Entrée Resources Ltd. press release
First Mineral Reserves for Entrée's Hugo North Extension Included in Initial Underground Mining at Oyu Tolgoi, Mongolia
TSX - Toronto Stock Exchange · Copper · Gold · Silver · Molybdenum · Canada
May 11, 2010 (Canada NewsWire Group) -- Entrée Gold Inc. (TSX:ETG; NYSE AMEX:EGI; Frankfurt:EKA - "Entrée" or the "Company") is pleased to report the first ore reserves defined under NI 43-101 criteria on the Hugo NorthExtension deposit in Mongolia.
The release of the 2010 Integrated Development Plan ("IDP10") for the Oyu Tolgoi mining complex was announced by Ivanhoe Mines Ltd. (TSX:IVN; NYSE:IVN; NASDAQ:IVN - "Ivanhoe Mines") on May 11, 2010. IDP10 declares the first underground mineral reserves for the Hugo Northdeposit, including Entrée's Hugo NorthExtension deposit. The Probable Reserve for Hugo NorthExtension totals 27 million tonnes grading 1.85% copper and 0.72 g/t gold. Entrée holds a 20% carried interest to production in this reserve through a joint venture with Oyu Tolgoi LLC, a subsidiary of Ivanhoe Mines.
IDP10 has presented two main mining scenarios: the Reserve Case ("Reserve Case") and the Life of Mine Sensitivity Case ("LOM Sensitivity Case"). The Reserve Case is the most likely scenario for reserves exploited in the initial ("Lift 1") underground block cave mining operation, including the reserve for Hugo NorthExtension. Probable Reserves and Inferred and Indicated Resources at Hugo NorthExtension and at the Heruga deposit are part of the LOM Sensitivity Case development and mining scenario. See the discussion below and attached figures for additional details regarding the two main mining scenarios.
Greg Crowe, Entrée's president and CEO commented, "The release of IDP10 is a crucial milestone in the history of Entrée. It confirms the near-term production and long-term importance of the Entrée-Ivanhoe Mines joint venture deposits to the overall development of the Oyu Tolgoi porphyry system. Few junior resource companies have the opportunity to participate in the development of a mine complex the size and caliber of Oyu Tolgoi."
In addition to the two main mining scenarios, IDP10 presents two alternative mine production plans for the development and mining of the deposits along the Oyu Tolgoi mineralized trend including the Southern Oyu, Hugo Southand Hugo North, Hugo NorthExtension and Heruga deposits. Due to the nature of the deposits associated with Oyu Tolgoi, the project operators have the flexibility to consider several options for maximizing the deposits for the benefit of their stakeholders. See the attached figures for additional details pertaining to the two alternative mine production plans presented in IDP10.
Highlights from the IDP10 in relation to Entrée include:
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Entrée has contracted AMEC Minproc to prepare a separate NI 43-101 compliant technical report for Entrée that incorporates the relevant portions of IDP10 covering the Company's Hugo NorthExtension and Heruga deposits. AMEC Minproc also prepared the IDP10 for Ivanhoe Mines. Ernst & Young was retained to advise on the development of a Real Option economic analysis of the LOM Sensitivity Case. Entrée's technical report will be filed on www.sedar.com within 45 days.
Greg Crowenoted, "The two main mining scenarios are important for Entrée in that they include not only mining the Lift 1 reserves at Hugo NorthExtension but also bring into consideration mining of the indicated and inferred mineralization at Hugo NorthExtension and Heruga. It must be emphasized that these mine plans are somewhat fluid and the actual production time frame may be subject to changes brought about by various factors such as a change in throughput or changes in economic parameters. The flexibility to bring Heruga production forward, as proposed in the second alternative production case, may be a significant benefit to Entrée's shareholders."
Reserve Case
The Reserve Case, using Proven and Probable mineral reserves, sets out the likely path of initial mine development and includes nine open pit stages at Southern Oyu and the initial underground block cave at Hugo North(including Entrée's Hugo NorthExtension). The Reserve Case in relation to both the Hugo Northand Southern Oyu deposits assumes the processing of 1.4 billion tonnes of ore over a 27 year period. A mill expansion, from 100,000 to 160,000 tonnes per day ("tpd"), is contemplated by the end of the fifth year of operations.
The Probable Mineral Reserve for Entrée on the Hugo NorthExtension portion of the Hugo DummettDeposit is the economically mineable portion of the Mineral Resources (Table 1) outlined in the 2010 Technical Report (see Entrée news release of March 31, 2010). The Probable Mineral Reserve presented in the IDP10 is summarized in Table 2.
<< Table 1. Entrée-Ivanhoe Mines Joint Venture Mineral Resources (0.6% CuEq cut-off), based on Technical Report March 2010 Deposit Tonnage Copper Gold CuEq Contained Metal (t) (%) (g/t) (%) ------------------------------- Copper Gold CuEq (000 lb) (oz) (000 lb) Hugo North Extension Deposit Indicated Shivee Tolgoi (Hugo North) 117 000 000 1.80 0.61 2.19 4 640 000 2 290 000 5 650 000 Inferred Shivee Tolgoi (Hugo North) 95 500 000 1.15 0.31 1.35 2 420 000 950 000 2 840 000 Heruga Deposit Heruga Javh- lant 910 000 000 0.48 0.49 0.87 9 570 000 14 300 000 17 390 000
Notes:
Copper Equivalent (CuEq) has been calculated using assumed metal prices of US$1.35/pound for copper, US$650/ounce for gold, and US $10.50 for molybdenum. The equivalence formula was calculated assuming that gold was 91% of copper recovery. CuEq was calculated using the formula: CuEq = %Cu + ((g/t Au*18.98)+(Mo*0.01586))/29.76.
The contained copper, gold, copper and molybdenum in the tables has not been adjusted for metallurgical recovery.
The 0.6% CuEq cut-off is highlighted as the base case resource for underground bulk mining.
The mineral reserves are not additive to the mineral resources.
Mineral resources that are not mineral reserves do not have demonstrated economic viability.
Entrée - Ivanhoe Mines Joint Venture includes a portion of the Shivee Tolgoi licence and the Javhlant licence. The Shivee Tolgoi and Javhlant JV licences are held by Entrée Gold and are planned to be operated by Oyu Tolgoi LLC. Oyu Tolgoi LLC will receive 80% and Entrée Gold will receive 20% of cash flows after capital and operating costs.
Table 2. Hugo North Extension Mineral Reserve, May 2010 Entrée - Ivanhoe Mines Joint Venture Deposit Ore NSR Cu Au Recovered Metal (Mt) (US$/t) (%) (g/t) -------------------------- Copper (lb) Gold (oz) Hugo Dummett Deposit Probable Shivee Tolgoi (Hugo North Extension) 27 55.57 1.85 0.72 1 032 000 000 531 000
Notes:
Metal prices used for calculating the Hugo North Underground NSR are copper US$1.50/lb, gold US$640/oz, and silver US$10.50/oz 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.
The NSR has been calculated with assumptions for smelter refining and treatment charges, deductions and payment terms, concentrate transport, metallurgical recoveries and royalties.
For the underground block cave, all material within the shell has been converted to mineral reserve; this includes low grade Indicated and Inferred material assigned zero grade and treated as dilution.
Only indicated resources were used to report probable reserves.
Entrée - Ivanhoe Mines Joint Venture includes a portion of the Shivee Tolgoi licence and the Javhlant licence. The Shivee Tolgoi licence is held by Entrée Gold and is planned to be operated by Oyu Tolgoi LLC. Oyu Tolgoi LLC will receive 80% and Entrée Gold will receive 20% of cash flows after capital and operating costs. >>
The NSR calculation reflects the net value received for the ore by the mine (after all costs and charges). An NSR has been calculated on a US Dollar per tonne basis for each of the Mineral Reserve areas. The Hugo NorthExtension has the highest NSR calculated for all the deposits at Oyu Tolgoi. The NSR of US$55.57 per tonne for Hugo NorthExtension is in comparison to US$51.12 per tonne for Hugo North- Ivanhoe and an overall Mineral Reserve (proven plus probable) NSR for all of Oyu Tolgoi of US$24.52 per tonne (includes open pit reserves at Southern Oyu Deposits). The NSR value for the 27 million tonnes of probable mineral reserves on Entrée's Shivee Tolgoi Licence is projected to be over US$1.5 billion.
Production commencement (Year 1) of the Reserve Case for all of Oyu Tolgoi is anticipated to be 2013 at the Southern Oyu open pit. Peak production from all Oyu Tolgoi deposits in the LOM Sensitivity Case is reached in Year 8 with 58 million tonnes/year, estimated to produce 1.7 billion pounds of copper and 1.1 million ounces of gold in that year.
In the Reserve Case, for the Entrée - Ivanhoe Mines Joint Venture, ore from development at Hugo NorthExtension is expected to enter the production stream in Year 4 with full block cave production commencing in Year 11. Peak production from Hugo NorthExtension is in Year 14 with an estimated production of 6.8 million tonnes at 1.82% copper and 0.69 g/t gold. In the Reserve Case, production from Lift 1 at Hugo NorthExtension is estimated to last until Year 18. Total capital costs for development of Hugo Northunderground block cave are estimated at $1.1 billion- a portion of which will be the responsibility of Entrée. Entrée is carried to production under the terms of the Entrée-Ivanhoe Mines joint venture and capital costs need only be repaid from 90% of production revenues.
The NPV(8%) of the Entrée share of Lift 1 at Hugo NorthExtension is estimated at US$79 million (using US$2.00/lb copper,US$850/oz gold and US$13.50/oz silver), while at current metal prices of US$3.13/lb copper and US$1208/oz gold Entrée's production has an NPV(8%) of US$134 million (silver and molybdenum prices unchanged.)
Life of Mine Sensitivity Case
A separate LOM Sensitivity Case is intended to show the significant, long-term potential of all classifications of current mineral resources at Oyu Tolgoi and extends the mine inventory to add Inferred Resource material from the planned second lift ("Lift 2") in Hugo North(to include Hugo NorthExtension), Hugo Southand an underground block cave for the Heruga deposit. This scenario projects a 59 year mine life and processing 3.01 billion tonnes of ore.
The LOM Sensitivity Case includes the Lift 1 mineral reserves plus Lift 2 indicated and inferred mineral resources. The LOM Sensitivity Case produces over 100% more copper and gold than the Reserve Case and adds an additional revenue stream from molybdenum produced from a potential Heruga block cave.
The LOM Sensitivity Case is a preliminary assessment that includes an economic analysis based, in part, on inferred mineral resources. It does not have as high a level of certainty as the Reserve Case. Inferred mineral resources are considered too speculative geologically to have the economic considerations applied to them that would allow them to be categorized as mineral reserves, and there is no certainty that the LOM Sensitivity Case will be realized.
If this LOM Sensitivity Case is implemented, production from Hugo NorthExtension Lift 2 would commence around Year 15 and reach a potential maximum production around Year 22 of approximately 14.8 million tonnes/year comprising 500 million pounds of copper, 200,000 ounces of gold and 1.75 million ounces of silver. Production from Hugo NorthExtension Lift 2 is estimated to continue until year 32 and total 122 million tonnes averaging 1.42% copper and 0.44 g/t gold.
Heruga would come on stream around Year 27, with maximum production reached around year 54. In Year 54, Heruga is estimated to produce around 24.5 million tonnes to yield approximately 150 million pounds of copper, 450,000 ounces of gold, 900,000 ounces of silver and 3.5 million pounds of molybdenum. Molybdenum production is estimate to peak around Year 56 at approximately 7.25 million pounds. Production at Heruga (assuming no additional economic mineralization is outlined) is projected to continue until Year 59 and to total 615 million tonnes averaging 0.41% copper, 0.46 g/t gold and 127 ppm molybdenum.
Greg Crowefurther noted, "This increased resource at Heruga is extremely significant in that it clearly demonstrates the upside potential to this growing deposit. Heruga hosts some of the highest gold-copper ratios at Oyu Tolgoi along with significant molybdenum content. It has been traced northwards onto Ivanhoe's Oyu Tolgoi concession and remains open to the north. More importantly for Entrée, geological and geophysical data suggests a potential offset to the Heruga deposit southwest of the area of the drilled inferred resource. There remains an additional 4 kilometres of highly prospective untested ground on Entrée's Javhlant mining license. Testing of this area is part of Ivanhoe's 2010 exploration program."
Joint Venture resource inventories used in the LOM Sensitivity Case are summarized in Table 3 below:
<< Table 3. Life of Mine Sensitivity Case - Mineral Resource Inventory Entrée-Ivanhoe Mines Joint Venture only Cut off Tonnes Cu Au Mo Cu Au (CuEq%) (M t) % g/t (ppm) (Billion (Million lb) oz) HNE-Lift 1 27 1.85 0.72 - 1.03 0.53
HNE-Lift 2 122 1.42 0.44 - 3.48 1.44 Heruga 615 0.41 0.46 127 4.54 6.60 TOTAL-HNE Lift 2 & Heruga 737 8.02 8.04
Notes:
Hugo North Extension ("HNE") Lift 1 is a Probable Mineral Reserve. HNE Lift 2 and Heruga reflect conceptual block caves within Inferred Mineral Resources. Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability.
The Mineral Reserves are not additive to the Mineral Resource.
For the underground block cave, all material within the shell has been converted to mineral reserve; this includes low grade Indicated and Inferred material assigned zero grade and treated as dilution.
Entrée Gold - Ivanhoe Mines Joint Venture holds the Shivee Tolgoi and Javhlant licences. The Shivee Tolgoi and Javhlant JV licences are held by Entrée Gold and are planned to be operated by Oyu Tolgoi LLC. Oyu Tolgoi LLC will receive 80% and Entrée Gold will receive 20% of cash flows after capital and operating costs. >>
Heruga would be a completely stand alone underground operation, independent of other Oyu Tolgoi underground development, and provides considerable flexibility for mine planning and development.
Ongoing exploration efforts at Oyu Tolgoi are directed at upgrading Inferred Resources to categories with higher confidence levels. A substantial amount of the Inferred Resources to be upgraded lie within the Entrée-Ivanhoe Mines Joint Venture ground. In addition, the Oyu Tolgoi mineralized trend covers 20 kilometres, approximately 12 kilometres on the Entrée-Ivanhoe Joint Venture ground, and much of the trend has not been extensively drill tested.
The LOM Sensitivity Case, which is effectively a preliminary assessment that includes an economic analysis based, in part, on inferred mineral resources, does not have as high a level of certainty as the Reserve Case. There is no certainty that the LOM Sensitivity Case will be realized. Production and financial results from the two scenarios are summarized in Table 4 below.
<< Table 4. IDP10 Summary Production and Financial Results - Entrée Gold Description Units Reserve Case Life of Mine Sensitivity Case (includes Inferred Resource) Inventory Mineral Reserve Mineral Reserve and Inferred Resources Production Rate (average) Mt/a 51.6 51.1 Total Processed Mt 1 393 3 013 Entrée-Ivanhoe Mines Joint Venture Property Results Processed Mt 27 765 NSR US$/t 55.57 20.77 Cu Grade % 1.85 0.62 Au Grade g/t 0.72 0.47 Copper Recovered Billion lb 1.0 9.1 Gold Recovered Moz 0.5 8.6 NPV (8%) After Tax (long term prices) US$M 79 176 NPV (8%) After Tax (current prices) US$M 134 344
Notes:
Metal prices used for calculating the underground NSR are: copper US $1.50/lb, gold US$640/oz, silver US$10.50/oz, and molybdenum US $10.50/lb. Based on long-term metal price forecasts at the beginning of the mineral reserve work and still believed to be valid.
The NSR has been calculated with assumptions for smelter refining and treatment charges, deductions and payments terms, transport costs, metallurgical recoveries and royalties.
Long term metal prices used in the NPV economic analyses are: copper US$2.00/lb, gold US$850/oz, silver US$13.50/oz, molybdenum US $13.50/lb.
Current metal prices used in the NPV economic analyses are: copper US$3.13/lb, gold US$1,208/oz, (silver US$13.50/oz, and molybdenum US$13.50/lb - unchanged from long term pricing).
Under the NI 43-101 guidelines, inferred mineral resources are considered too speculative geologically to have the economic considerations applied to them that would allow them to be categorized as mineral reserves, and there is no certainty that the LOM Sensitivity Case will be realized. >>
The NPV(8%) of the Entrée share in the LOM Sensitivity Case is estimated at US$176 million (using US$2.00/lb copper, US$850/oz gold, US$13.50/oz silver, US$13.50/lb molybdenum), while at current metal prices of US$3.13/lb copper and US$1208/oz gold Entrée's production has an NPV(8%) of US$344 million (silver and molybdenum prices unchanged.)
Real Option Analysis of the LOM Sensitivity Case
A Dynamic Discounted Cash Flow ("Dynamic DCF")and Real Option evaluation model was constructed to investigate whether the explicit recognition of price reversion and other metal price uncertainty characteristics affect the long-term cash flows generated by Entrée's production share from the conceptual LOM Sensitivity Case and the uncertainty characteristics associated with this cash flow. This evaluation model uses stochastic Monte Carlosimulation to approximate the uncertainty characteristics of copper, gold, and molybdenum prices. The model is based on the same assumptions, production and cost forecasts, discount rates and long-term metal-price forecasts of the LOM Case presented in the previous section.
The Real Option method is an alternative approach for estimating project net present value ("NPV"). There is extensive academic literature regarding the Real Option method and it is being studied by some mining companies as an alternative to the DCF method. The DCF and Real Option methods are differentiated by how each method adjusts uncertain cash flows for risk during the NPV calculation. A single risk-adjusted discount rate reflecting aggregate project risk is used by the DCF method to adjust project net cash flows for risk and time. In contrast, the Real Option method adjusts the primary individual sources of cash flow uncertainty (e.g., metal price) for risk before calculating net cash flow and adjusting for the time value of money. Both of these methods may be extended to recognize the value benefits of management flexibility.
The long-term nature of the cash flows from Entrée's production share in the LOM Sensitivity Case may require modeling of price reversion in copper and molybdenum prices. Metal-price reversion is a characteristic whereby spot metal prices fluctuate around a long-term equilibrium level in constant (real) dollar terms. The metal spot price tends to decrease when the spot price is above the equilibrium level and increase when it is below this level. Price reversion causes long-term metal price uncertainty to be confined to a narrower range than would prevail without reversion as the possibility of sustained periods of very high or low prices with respect to the equilibrium level is reduced. Reversion in copper and molybdenum prices was confirmed with econometric statistical analysis of historic metal prices. This analysis was combined with general market information and the Entrée metal-price forecasts to estimate parameters for the metal-price-uncertainty models and the associated risk adjustments used in the Real Option analysis.
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The Real Option and Dynamic DCF NPV results are not the same because of differences related to risk adjustment and the ability to recognize the effect of price reversion on cash-flow uncertainty. Price reversion and its impact on project NPV is recognized by the Real Option method but not by the Dynamic DCF method when using a single discount rate. In this evaluation situation, the Real Option method tends to value each dollar of project net cash flow more highly than the Dynamic DCF method.