Common Shares, 24,390 Replacement Warrants
and 935,000 stock options. |
| (10) | As at
March 8, 2018, Ms. McLeod held 412,655 Common Shares, 61,000 Replacement Warrants
and 910,000 stock options. |
To the best of the Company’s knowledge
as at December 31, 2017, directors and executive officers, as a group, beneficially owned, or controlled or directed, directly
or indirectly, 3,442,700 Common Shares (not including Common Shares issuable upon exercise of Replacement Warrants or stock options)
representing 1.98% of the then outstanding Common Shares (March 8, 2018: 3,653,964 Common Shares representing 2.10%).
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Alan Edwards, a director of the Company,
was Chairman of the Board of Oracle Mining Corp. (“Oracle”) until his resignation effective February 15, 2015. On
December 23, 2015, Oracle announced that the Superior Court of Arizona had granted the application of Oracle’s lender to
appoint a receiver and manager over the assets, undertaking and property of Oracle Ridge Mining LLC.
Standing Committees of the Board of Directors
The standing committees of the Board are
the Audit Committee, the Compensation Committee, the Corporate Governance and Nominating Committee and the Technical Committee.
Audit Committee
The Audit Committee is comprised of three
directors, each of whom, in the judgement of the Board, meets the independence requirements of applicable securities legislation
and policies for audit committee members. The members of the Audit Committee are Anna Stylianides (chair), Mark Bailey and James
Harris. All members of the Audit Committee are financially literate. Relevant education and experience for members of the Audit
Committee is listed under their profiles above.
The mandate of the Audit Committee is
to oversee the Company’s financial reporting obligations, systems and disclosure, including monitoring the integrity of
the Company’s financial statements, monitoring the independence and performance of the Company’s external auditors
and acting as a liaison between the Board and the Company’s auditors. The activities of the Audit Committee typically include
reviewing interim financial statements and annual financial statements, management’s discussion and analysis and news releases
with respect to the Company’s financial performance before they are publicly disclosed, ensuring that internal controls
over accounting and financial systems are maintained and that accurate financial information is disseminated to shareholders.
Other responsibilities include reviewing the results of internal and external audits and any change in accounting procedures or
policies, and evaluating the performance of the Company's auditors. The Audit Committee communicates directly with the Company’s
external auditors in order to discuss audit and related matters whenever appropriate.
The full text of the Audit Committee Charter
is attached to this AIF as an Appendix.
Audit Fees
The following table shows the aggregate
fees billed to the Company by its external auditor in each of the last two years.
| |
2017 (US$) |
2016 (US$) |
| Audit Fees(1) |
$34,485 |
$37,820 |
| Audit Related Fees(2) |
$24,173 |
$Nil |
| Tax Fees(3) |
$Nil |
$Nil |
| All other fees |
$Nil |
$Nil |
| Total: |
$58,658 |
$37,820 |
| (1) | Audits
of the Company’s consolidated financial statements, meetings with the Audit Committee
and management with respect to annual filings, consulting and accounting standards and
transactions, issuance of consent in connection with Canadian and United States securities
filings. |
| (2) | Audit-related
fees paid for assurance and related services by the auditors that were reasonably related
to the performance of the audit or the review of the Company’s quarterly financial
statements that are not included in Audit Fees. |
| (3) | Tax compliance,
taxation advice and tax planning for international operations. |
Compensation Committee
The Compensation Committee is comprised
of three directors, each of whom, in the judgement of the Board, meets the independence requirements of applicable securities
legislation and policies for compensation committee members. The members of the Compensation Committee are: Mark Bailey (chair),
Alan Edwards and James Harris.
The primary objective of the Compensation
Committee is to discharge the Board’s responsibilities relating to compensation and benefits of the executive officers and
directors of the Company to ensure that such compensation realistically reflects the responsibilities and risks of such positions.
In addition, the Compensation Committee makes recommendations for grants made under the Company’s Stock Option Plan, determines
the recipients of, and the nature and size of share compensation awards granted from time to time, and determines any bonuses
to be awarded from time to time.
Corporate Governance and Nominating
Committee
The Corporate Governance and Nominating
Committee is comprised of three directors, each of whom, in the judgement of the Board, meets the independence requirements of
applicable securities legislation and policies for nominating committee members. The Corporate Governance and Nominating Committee:
(1) assists the Board, on an annual basis, by identifying individuals qualified to become Board members, and recommends to the
Board the director nominees for the next annual meeting of shareholders; (2) assists the Board in the event of any vacancy on
the Board by identifying individuals qualified to become Board members, and recommends to the Board qualified individuals to fill
any such vacancy; and (3) recommends to the Board, on an annual basis, director nominees for each Board committee. The members
of the Corporate Governance and Nominating Committee are: James L. Harris (chair), Alan Edwards and Anna Stylianides.
Technical Committee
The members of the Technical Committee
consist of Alan Edwards (chair), Mark Bailey and Stephen Scott. In the judgement of the Board, Mr. Edwards and Mr. Bailey are
independent directors. Mr. Scott is not independent, by virtue of the fact that he is the President and Chief Executive Officer
of the Company. The mandate of the Technical Committee is to exercise all the powers of the Board (except those powers specifically
reserved by law to the Board itself) during intervals between meetings of the Board pertaining to the Company’s mining properties,
programs, budgets, and other related activities and the administration thereof.
Potential Conflicts of Interest
To the best of the Company’s knowledge,
and other than as disclosed in this AIF, there are no known existing or potential conflicts of interest between the Company and
any director or officer of the Company. The Company’s directors and officers may serve as directors or officers of other
companies, including Mason, with whom the Company has an Administrative Services Agreement, or have significant shareholders in
other resource companies. Such associations may give rise to conflicts of interest from time to time. Directors are required by
law to act honestly and in good faith with a view to Entrée’s best interests and to disclose any interest which they
may have in any of Entrée’s projects or opportunities. In general, if a conflict of interest arises at a meeting
of the Board, any director in a conflict will disclose his or her interest and abstain from voting on such matter or, if he or
she does vote, his or her vote does not count. In determining whether or not Entrée will participate in any project or
opportunity, the directors will primarily consider the degree of risk to which Entrée may be exposed and its financial
position at that time.
PROMOTERS
Not applicable.
LEGAL
PROCEEDINGS AND REGULATORY ACTIONS
Not applicable.
INTEREST
IN MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Agreement
to Amend with Sandstorm Gold Ltd.
On February 23,
2016, the Company and Sandstorm entered into an Agreement to Amend, which provides for a 17% reduction in the metal credits
that the Company is required to sell and deliver to Sandstorm under the 2013 Agreement. In return, the Company refunded 17% of
the Deposit by paying $5.5 million in cash and issuing $1.3 million of common shares (thereby reducing the Deposit to $33.2 million).
At closing, the parties entered into the Amended Funding Agreement. See “Description of the Business – Agreements
with Sandstorm – Amended and Restated Equity Participation and Funding Agreement” above.
The transaction closed on March 1, 2016.
Pursuant to the Agreement to Amend, the Company issued 5,128,604 common shares to Sandstorm at a price of C$0.3496 per common
share. The price was calculated using the VWAP of the Company’s common shares on the TSX for the 15 trading days preceding
February 23, 2016, the effective date of the Agreement to Amend.
The Agreement to Amend is a related party
transaction as that term is defined in Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special
Transactions (“MI 61-101”) by virtue of the fact that Sandstorm beneficially owns Common Shares of the Company
carrying more than 10% of the voting rights attached to all of the Company’s outstanding Common Shares. The Company
relied on exemptions from the formal valuation and minority approval requirements set out in MI 61-101 based on a determination
that neither the fair market value of the partial refund or the amendments (including, without limitation, the reduction in deliverable
metal credits), exceeds 25% of the Company’s market capitalization. The Agreement to Amend was approved by the Board, which
is entirely comprised of independent directors, with one director dissenting.
Non-Brokered
Private Placement
On January 11, 2017, the Company closed
the first of two tranches of the Private Placement. The Company issued 17,309,971 Units at a price of C$0.41 per Unit for gross
proceeds of C$7,097,088.11. A second tranche of 1,219,513 Units closed on January 13, 2017. See “Description of the Business
– Non-Brokered Private Placement” above.
Each Unit consisted of one common share
of the Company and one-half of one transferable common share purchase warrant. Each whole warrant entitled the holder to acquire
one additional common share of the Company for a period of five years at a price of C$0.65.
As part of the Arrangement, warrantholders
of the Company received Mason Warrants which were proportionate to, and reflective of the terms of, their existing warrants of
the Company. In exchange for each existing warrant, the holder was issued one Replacement Warrant and 0.45 of a Mason Warrant.
On May 23, 2017, warrantholders of the Company received an aggregate 4,169,119 Mason Warrants each with an exercise price of C$0.23,
and an aggregate 9,264,735 Replacement Warrants each with an exercise price of C$0.55. The exercise prices assigned to the Replacement
Warrants and the Mason Warrants reflect the allocation of the original exercise price of the existing warrants between the Replacement
Warrants and the Mason Warrants issued, based on the relative market value of Mason and the Company following completion of the
Arrangement.
Directors and executive officers of the
Company and their associates acquired an aggregate 1,144,902 Units under the Private Placement on the same terms and conditions
as the other subscribers. In addition, Sandstorm acquired 914,634 Units. As at March 8, 2018, Sandstorm holds 23,900,380 Common
Shares, or 13.72% of the Company’s issued and outstanding Common Shares.
The following directors, executive officers
and persons or companies that beneficially own, or control or direct, directly or indirectly, more than 10% of the Common Shares
of the Company acquired Units under the Private Placement on the same terms and conditions as the other subscribers:
Name
of person or
company |
Nature
of relationship
to Company |
#
of Units
purchased |
%
of Units
purchased |
%
of Common Shares of
Company held by
person or company as
at March 8, 2018 |
| Sandstorm
Gold Ltd. |
10%
shareholder |
914,634 |
4.94 |
13.72 |
| Stephen
Scott |
Director
& executive officer |
73,171 |
0.39 |
0.18 |
| Walentyna
Szczepinska-Karcz |
Associate
of director & executive officer |
24,390
|
0.13 |
0.01 |
| Michael
Howard |
Former
Director |
202,439 |
1.09 |
0.25 |
| James
Harris |
Director |
13,500 |
0.07 |
0.28 |
| Maureen
Leyland |
Associate
of director |
13,500 |
0.07 |
0.02 |
| JLHLC
Holdings Inc. |
Associate
of director |
108,000
|
0.58 |
0.22 |
| Alan
Edwards |
Director |
121,951 |
0.66 |
0.26 |
Name
of person or
company |
Nature
of relationship
to Company |
#
of Units
purchased |
%
of Units
purchased |
%
of Common Shares of
Company held by
person or company as
at March 8, 2018 |
| Mark
Bailey |
Director |
100,000
|
0.54 |
0.35 |
| Anna
Stylianides |
Director |
73,171
|
0.39 |
0.04 |
| Duane
Lo |
Executive
officer |
244,000
|
1.32 |
0.42 |
| Robert
Cinits |
Executive
officer |
48,780
|
0.26 |
0.08 |
| Susan
McLeod |
Executive
officer |
37,000
|
0.20 |
0.16 |
| John
Quelch |
Associate
of executive officer |
85,000
|
0.46 |
0.08 |
The Company relied on exemptions from
the formal valuation and minority approval requirements set out in MI 61-101 based on a determination that neither the fair market
value of the Units subscribed for by the foregoing persons and companies, nor the consideration paid by such persons and companies,
would exceed 25% of the Company’s market capitalization.
On January 3, 2017, the Company’s
Audit Committee reviewed the related party component of the Private Placement and unanimously deemed it to be appropriate. On
January 4, 2017, the Board unanimously authorized and approved the Private Placement.
TRANSFER
AGENTS AND REGISTRARS
Computershare Investor Services Inc. at
its offices in Vancouver and Toronto is both the transfer agent and registrar for the Company. Their address is 3rd
Floor, 510 Burrard Street, Vancouver, British Columbia, V6C 3G9, Telephone: (604) 689-9853, Facsimile: (604) 689-8144.
MATERIAL
CONTRACTS
| 1. | Arrangement Agreement dated
February 28, 2017 between Entrée Gold Inc. and Mason Resources Corp. |
See “Description of the
Business – Plan of Arrangement” above.
| 2. | Amended and Restated Equity
Participation and Funding Agreement dated February 14, 2013 and amended March 1, 2016
between Entrée Gold Inc. and Sandstorm Gold Ltd. |
See “Description of the
Business – Agreements with Sandstorm – Amended and Restated Equity Participation and Funding Agreement” above.
| 3. | Joint Venture Agreement effective
June 30, 2008 between Entrée Gold Inc. and Ivanhoe Mines Mongolia Inc. XXK (now
OTLLC). |
Pursuant to Earn-In Agreement,
a joint venture was formed on June 30, 2008 and the parties were required to enter into the Entrée/Oyu Tolgoi JVA in the
form attached to the Earn-In Agreement as Appendix A.
The Entrée/Oyu Tolgoi
JVA contains provisions governing the parties’ activities on the Entrée/Oyu Tolgoi JV Property, including exploration,
acquisition of additional real property and other interests, evaluation of, and if justified, engaging in development and other
operations, engaging in marketing products, and completing and satisfying all environmental compliance and other continuing obligations
affecting the Entrée/Oyu Tolgoi JV Property.
| 4. | Equity Participation and Earn-in
Agreement dated October 15, 2004, between Entrée Gold Inc. and Ivanhoe Mines Ltd.
(now Turquoise Hill), as amended on November 9, 2004 and subsequently assigned to Ivanhoe
Mines Mongolia Inc. XXK (OTLLC) on March 1, 2005. |
Under the Earn-In Agreement,
OTLLC earned a 70% interest in mineralization above a depth of 560 metres on the Entrée/Oyu Tolgoi JV Property, and an
80% interest in mineralization below that depth, by spending an aggregate $35 million on exploration. OTLLC completed its earn-in
on June 30, 2008, at which time a joint venture was formed under the terms of the Entrée/Oyu Tolgoi JVA. The Entrée/Oyu
Tolgoi JVA was intended to replace the Earn-In Agreement, with the Earn-In Agreement terminating, except for certain provisions
that expressly survive the termination. Those parts include provisions related to the Entrée/Oyu Tolgoi JVA, title, tenure
and related matters and arbitration.
INTEREST
OF EXPERTS
Entrée’s auditor
is Davidson & Company LLP, Chartered Professional Accountants, in Vancouver, British Columbia. The Corporation’s
audited consolidated financial statements as at and for the years ended December 31, 2017, 2016 and 2015 have been filed under
National Instrument 51-102 – Continuous Disclosure Obligations in reliance on the report of Davidson &
Company, independent registered chartered professional accountants, given on their authority as experts in auditing
and accounting. Davidson & Company LLP have confirmed they are independent of the Company in accordance with the rules
of professional conduct of the Chartered Professional Accountants of British Columbia.
Amec Foster Wheeler Americas Limited prepared
the 2018 Technical Report, which forms the basis of the scientific and technical disclosure regarding the Entrée/Oyu Tolgoi
JV Project, a copy of which is available on SEDAR at www.sedar.com. To the knowledge of the Company, Amec Foster Wheeler Americas
Limited and its designated professionals as a group have a registered or beneficial interest, direct or indirect, in less than
one percent of the outstanding Common Shares.
Robert Cinits, P. Geo, the Company’s
Vice President, Corporate Development, approved the technical information in this AIF and the Company’s news releases and
other disclosure documents. Mr. Cinits has a registered or beneficial interest, direct or indirect, in 131,805 Common Shares,
24,390 Replacement Warrants and incentive stock options to purchase 935,000 Common Shares of the Company.
ADDITIONAL
INFORMATION
Additional information, including directors’
and officers’ remuneration and indebtedness, principal holders of the Company’s securities and securities authorized
for issuance under equity compensation is contained in the management information circular for the Annual General and Special
Meeting of the Company’s securityholders held on May 1, 2017. Additional financial information is contained in the Company’s
comparative financial statements and MD&A as at and for the years ended December 31, 2017, 2016 and 2015. Copies of the information
circular, financial statements and MD&A are available on SEDAR, and may also be obtained upon request from the Company at
Suite 1650, 1066 West Hastings Street, Vancouver, British Columbia V6E 3X1.
Additional information relating to Entrée Resources
Ltd. may be found on SEDAR at www.sedar.com.
APPENDIX
TO ANNUAL INFORMATION FORM DATED MARCH
10, 2017
entrée
RESOURCES LTD.
Audit
Committee Charter
As Adopted by the Board of Directors on
December 4, 2014
I. Purpose
of Audit Committee of Entrée Resources Ltd. (the “Company”)
The purpose of the Audit Committee (the
“Committee”) is to:
| 1. | Assist the Board of Directors of
the Company (the “Board”) in fulfilling its oversight responsibilities relating
to: |
| (a) | the quality and integrity of the
Company’s financial statements, financial reporting process and systems of internal
controls and disclosure controls regarding risk management, finance, accounting, and
legal and regulatory compliance; |
| (b) | the appointment, independence, qualifications,
and compensation of the Company’s independent accountants and review of the audit
efforts of the Company’s independent accountants; and |
| (c) | the development and implementation
of policies and processes regarding corporate governance matters. |
| 2. | Provide an open avenue of communication
between the independent accountants, the Company’s financial and senior management
and the Board. |
| 3. | Prepare any reports required to
be prepared by the Committee pursuant to the rules of any stock exchange on which the
Company’s shares are listed and pursuant to the rules of any securities commission
or other regulatory authority having jurisdiction, whether for inclusion in the Company’s
annual proxy statement or otherwise. |
The Committee will primarily fulfill these
responsibilities by carrying out the activities enumerated in Section VII below of this Charter.
While the Committee has the responsibilities
and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits, or to determine that the
Company’s financial statements are complete and accurate or are in accordance with generally accepted accounting principles,
accounting standards, or applicable laws and regulations. This is the responsibility of management of the Company and the Company’s
independent accountants, as well as any advisors employed by the Committee. Because the primary function of the Committee is oversight,
the Committee shall be entitled to rely on the expertise, skills and knowledge of management and the Company’s independent
accountants and the integrity and accuracy of information provided to the Committee by such persons in carrying out its oversight
responsibilities. Nothing in this Charter is intended to change the responsibilities of management and the independent accountants.
II. Composition
The Committee shall be composed of at
least three directors, each of whom the Board determines has no relationship that would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director, is otherwise “unrelated” and satisfies the definition
of “independent” as set forth by Rule 10A-3 of the Securities and Exchange Act of 1934, as amended (the “Exchange
Act”), Section 803A of the NYSE MKT Company Guide and any other applicable securities laws, rules or requirements of any
stock exchange upon which the Company’s securities are listed as in effect from time to time.
Exchange Act Rule 10A-3 requires that
each member of the Audit Committee must serve on the Board and satisfy independence requirements. For the purposes of satisfying
the independence requirement, Audit Committee members may not, other than in their capacity as members of the Committee, the Board,
or any other committee of the Board (i) accept, directly or indirectly, any consulting, advisory, or other compensatory fee1
from the Company, or of the Company’s subsidiaries; or (ii) be an affiliate of the Company or any of the Company’s
subsidiaries.
Because the Company is currently
a foreign private issuer, the Company may seek to take advantage of the following exemptions from the Rule 10A-3 independence
requirements:
| 1. | A non-executive employee of the
Company may be exempt from the prohibition of accepting consulting, advisory or other
compensatory fees if that employee is elected or named to the Board or Audit Committee
pursuant to the Company’s governing laws or constating documents, an employee collective
bargaining or similar agreement or other home country legal or listing requirement; and |
| 2. | An Audit Committee member may be
exempt from the prohibition of being an affiliate of the Company if: |
| (a) | The member is an affiliate of the
Company or a representative of such an affiliate; |
| (b) | The member has only observer status
on, and is not a voting member or the chair of the Audit Committee; and |
| (c) | The member nor the affiliate for
which such member is a representative is an executive officer of the Company. |
These exemptions are only available to
the Company so long as it remains a foreign private issuer as defined by Exchange Act Rule 3b-4(c). If the Company ceases to fall
within the definition of a foreign private issuer, the Company must immediately take steps to cure any independence non-compliance
within the Audit Committee.2
1 Compensatory
fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for
prior service with the Company (provided, however, that such compensation is not contingent upon continued service to the Company.)
This exception, however, may be overridden by the NYSE MKT and the Audit Committee should, during its routine evaluation of the
effectiveness of this Charter, determine whether this exception still applies.
2 If
the Company elects to take advantage of either these exemptions, the Audit Committee should periodically review its status as
a foreign private issuer as defined by Exchange Act Rule 3b-4(c). If the Company ceases to qualify as a foreign private issuer,
and the Company’s securities are listed on the NYSE MKT, the Company may need to adjust its “independence” criteria
to reflect the requirements set forth in Rule 803A of the NYSE MKT Company Guide Rule.
All members of the Committee must be financially
literate, meaning that such member has the ability to read and understand a set of financial statements that present a breadth
and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can
reasonably be expected to be raised by the Company’s financial statements. One or more members of the Committee shall be,
in the judgment of the Board an “audit committee financial expert” as such term is defined by applicable rules and
regulations.
If any executive officer of the Company
becomes aware of any material non-compliance with the requirements of Exchange Act Rule 10A-3, the Company must provide notification
to the exchange on which its securities are listed.
If any member of the Committee ceases
to be “independent”, as defined by the applicable securities laws and exchange requirements, including Exchange Act
Rule 10A-3, for reasons outside that member’s reasonable control, that person, with prompt notice to the exchange on which
the Company’s securities are listed, may remain an audit committee member until the earlier of the next annual meeting of
the shareholders or one year from the occurrence of the event that caused the member to no longer be independent.
III. Authority
The Committee shall have the authority
to (i) retain (at the Company’s expense) its own legal counsel, accountants and other consultants that the Committee believes,
in its sole discretion, are needed to carry out its duties and responsibilities; (ii) conduct investigations that it believes,
in its sole discretion, are necessary to carry out its responsibilities; and (iii) take whatever actions that it deems appropriate
to foster an internal culture that is committed to maintaining quality financial reporting, sound business risk practices and
ethical behaviour within the Company. In addition, the Committee shall have the authority to request any officer, director, employee
or consultant of the Company, the Company’s outside legal counsel and the independent accountants to meet with the Committee
and any of its advisors and to respond to their inquiries. The Committee shall have full access to the books, records and facilities
of the Company in carrying out its responsibilities. Finally, the Board shall adopt resolutions which provide for appropriate
funding, as determined by the Committee, for (i) services provided by the independent accountants in rendering or issuing an audit
report, (ii) services provided by any adviser employed by the Committee which it believes, in its sole discretion, are needed
to carry out its duties and responsibilities, or (iii) ordinary administrative expenses of the Committee that are necessary or
appropriate in carrying out its duties and responsibilities.
The Committee shall be responsible for
establishing procedures for (i) the receipt, retention and treatment of complaints received by the Company regarding accounting,
internal accounting controls, or auditing matters and (ii) the confidential, anonymous submissions by employees of the Company
regarding questionable accounting or auditing matters.
The Committee shall review the reports
of the Chief Executive Officer and Chief Financial Officer (in connection with their required certifications for the Company’s
filings with the United States Securities and Exchange Commission) regarding any significant deficiencies or material weaknesses
in the design of operation of internal controls and any fraud that involves management or other employees of the Company who have
a significant role in managing or implementing the Company’s internal controls. During this review, the Committee should
evaluate whether the internal control structure, as created and as implemented, provides reasonable assurances that transactions
are recorded as necessary to permit the Company’s external auditors to reconcile the Company’s financial statements
in accordance with applicable securities laws.
The Committee, in its capacity as a committee
of the Board, is directly responsible for the appointment, compensation, retention and oversight of the work of the independent
accountants engaged (including resolution of disagreements between the Company’s management and the independent accountants
regarding financial reporting) for the purpose of preparing and issuing an audit report or performing other audit, review or attest
services for the Company.
The independent accountants shall submit
to the Audit Committee annually a formal written statement delineating all relationships between the independent accountants and
the Company and its subsidiaries, addressing the non-audit services provided to the Company or its subsidiaries and the matters
set forth in or required by the rules and regulations of all relevant regulatory authorities.
The independent accountants shall submit
to the Audit Committee annually a formal written statement of the fees billed for each of the following categories of services
rendered by the independent accountants: (i) the audit of the Company’s annual financial statements for the most recent
fiscal year and any reviews of the financial statements; (ii) information technology consulting services for the most recent fiscal
year, in the aggregate and by each service (and separately identifying fees for such services relating to financial information
systems design and implementation); and (iii) all other services rendered by the independent accountants for the most recent fiscal
years, in the aggregate and by each service.
IV. Appointing
Members
The members of the Committee shall be
appointed or re-appointed by the Board on an annual basis. Each member of the Committee shall continue to be a member thereof
until such member’s successor is appointed, unless such member shall resign or be removed by the Board or such member shall
cease to be a director of the Company. Where a vacancy occurs at any time in the membership of the Committee, it may be filled
by the Board and shall be filled by the Board if the membership of the Committee is less than three directors as a result of the
vacancy or the Committee no longer has a member who is an “audit committee financial expert” as a result of the vacancy.
V. Chairperson
The Board, or in the event of its failure
to do so, the members of the Committee, must appoint a Chairperson from the members of the Committee. If the Chairperson of the
Committee is not present at any meeting of the Committee, an acting Chairperson for the meeting shall be chosen by majority vote
of the Committee from among the members present. In the case of a deadlock on any matter or vote, the Chairperson shall refer
the matter to the Board. All requests for information from the Company or the independent accountants shall be made through the
Chairperson.
VI. Meetings
The time and place of meetings of the
Committee and the procedure at such meetings shall be determined from time to time by the members thereof provided that:
| 1. | A quorum for meetings shall be two
members, present in person or by telephone or other telecommunication device that permit
all persons participating in the meeting to speak and hear each other; |
| 2. | The Committee shall meet at least
quarterly (or more frequently as circumstances dictate); and |
| 3. | Notice of the time and place of
every meeting shall be given in writing or facsimile communication to each member of
the Committee and the external auditors of the Company at least 48 hours prior to the
time of such meeting. |
While the Committee is expected to communicate
regularly with management, the Committee shall exercise a high degree of independence in establishing its meeting agenda and in
carrying out its responsibilities. The Committee shall submit the minutes of all meetings of the Committee to, or discuss the
matters discussed at each Committee meeting with, the Board.
VII. Specific
Duties
In meeting its responsibilities, the Committee
is expected to:
| 1. | Select the independent accountants,
considering independence and effectiveness, approve all audit and non-audit services
in advance of the provision of such services and the fees and other compensation to be
paid to the independent accountants, and oversee the services rendered by the independent
accountants (including the resolution of disagreements between management and the independent
accountants regarding preparation of financial statements) for the purpose of preparing
or issuing an audit report or related work, and the independent accountants shall report
directly to the Committee; |
| 2. | To pre-approve any non-audit services
to be provided to the Company by the external auditor and the fees for those services; |
| 3. | Review the performance of the independent
accountants, including the lead partner of the independent accountants, and, in its sole
discretion, approve any proposed discharge of the independent accountants when circumstances
warrant, and appoint any new independent accountants; |
| 4. | Periodically review and discuss
with the independent accountants all significant relationships the independent accountants
have with the Company to determine the independence of the independent accountants, including
a review of service fees for audit and non-audit services; |
| 5. | Review and approve the issuer’s
hiring policies from time to time regarding partners, employees and former partners and
employees of the present and former external auditor of the issuer; |
| 6. | Inquire of management and the independent
accountants and evaluate the effectiveness of the Company’s process for assessing
significant risks or exposures and the steps management has taken to monitor, control
and minimize such risks to the Company. Obtain annually, in writing, the letters of the
independent accountants as to the adequacy of such controls; |
| 7. | Consider, in consultation with the
independent accountants, the audit scope and plan of the independent accountants; |
| 8. | Review with the independent accountants
the coordination of audit effort to assure completeness of coverage, and the effective
use of audit resources; |
| 9. | Consider and review with the independent
accountants, out of the presence of management: |
| (a) | the adequacy of the Company’s
internal controls and disclosure controls including the adequacy of computerized information
systems and security; |
| (b) | the truthfulness and accuracy of
the Company’s financial statements; and |
| (c) | any related significant findings
and recommendations of the independent accountants together with management’s responses
thereto; |
| 10. | Following completion of the annual
audit, review with management and the independent accountants: |
| (a) | the Company’s annual financial
statements and related footnotes; |
| (b) | the independent accountants’
audit of the financial statements and the report thereon; |
| (c) | any significant changes required
in the independent accountants’ audit plan; and |
| (d) | other matters related to the conduct
of the audit which are to be communicated to the committee under generally accepted auditing
standards; |
| 11. | Following completion of the annual
audit, review separately with each of management and the independent accountants any
significant difficulties encountered during the course of the audit, including any restrictions
on the scope of work or access to required information; |
| 12. | Establish regular and separate
systems of reporting to the Committee by each of management and the independent accountants
regarding any significant judgments made in management’s preparation of the financial
statements and the view of each as to appropriateness of such judgments; |
| 13. | In consultation with the independent
accountants, review any significant disagreement among management and the independent
accountants in connection with the preparation of the financial statements, including
management’s responses; |
| 14. | Consider and review with management: |
| (a) | significant findings during the year
and management’s responses thereto; and |
| (b) | any changes required in the planned
scope of their audit plan; |
| 15. | Review, prior to publication, all
filings with regulatory authorities and any other publicly disclosed information containing
the Company’s financial statements, including Management’s Discussion &
Analysis, any certification, report, opinion or review rendered by the independent accountants,
any press releases announcing earnings (especially the use of “pro forma”
or “adjusted” information not prepared in compliance with generally accepted
accounting principles) and all financial information and earnings guidance intended to
be provided to analysts and the public or to rating agencies, and consider whether the
information contained in these documents is consistent with the information contained
in the financial statements; |
| 16. | Facilitate the preparation and
inclusion of any report from the Committee or other disclosures as required by applicable
laws and regulations in the Company’s annual proxy statement or other filings of
all regulatory authorities having jurisdiction; |
| 17. | Review with management the adequacy
of the insurance and fidelity bond coverages, reported contingent liabilities, and management’s
assessment of contingency planning. Review management’s plans regarding any changes
in accounting practices or policies and the financial impact of such changes, any major
areas in management’s judgment that have a significant effect upon the financial
statements of the Company, and any litigation or claim, including tax assessments, that
could have a material effect upon the financial position or operating results of the
Company; |
| 18. | Review with management and the
independent accountants each annual, quarterly and other periodic report prior to its
filing with the relevant regulators or prior to the release of earnings; |
| 19. | Review policies and procedures
with respect to officers’ expense accounts and perquisites, including their use
of corporate assets, and consider the results of any review of these areas by the independent
accountants; |
| 20. | Review, with the Company’s
counsel, any legal, tax or regulatory matter that may have a material impact on the Company’s
financial statements, operations, related Company compliance policies, and programs and
reports received from regulators; |
| 21. | Evaluate and review with management
the Company’s guidelines and policies governing the process of risk assessment
and risk management; |
| 22. | Meet with the independent accountants
and management in separate executive sessions to discuss any matters that the Committee
or these groups believe should be discussed privately with the Committee; |
| 23. | Report Committee actions to the
Board with such recommendations as the Committee may deem appropriate; |
| 24. | Maintain, review and update the
procedures for (i) the receipt, retention and treatment of complaints received by the
Company regarding accounting, internal accounting controls or auditing matters and (ii)
the confidential, anonymous submission by employees of the Company of concerns regarding
questionable accounting or auditing matters, as set forth in Annex A attached
to this Charter; |
| 25. | Review, assess and update this
Charter on an annual basis and recommend any proposed changes to the Board for approval,
in accordance with the requirements of the all applicable laws; and |
| 26. | Perform such other functions consistent
with this Charter, the Company’s Articles and governing law, as the Committee deems
necessary or appropriate. |
ANNEX A
PROCEDURES FOR THE SUBMISSION OF
COMPLAINTS AND CONCERNS REGARDING
ACCOUNTING, INTERNAL ACCOUNTING CONTROLS OR
AUDITING MATTERS
| 1. | Entrée Resources Ltd. (the “Company”)
has designated its Audit Committee of its Board of Directors (the “Committee”)
to be responsible for administering these procedures for the receipt, retention, and
treatment of complaints received by the Company or the Committee directly regarding accounting,
internal accounting controls, or auditing matters. |
| 2. | Any employee or consultant of the Company
may on a confidential and anonymous basis submit concerns regarding questionable accounting
controls or auditing matters to the Committee by setting forth such concerns in a letter
addressed directly to the Committee with a legend on the envelope such as “Confidential”
or “To be opened by Committee only”. If an employee or consultant would like
to discuss the matter directly with a member of the Committee, the employee or consultant
should include a return telephone number in his or her submission to the Committee at
which he or she can be contacted. All submissions by letter to the Committee can be sent
to: |
Entrée Resources
Ltd.
c/o Audit Committee
Attn: Chairperson
Suite 1650 - 1066 West Hastings Street
Vancouver, BC CANADA
V6E 3X1
Email Address:
whistleblower@entreeresourcesltd.com
| 3. | Any complaints received by the Company
that are submitted as set forth herein will be forwarded directly to the Committee and
will be treated as confidential if so indicated. |
| 4. | At each meeting of the Committee, or
any special meetings called by the Chairperson of the Committee, the members of the Committee
will review and consider any complaints or concerns submitted by employees as set forth
herein and take any action it deems necessary in order to respond thereto. |
| 5. | All complaints and concerns submitted
as set forth herein will be retained by the Committee for a period of seven (7) years. |
