Management’s Discussion and Analysis Year Ended December 31, 2016 (Expressed in United States dollars, except per share amounts and where otherwise noted) |
· | On May 5th and 6th, 2016, formal ‘notice to proceed’ approval was given for the next stage of development of the world-class Oyu Tolgoi copper-gold mine in Mongolia ("OT") by the boards of Turquoise Hill Resources Ltd. ("Turquoise Hill"), Rio Tinto and Entrée’s joint venture partner, Oyu Tolgoi LLC ("OTLLC"). According to Turquoise Hill, this was the final requirement for the re-start of underground development at the Hugo North Lift 1 block cave ("Lift 1"), including Lift 1 of the Entrée/Oyu Tolgoi joint venture’s Hugo North Extension deposit; |
· | In June and July 2016, OTLLC signed a contract with Jacobs Engineering Group ("Jacobs") to provide engineering, procurement and construction management ("EPCM") services for the underground development and 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; |
· | In August 2016, Turquoise Hill advised that OTLLC drew down approximately $4.3 billion of the $4.4 billion project finance facility that was signed in December 2015. As part of the project finance facility, a debt cap of $6.0 billion for OT was agreed, which provides the possibility for an additional $1.6 billion of supplemental debt in the future; |
· | On October 21, 2016, Turquoise Hill filed an updated technical report ("2016 OTTR") under NI 43-101 relating to the OT project. The 2016 OTTR includes Preliminary Economic Assessments ("PEAs") of potential later phases of the OT deposits which include Entrée/Oyu Tolgoi joint venture resources; |
· | During the fourth quarter of 2016, the underground workforce 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. Lateral development rates were progressing well with a further increase expected in 2017 when additional underground crushing capacity is added. |
· | In March 2016, the Company entered into an agreement with Sandstorm Gold Ltd. ("Sandstorm") to amend the Equity Participation and Funding Agreement dated February 14, 2013 resulting in a 17% reduction in the metal credits that Entrée is required to sell and deliver to Sandstorm in return for a payment of $5.5 million in cash and issuing $1.3 million of common shares of the Company; |
· | In January 2017, the Company closed a non-brokered private placement of 18,529,484 units of the Company at a price of C$0.41 per unit for gross proceeds of approximately C$7.6 million. Each unit consists of one common share and one-half of one transferable common share purchase warrant (each whole warrant, a "Warrant"). Each Warrant entitles the holder to purchase one additional common share of the Company at a price of C$0.65 per share for a period of 5 years following the date of issuance; |
· | On February 28, 2017, the Company announced that its Board of Directors (the "Board") had unanimously approved a strategic reorganization of Entrée’s business. Entrée’s U.S. based assets, the Ann Mason and Lordsburg projects, will be transferred to a newly incorporated company, Mason Resources Corp. ("Mason Resources"). The strategic reorganization will result in 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; |
· | As at March 10, 2017, the Company’s cash balance was $18.5 million. Of that, it is expected that $8.75 million will be transferred to Mason Resources as part of the strategic reorganization; |
· | For the 2016 year, the Company’s exploration and general and administrative expenditures of approximately $1.9 million and $2.5 million, respectively, were reduced by 64% and 54% compared to 2015 as a result of the Company’s continued focus on reducing non value adding expenditures. |
· | Entrée/Oyu Tolgoi joint venture interest – a 20% carried interest in two of the OT project deposits in Mongolia as well as a large underexplored, highly prospective land package adjacent on three sides to OTLLC’s Oyu Tolgoi mining licence (the "Entrée/Oyu Tolgoi JV Property"); and |
· | Ann Mason Project – 100% interest in one of the largest undeveloped copper-molybdenum porphyry projects in North America. The project is located in the prolific Yerington district in Nevada, USA. |
· | Lordsburg Project – an early stage copper-gold porphyry exploration property ("Lordsburg") in New Mexico, USA; |
· | Blue Rose JV – a 55.79% interest in the Blue Rose copper-iron-gold-molybdenum joint venture property ("Blue Rose") in the Olary Region of South Australia; and |
· | Cañariaco Project Royalty – a 0.5% net smelter returns royalty on Candente Copper Corp.’s Cañariaco copper porphyry project in Peru ("Cañariaco Royalty"). |
· | OTLLC shall bear and pay for 100% of such costs allocated to the Oyu Tolgoi mining licence and all associated liabilities including for environmental compliance; and |
· | The balance of such costs shall be borne and paid by Entrée and OTLLC in accordance with their respective joint venture interests. |
Entrée/Oyu Tolgoi JV – LTHR16 Mineral Reserve Hugo North Extension Lift 1, Effective 20 September 2014 | ||||||||
Classification | Ore | NSR | Cu | Au | Ag | Recovered Metal | ||
(Mt) | ($/t) | (%) | (g/t) | (g/t) | Cu (Mlb) | Au (Koz) | (Ag(Koz) | |
Probable | 35 | 100.57 | 1.59 | 0.55 | 3.72 | 1,121 | 519 | 3,591 |
1. | Entrée has a 20% interest in the Hugo North Extension Lift 1 mineral reserve. |
2. | Metal prices used for calculating the Hugo North Extension underground net smelter return ("NSR") are as follows: copper at $3.01/lb; gold at $1,250/oz; and silver at $20.37/oz, all based on long-term metal price forecasts at the beginning of the mineral reserve work. The analysis indicates that the mineral reserve is still valid at these metal prices. |
3. | The NSR has been calculated with assumptions specific to Hugo North Extension for smelter refining and treatment charges, deductions and payment terms, concentrate transport, metallurgical recoveries and royalties. |
4. | The block cave shell was defined using a NSR cut-off of $15/t NSR. |
5. | For the underground block cave, all mineral resources within the shell have been converted to mineral reserves, however, low-grade Indicated mineral resources and Inferred mineral resources have been assigned a zero grade and are treated as dilution. |
6. | Only Indicated mineral resources were used to report Probable mineral reserves. |
7. | The base case financial analysis has been prepared using the following current long-term metal price estimates: copper at $3.08/lb; gold at $1,304/oz; and silver at $21.46/oz. |
8. | The mineral reserves reported above are not additive to the mineral resources. |
Entrée/Oyu Tolgoi JV – LTHR16 Mineral Resources | |||||||||||
Classification | Tonnage (Mt) | Cu (%) | Au (g/t) | Ag (g/t) | Mo (ppm) | CuEq (%) | Contained Metal | ||||
Cu (Mlb) | Au (Koz) | Ag (Koz) | Mo (Mlb) | CuEq (Mlb) | |||||||
Hugo North Extension (>0.37% CuEq Cut-Off) | |||||||||||
Measured | 1.2 | 1.38 | 0.12 | 2.77 | 38.4 | 1.47 | 36 | 4.4 | 105 | 0.1 | 38 |
Indicated | 128 | 1.65 | 0.55 | 4.12 | 33.6 | 1.99 | 4,663 | 2,271 | 16,988 | 9.5 | 5,633 |
Inferred | 179 | 0.99 | 0.34 | 2.68 | 25.4 | 1.20 | 3,887 | 1,963 | 15,418 | 10.0 | 4,730 |
Heruga (>0.37% CuEq Cut-Off) | |||||||||||
Inferred | 1,700 | 0.39 | 0.37 | 1.39 | 113.2 | 0.64 | 14,610 | 20,428 | 75,955 | 424 | 24,061 |
1. | Entrée has a 20% interest in the Hugo North Extension and Heruga mineral resources. |
2. | "CuEq" is copper-equivalent grade, expressed in percent. |
3. | The effective date for the Hugo North Extension resource estimate is March 28, 2014; for Heruga the effective date is March 30, 2010. |
4. | The 0.37% CuEq cut-off is equivalent to the underground mineral reserve cut-off as determined by OTLLC. |
5. | CuEq has been calculated using assumed metal prices ($3.01/lb for copper, $1,250/oz for gold, $20.37/oz for silver, and $11.90/lb for molybdenum). |
6. | Hugo North Extension CuEq% = Cu% + (( Au (g/t) x 1,250 x 0.0321507 x 0.913) + ( Ag (g/t) x 20.37 x 0.0321507 x 0. 942)) / (3.01 x 22.0462). |
7. | Heruga CuEq% = Cu% + (( Au (g/t) x 1,250 x 0.0321507 x 0.911) + ( Ag (g/t) x 20.37 x 0.0321507 x 0. 949) + (Mo (ppm) x 11.9 x 0.0022046 x 0.736)) / (3.01 x 22.0462). |
8. | The contained copper, gold, silver and molybdenum in the tables have not been adjusted for metallurgical recovery. |
9. | Totals may not match due to rounding. |
10. | Mineral resources that are not mineral reserves do not have demonstrated economic viability. |
Description | Units | Total | |||||
Metal Prices | |||||||
Copper | $/lb | 3.08 | |||||
Gold | $/oz | 1,304 | |||||
Silver | $/oz | 21.46 | |||||
Entrée/Oyu Tolgoi JV Property Results (Lift 1) | |||||||
Processed | Mt | 34.8 | |||||
NSR | $/t | 100.57 | |||||
Cu Grade | % | 1.59 | |||||
Au Grade | g/t | 0.55 | |||||
Ag Grade | g/t | 3.72 | |||||
Copper Recovered | Mlb | 1,121 | |||||
Gold Recovered | koz | 519 | |||||
Silver Recovered | koz | 3,591 | |||||
Total Cash Costs After Credits | $/lb Payable Copper | 0.99 | |||||
NPV8% Before Tax (Entrée’s 20% interest only) | $M | 142 | |||||
NPV8% After Tax (Entrée’s 20% interest only) | $M | 106 |
1. | Entrée has a 20% interest in Entrée/Oyu Tolgoi JV Property mineralization. Unless otherwise noted above, results are for the entire Entrée/Oyu Tolgoi JV. |
2. | Metal prices used for calculating the Hugo North Extension underground NSR are as follows: copper at $3.01/lb; gold at $1,250/oz; and silver at $20.37/oz, all based on long-term metal price forecasts at the beginning of the mineral reserve work. The analysis indicates that the mineral reserve is still valid at these metal prices. |
3. | The NSR has been calculated with assumptions specific to Hugo North Extension for smelter refining and treatment charges, deductions and payment terms, concentrate transport, metallurgical recoveries and royalties. |
4. | The block cave shell was defined using a NSR cut-off of $15/t NSR. |
5. | For the underground block cave, all Indicated mineral resources within the shell have been converted to mineral reserves. Low-grade Indicated mineral resources and Inferred mineral resources have been assigned a zero grade and treated as dilution. |
6. | The mineral reserves reported are not additive to the mineral resources. |
· | Base Case* pre-tax net present value ("NPV") (7.5% discount rate) of $1,158 million, internal rate of return ("IRR") of 15.8%. |
· | Base Case* post-tax NPV (7.5% discount rate) of $770 million, IRR of 13.7%. |
· | Development capital costs of approximately $1.35 billion, including $103 million contingency. |
· | Pre-production development of three years. |
· | Mine production for 21 years, followed by four years of reclamation (Life of Mine or "LOM"). |
· | Average LOM cash costs (net of by-product sales) pre-tax of $1.49/lb copper (see Non-US GAAP Performance Measurement below). |
· | Average LOM all-in sustaining costs ("AISC") (net of by-product sales) pre-tax of $1.57/lb copper (see Non-US GAAP Performance Measurement below). |
· | Net average pre-tax undiscounted cash flow over Years 1 to 21 of approximately $298 million per year (and post-tax of $238 million per year). |
· | LOM payable production of approximately: |
o | 5.1 billion pounds of copper, |
o | 46 million pounds of molybdenum, |
o | 0.4 million ounces of gold, and |
o | 8.8 million ounces of silver. |
· | Average annual payable production of approximately: |
o | 241 million pounds of copper, |
o | 2.2 million pounds of molybdenum, |
o | 20,000 ounces of gold, and |
o | 421,000 ounces of silver. |
· | Strip ratio of 2.01:1 waste to mineralized material (including pre-strip). |
· | LOM average copper recovery of 92%. |
· | Copper concentrate grading 30%. |
Classification | Tonnage (Mt) | Grade | Contained Metal | ||||||
Cu (%) | Mo (%) | Au (g/t) | Ag (g/t) | Cu (Mlb) | Mo (Mlb) | Au (Moz) | Ag (Moz) | ||
Measured | 412 | 0.33 | 0.006 | 0.03 | 0.64 | 3,037.6 | 58.1 | 0.37 | 8.46 |
Indicated | 988 | 0.31 | 0.006 | 0.03 | 0.66 | 6,853.3 | 128.5 | 0.97 | 21.00 |
Measured and Indicated | 1,400 | 0.32 | 0.006 | 0.03 | 0.65 | 9,890.9 | 186.6 | 1.33 | 29.46 |
Inferred | 623 | 0.29 | 0.007 | 0.03 | 0.66 | 3,987.2 | 96.2 | 0.58 | 13.16 |
1. | Effective date March 3, 2017, Peter Oshust, P.Geo. |
2. | Mineral resources are reported within a constraining pit shell developed using Whittle™ software. Assumptions include metal prices of $3.74/lb for copper, $13.23/lb for molybdenum, $1,495/oz for gold, and $23.58/oz for silver, process recoveries of 92% for copper, 50% for molybdenum, 50% for gold, and 55% for silver, mining cost of $1.09/t + $0.02/bench below 1605 metres, $5.82/t for processing, and $0.30/t for G&A. |
3. | Assumptions include 100% mining recovery. |
4. | An external dilution factor was not considered during this mineral resource estimation. |
5. | Internal dilution within a 20 metre x 20 metre x 15 metre selective mining unit ("SMU") was considered. |
6. | The 0.4% NSR royalty held by Sandstorm was not considered during the preparation of the constraining pit. |
7. | Mineral resources that are not mineral reserves do not have demonstrated economic viability. |
Zone | Base Case Cut-off (Cu %) | Tonnes (Million) | Cu (%) | Cu (Million lb) | Mo (%) | Au (g/t) | Ag (g/t) |
Oxide | 0.10 | 47.44 | 0.17 | 179.37 | --- | --- | --- |
Mixed | 0.10 | 24.69 | 0.18 | 98.12 | --- | --- | --- |
Oxide/Mixed Sub-total | 0.10 | 72.13 | 0.17 | 277.49 | --- | --- | --- |
Sulphide | 0.15 | 49.86 | 0.23 | 253.46 | 0.005 | 0.01 | 0.3 |
1. | Mineral resources are classified in accordance with the 2014 CIM Definition Standards for Mineral Resources and Mineral Reserves. |
2. | Mineral resources do not include external dilution, nor was the tabulation of contained metal adjusted to reflect metallurgical recoveries. |
3. | Tonnages are rounded to the nearest 10,000 tonnes, and grades are rounded to two decimal places. |
4. | Rounding as required by reporting guidelines may result in apparent summation differences between tonnes, grade, and contained metal content. |
5. | Material quantities and grades are expressed in metric units, and contained metal in imperial units. |
2016 | 2015 | 2014 | ||||||||||
Exploration | $ | (1,855 | ) | $ | (5,139 | ) | $ | (9,019 | ) | |||
General and administration | (2,115 | ) | (4,598 | ) | (4,002 | ) | ||||||
Consultancy and advisory | - | (125 | ) | (831 | ) | |||||||
Impairment of mineral property interests | - | - | (552 | ) | ||||||||
Gain on sale of mineral property interests | - | - | 28 | |||||||||
Stock-based compensation | (489 | ) | (197 | ) | (251 | ) | ||||||
Foreign exchange (loss) gain | (343 | ) | 2,919 | 1,979 | ||||||||
Loss from operations | (4,802 | ) | (7,140 | ) | (12,648 | ) | ||||||
Interest expense, net | (177 | ) | (412 | ) | 30 | |||||||
Loss from equity investment | (237 | ) | (119 | ) | (108 | ) | ||||||
Income taxes | 553 | (160 | ) | 4,057 | ||||||||
Net loss | (4,663 | ) | (7,831 | ) | (8,669 | ) | ||||||
Foreign currency translation adjustment | 717 | (4,928 | ) | (3,316 | ) | |||||||
Comprehensive loss | $ | (3,946 | ) | $ | (12,759 | ) | $ | (11,985 | ) | |||
Basic/diluted loss per share | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.06 | ) | |||
Total assets | $ | 53,280 | $ | 61,662 | $ | 79,690 | ||||||
Total non-current liabilities | $ | 33,336 | $ | 39,316 | $ | 44,270 |
Q4 16 | Q3 16 | Q2 16 | Q1 16 | Q4 15 | Q3 15 | Q2 15 | Q1 15 | |||||||||||||||||||||||||
Exploration | $ | 540 | $ | 397 | $ | 447 | $ | 498 | $ | 868 | $ | 1,066 | $ | 1,329 | $ | 1,898 | ||||||||||||||||
General and administrative | 911 | 537 | 492 | 605 | 2,213 | 777 | 802 | 939 | ||||||||||||||||||||||||
Consultancy and advisory fees | - | - | - | - | - | - | - | 125 | ||||||||||||||||||||||||
Depreciation | 7 | 7 | 8 | 9 | 10 | 10 | 11 | 12 | ||||||||||||||||||||||||
Foreign exchange loss (gain) | (54 | ) | (41 | ) | 3 | 434 | (405 | ) | (1,135 | ) | 369 | (1,749 | ) | |||||||||||||||||||
Loss from operations | 1,404 | 900 | 950 | 1,546 | 2,686 | 718 | 2,511 | 1,225 | ||||||||||||||||||||||||
Interest expense | 48 | 46 | 44 | 40 | 289 | 66 | 40 | 17 | ||||||||||||||||||||||||
Loss from equity investment | 68 | 63 | 60 | 46 | 41 | 25 | 27 | 26 | ||||||||||||||||||||||||
Income tax expense (recovery) | (553 | ) | - | - | - | 1,057 | (662 | ) | 472 | (707 | ) | |||||||||||||||||||||
Net loss | $ | 967 | $ | 1,009 | $ | 1,054 | $ | 1,632 | $ | 4,073 | $ | 147 | $ | 3,050 | $ | 561 | ||||||||||||||||
Basic/diluted loss per share | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.00 | ) |
· | 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 Shivee West); 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. |
December 31, 2016 | December 31, 2015 | |||||||
Financial assets | ||||||||
Cash and cash equivalents | $ | 13,391 | $ | 22,786 | ||||
Receivables | 35 | 98 | ||||||
Deposits | 10 | 17 | ||||||
Total financial assets | $ | 13,436 | $ | 22,901 | ||||
Financial liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 455 | $ | 1,350 | ||||
Loans payable | 7,334 | 6,824 | ||||||
Total financial liabilities | $ | 7,789 | $ | 8,174 | ||||
On November 1, 2013, an Investment Law came into effect in Mongolia. The law is 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.
The Ministry of Mining is currently working on a draft mining law, aimed at regulating the mining sector in greater detail in Mongolia. The Ministry plans to propose this law to Parliament in 2017 for adoption. 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.
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 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.
There is no assurance that a commercially viable mineral deposit exists on any of the exploration properties in which Entrée has an interest. There is also no assurance 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, recoveries 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. If mineral reserves in commercially exploitable quantities are established on any of Entrée’s properties (other than the Entrée/Oyu Tolgoi JV Property, in which Entrée has a carried interest), Entrée will be required to expend substantial sums of money to establish the extent of the resource, develop processes to extract it and develop extraction and processing facilities and infrastructure. Although Entrée may derive substantial benefits from the discovery of a major deposit, there can be no assurance that such a resource will be large enough to justify commercial operations, nor can there be any assurance that Entrée will be able to raise the funds required for development on a timely basis. If Entrée cannot raise the necessary capital or complete the necessary facilities and infrastructure, its business may fail. Entrée may be required to acquire rights to additional lands in order to develop a mine if a mine cannot be properly located on Entrée’s properties. There can be no assurance that Entrée will be able to acquire such additional lands on commercially reasonable terms, if at all.