(Name, Telephone,
E-mail and/or Facsimile number and Address of Company Contact Person)
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:
None
Indicate
the number of outstanding shares of each of the Registrant’s classes of capital or common stock as of the close of the period
covered by the annual report:
As at December 31, 2018, 174,806,820 Common Shares of the Registrant were issued and outstanding.
Indicate by check mark if the Registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this
report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes
¨
No
x
Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the Registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or an emerging growth company. See definition of
"large accelerated filer", "accelerated filer" and "emerging growth company" in Rule 12b-2 of the
Exchange Act.
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the Registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a)
of the Exchange Act.
†The term "new or revised financial
accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
Indicate by check mark which basis of accounting
the Registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:
If this
is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
In this annual report on Form 20-F, which
we refer to as the "Annual Report", except as otherwise indicated or as the context otherwise requires, the "Company",
"we", "our" or "us" or "Entrée" or "Entrée Resources" refers to
Entrée Resources Ltd. and its consolidated subsidiaries, as applicable. The Company is a "foreign private issuer"
as defined in Rule 3b-4 under the United States Securities Exchange Act of 1934, as amended (the "U.S. Exchange Act").
The equity securities of the Company are accordingly exempt from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the U.S. Exchange
Act pursuant to Rule 3a12-3.
Unless we otherwise indicate in this Annual
Report, all references to "Canadian Dollars", "Cdn $" or "C$" are to the lawful currency of Canada
and all references to "U.S. Dollars" or "$" are to the lawful currency of the United States.
This Annual Report contains "forward
looking information" and "forward-looking statements" (together, "forward-looking statements") within
the meaning of securities legislation in Canada and the United States Private Securities Litigation Reform Act of 1995, as amended.
Such forward-looking statements concern the Company’s anticipated results and developments in the Company’s operations
in future periods, planned exploration and development of its properties, plans related to its business and other matters that
may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results,
estimates of amounts not yet determinable and assumptions of management.
Statements concerning mineral
resource estimates may also be deemed to constitute forward-looking statements to the extent that they involve estimates of
the mineralization that will be encountered if the property is developed, and such statements reflect the conclusion based on
certain assumptions that the mineral deposit can be economically exploited. Any statements that express or involve
discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events
or performance (often, but not always, using words or phrases such as "expects" or "does not expect",
"is expected", "anticipates" or "does not anticipate", "plans", "estimates"
or "intends", or stating that certain actions, events or results "may", "could",
"would", "might" or "will" be taken, occur or be achieved) are not statements of historical
fact and may be forward-looking statements. 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 the
Company’s future performance and are based on numerous assumptions regarding present and future business strategies,
local and global economic conditions and the environment in which Entrée will operate in the future, including the
price of copper, gold, silver and molybdenum, projected grades, anticipated capital and operating costs, anticipated future
production and cash flows and the status of Entrée’s relationship and interaction with the Government of
Mongolia, OTLLC, Rio Tinto and Turquoise Hill. The 2018 PEA 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.
The above list is not exhaustive of the
factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking
statements are described further under the section heading "Item 3. Key Information – D. Risk Factors" below in
this Annual Report. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in the forward-looking statements. Forward-looking statements are made
based on management’s beliefs, estimates and opinions on the date the statements are made, and the Company undertakes no
obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change,
except as required by law. Investors are cautioned against attributing undue certainty to forward-looking statements.
As used in this Annual Report, the terms
"mineral reserve", "Proven mineral reserve" and "Probable mineral reserve" are Canadian mining terms
as defined in accordance with Canadian National Instrument 43-101 –
Standards of Disclosure for Mineral Projects
("NI 43-101") and the Canadian Institute of Mining, Metallurgy and Petroleum ("CIM") -
CIM Definition
Standards on Mineral Resources and Mineral Reserves
, adopted by the CIM Council on May 10, 2014, as amended. These definitions
differ from the definitions in the U.S. Securities and Exchange Commission’s ("SEC") Industry Guide 7 ("SEC Industry
Guide 7") under the United States Securities Act of 1933, as amended ("U.S. Securities Act"). Under SEC Industry
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 all necessary permits and governmental
authorizations 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 have
historically not been 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 mineral deposits in these categories will ever be converted into reserves. "Inferred mineral
resources" have a great amount of uncertainty as to their existence, and 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. Investors are cautioned not to assume that all or any part of an Inferred mineral resource exists or is economically
or legally mineable. Disclosure of "contained ounces" in a resource is permitted disclosure under Canadian regulations;
however, the SEC normally only permits issuers to report mineralization that does not constitute "reserves" by SEC Industry
Guide 7 standards as in place tonnage and grade without reference to unit measures.
Accordingly, information contained in this
Annual Report and the documents incorporated by reference herein contain descriptions of our mineral deposits that may not be comparable
to similar information made public by U.S. companies pursuant to SEC Industry Guide 7.
PART I.
|
|
Item 1.
|
Identity of Directors, Senior Management and Advisers
|
Not Applicable.
|
|
Item 2.
|
Offer Statistics and Expected Timetable
|
Not Applicable.
|
|
A.
|
Selected Financial Data
|
The selected financial data and the information
in the following table of the Company as at December 31, 2018 and 2017 and for the years then ended was derived from the audited
consolidated financial statements of the Company, audited by Davidson & Company LLP, Chartered Professional Accountants, as
indicated in their report which is included elsewhere in this Annual Report.
The selected historical consolidated financial
information presented below is condensed and may not contain all the information that you should consider. This selected financial
data should be read in conjunction with our annual audited consolidated financial statements, the notes thereto and the sections
entitled "Item 3. Key Information – D. Risk Factors" and "Item 5. Operating and Financial Review and Prospects".
The table below sets forth selected consolidated
financial data under IFRS. The information has been derived from our annual audited consolidated financial statements set forth
in "Item 18. Financial Statements".
|
|
|
2018
|
|
|
2017
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Exploration
|
|
$
|
175
|
|
|
$
|
332
|
|
|
General and administrative
|
|
|
1,145
|
|
|
|
1,656
|
|
|
Share-based compensation
|
|
|
506
|
|
|
|
678
|
|
|
Depreciation
|
|
|
22
|
|
|
|
20
|
|
|
Other
|
|
|
(13
|
)
|
|
|
192
|
|
|
Operating loss
|
|
|
1,835
|
|
|
|
2,878
|
|
|
Unrealized loss on investments
|
|
|
73
|
|
|
|
-
|
|
|
Foreign exchange loss (gain)
|
|
|
287
|
|
|
|
(380
|
)
|
|
Interest income
|
|
|
(111
|
)
|
|
|
(116
|
)
|
|
Interest expense
|
|
|
307
|
|
|
|
287
|
|
|
Loss from equity investee
|
|
|
175
|
|
|
|
215
|
|
|
Deferred revenue finance costs
|
|
|
2,985
|
|
|
|
-
|
|
|
Gain on sale of mining property interest
|
|
|
(353
|
)
|
|
|
-
|
|
|
Loss on the Arrangement
|
|
|
-
|
|
|
|
33,627
|
|
|
Loss before income taxes
|
|
|
5,198
|
|
|
|
36,511
|
|
|
Income tax recovery
|
|
|
-
|
|
|
|
(72
|
)
|
|
Net loss from continuing operations
|
|
|
5,198
|
|
|
|
36,439
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
-
|
|
|
|
176
|
|
|
Net loss for the year
|
|
|
5,198
|
|
|
|
36,615
|
|
|
Other comprehensive (income) loss
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(3,372
|
)
|
|
|
1,684
|
|
|
Total net loss and comprehensive loss
|
|
$
|
1,826
|
|
|
$
|
38,299
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted – continuing operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.21
|
)
|
|
Basic and fully diluted – discontinued operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Common Shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted (000’s)
|
|
|
174,344
|
|
|
|
172,259
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Shares
issued
and outstanding (000’s)
|
|
|
174,807
|
|
|
|
173,573
|
|
|
|
B.
|
Capitalization and Indebtedness
|
Not Applicable.
|
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not Applicable.
In addition to the other information presented
in this Annual Report, the following should be considered carefully in evaluating us and our business. This Annual Report contains
forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from the results discussed
in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed
below and elsewhere in this Annual Report.
The significant property in which the Company
has an interest is currently at the development stage. The activities of the Company are speculative due to the high-risk nature
of its business which is the acquisition, financing, exploration and development of mining properties. The following risk factors,
which are not exhaustive, could materially affect the Company’s business, financial condition or results of operations and
could cause actual events to differ materially from those described in forward-looking statements relating to the Company. These
risks include but are not limited to the following:
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.
Even
Entrée’s best efforts to comply with the laws and regulations may not result in effective compliance in the determination
of government representatives, which may have a material adverse impact on the Company and its share price. Accordingly, while
the Company believes that it has taken the legal steps necessary to obtain and hold its assets in Mongolia, there can be no guarantee
that such steps will be sufficient to preserve those interests.
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 otherwise adversely impacts Entrée’s interest in the Entrée/Oyu Tolgoi JV Property 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 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.
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. The 2014
Amendments also set the royalty payment for gold at 2.5% of the sales value, with an additional royalty of 0% for gold if it is
sold to the Central Bank of Mongolia or its designated commercial banks, for a period ending December 31, 2018. Commencing January
1, 2019, the royalty payment for gold became 5% of sales value, with an additional royalty of between 0% and 5%. The Mongolian
Parliament is currently discussing whether to extend the period and re-establish the above-mentioned lower rates for gold sold
to the Central Bank of Mongolia or its designated commercial banks.
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 or its designated commercial banks.
The Mongolian Parliament and its
relevant standing committees are in the process of discussing the draft laws and draft amendments to the tax legislation of
Mongolia submitted by the Government 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 November 10, 2017, the Parliament
of Mongolia adopted the 2017 Amendments, which become effective on January 1, 2018, to introduce the concept of an
"ultimate holder" (now referred to as an “ultimate owner”) of a legal entity for tax purposes. Any
change of an ultimate owner 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 owner. 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.
On December 5, 2018, the Minister for Mining
and Heavy Industry submitted, on behalf of the Government of Mongolia, proposed amendments to the Minerals Law, the Petroleum Law,
the Petroleum Product Law and other relevant laws thereto, aimed at regulating the minerals sector in greater detail to eliminate
legal duplication and gaps in the related legislation and to resolve discrepancies between national and local governments and minerals
licence holders. It is not possible to determine when, if ever, these amendments would be adopted and in what form, or the impact
they would have on Entrée’s interests.
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 proposed amendments aimed at regulating the mineral sector 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, which came into effect in 2008, 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
17.4% 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. In addition, the Government of Mongolia owns a significant stake in OTLLC. The interests of Rio
Tinto, Turquoise Hill, the Government of Mongolia and OTLLC are not necessarily aligned with each other or with the
interests of the Company’s other shareholders and there can be no assurance that Rio Tinto,
Turquoise Hill, the Government of Mongolia or OTLLC will exercise their rights or act in a manner that is consistent with the best interests of the
Company or its 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 Entée’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.
Entrée’s joint
venture partners may be limited in their ability to enforce the Oyu Tolgoi Investment Agreement and the Mine Plan against Mongolia,
a sovereign government.
The
Oyu Tolgoi Investment Agreement and the Mine Plan impose numerous obligations and commitments upon the Government of Mongolia that
provide clarity and certainty in respect of the development and operation of Oyu Tolgoi, including the Entrée/Oyu Tolgoi
JV Property. The Oyu Tolgoi Investment Agreement also includes a dispute resolution clause that requires the parties to the Oyu
Tolgoi Investment Agreement to resolve disputes through international commercial arbitration procedures. Nevertheless, if and to
the extent the Government of Mongolia does not observe the terms and conditions of the Investment Agreement and the Mine Plan,
there may be limitations on the ability of OTLLC, Turquoise Hill and Rio Tinto to enforce the terms of the Investment Agreement
and the Mine Plan against the Government of Mongolia, which is a sovereign nation, regardless of the outcome of any arbitration
proceeding. In addition, the Parliamentary Working Group of the Mongolian Parliament is currently reviewing the implementation
of certain agreements entered into by the Government of Mongolia and the outcome of that review is pending. If the terms of the
Investment Agreement or the Mine Plan cannot be enforced effectively, OTLLC, Turquoise Hill and Rio Tinto could be deprived of
substantial rights and benefits arising from their investment in Oyu Tolgoi with little or no recourse against the Government of
Mongolia, which by extension may also deprive Entrée of substantial rights and benefits arising from the Entrée/Oyu
Tolgoi JVA, with little or no recourse for fair and reasonable compensation. Irrespective of the ultimate outcome of any potential
dispute, any requirement for OTLLC, Turquoise Hill or Rio Tinto to engage in discussions or proceedings with the Government of
Mongolia, whether or not formal, would result in significant delays, expense and diversion of management attention, including with
respect to development of the Entrée/Oyu Tolgoi JV Property, which could have a material adverse impact on Entrée
and the Company’s share price.
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; ground and rock mass conditions and stability; 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, construction or expansion of existing facilities to experience unexpected problems and
delays during such activities, which may cause delays in commencement or expansion of mineral production or sustainable
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.
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 on
reasonable commercial terms.
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 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 or breach 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. Although OTLLC entered into the PSFA with the Government of Mongolia in December
2018, there is no certainty that this project will be completed or that the proposed power plant will be sufficient to meet the
needs of the Oyu Tolgoi project. Despite the best efforts of OTLLC, Turquoise Hill and Rio Tinto, the ability to meet OTLLC’s
obligations under the PSFA or any future agreement committing OTLLC to use Mongolian power sources 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 joint venture 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.
Global climate change.
Global climate change could exacerbate
certain of the risks facing Entrée’s business, including the frequency and severity of weather-related events, resource
shortages, changes in rainfall and storm patterns and intensities, water shortages, rising water levels and changing temperatures
which can disrupt operations, damage infrastructure or assets, create financial risk or otherwise have a material adverse effect
on Entrée’s results of operations, financial position or liquidity. These may result in substantial costs to respond
during the event, to recover from the event and possibly to modify existing or future infrastructure requirements to prevent recurrence.
Climate changes could also disrupt operations by impacting the availability and cost of materials needed for mining operations
and could increase insurance and other operating costs. Global climate change also results in regulatory risks which vary according
to the national and local requirements implemented by each jurisdiction where Entrée is present. There continues to be a
lack of consistent climate legislation, which creates economic and regulatory uncertainty. Increased public awareness and concern
regarding global climate change may result in more legislative and regulatory requirements to reduce or mitigate the effects of
greenhouse gas emissions.
Risks Related To Our Company
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, 2018, Entrée had working capital of approximately $6.8 million. Entrée’s average monthly operating
expenses in 2018 were approximately $0.2 million, 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.
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 16.3% of the Company’s outstanding Common Shares, and Rio
Tinto’s beneficial shareholdings in the Company, totalling approximately 17.4% 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 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 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, 2018 Entrée had outstanding options
exercisable into 8,710,000 Common Shares (March 29, 2019 – 8,560,000 Common Shares) which, if exercised as at March 29, 2019
would represent approximately 5.0% (March 29, 2019 – 4.9%) of its issued and outstanding Common Shares. If all 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. 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, including the U.S. Foreign Corrupt Practices Act.
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, consultants 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,
consultants 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 2018, which may have a material effect on U.S. Holders.
The Company believes it was a PFIC during
the year ended December 31, 2018 and may be a PFIC for subsequent tax years, which may have a material effect on U.S. Holders.
United States income tax legislation contains rules governing PFICs, which can have significant tax effects on U.S. Holders of
foreign corporations. A U.S. 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 U.S. Holder. The United States federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition
of Common Shares will depend on whether such U.S. Holder makes an election to treat the Company as a qualified electing fund under
Section 1295 of the Code or a mark-to-market election under Section 1296 of the Code. Additional adverse rules would apply to U.S.
Holders for any year the Company is a PFIC and Entrée owns or disposes of shares in another corporation which is a PFIC.
However, U.S. Holders should be aware that there can be no assurance that the Company will satisfy the record keeping requirements
that apply to a qualified electing fund, or that the Company will supply U.S. Holders with information that such U.S. Holders require
to report under the QEF Election rules, in the event that the Company is a PFIC and a U.S. Holder wishes to make a QEF Election.
Thus, U.S. Holders may not be able to make a QEF Election with respect to their Common Shares.
This paragraph is qualified in its entirety
by the discussion below the heading "Certain United States Federal Income Tax Consequences". Each U.S. Holder should
consult its own tax advisor regarding the PFIC rules and the U.S. federal income tax consequences of the acquisition, ownership
and disposition of Common Shares.
It may be difficult to enforce
judgments 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 judgments 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.
There are differences in United
States and Canadian reporting of reserves and resources
.
The disclosure in this Annual Report, including
the documents incorporated herein by reference, uses terms that comply with reporting standards in Canada. The terms "mineral
resource", "Measured mineral resource", "Indicated mineral resource" and "Inferred mineral resource"
are defined in and required to be used by the Company pursuant to NI 43-101; however, these terms are not defined terms under SEC
Industry Guide 7 and have historically not been 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 mineral deposits in these categories will ever be converted into
reserves. "Inferred mineral resources" have a great amount of uncertainty as to their existence, and as to their economic
and legal feasibility. It cannot be assumed that all or any part of the Measured mineral resources, Indicated mineral resources,
or Inferred mineral resources will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred mineral resources
may not form the basis of Feasibility, Pre-Feasibility studies or other economic studies, except in rare cases.
Investors are cautioned not to assume that
all or any part of an Inferred mineral resource exists or is economically or legally mineable. Disclosure of "contained ounces"
in a resource is permitted disclosure under Canadian regulations; however, the SEC historically only permited issuers to report
mineralization that does not constitute "reserves" by SEC Industry Guide 7 standards as in place tonnage and grade without
reference to unit measures.
Further, the terms "mineral reserve",
"Proven mineral reserve" and "Probable mineral reserve" are Canadian mining terms as defined in accordance
with NI 43-101 and the CIM Standards. These definitions differ from the definitions in SEC Industry Guide 7. Under SEC Industry
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 all necessary permits or governmental
authorizations must be filed with the appropriate governmental authority.
Accordingly, information contained in this
Annual Report and the documents incorporated by reference herein containing descriptions of the Company’s mineral deposits
may not be comparable to similar information made public by United States companies disclosed in accordance with SEC Industry Guide
7.
As a "foreign private issuer",
the Company is exempt from Section 14 proxy rules and Section 16 of the U.S. Exchange Act.
The Company is a "foreign private
issuer" as defined in Rule 3b-4 under the U.S. Exchange Act. Equity securities of the Company are accordingly exempt
from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the U.S. Exchange Act pursuant to Rule 3a12-3 of the U.S. Exchange
Act. Therefore, the Company is not required to file a Schedule 14A proxy statement in relation to the annual meeting of shareholders.
The submission of proxy and annual meeting of shareholder information on Form 6-K may result in shareholders having less complete
and timely information in connection with shareholder actions. The exemption from Section 16 rules regarding reports of beneficial
ownership and purchases and sales of Common Shares by insiders and restrictions on insider trading in our securities may result
in shareholders having less data and there being fewer restrictions on insiders’ activities in our securities.
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Item 4.
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Information on the Company
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A.
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History and Development of the Company
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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 Annual Report. 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 ("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". The Company’s Common Shares also
trade on the NYSE American under the symbol "EGI".
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 Resources"), 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 Resources by way of a share exchange, pursuant to which each existing Common Share of Entrée
was exchanged for one "new" Common Share of Entrée and 0.45 of a common share of Mason Resources. Optionsholders
and warrantholders of the Company also received replacement options and warrants of the Company and Mason Resources that were proportionate
to, and reflective of the terms of, their original options and warrants of the Company.
A total of 77,805,786 common shares of
Mason Resources were distributed to Entrée shareholders that commenced trading on the TSX on May 12, 2017, under the symbol
"MNR", and on the OTCQB on November 9, 2017, under the symbol "MSSNF". On December 19, 2018, Mason Resources
and Hudbay Minerals Inc. ("Hudbay") completed a plan of arrangement under Part 9, Division 5 of the BCBCA whereby Hudbay
acquired all the issued and outstanding common shares of Mason Resources it did not already own for C$0.40 per common share. Mason
Resources’ shares were delisted from the TSX and the OTCQB and Mason Resources ceased to be a reporting issuer under applicable
Canadian securities laws.
General Development of the Business
Entrée is an exploration stage resource
company with interests in exploration and advanced properties in Mongolia, Peru and Australia.
On May 9, 2017, the Company closed 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, through the Arrangement. A total of 77,805,786 common shares of Mason Resources were distributed to
the Company’s shareholders, with no change to shareholders’ interests in the Company.
The Company transferred to Mason Resources
all of the issued and outstanding shares of Entrée U.S. Holdings Inc., which indirectly held the Ann Mason Project and the
Lordsburg property, along with $8.84 million in cash. The result of the Arrangement was 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.
Following the Arrangement, Entrée’s
primary asset is its carried 20% or 30% joint venture interest (depending on the depth of mineralization) 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% or 70% 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 currently 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 (the "2018 Technical Report") that was completed on its interest in the Entrée/Oyu
Tolgoi JV Property. The 2018 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
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Entrée/Oyu Tolgoi JV Property
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Units
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2018 Reserve Case
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2018 PEA
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LOM Processed Material
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Probable Reserve Feed
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35 Mt @ 1.59% Cu,
0.55 g/t Au, 3.72 g/t Ag
(1.93% CuEq)
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—
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Indicated Resource Feed
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—
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113 Mt @ 1.42% Cu,
0.50 g/t Au, 3.63 g/t Ag
(1.73% CuEq)
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Inferred Resource Feed
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—
|
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 tpd, which is blended with production from OTLLC’s
Oyut open pit deposit 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 per pound
payable copper.
|
|
|
·
|
Entrée LOM average C1 $0.56/lb payable copper.
|
|
|
·
|
Entrée LOM average 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 assumptions 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 2018 Technical Report has been filed
on SEDAR and EDGAR and is available for review under the Company’s profile on SEDAR (
www.sedar.com
) or EDGAR (
www.sec.gov
)
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 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 Chief Financial Officer of the Company.
|
|
May 2016
|
Turquoise Hill and Rio Tinto International Holdings Limited ("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 its $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. Turquoise Hill further announces that OTLLC has signed an engineering, procurement and construction management services contract with Jacobs Engineering Group, which paves the way for underground construction to begin, and a contract with mining services provider Thiess and Mongolian contractor Khishig Arvin for development of twin declines, incorporating both a service and conveyor tunnel. Shaft 2 has approximately 100 metres of development remaining and is expected to be completed in 2016.
|
|
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. Shareholders of the Company will receive common shares of Mason Resources 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 Resources, 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.".
|
|
|
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 Wood Canada Limited (formerly known as Amec Foster Wheeler Americas Limited) ("Wood") 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 Wood has completed its initial data review and has commenced work on an updated NI 43-101 technical report relating to Entrée’s 20% or 30% (depending on the depth of mineralization) 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 the 2018 Technical Report completed on its interest in the Entrée/Oyu Tolgoi JV Property. The 2018 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 Chair of the Board. Mark Bailey has been appointed Non-Executive Chair of the Board and Michael Price has been appointed to the Board to fill the vacancy created by Lord Howard’s retirement.
|
|
March 2018
|
As reported by Turquoise Hill, the sinking of Shaft 5 is completed at a final depth of 1,178 metres. Installation of the shaft exhaust fan is on target to be finished in early second quarter 2018. Shaft 5 will be dedicated to ventilation thereby increasing the capacity for underground activities.
|
|
June 2018
|
The Company announces that it has sold its 0.5% net smelter returns ("NSR") royalty on Candente Copper Corp.’s Cañaraico copper project in Northern Peru to Anglo Pacific Group PLC ("Anglo Pacific"). The Company transferred all the issued and outstanding shares of its subsidiaries that directly or indirectly hold the royalty to Anglo Pacific for consideration of $1 million, payable by the issuance of 478,951 Anglo Pacific shares. The Company also retains the right to a portion of any future royalty income received by Anglo Pacific in relation to the royalty.
|
|
July 2018
|
Turquoise Hill announces the Oyu Tolgoi project has achieved an important underground development milestone with the completed commissioning of Shaft 5, which is 1,178 metres deep and 6.7 metres in diameter. There is expected to be a step-up in underground activities with the increased ventilation capacity from Shaft 5. Earthworks for Shafts 3 and 4 continued during the second quarter 2018 and the sinking package was awarded in July 2018.
|
|
October 2018
|
Turquoise Hill announces that Rio Tinto,
in its role as manager of the Oyu Tolgoi project and underground construction contractor, has undertaken its second annual schedule
and cost re-forecast for the project. According to this re-forecast, lateral development has progressed well, the construction
completion schedule for Hugo North Lift 1 on the Oyu Tolgoi mining licence remains on track for 2022 and the project is expected
to be completed at the $5.3 billion budget estimate disclosed in the 2016 Oyu Tolgoi Feasibility Study and the 2016 Oyu Tolgoi
Technical Report. OTLLC has committed $2.1 billion to Mongolian vendors and contractors since the restart of project development.
Additionally, several key facilities have been completed, including Shaft 5, various underground infrastructure and a new camp
to house 5,500 workers.
Despite significant progress in the development
of the project, Rio Tinto has notified Turquoise Hill, based on preliminary results of its second annual schedule and cost re-forecast
for the project, of a delay to achievement of sustainable first production from Hugo North Lift 1 on the Oyu Tolgoi mining licence
which is now expected to occur by the end of third quarter 2021 instead of first quarter 2021. This is a result of certain delays
including, but not limited to, the completion of Shaft 2 and challenging ground conditions. First draw bell remains on track for
mid-2020, partly due to a change in the draw bell sequencing strategy.
|
|
November 2018
|
Turquoise Hill announces that the main focus of 2018 continues to be underground lateral development, the fit out of Shaft 2, support infrastructure and the convey-to-surface decline. At the end 2018, underground development is expected to have completed approximately 11 kilometres of equivalent development through a mixture of mass excavation and lateral development. Pre-sinking activities for Shafts 3 and 4 progressed during the third quarter of 2018, including a box cut, and sinking for both shafts is expected to commence mid-2019. Shaft 2 completed sinking in January 2018 and was followed by the completion of stripping in the third quarter of 2018 and the start of the fit-out process in the same quarter. During the third quarter of 2018, Shaft 2 collar doors and controls were commissioned and mechanical installation of the rock breaker on the shaft’s jaw crusher was completed. Shaft 2 capabilities, along with increased development, are critical path items to the start of production ramp-up. During the third quarter of 2018, development of the convey-to-surface decline also continued to progress with the permanent ventilation facility being commissioned and becoming operational. The convey-to-surface system enables production ramp up beyond the Shaft 2, 30,000 tonnes per day capacity to the full 95,000 tonne per day underground production from the mine.
|
|
December 2018
|
Turquoise Hill announces the signing of the Power Source Framework Agreement ("PSFA") between OTLLC and the Government of Mongolia which provides a binding framework and pathway forward for the construction of a Tavan Tolgoi-based power project, as well as establishes the basis for a long-term domestic solution for the Oyu Tolgoi project. The PSFA formalizes the role of each party and sets out an amended timetable for OTLLC to source power domestically. Construction is expected to start in 2020 following further studies and commissioning of the power plant is scheduled for mid-2023. OTLLC will now move forward to confirm the technical design of the project and finalize the commercial arrangements, including financing, underpinning the PSFA. The 300 megawatt plant will be majority owned by OTLLC and will be situated close to the Tavan Tolgoi coalfields.
|
During the year ended December 31, 2016,
the Company did not divest any capital items.
During the year ended December 31, 2017,
the Company divested its mineral property interests in the Ann Mason Project and the Lordsburg property as part of the Arrangement
with Mason Resources in exchange for 77,804,786 common shares of Mason Resources.
During the year ended December 31, 2018,
the Company divested a 0.5% NSR royalty on Candente Copper Corp.’s Cañaraico copper project in Northern Peru to Anglo
Pacific in return for $1.0 million payable by issuance of 478,951 common shares of Anglo Pacific.
The Company made no capital acquisitions
during the past three fiscal years.
The SEC maintains an Internet site at
http://www.sec.gov
that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC. Information is also available under the Company’s profile on SEDAR (
www.sedar.com
)
or on
www.EntreeResourcesLtd.com.
Mineral Exploration 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 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, Peru and Australia.
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 Mt grading 1.59% copper, 0.55 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 are part of the alternative, 2018 PEA mine plan and 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.
|
Further details regarding the Entrée/Oyu
Tolgoi JV Project are provided in "Item 4. Information on the Company – C. Property, Plants and Equipment" below.
Aside from its principal asset, Entrée
has royalty and other interests in properties in Australia and Peru. See "Item 4. Information on the Company – C. Property,
Plants and Equipment" below for more information.
Robert Cinits, P.Geo., formerly Vice President,
Corporate Development of the Company and currently a consultant to Entrée has approved all scientific and technical information
in this Annual Report. Mr. Cinits is a qualified person ("QP") as defined in NI 43-101.
Turquoise Hill, Rio Tinto, OTLLC and
Government of Mongolia
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 provided in "Item 4. Information on the Company C. – Property, Plants and Equipment" 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 of the Entrée/Oyu Tolgoi JV in 2008, and as of December 31, 2018, the Entrée/Oyu Tolgoi JV has expended
approximately $31.2 million to advance the Entrée/Oyu Tolgoi JV Property. As of December 31, 2018, OTLLC has contributed
on Entrée’s behalf the required cash participation amount equal to 20% of the $31.2 million incurred to date, plus
accrued interest at prime plus 2%, for a total of $8.4 million.
At December 31, 2018, Turquoise Hill owned
approximately 7.9% 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 9.5% of the Company’s issued and outstanding
Common Shares as at December 31, 2018.
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 an Underground Mine Development and Financing Plan (the "Mine Plan"), signalling
the firm commitment of the parties to move forward with underground development of the Oyu Tolgoi copper-gold project. The Mine
Plan addresses 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,
providing 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. 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 in its News
Release dated March 14, 2019:
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The main focus for Turquoise Hill during 2018 was Oyu Tolgoi underground development, the fit out
of Shaft 2, completion and commissioning of Shaft 5, support infrastructure and the convey-to-surface decline. Shaft 2 completed
sinking in January 2018, which was followed by the completion of stripping in third quarter 2018 and commencement of the fit-out
process in the same quarter. The completed commissioning of Shaft 5 was achieved during second quarter 2018.
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During 2018, underground lateral development at the Oyu Tolgoi project advanced 10.3 equivalent
kilometres, a 68.9% increase over 2017. Of this, 2.3 equivalent kilometres was completed during fourth quarter 2018.
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Shaft 2-connected underground infrastructure progressed well during the fourth quarter 2018 with
the completion of the lining installation and handover of Ore Bin 11 as well as advancement of the new 6,000-tonne-per-day jaw
crusher under construction.
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Underground expansion capital for Hugo North Lift 1 for 2018 was $1.2 billion, meeting the upper-end
of Turquoise Hill’s guidance.
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Turquoise Hill has completed an independent review of Rio Tinto’s previously announced second
annual schedule and cost re-forecast for Lift 1 underground development. The review found that project cost was expected to remain
within the $5.3 billion budget but that it is likely there will be further delays to individual activities and that this will result
in additional delays to sustainable first production from the Oyu Tolgoi mining licence. Since completion of Turquoise Hill’s
independent review, Rio Tinto, as manager of the Oyu Tolgoi project, has advised Turquoise Hill that delays on the Shaft 2 fit
out are expected to result in an overall schedule delay to sustainable first production from the Oyu Tolgoi mining licence beyond
the end of third quarter 2021. Additionally, Rio Tinto is studying relocating the ore passes on the footprint and this may modify
the initiation sequence within Panel 0. The study will be incorporated into the definitive estimate review, as will work necessary
to estimate any impact on cost and development schedule. The definitive estimate review is expected to be complete towards the
end of 2019.
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OTLLC is currently undertaking an updated Feasibility Study on the Oyu Tolgoi project.
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Entrée is not currently
aware of any expected delays to development production or initial block cave production from Lift 1 of the Hugo North
Extension deposit on the Entrée/Oyu Tolgoi JV Property resulting from delays to individual activities at the Oyu
Tolgoi project. Entrée will evaluate any information made available to it by Rio Tinto or OTLLC as the definitive
estimate review and Feasibility Study progress and will update the market accordingly.
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. On February 15, 2018, Turquoise Hill announced that OTLLC had received notification the Government of
Mongolia has canceled the PSCA. On December 30, 2018, Turquoise Hill announce the signing of the
PSFA between OTLLC and the Government of Mongolia which provides a binding framework and pathway forward for the
construction of a Tavan Tolgoi-based power project, as well as establishes the basis for a long-term domestic solution for the
Oyu Tolgoi project. The PSFA formalizes the role of each party and sets out an amended timetable for OTLLC to source power domestically.
Construction is expected to start in 2020 following further studies and commissioning of the power plant is scheduled for mid-2023.
OTLLC will now move forward to confirm the technical design of the project and finalize the commercial arrangements, including
financing, underpinning the PSFA. The 300 megawatt plant will be majority owned by OTLLC and will be situated close to the Tavan
Tolgoi coalfields.
Recent Exploration on the Entrée/Oyu
Tolgoi JV Property
Rio
Tinto undertakes all exploration work on the Entrée/Oyu Tolgoi JV Property on behalf of joint venture manager OTLLC, through
various agreements among OTLLC, Rio Tinto and Turquoise Hill. Exploration during 2016 to 2018 on the Entrée/Oyu Tolgoi JV
Property has focused on several near-surface prospects on both the Shivee Tolgoi mining licence (Airstrip prospect) and the Javkhlant
mining licence (Castle Rock, Southeast IP, Mag West and Bumbat Ulaan prospects) (refer to Figure 3).
The
most significant prospect identified to date is Castle Rock, a porphyry-style target located about five km southwest of the Heruga
deposit. Previous work at Castle Rock has identified a polymetallic (Mo-As-Sb-Se-Te index) soil anomaly covering an area of about
1.5 km by 2.0 km coincident with a 400 m by 400 m area of outcropping quartz-sericite-illite altered dacite intrusive. A strong
north-trending induced polarization ("IP") chargeability anomaly is coincident with the zone and two east-west dipole-dipole
IP lines further outline the anomaly. During 2018 mapping identified scattered outcrops with sheeted and irregular quartz veining
hosted within the dacite, along with occasional quartz breccia veins with oxidized sulphides. A gravity survey was completed during
2018, followed by two reverse circulation (“RC”) drill holes, EJRC0046 (250 m depth) and EJRC0047 (227 m depth).
Both
holes intersected Carboniferous-aged rock sequences dominated by andesitic tuff and andesitic to basaltic tuff (lithic and lapilli)
with weak to moderate chlorite-epidote (porpylitic) or weak illite-sericite (phyllic) alteration and trace to 6% pyrite mineralization.
These sequences were intruded by several fresh, unmineralized porphyritic dacite dykes, and occasional hornblende-biotite andesite
dykes. There were no copper bearing minerals or porphyry-style alteration assemblages identified in the RC chips and no significant
assay results were returned. According to OTLLC, the near-surface targeted chargeability anomaly has been explained by the abundant
pyrite, however the lack of copper mineralization and porphyry alteration downgrades the near-surface exploration potential for
this target. The potential for porphyry mineralization at depth remains a target.
At
the Southeast IP prospect several clusters of 60 to 511 ppm copper soil anomalies, together covering about 3 km by 3 km have
been outlined, adjacent to a strong IP (chargeability) anomaly. Additional geological mapping was completed during 2018
(1:5000 scale covering 1,830 ha). An inferred Devonian window is projected to occur immediately west of the anomaly. Further
exploration, including drilling was budgeted for this prospect in 2018, however only additional geological mapping
was completed.
At
the Mag West prospect, a previous IP survey revealed a strong chargeability anomaly adjacent to a magnetic high anomaly. A
soil sampling survey covering the magnetic and IP anomalies returned a patchy anomaly of Bi+Cu+Mo+Se+Te.
Additional geological mapping was also completed (1:5000 scale covering 430 ha). Although drilling was initially proposed for
2018, no holes were drilled.
The
Airstrip target is located to the southwest of the airport and in 2016 six shallow PCD
(Polycrystalline Diamond Composite) holes were drilled, together totaling 420 m. The drilling intersected various
intrusive phases of rock but no significant sulphide mineralization. During 2018, additional alteration and age dating
analysis was completed on the drill samples along with surface ground magnetic and gravity surveys, a Tromino survey (to
determine the depth of overburden) and a dipole-dipole IP survey. Drilling was planned for 2018, but none was
completed.
Bumbat Ulaan is an early-stage target focused
on a previously mapped lithcap. In 2018, the prospect saw additional geological mapping (1:5000 scale over 1,050 ha), along with
both gravity and magnetic geophysical surveys and soil sampling. The lithocap trends northeast and covers an area approximately
380 m long and 50 m wide. The zone shows strong silicification and hematite-magnetite mineralization, hosted within andesite-basalt
and intruded by dacite porphyry subvolcanics. A second alteration zone occurs two kilometres south from the lithocap and comprises
strong advanced argillic alteration zone with disseminated goethite and limonite veinlets, hosted within andesite basalt cut by
feldspar rhyolite porphyry dykes and subvolcanics. The second alteration zone is north-south trending and about 100-200 m long
and 50-100 m wide.
Moderate-to-strong surface malachite-goethite
mineralization (after chalcopyrite) has been identified at several other locations at Bumbat Ulaan. The mineralization is associated
with quartz-albite veins or outcrops of potassic-silicic quartz eye granite and red granite. These northwest trending copper mineralized
zones are locally 1-10 m wide and up to 100-300 m long, however the overall trend of mineralization is about 1.5 km in length and
1.0 km wide.
The
areas to the north of Hugo North Extension and to the south of Heruga have been under-explored and remain strong targets for future
exploration.
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, 2018, Rio Tinto directly owned approximately 9.5% of the Company’s issued
and outstanding Common Shares. When combined with the Common Shares owned by Turquoise Hill, at December 31, 2018 and March 29,
2019 Rio Tinto beneficially owned approximately 17.4% of the Company’s issued and outstanding Common Shares.
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. The 2014
Amendments also set the royalty payment for gold at 2.5% of the sales value, with an additional royalty of 0% for gold if it
is sold to the Central Bank of Mongolia or its designated commercial banks, for a period ending December 31, 2018. Commencing
January 1, 2019, the royalty payment for gold became 5% of sales value, with an additional royalty of between 0% and 5%. The
Mongolian Parliament is currently discussing whether to extend the period and re-establish the above-mentioned lower rates
for gold sold to the Central Bank of Mongolia or its designated commercial banks.
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 or its designated commercial banks.
The Mongolian Parliament and its
relevant standing committees are in the process of discussing the draft laws and draft amendments to the tax legislation of
Mongolia submittied by the Government 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 November 10, 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") which became effective
on January 1, 2018, to introduce the concept of an "ultimate holder" (now referred to as an “ultimate
owner”) of a legal entity for tax purposes. Any change of an ultimate owner 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 owner. 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 on the Company is not yet known.
On December 5, 2018, the Minister for Mining
and Heavy Industry submitted, on behalf of the Government of Mongolia, proposed amendments to the Minerals Law, the Petroleum Law,
the Petroleum Product Law and other relevant laws thereto, aimed at regulating the minerals sector in greater detail to eliminate
legal duplication and gaps in the related legislation and to resolve discrepancies between national and local governments and minerals
licence holders. It is not possible to determine when, if ever, these amendments would be adopted and in what form, or the impact
they would have on Entrée’s interests.
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:
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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
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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.
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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/oz
of gold, $5/oz of silver and $0.50/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 "Item
4. Information on the Company – B. Business Overview –Sandstorm – Amended and Restated Equity Participation and
Funding Agreement" above. 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.
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 "Item 4.
Information on the Company – B. Business Overview – Non-Brokered Private Placement" below.
As at December 31, 2018 and March 9, 2019,
Sandstorm held 28,559,880 Common Shares, or approximately 16.3% of the outstanding Common Shares of the Company, and Replacement
Warrants (as defined in "Item 4. Information on the Company – B. Business Overview – Non-Brokered Private Placement"
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 "Non-Brokered 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 Non-Brokered Private Placement.
As part of the Arrangement, warrantholders
of the Company received Mason Resources common share purchase warrants ("Mason Resources 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 Resources
Warrant. On May 23, 2017, warrantholders of the Company received an aggregate 4,169,119 Mason Resources 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 Resources Warrants reflect the allocation of the original exercise price of the existing
warrants between the Replacement Warrants and the Mason Resources Warrants issued, based on the relative market value of Mason
Resources and the Company following completion of the Arrangement.
Net proceeds from the Non-Brokered 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.
Then 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 then insiders
of the Company and their associates acquired an aggregate 5.5 million Units, including 914,634 Units acquired by Sandstorm. See
"Item 4. Information on the Company – B. Business Overview – Sandstorm – Securities Held by Sandstorm"
above and "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions" 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 Resources, through a court approved plan of arrangement under Section 288 of the BCBCA. The Company’s shareholders
received common shares of Mason Resources 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 Resources. A total of 77,805,786 common shares of Mason Resources
were distributed to the Company’s shareholders. There was no change to shareholders’ interests in the Company.
The Company transferred to Mason Resources
all of the issued and outstanding shares of Entrée U.S. Holdings Inc., which indirectly held the Ann Mason Project and the
Lordsburg property, along with $8.84 million in cash. The result of the Arrangement was 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 Resources Warrants and options of Mason
Resources which were proportionate to, and reflective of the terms of, their original options and warrants of the Company.
Mason Resources’ common shares commenced
trading on the TSX on May 12, 2017 under the symbol "MNR", and on the OTCQB on November 9, 2017 under the symbol "MSSNF".
On December
19, 2018, Mason Resources and Hudbay completed a plan of arrangement under Part 9, Division 5 of the BCBCA whereby Hudbay acquired
all the issued and outstanding common shares of Mason Resources it did not already own for C$0.40 per common share. Mason Resources’
shares were delisted from the TSX and the OTCQB, and Mason Resources ceased to be a reporting issuer under applicable Canadian
securities laws.
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 $1,160). 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 soum
s
.
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.
Seasonality
The Entrée/Oyu
Tolgoi JV Project is located in the South Gobi region of Mongolia, which has a continental, semi-desert climate. The spring and
autumn seasons are cool, summers are hot, and winters are cold. The climatic conditions are such that operations can run throughout
the year on a continuous shift basis, with minor disruptions expected.
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.
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C.
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Organizational Structure
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The Company conducts its business and owns
its property interests through the four subsidiaries set out in the organizational chart below. All of the Company’s subsidiaries
are 100% owned.
*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 OTLLC. OTLLC is owned as to 66% by Turquoise Hill and as
to 34% by the Government of Mongolia (through Erdenes Oyu Tolgoi LLC). See "4. Information on the Company – B. Business
Overview" above for additional information.
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D.
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Property, Plants and Equipment
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Entrée is a Canadian mineral exploration
company based in Vancouver, British Columbia, focused on the worldwide exploration and development of copper, gold and molybdenum
prospects.
Entrée is committed to make lease
payments totalling $0.4 million over its four-year office lease in Vancouver, Canada.
Entrée has an interest in one material
property, the advanced Entrée/Oyu Tolgoi JV Property. The Entrée/Oyu Toloi Property forms an integral part of the
Oyu Tolgoi project in southern Mongolia.
ENTRÉE/OYU TOLGOI JV PROJECT,
MONGOLIA
The Company
engaged Wood 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 2018 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 Wood Canada Limited (formerly known a Amec Foster Wheeler Americas Limited). 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 EDGAR located at
www.sec.gov
,
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 method. 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, the 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 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
Wood did not independently review ownership
of the Project area and any underlying property agreements, mineral tenure, surface rights, or royalties. Wood 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 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:
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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.
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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.
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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 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 "Item 4. Information on the Company – D. Property, Plants
and Equipment – 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 (IP, regional magnetic, ground magnetometer,
and high-resolution magnetotelluric surveys); interpretation of satellite imagery; 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 between 2004 and the effective
date of the 2018 Technical Report. 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 up to the effective
date of the 2018 Technical Report.
Entrée/Oyu Tolgoi JV
Property Drilling
Most holes at Hugo North and Hugo North
Extension were collared with PQ drill rods (85 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 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 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.
Wood 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, Wood
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 Wood, 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 kt/h (121 kt/d, 44.3 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 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 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 $970.00/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, $1,250.00/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.
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.
|
|
|
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.
|
|
|
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).
Wood 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 Wood’s
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
reviewed by Wood and have an effective date of January 15, 2018.
|
|
|
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 deposit 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 m
3
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 Wood, 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 kV concentrator substation
will increase by an estimated 20 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 m
3
/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 km
2
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 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.
Wood 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, Wood 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 Wood is familiar with, and the metal pricing is in line with Wood’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.
Wood reviewed the 2016 Oyu Tolgoi Feasibility
Study overall capital and sustaining capital cost estimates, 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 portions of the capital cost/sustaining capital cost estimates are discussed below in "Item
4. Information on the Company – D. Property, Plants and Equipment – 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 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
|
|
|
|
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 "Item 4. Information on the Company – D. Property, Plants
and Equipment – Entrée/Oyu Tolgoi JV Project, Mongolia – Economic Analysis – 2018 Reserve Case".
Table 7 – Overall Phase 2 Operating
Cost Estimate Summary
|
Description
|
|
Unit
|
|
Value
|
|
|
Mining
|
|
$/t processed
|
|
|
6.19
|
|
|
Processing
|
|
$/t processed
|
|
|
8.41
|
|
|
Infrastructure
|
|
$/t processed
|
|
|
2.04
|
|
|
Total
|
|
$/t processed
|
|
|
16.64
|
|
|
|
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 "Item 4. Information on the Company – D. Property, Plants and Equipment – 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 "Cautionary Note Regarding Forward-Looking
Statements" and "Item 3. Key Information – D. Risk Factors" sections in this Annual Report. 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 the Entrée/Oyu Tolgoi JV will not be subject to additional taxes and royalties, such as the
surtax royalty which came into effect in Mongolia on January 1, 2011, which could have an adverse effect on Entrée’s
future cash flow and financial condition. In the course of finalizing such agreements, Entrée may have to make certain concessions,
including with respect to the economic benefit of Entrée’s interest in the Entrée/Oyu Tolgoi JV Property, 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.
Wood 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, Wood 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 $111 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’s 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 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
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 Wood, 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.
"Item 4. Information on the Company
– D. Property, Plants and Equipment – Entrée/Oyu Tolgoi JV Project, Mongolia – Introduction" through
to "Item 4. Information on the Company – D. Property, Plants and Equipment – Entrée/Oyu Tolgoi JV Project,
Mongolia – Mineral Resource Statement" and "Item 4. Information on the Company – D. Property, Plants and
Equipment – Entrée/Oyu Tolgoi JV 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: T
he
tabulation was derived by Wood 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 Wood,
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 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 "Item 4. Information
on the Company – D. Property, Plants and Equipment – 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 "Item 4. Information on the Company – D. Property, Plants and Equipment – 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 Technical 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
"Item 4. Information on the Company – D. Property, Plants and Equipment – 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 "Item 4. Information on the Company – D. Property, Plants and Equipment – Entrée/Oyu
Tolgoi JV Project, Mongolia – Capital Cost Estimates" above). 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 "Item 4. Information on the Company – D. Property,
Plants and Equipment – Entrée/Oyu Tolgoi JV Project, Mongolia – Capital Cost Estimates" above) 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.
Wood 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 "Item 4. Information on the Company –
D. Property, Plants and Equipment – Entrée/Oyu Tolgoi JV Project, Mongolia – Economic Analysis" above).
Entrée’s 20% attributable portion of the capital cost and sustaining capital cost estimates is discussed in "Item
4. Information on the Company – D. Property, Plants and Equipment – 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
|
|
|
|
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
|
|
|
|
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 "Item
4. Information on the Company – D. Property, Plants and Equipment – Entrée/Oyu Tolgoi JV Project, Mongolia –
Preliminary Economic Analysis – 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
|
|
|
|
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 "Item 4. Information on the Company – D. Property, Plants and Equipment – 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.
Wood apportioned the capital and sustaining
capital costs according to Entrée’s interpretation of the Entrée/Oyu Tolgoi JVA (summarized in "Item 4.
Information on the Company – D. Property, Plants and Equipment – 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 $1,727.4 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, Wood 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’s 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 Wood, 2017.
Recommendations
Wood was 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.
|
Wood is 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, Wood 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. Wood 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 "Item 5. Operating and Financial Review and Results – A. Operating Results"
below.
|
|
·
|
Blue Rose Joint Venture, Australia
. Entrée
has a 56.53% interest in the Blue Rose joint venture ("Blue Rose JV") to explore for minerals other than iron ore on
Exploration Licence 6006 ("EL 6006"), with Giralia Resources Pty Ltd, a subsidiary of Hancock Prospecting Pty Ltd, retaining
a 43.47% interest. EL 6006, totalling 257 square kilometres, is located in the Olary Region of South Australia, 300 kilometres
northeast of Adelaide and 130 kilometres west-southwest of Broken Hill.
|
The rights to explore for and develop iron ore on EL 6006 are held by Fe Mines Limited ("FML"), a subsidiary of Lodestone Equities Limited ("Lodestone") pursuant to a prior agreement with the Blue Rose JV partners. On April 18, 2017, the Blue Rose JV partners entered into a Deed of Consent, Sale and Variation (the "Deed") with Lodestone and FML. In accordance with the Deed, the Blue Rose JV partners transferred title to EL 6006 and assigned their native title agreements to FML and agreed to vary a payment required to be made to the Blue Rose JV partners under the prior agreement. FML paid to the Blue Rose JV 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 EL 6006, 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 EL 6006. Under the Deed, an additional A$285,000 must also be paid to the Blue Rose JV partners upon the commencement of Commercial Production (as such term is defined in the Deed).
The Braemar Iron Formation is
the host rock to magnetite mineralisation on EL 6006. The Braemar Iron Formation is a meta-sedimentary iron siltstone, which is
inherently soft. 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.
|
|
·
|
Royalty Pass-Through Payments, Cañariaco Project
Royalty, Peru
. In August 2015, the Company acquired from Candente Copper Corp. (TSX:DNT) ("Candente") a 0.5% NSR
royalty (the "Cañariaco Project Royalty") on Candente's 100% owned Cañariaco copper project in Peru for
a purchase price of $500,000.
|
On June 8, 2018, the Company
sold the Cañariaco Project Royalty to Anglo Pacific, whereby the Company transferred all the issued and outstanding shares
of its subsidiaries that directly or indirectly hold the Cañariaco Project Royalty to Anglo Pacific in return for consideration
of $1.0 million, payable by the issuance of 478,951 Anglo Pacific common shares. In addition, Entrée retains the right to
a portion of any future royalty income received by Anglo Pacific in relation to the Cañariaco Project Royalty ("Royalty
Pass-Through Payments") as follows:
|
|
o
|
20% of any royalty payment received for any calendar quarter
up to and including December 31, 2029;
|
|
|
o
|
15% of any royalty payment received for any calendar quarter commencing January 1, 2030 up to and
including the quarter ending December 31, 2034; and
|
|
|
o
|
10% of any royalty payment received for any calendar quarter
commencing January 1, 2035 up to and including the quarter ending December 31, 2039.
|
The Cañariaco copper
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.
|
|
Item 4A.
|
Unresolved Staff Comments
|
None.
|
|
Item 5.
|
Operating and Financial Review and Prospects
|
Overview
Entrée is a mineral resource company
with interests in development and exploration properties in Mongolia, Peru and Australia.
The Company’s principal asset is
its interest in the Entrée/Oyu Tolgoi JV Property – a carried 20% participating interest in two of the Oyu Tolgoi
project deposits, and a carried 20% or 30% interest (depending on the depth of mineralization) in the surrounding large, underexplored,
highly prospective land package located in the South Gobi region of Mongolia. Entrée’s joint venture partner, OTLLC,
holds the remaining interest.
The Oyu Tolgoi project includes two separate
land holdings: the Oyu Tolgoi mining licence, which is held by OTLLC (66% Turquoise Hill and 34% the Government of Mongolia), and
the Entrée/Oyu Tolgoi JV Property, which is a partnership between Entrée and OTLLC. The Entrée/Oyu Tolgoi
JV Property comprises the eastern portion of the Shivee Tolgoi mining licence, and all of the Javhlant mining licence, which mostly
surround the Oyu Tolgui mining licence (Figure 1). Both the Shivee Tolgoi and Javhlant mining licences are held by Entrée.
The terms of the Entrée/Oyu Tolgoi JV state that Entrée has a 20% participating interest with respect to mineralization
extracted from deeper than 560 metres below surface and a 30% participating interest with respect to mineralization extracted from
above 560 metres depth.
The Entrée/Oyu Tolgoi JV Property includes
the Hugo North Extension copper-gold deposit (HNE) and the majority of the Heruga copper-gold-molybdenum deposit. The resources
at Hugo North Extension include a Probable reserve, which is part of Lift 1 of the Oyu Tolgoi underground block cave mining operation.
Lift 1 is in development by project operator Rio Tinto, with first development production from the Entrée/Oyu Tolgoi JV
Property expected in 2021. While Entrée is not currently aware of any expected delays to development production or initial
block cave production from Lift 1 of HNE resulting from delays to individual activities at the Oyu Tolgoi project, Entrée
will evaluate any information made available to it by Rio Tinto or OTLLC as the definitive estimate review and Feasibility Study
progress and will update the market accordingly. When completed, Oyu Tolgoi is expected to become the world’s third largest
copper mine.
In addition to the Hugo North Extension
copper-gold deposit, the Entrée/Oyu Tolgoi JV Property includes approximately 94% of the resource tonnes outlined at the
Heruga copper-gold-molybdenum deposit and a large exploration land package, which together form a significant component of the
overall Oyu Tolgoi project.
The first two phases of the Oyu Tolgoi
project are fully financed, with the Oyut open pit mine on the Oyu Tolgoi mining licence (Phase 1) currently in production and
construction of Lift 1 of the Hugo North/Hugo North Extension underground block cave (Phase 2) currently in progress.
Our financial statements for the years
ended December 31, 2018 and 2017 have been prepared in accordance with IFRS. The consolidated financial statements have been prepared
on the basis of accounting principles applicable to a going concern which assumes that the Company will be able to continue for
the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The
Company has consistently applied the same accounting policies throughout all periods presented, as if these policies had always
been in effect.
The Company’s
expected 2019 full year expenditures, which include Mongolian site management and compliance costs, is between $1.2 million and
$1.5 million.
Critical Accounting Policies and Use
of Estimates
The preparation of consolidated financial
statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Significant estimates and judgements used
in the preparation of these consolidated financial statements include: plan of arrangement – fair value of net assets distributed;
determination of functional currencies; recoverable amount of property and equipment; title to mineral properties; share-based
compensation; and income taxes. Estimates that have the most significant effect on the amounts recognized in the Company’s
consolidated financial statements are as follows:
Plan of arrangement – fair value
of net assets distributed
On May 9, 2017, the Company completed
the Arrangement under Section 288 of the BCBCA pursuant to which Entrée transferred its wholly owned subsidiaries that
directly or indirectly held the Ann Mason Project in Nevada and the Lordsburg property in New Mexico to Mason Resources.
Accounting for this transaction involves critical judgements and estimates in determining the fair value of the net assets
distributed. In performing an analysis, the Company relied on Mason Resources’ share price to calculate the fair value
of net assets transferred.
Determination of functional currencies
The determination of the Company’s
functional currency is a matter of judgment based on an assessment of the specific facts and circumstances relevant to determining
the primary economic environment of each individual entity within the group. The Company reconsiders the functional currencies
used when there is a change in events and conditions considered in determining the primary economic environment of each entity.
Income taxes
The Company must make significant estimates
in respect of the provision for income taxes and the composition of its deferred income tax assets and deferred income tax liabilities.
The Company’s operations are, in part, subject to foreign tax laws where interpretations, regulations and legislation are
complex and continually changing. As a result, there are usually some tax matters in question which may, on resolution in the future,
result in adjustments to the amount of current or deferred income tax assets or liabilities, and those adjustments may be material
to the Company’s statement of financial position and results of operations.
The determination of the ability of the
Company to utilize tax losses carried forward to offset income taxes payable in the future and to utilize temporary differences
which will reverse in the future requires management to exercise judgment and make assumptions about the Company’s future
performance. Management is required to assess whether the Company is more likely than not able to benefit from these tax losses
and temporary differences. Changes in the timing of project completion, economic conditions, metal prices and other factors having
an impact on future taxable income streams could result in revisions to the estimates of benefits to be realized or the Company’s
assessments of its ability to utilize tax losses before expiry. These revisions could result in material adjustments to the consolidated
financial statements.
Share-based compensation
The Company uses the Black-Scholes option
pricing model for the valuation of share-based compensation. Option pricing models require the input of the subjective assumptions
including expected price volatility, interest rate and forfeiture rate. Changes in the input assumptions can materially affect
the fair value estimate and the Company’s net loss and reserves.
Changes in Accounting Policies
The annual consolidated financial statements
for the year ended December 31, 2018 contained in this Annual Report are the Company’s first consolidated financial statements
prepared in accordance with IFRS as issued by the International Accounting Standards Board. Due to the requirement to present comparative
financial information, the Transition Date is January 1, 2017.
Note 21 – "First Time Adoption
of IFRS" to the annual consolidated financial statements for the year ended December 31, 2018 included in this Annual Report
provides more detail on the key differences between accounting principles generally accepted in the United States of America ("U.S.
GAAP") (its previous GAAP) and IFRS, the accounting policy decisions, and the application of IFRS 1, First Time Adoption of
International Financial Reporting Standards.
Transitional financial impact
On adoption of IFRS, the Company has adjusted
amounts previously presented in the consolidated financial statements prepared in accordance with U.S. GAAP.
The impact of the transition to IFRS on
net loss and comprehensive loss is outlined in the table below:
|
Reconciliation of net loss and comprehensive loss
|
|
December 31, 2017
|
|
|
Net loss and comprehensive loss under U.S. GAAP
|
|
$
|
5,680
|
|
|
IFRS adjustments to net loss and comprehensive loss:
|
|
|
|
|
|
Loss on the Arrangement
|
|
|
33,416
|
|
|
Foreign currency translation adjustment
|
|
|
(797
|
)
|
|
Total net loss and comprehensive loss under IFRS
|
|
$
|
38,299
|
|
The impact of the transition to IFRS on
the statements of financial position is outlined in the table below:
|
|
|
US GAAP
December 31, 2017
|
|
|
Effects of
transition to IFRS
|
|
|
IFRS
December 31,
2017
|
|
|
Shareholders’ equity (deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
139,689
|
|
|
|
32,619
|
|
|
|
172,308
|
|
|
Reserves
|
|
|
22,175
|
|
|
|
-
|
|
|
|
22,175
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
5,230
|
|
|
|
(6,914
|
)
|
|
|
(1,684
|
)
|
|
Deficit
|
|
|
(191,583
|
)
|
|
|
(25,705
|
)
|
|
|
(217,288
|
)
|
|
Total shareholders’ equity (
deficiency
)
|
|
|
(24,489
|
)
|
|
|
-
|
|
|
|
(24,489
|
)
|
|
Total liabilities and
shareholders’ equity (
deficiency
)
|
|
$
|
8,257
|
|
|
$
|
-
|
|
|
$
|
8,257
|
|
There were no changes to the net cash used
in/from operating, financing or investing activities.
The following discussion is intended to
supplement the audited consolidated financial statements of the Company for the years ended December 31, 2018 and 2017, and the
related notes thereto, which have been prepared in accordance with IFRS. This discussion should be read in conjunction with the
audited consolidated financial statements contained in this Annual Report. This discussion contains "forward-looking statements"
that are subject to risk factors set out under the heading "Item 3. Key Information – D. Risk Factors". See "Cautionary
Note Regarding Forward-Looking Statements" above.
The Company’s operating results for
the two years ended December 31, 2018 and 2017 are summarized as follows:
|
|
|
Three months ended December 31
|
|
|
Years ended December 31
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration
|
|
$
|
38
|
|
|
$
|
95
|
|
|
$
|
175
|
|
|
$
|
332
|
|
|
General and administration
|
|
|
202
|
|
|
|
259
|
|
|
|
1,145
|
|
|
|
1,656
|
|
|
Share-based compensation
|
|
|
453
|
|
|
|
441
|
|
|
|
506
|
|
|
|
678
|
|
|
Depreciation
|
|
|
5
|
|
|
|
6
|
|
|
|
22
|
|
|
|
20
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
192
|
|
|
Operating loss
|
|
|
698
|
|
|
|
801
|
|
|
|
1,835
|
|
|
|
2,878
|
|
|
Unrealized loss on investments
|
|
|
1
|
|
|
|
-
|
|
|
|
73
|
|
|
|
-
|
|
|
Foreign exchange loss (gain)
|
|
|
145
|
|
|
|
26
|
|
|
|
287
|
|
|
|
(380
|
)
|
|
Interest expense, net
|
|
|
50
|
|
|
|
49
|
|
|
|
196
|
|
|
|
171
|
|
|
Loss from equity investee
|
|
|
66
|
|
|
|
57
|
|
|
|
175
|
|
|
|
215
|
|
|
Deferred revenue finance costs
|
|
|
2,985
|
|
|
|
-
|
|
|
|
2,985
|
|
|
|
-
|
|
|
Gain (loss) on sale of mining property interest
|
|
|
8
|
|
|
|
-
|
|
|
|
(353
|
)
|
|
|
-
|
|
|
Loss on the Arrangement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,627
|
|
|
Operating loss before income taxes
|
|
|
3,953
|
|
|
|
933
|
|
|
|
5,198
|
|
|
|
36,511
|
|
|
Income tax recovery
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(72
|
)
|
|
Net loss from continuing operations
|
|
|
3,953
|
|
|
|
933
|
|
|
|
5,198
|
|
|
|
36,439
|
|
|
Net loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
176
|
|
|
Net loss
|
|
|
3,953
|
|
|
|
933
|
|
|
|
5,198
|
|
|
|
36,615
|
|
|
Foreign currency translation adjustment
|
|
|
(2,576
|
)
|
|
|
(23
|
)
|
|
|
(3,372
|
)
|
|
|
1,684
|
|
|
Net loss and comprehensive loss
|
|
$
|
1,377
|
|
|
$
|
910
|
|
|
$
|
1,826
|
|
|
$
|
38,299
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.21
|
)
|
|
Discontinued operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
Total assets
|
|
$
|
7,432
|
|
|
$
|
8,257
|
|
|
$
|
7,432
|
|
|
$
|
8,257
|
|
|
Total non-current liabilities
|
|
$
|
46,835
|
|
|
$
|
32,499
|
|
|
$
|
46,835
|
|
|
$
|
32,499
|
|
|
Working capital
(1)
|
|
$
|
6,788
|
|
|
$
|
7,203
|
|
|
$
|
6,788
|
|
|
$
|
7,203
|
|
(1)
Working
capital is defined as Current Assets less Current Liabilities.
Operating Loss:
During the year ended December 31, 2018,
the Company’s operating loss was $1.8 million compared to $2.9 million for the year ended December 31, 2017.
Exploration costs in 2018 included expenditures
of $0.1 million for administration costs in Mongolia compared to $0.2 million in the comparative 2017 period. Holding costs on
all other properties in 2018 and 2017 were insignificant.
Overall, general and administration expenditures
in 2018 were 31% lower compared to the same period in 2017 due to the reduction in corporate overhead costs in 2018.
Share-based compensation expense in 2018
was 25% lower compared to the same period in 2017 due partly to adjustments made in 2017 relating to the Arrangement with Mason
Resources.
Non-operating Items:
During 2018, the Company adopted IFRS,
disposed of its Cañariaco Project Royalty to Anglo Pacific and commenced capitalizing direct expenditures related to the
development of the Oyu Tolgoi project. As a result, there were some significant non-cash items recognized in profit and loss.
Upon the adoption of IFRS, the
Company was required to recognize a non-cash loss of $33.6 million on the spin-out of the U.S.-based assets to Mason
Resources in 2017, which was the main difference between 2018 and 2017 results. The Company also adopted IFRS 15 – Revenue
from Contracts with Customers, which required the Company to record non-cash finance costs related to the deferred revenue
balance, specifically the Sandstorm stream, during the year.
In addition, the Company recognized a gain
on the sale of the Cañariaco Project Royalty in 2018 and subsequent to the sale, the Company recognized an unrealized loss on held-for-trading investments ("HFT investments") which was related to the holding of Anglo Pacific common shares.
As Entrée completed this transaction in 2018, there was no amount in comparative periods.
The foreign exchange loss of $0.3 million
in 2018 was primarily the result of movements between the C$ and US$ as the Company holds its cash in both currencies.
Interest expense (net) was primarily related
to the loan payable to OTLLC pursuant to the Entrée/Oyu Tolgoi JVA and is subject to a variable interest rate.
The loss from equity investee was related
to exploration costs on the Entrée/Oyu Tolgoi JV Property. Effective January 1, 2018, the Company commenced capitalizing
direct expenditures related to the development of the Oyu Tolgoi project. As a result, the loss from equity investee was lower
in 2018 compared to 2017 due to the change in this accounting policy.
Net loss from discontinued operations was
due to the Arrangement that was completed during second quarter 2017 and the amount was related to exploration costs of the U.S.-based
assets that were spun-out to Mason Resources.
Aside from the adjustment to the deferred
revenue balance mentioned above, the total assets and total non-current liabilities as at December 31, 2018 were comparable to
the balances at December 31, 2017.
REVIEW OF OPERATIONS
MONGOLIA
Entrée/Oyu Tolgoi JV Project
No significant exploration has been completed
by OTLLC on the Entrée/Oyu Tolgoi JV Property since February 2013 and work planned for 2019 has not yet been finalized.
Since formation, and as of December 31,
2018, the Entrée/Oyu Tolgoi JV has expended approximately $31.2 million to advance the Entrée/Oyu Tolgoi JV Property.
As of December 31, 2018, OTLLC has contributed on Entrée’s behalf the required cash participation amount equal to
20% of the $31.2 million incurred to date, plus accrued interest at prime plus 2%, for a total of $8.4 million.
For the three months ended December 31,
2018 and December 31, 2017, Entrée expenses related to Mongolian operations were not significant. For the full year ended
December 31, 2018, expenses related to Mongolian operations were $0.1 million compared to $0.2 million for the 2017 year. In 2018,
these costs represented in-country administration expenses. In 2017, the expenses related to similar expenditure items and also
included consulting costs related to 2018 Technical Report preparation.
AUSTRALIA
Blue Rose JV
Entrée has a 56.53% interest in
the Blue Rose JV to explore for minerals other than iron ore on EL 6006, with Giralia Resources Pty Ltd, a subsidiary of Hancock
Prospecting Pty Ltd, retaining a 43.47% interest. EL 6006, totalling 257 square kilometres, is located in the Olary Region of South
Australia, 300 kilometres northeast of Adelaide and 130 kilometres west-southwest of Broken Hill.
The rights to explore for and develop iron
ore on EL 6006 are held by FML, a subsidiary of Lodestone pursuant to a prior agreement with the Blue Rose JV partners. On April
18, 2017, the Blue Rose JV partners entered into the Deed with Lodestone and FML. In accordance with the Deed, the Blue Rose JV
partners transferred title to EL 6006 and assigned their native title agreements to FML and agreed to vary a payment required to
be made to the Blue Rose JV partners under the prior agreement. FML paid to the Blue Rose JV 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 EL 6006, 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 EL 6006. Under the Deed, an additional A$285,000 must also be paid to the
Blue Rose JV partners upon the commencement of Commercial Production (as such term is defined in the Deed).
The Braemar Iron Formation is the host
rock to magnetite mineralisation on EL 6006. The Braemar Iron Formation is a meta-sedimentary iron siltstone, which is inherently
soft. 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.
Expenditures in 2018 were minimal and related
to administrative costs in Australia.
INVESTMENTS
At December 31, 2018, the Company owned
478,951 common shares of Anglo Pacific, a public company listed on the London Stock Exchange ("LSE") and the TSX.
The common shares have been categorized
as fair value through profit and loss ("FVTPL") and any revaluation gains and losses in fair value are included in the
statement of comprehensive loss. The fair value of the common shares is determined based on the closing price on the LSE at each
period end.
In August 2015, the Company acquired from
Candente the Cañariaco Project Royalty on Candente's 100% owned Cañariaco copper project in Peru for a purchase price
of $500,000.
On June 8, 2018, the Company sold the Cañariaco
Project Royalty to Anglo Pacific, whereby the Company transferred all the issued and outstanding shares of its subsidiaries that
directly or indirectly hold the Cañariaco Project Royalty to Anglo Pacific in return for consideration of $1.0 million,
payable by the issuance of 478,951 Anglo Pacific common shares. In addition, Entrée retains the right to the Royalty Pass-Through
Payments as follows:
|
|
·
|
20% of any Cañariaco Project Royalty payment
received for any calendar quarter up to and including December 31, 2029;
|
|
|
·
|
15% of any Cañariaco Project Royalty payment
received for any calendar quarter commencing January 1, 2030 up to and including the quarter ending December 31, 2034; and
|
|
|
·
|
10% of any Cañariaco Project Royalty
payment received for any calendar quarter commencing January 1, 2035 up to and including the quarter ending December 31, 2039.
|
In accordance with IFRS, the Company has
attributed a value of nil to the Royalty Pass-Through Payments since realization of the proceeds is contingent upon several uncertain
future events not wholly within the control of the Company.
The Company recognized a gain on the sale
of the Cañariaco Project Royalty of $0.4 million as at June 8, 2018 as outlined below.
|
|
|
|
|
|
Consideration received
|
|
$
|
1,000
|
|
|
Mineral property interest cost - Cañariaco Project Royalty
|
|
|
(532
|
)
|
|
Transaction costs
|
|
|
(115
|
)
|
|
Gain on sale
|
|
$
|
353
|
|
The fair value of the common
shares received was determined based on the trading price at GBP1.57 ($2.09) per common share.
Subsequent to the end of the year, the
Company disposed of all its investment in common shares of Anglo Pacific for net proceeds of $1.0 million.
|
|
B.
|
Liquidity and Capital Resources
|
|
|
|
Year ended December 31
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Cash flows used in operating activities
|
|
|
|
|
|
|
|
|
|
- Before changes in non-cash working capital items
|
|
$
|
(1,243
|
)
|
|
$
|
(3,144
|
)
|
|
- After changes in non-cash working capital items
|
|
|
(777
|
)
|
|
|
(2,996
|
)
|
|
Cash flows from financing activities
|
|
|
165
|
|
|
|
5,237
|
|
|
Cash flows used in investing activities
|
|
|
(126
|
)
|
|
|
(8,943
|
)
|
|
Net cash outflows
|
|
|
(738
|
)
|
|
|
(6,702
|
)
|
|
Effect of exchange rate changes on cash
|
|
|
(176
|
)
|
|
|
379
|
|
|
Cash balance
|
|
$
|
6,154
|
|
|
$
|
7,068
|
|
|
Cash flows used in operating activities per share
|
|
|
|
|
|
|
|
|
|
- Before changes in non-cash working capital items
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
- After changes in non-cash working capital items
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
Cash flows after changes in non-cash
working capital items in 2018 were 74% lower than 2017 due mainly to one-time restructuring costs in 2017 and the additional
receipt of the final payments associated with the Administrative Services Agreement, which was terminated in December.
Cash flows from financing activities were
lower in 2018 compared to 2017 due to $5.2 million received from the Non-Brokered Private Placement which closed in Q1 2017.
Cash flows used in investing activities
were lower in 2018 compared to 2017 due to the transfer of $8.8 million to Mason Resources in Q2 2017 as a capital contribution
in connection with the Arrangement.
The Company is an exploration stage company
and has not generated positive cash flows from its operations. As a result, the Company has been dependent on equity and production-based
financings for additional funding. Working capital on hand at December 31, 2018 was approximately $6.8 million with a cash balance
of approximately $6.1 million. Management believes it has adequate financial resources to satisfy its obligations over the next
12 month period and up to the time when the Company expects the Entrée/Oyu Tolgoi JV Property will commence production.
The Company does not currently anticipate the need for additional funding during this time.
Loan Payable to Oyu Tolgoi LLC
Under the terms of the
Entrée/Oyu Tolgoi JVA, the Company has elected to have OTLLC contribute funds to approved joint venture programs and
budgets on the Company’s behalf, each such contribution to be treated as a non-recourse loan. Interest on each loan advance
shall accrue at an annual rate equal to OTLLC’s actual cost of capital or the prime rate of the Royal Bank of Canada,
plus two percent (2%) per annum, whichever is less, as at the date of the advance. The loan will be repayable by the
Company monthly from ninety percent (90%) of the Company’s share of available cash flow from the Entrée/Oyu
Tolgoi JV. In the absence of available cash flow, the loan will not be repayable. The loan is not expected to be repaid
within one year.
Capital Resources
Entrée had no commitments for capital
assets at December 31, 2018.
At December 31, 2018, Entrée had
working capital of $6.8 million compared to $7.2 million as at December 31, 2017.
Share Capital
The Company’s authorized share capital
consists of unlimited Common Shares without par value. At December 31, 2018, the Company had 174,806,820 Common Shares issued and
outstanding.
Share options
As at December 31, 2018, the Company had
8,710,000 stock options outstanding, of which 8,685,000 had vested and were exercisable.
For the year ended December 31, 2018, the
total share-based compensation charges relating to 2,290,000 options granted to officers, employees, directors and consultants
was $0.5 million.
Share purchase warrants
At December 31, 2018, 9,264,735 Replacement
Warrants were outstanding.
|
|
C.
|
Research and Development, Patents and Licenses, etc.
|
None.
While the Company does not have any producing
mines it is directly affected by trends in the metal industry. At the present time global metal prices are extremely volatile.
Base metal prices and gold prices, driven by rising global demand, climbed dramatically and approached near historic highs several
years ago. Prices have declined significantly since those highs.
Overall market prices for securities in
the mineral resource sector and factors affecting such prices, including base metal prices, political trends in the countries in
which such companies operate, and general economic conditions, may have an effect on the terms on which financing is available
to the Company, if available at all.
Except as disclosed, the Company does not
know of any trends, demand, commitments, events or uncertainties that will result in, or that are reasonably likely to result in,
its liquidity either materially increasing or decreasing at present or in the foreseeable future. Material increases or decreases
in liquidity are substantially determined by the results of exploration and development programs on the Company’s material
assets.
The Company’s financial assets and
liabilities generally consist of cash and cash equivalents, investments, receivables, deposits, accounts payable and accrued liabilities,
and loan payable, some of which are denominated in foreign currencies including United States dollars, Mongolian Tugriks and Australian
dollars. The Company is at risk to financial gain or loss as a result of foreign exchange movements against the Canadian dollar.
The Company does not currently have major commitments to acquire assets in foreign currencies, but historically it has incurred
the majority of its exploration costs in foreign currencies.
|
|
E.
|
Off-balance Sheet Arrangements
|
The Company has no off-balance sheet arrangements
except for the contractual obligation noted below.
|
|
F.
|
Tabular Disclosure of Contractual Obligations
|
The following table lists, as at December
31, 2018, in thousands of United States dollars, the Company’s contractual obligations. Entrée is committed to make
lease payments totalling $0.4 million over its four-year year office lease in Vancouver, Canada.
|
|
Less than 1
year
|
1-3 Years
|
3-5 years
|
More than 5
years
|
Total
|
|
Office lease
|
$106
|
$315
|
$Nil
|
$Nil
|
$421
|
|
Total
|
$106
|
$315
|
$Nil
|
$Nil
|
$421
|
The Company seeks safe harbor for our forward-looking
statements contained in Items 5.E and F. See the heading "Cautionary Note Regarding Forward-Looking Statements" above.
|
|
Item 6.
|
Directors, Senior Management and Employees
|
|
|
A.
|
Directors and Senior Management
|
The following is a list of the Company’s
directors and executive officers. The directors were elected by the Company’s shareholders on May 23, 2018 and are elected
for a term of one year, which term expires at the election of the directors at the next annual meeting of shareholders.
The Board adopted a majority voting policy
in May 2013. If the number of shares "withheld" from voting for the election of a nominee is greater than the number
of shares voted "for" his or her election, the director must submit his or her resignation to the Non-Executive Chair
of the Board promptly after the shareholders’ meeting. The Corporate Governance and Nominating Committee of the Board (the
"CGNC") will consider the resignation and will recommend to the Board whether or not to accept it. After considering
the recommendations of the CGNC, the Board will make its decision as to whether to accept or reject the resignation in question
and the Company will announce the Board’s decision, including any reasons for the Board not accepting a resignation, within
90 days following the shareholders’ meeting. The policy does not apply if there is a contested director election or where
the election involves a proxy battle.
The Company’s Board consists of six
directors. 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, 70
Mr. Bailey has been a director of the Company
since June 28, 2002. On February 5, 2018, Mr. Bailey was appointed Non-Executive Chair 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 Fiore Gold Ltd. and Core Gold Inc. and was a director
of Mason Resources until its acquisition by Hudbay.
James Harris, Director, 67
Mr. Harris has been a director of the Company
since January 29, 2003, served as the Company’s Non-Executive Chair between March 15, 2006 and June 27, 2013 and served as
the Company’s Non-Executive Deputy Chair 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 was a director of Mason
Resources until its acquisition by Hudbay.
Alan Edwards, Director, 61
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 Detour Gold Corporation, Americas Silver Corporation and Orvana Minerals Corp. He served as the Non-Executive
Chair of the Board of Mason Resources until its acquisition by Hudbay. He also served as the non-executive Chairman of Rise Gold
Corp. from April 2017 to September 2018, 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,
53
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, 63
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 and he has a Mine Manager’s Certificate of Competency (South Africa).
Stephen Scott, President, Chief
Executive Officer and Director, 58
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 was also the President, Chief Executive
Officer and a director of Mason Resources until its acquisition by Hudbay.
Duane Lo, Chief Financial Officer,
45
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 was also the Chief Financial
Officer of Mason Resources until its acquisition by Hudbay. 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. and Golden
Ridge Resources Ltd.
Susan McLeod, Vice President,
Legal Affairs and Corporate Secretary, 47
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 was also the Chief Legal Officer
and Corporate Secretary of Mason Resources until its acquisition by Hudbay. 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, Former Vice
President, Corporate Development, 57
Mr. Cinits was the Company’s Vice
President, Corporate Development between January 1, 2014 and January 1, 2019. 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 was also the Chief Operating Officer of Mason Resources
until its acquisition by Hudbay. 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.
Family Relationships
There
are no family relationships between any directors or executive officers of the Company.
Arrangements
There
are no known arrangements or understandings with any major shareholders, customers, suppliers or others, pursuant to which any
of the Company’s officers or directors was selected as an officer or director of the Company.
Conflicts of Interest
There are no existing or potential conflicts
of interest among the Company, its directors, officers or promoters as a result of their outside business interests with the exception
that certain of the Company’s directors, officers and promoters serve as directors, officers and promoters of other companies,
and, therefore, it is possible that a conflict may arise between their duties as a director, officer or promoter of the Company
and their duties as a director or officer of such other companies.
The directors and officers of the Company
are aware of the existence of laws governing accountability of directors and officers for corporate opportunity and requiring disclosures
by directors of conflicts of interest and the Company will rely upon such laws in respect of any directors’ and officers’
conflicts of interest or in respect of any breaches of duty by any of its directors or officers. All such conflicts will be disclosed
by such directors or officers in accordance with the BCBCA, and they will govern themselves in respect thereof to the best of their
ability in accordance with the obligations imposed upon them by law.
The majority of the Company’s directors
are also directors, officers or shareholders of other companies that are engaged in the business of acquiring, developing and exploiting
natural resource properties including properties in countries where the Company is conducting its operations. Such associations
may give rise to conflicts of interest from time to time. Such a conflict poses the risk that the Company may enter into a transaction
on terms which place the Company in a worse position than if no conflict existed. The directors of the Company are required by
law to act honestly and in good faith with a view to the best interest of the Company and to disclose any interest which they may
have in any project or opportunity of the Company. However, each director has a similar obligation to other companies for which
such director serves as an officer or director. The Company’s Code of Business Conduct and Ethics (the "Code of Ethics")
sets out the Company’s internal policy regarding the avoidance of any relationship which could create a conflict of interest
and the disclosure of such relationships and conflicts. The Code of Ethics also offers specific guidance in respect of certain
conflict of interest situations.
For the purposes of this Annual Report,
"executive officer" of the Company means an individual who at any time during the year was the Chair, or a Vice-Chair
or President of the Company; any Vice President in charge of a principal business unit, division or function including sales, finance
or production; and any individual who performed a policy-making function in respect of the Company.
Set out below are particulars
of compensation paid to the following persons (the "Named Executive Officers" or "NEOs"):
|
|
1.
|
a chief executive officer ("CEO");
|
|
|
2.
|
a chief financial officer ("CFO");
|
|
|
3.
|
each of the three most highly compensated executive officers,
or the three most highly compensated individuals acting in a similar capacity, other than the CEO and CFO, at the end of the most
recently completed financial year whose total compensation was, individually, more than C$150,000 for that financial year; and
|
|
|
4.
|
any individual who would be a NEO under paragraph (3) but for the fact that the individual was
neither an executive officer of the Company, nor acting in a similar capacity, at the end of that financial year.
|
As at December 31, 2018, the end of the
most recently completed financial year of the Company, the Company had four NEOs.
Compensation Discussion and Analysis
The Compensation Committee of the Board
typically meets in the fall of each year to discuss and determine the recommendations that it will make to the Board regarding
executive officer compensation. The general objectives of the Company’s compensation strategy are to (a) compensate executive
officers in a manner that encourages and rewards a high level of performance and outstanding results with a view to increasing
long-term shareholder value; (b) align management’s interests with the long-term interests of shareholders; (c) provide a
compensation package that is commensurate with other comparable companies to enable the Company to attract and retain talent; and
(d) ensure that the total compensation package is designed in a manner that takes into account the fact that the Company is without
a history of earnings, current market and industry circumstances and the Company’s ability to raise capital.
In the course of its annual compensation
evaluation, the Compensation Committee considers, among such other factors as it may deem relevant, the CEO’s recommendations
with respect to compensation of other executive officers, the extent to which corporate goals have been achieved, the Company’s
overall performance, awards given to executive officers in prior years, and general market conditions and economic outlook.
The Compensation Committee generally considers
three elements of compensation – a base salary for the next financial year, a discretionary cash bonus to reward superior
performance and an award of long-term incentive stock options. Base salary comprises the portion of executive compensation that
is fixed, whereas discretionary cash bonuses and option-based compensation represent compensation that is "at risk" depending
on whether the executive officer is able to meet or exceed his or her applicable performance expectations, and overall performance
of the Company. No specific formula has been developed to assign a specific weighting to each of these components. Rather, the
Compensation Committee focuses on ensuring that the total compensation package for each executive officer meets the general objectives
of the Company’s compensation strategy.
Base salary is used to provide executive
officers a set amount of money during the year with the expectation that each executive officer will perform his or her responsibilities
to the best of his or her ability and in the best interests of the Company. Generally, the Compensation Committee makes recommendations
regarding each executive officer’s base salary for the upcoming year after taking multiple factors into account, including
the overall performance of the Company, general market performance and economic outlook, base salaries paid to executive officers
of comparable companies, the performance of the executive officer, and the executive officer’s experience level and responsibilities.
The awarding of incentive stock options
provides a link between executive officer compensation and the Company’s share price. It also rewards management for achieving
results that improve Company performance and thereby increase shareholder value. Stock options are generally awarded to executive
officers at the commencement of employment and periodically thereafter. In making a determination as to whether an award of long-term
incentive stock options is appropriate, and if so, the number of options that should be awarded, the Compensation Committee will
consider, among such other factors as it may deem relevant, the value in securities of the Company that the Compensation Committee
intends to award as compensation, current and expected future performance of the executive officer, the potential dilution to shareholders
and the cost to the Company, previous awards made to the executive officer and the limits imposed by the terms of the Company’s
Stock Option Plan (the "Plan") and the TSX. The Company considers the awarding of incentive stock options to be a particularly
important element of compensation as it allows the Company to encourage and reward each executive officer’s efforts to increase
value for shareholders without requiring the Company to use cash from its treasury. The terms and conditions of the Company’s
stock option awards, including vesting provisions and exercise prices, are determined by the Board at the time of award, subject
to the limits imposed by the terms of the Plan.
Finally, the Compensation Committee will
consider whether it is appropriate and in the best interests of the Company to award a discretionary cash bonus to executive officers
and if so, in what amount. The extent to which management has achieved goals for the year will be evaluated by the Compensation
Committee and the Board, and the actual amount of discretionary cash bonuses that will be paid out, if any, will be recommended
by the Compensation Committee and approved by the Board in its discretion based upon that evaluation.
Administrative Services Agreement
with Mason Resources
Effective May 9, 2017, the Company entered
into an Administrative Services Agreement with Mason Resources (the "Administrative Services Agreement"), pursuant to
which the Company provided office space, furnishings and equipment, communications facilities and personnel necessary for Mason
Resources to fulfill its basic day-to-day head office and executive responsibilities on a pro-rata cost-recovery basis. Mason Resources
terminated the Administrative Services Agreement on December 19, 2018, concurrently with the closing of the acquisition of Mason
Resources by Hudbay.
During the term of the Administrative Services
Agreement, Mason Resources’ executive officers did not receive salaried compensation from Mason Resources. Instead Mason
Resources had sufficient access to and the use of the Company’s executive officers to enable Mason Resources to achieve its
corporate goals and objectives. The Company was the sole employer and was responsible for paying 100% of executive officer salaries
for services provided by executive officers to both the Company and Mason Resources. The Company then invoiced Mason Resources
for its proportionate share of actual costs for the executive officers, including base salary, benefits, vacation pay, perquisites,
professional memberships and continuing education expenses. The Company could also propose discretionary cash bonuses to be allocated
between the Company and Mason Resources to reward exceptional service by executive officers to Mason Resources and the Company,
taken as a whole.
2018 Assessments
In February 2018, the Compensation Committee
met to assess the performance of the Company and management as a whole. Key corporate goals set by management, approved by the
Board and achieved since February 2017 included:
|
|
·
|
completing the spin-out of the Ann Mason Project and
Lordsburg property by way of the Arrangement, into a new public company listed for trading on the TSX and the OTCQB;
|
|
|
·
|
engaging Wood to complete the 2018 Technical Report
on the Company’s interest in the Entrée/Oyu Tolgoi JV Property in Mongolia;
|
|
|
·
|
raising investor awareness of the Company’s
key asset; and
|
|
|
·
|
further initiatives to reduce the Company’s
cash burn rate, including by entering into the Administrative Services Agreement, ensuring that the Company 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.
|
Following its assessment, the Compensation
Committee determined that it was appropriate to recommend to the Board that discretionary cash bonuses be awarded to the NEOs.
The award was approved by the Board on February 27, 2018. The Company proposed to Mason Resources that the cost of the discretionary
cash bonuses be allocated between the Company and Mason Resources to reward exceptional service by the NEOs to Mason Resources
and the Company over the previous year, taken as a whole. As the NEOs were principally focussed on completing the Arrangement until
May 2017 and the NEOs spent 50% of their time providing services to Mason Resources therafter, the parties agreed that it was appropriate
to allocate 50% of the cost of the discretionary cash bonuses to Mason Resources as follows:
|
NEO
|
|
Total Bonus Paid to NEO (C$)
|
|
|
Amount of Bonus Allocated to Mason Resources (C$)
|
|
|
Stephen Scott
|
|
$
|
80,000
|
|
|
$
|
40,000
|
|
|
Duane Lo
|
|
$
|
36,000
|
|
|
$
|
18,000
|
|
|
Susan McLeod
|
|
$
|
40,000
|
|
|
$
|
20,000
|
|
|
Robert Cinits
|
|
$
|
36,000
|
|
|
$
|
18,000
|
|
In December 2018, the Compensation Committee
met to discuss executive officer compensation for 2019 and determined that no salary increases or discretionary cash bonuses should
be recommended to the Board at that time.
In connection with the appointment of Stephen
Scott as Interim CEO in November 2015, the Company agreed to grant to Mr. Scott, as an inducement for his service, up to 500,000
Common Shares (the "Bonus Shares"). Under the terms of Mr. Scott’s employment agreement with the Company, as amended,
the Bonus Shares were issuable at the discretion of the Board, based on the achievement of the Company’s strategic direction
or the achievement of one or more fundamental transactions, provided the Bonus Shares would not be issued and Mr. Scott would have
no entitlement to receive any of the Bonus Shares after December 31, 2018. The grant was made outside the Company’s existing
shareholder approved equity incentive plans and was approved by the independent members of the Board as a material inducement to
Mr. Scott’s employment in reliance upon section 711(a) of the NYSE American Company Guide. The Company could, at its option,
satisfy any obligation to issue Bonus Shares by making a cash payment to Mr. Scott equivalent to the then market price of the Bonus
Shares. The Board authorized the issuance of 100,000 Bonus Shares to Mr. Scott effective May 5, 2017, immediately prior to completion
of the Arrangement. At its meeting in December 2018, the Compensation Committee noted that no further Bonus Shares could be issued
to Mr. Scott under the terms of his employment agreement with the Company, as amended. The Compensation Committee further noted
that in the event Management achieves one or more fundamental transactions during 2019, the Compensation Committee would re-consider
the award of discretionary cash bonuses to executive officers, including a cash bonus of up to C$200,000 to Mr. Scott.
Management has also annually proposed,
and the Compensation Committee has recommended, option awards for directors, officers, employees and consultants of the Company,
as a means of rewarding performance without depleting the Company’s treasury.
The Board can exercise discretion to award
compensation absent attainment of corporate goals or to reduce or increase the size of any award. The Board did not exercise this
discretion in 2018 with respect to any NEO.
In the course of conducting its annual
review of compensation, the Compensation Committee considers the implications and risks associated with the Company’s executive
compensation policies, philosophy and practices. As discussed above, the Compensation Committee follows an overall compensation
model which ensures that an adequate portion of overall compensation for executive officers is "at risk" and only realized
through the performance of the Company over both the short-term and long-term. The Compensation Committee reviews the model to
ensure that there are sufficient features to mitigate the incentive for excessive risk taking. Some of the key risk mitigating
features include:
|
|
·
|
balanced design, between fixed and variable pay and
between short-term and long-term incentives; and
|
|
|
·
|
a greater reward opportunity derived from long-term
incentives compared to short-term incentives, creating a greater focus on sustained performance over time.
|
The Company does not permit its executive
officers or directors to hedge any of the equity compensation granted to them.
Compensation Governance
The Compensation Committee is composed
of Mark Bailey (chair), James Harris and Alan Edwards, all of whom are independent directors, applying the definition set out in
section 1.4 of National Instrument 52-110 –
Audit Committees
("NI 52-110") and under Section 803A of the
NYSE American Company Guide. Each member of the Compensation Committee has served on various other public company boards, which
gives them sufficient direct experience in executive compensation to assist them in making decisions about the suitability of the
Company’s compensation practices and policies. For a description of each committee member’s experience, see "Item
6. Directors, Senior Management and Employees – A. Directors and Senior Management" above.
The Board has adopted a Compensation Committee
Charter, which governs the organization of the Compensation Committee and sets out the duties and responsibilities of the chair
and the Compensation Committee as a whole.
The primary objective of the Compensation
Committee is to discharge the responsibilities of the Board relating to compensation and benefits of the executive officers and
directors of the Company. The Committee shall consist of three or more directors appointed by the Board, each of whom must be independent.
The Committee shall meet as many times as it deems necessary, but not less frequently than one time per year. The CEO may not be
present during the Compensation Committee’s voting or deliberations.
Responsibilities of the Compensation Committee
include:
|
|
·
|
Reviewing and approving on an annual basis corporate
goals and objectives relevant to CEO compensation, evaluating the CEO’s performance in light of those goals and objectives
and setting the CEO’s compensation level based on this evaluation. In determining the long-term incentive component of CEO
compensation, the Compensation Committee will consider, among such other factors as it may deem relevant, the Company’s
performance, shareholder returns, the value of similar incentive awards to chief executive officers at comparable companies and
the awards given to the CEO in past years;
|
|
|
·
|
Reviewing and approving on an annual basis the adequacy
and form of compensation and benefits of all other executive officers and directors, and making recommendations to the Board in
that regard;
|
|
|
·
|
Making recommendations to the Board with respect to
the Plan and any other incentive compensation plans and equity-based plans;
|
|
|
·
|
Determining the recipients of, and the nature and
size of share compensation awards and bonuses granted from time to time, in compliance with applicable securities law, stock exchanges
and other regulatory requirements; and
|
|
|
·
|
Approving inducement grants, which include grants
of options or stock to new employees in connection with a merger or acquisition, as well as any tax-qualified, non-discriminatory
employee benefit plans or non-parallel non-qualified plans, to new employees.
|
The Compensation Committee is acutely aware
of the dual responsibility that non-executive directors have for overseeing the Company’s corporate governance and long-term
sustainability, as well as its compensation plans. In the course of determining compensation for non-executive directors, the Compensation
Committee tries to ensure that non-executive director interests are closely aligned with those of shareholders, and that best practices
for corporate governance are observed in the course of structuring non-executive director pay. In particular, the Compensation
Committee is committed to structuring director pay in a manner that enables directors to maintain their independence. One of the
ways that the Compensation Committee attempts to achieve this is by imposing reasonable limits on independent director participation
in the Plan.
The Compensation
Committee has the authority to retain outside advisors, including the sole authority to retain or terminate consultants to assist
the Compensation Committee in the evaluation of compensation of executive officers and directors. No compensation consultant or
advisor has been retained by the Company, and no fees have been paid to a compensation consultant or advisor, in either of the
Company’s two most recently completed financial years.
Summary Compensation Table
The following table is a summary of compensation
paid or granted to the NEOs for the last three financial years ending December 31, 2018, 2017 and 2016.
|
|
|
|
|
|
Non-equity incentive
plan compensation
(US$)
(2) (3)
|
|
|
|
Name and
Principal
Position
|
Year
|
Salary
(US$)
(3)
|
Share-
based
awards
(US$)
(4)
|
Option-
based
awards
(1)
(US$)
|
Annual
incentive
plans
|
Long-
term
incentive
plans
|
Pension
value
(US$)
|
All other
compensation
(US$)
(3)
|
Total
compensation
(US$)
|
|
Stephen Scott,
President and CEO
(5) (6)
|
2018
|
$236,860
(7)
|
Nil
|
$109,387
|
$58,642
(7)
|
Nil
|
Nil
|
Nil
|
$404,890
(7)
|
|
2017
|
$223,692
(7)
|
$45,094
|
$78,934
|
$79,890
|
Nil
|
Nil
|
Nil
|
$427,610
(7)
|
|
2016
|
$156,401
|
Nil
|
$72,360
|
Nil
|
Nil
|
Nil
|
$39,100
|
$267,861
|
|
Duane Lo,
CFO
(8)
|
2018
|
$151,188
(9) (10)
|
Nil
|
$54,694
|
$26,389
(9)
|
Nil
|
Nil
|
Nil
|
$232,270
(9)
|
|
2017
|
$179,753
(9)
|
Nil
|
$48,575
|
$25,565
|
Nil
|
Nil
|
Nil
|
$253,893
(9)
|
|
2016
|
$27,929
|
Nil
|
$59,821
|
Nil
|
Nil
|
Nil
|
$78,945
|
$166,695
|
|
Susan McLeod,
Vice President, Legal Affairs & Corporate
Secretary
|
2018
|
$184,724
(11)
|
Nil
|
$54,694
|
$29,321
(11)
|
Nil
|
Nil
|
Nil
|
$268,738
(11)
|
|
2017
|
$201,323
(11)
|
Nil
|
$54,646
|
$28,760
|
Nil
|
Nil
|
Nil
|
$284,729
(11)
|
|
2016
|
$187,682
|
Nil
|
$36,180
|
Nil
|
Nil
|
Nil
|
Nil
|
$223,862
|
|
Robert Cinits,
Vice President, Corporate Development
|
2018
|
$184,724
(12)
|
Nil
|
Nil
(13)
|
$26,389
(12)
|
Nil
|
Nil
|
Nil
|
$211,113
(12)
|
|
2017
|
$201,323
(12)
|
Nil
|
$48,575
|
$25,565
|
Nil
|
Nil
|
Nil
|
$275,463
(12)
|
|
2016
|
$187,682
|
Nil
|
$36,180
|
Nil
|
Nil
|
Nil
|
Nil
|
$223,862
|
|
|
(1)
|
The Company uses the Black-Scholes option-pricing
model for determining fair value of stock options issued at the grant date. The Company selected the Black-Scholes option-pricing
model because it is widely used in estimating option based compensation values by Canadian and U.S. public companies. The practice
of the Company is to grant all option based awards in Canadian currency, and then convert the grant date fair value amount to
United States currency for reporting the value of the grants in the Company’s financials. The conversion rate for each grant
is the average of the rates quoted by the Bank of Canada as its daily average exchange rate of the last day of the three months
in the quarter in which the grant is made. The conversion rates for the purpose of the grants in this table are presented below
and are based on the applicable conversion rate on the date of grant, each as supplied by the Bank of Canada.
|
|
|
(2)
|
The Company does not have a formal annual incentive
program, however, bonuses are granted as determined by the Compensation Committee and approved by the Board on an individual basis.
The Company does not presently have a pension incentive plan for any of its executive officers, including its NEOs.
|
|
|
(3)
|
All compensation is negotiated and settled in Canadian
dollars. The exchange rate used to convert 2018 compensation to US$ is 1.3642 (2017 – 1.2517; 2016 – 1.3427).
|
|
|
(4)
|
Mr. Scott received 100,000 Bonus Shares on May 5,
2017. The fair value of the share-based award at the grant date is calculated using the closing price of the Company’s Common
Shares on the TSX on May 5, 2017. The grant date fair value amount is then converted to United States currency using the rate
quoted by the Bank of Canada as its daily average exchange rate for May 5, 2017 (1.3749).
|
|
|
(5)
|
Mr. Scott is also a director of the Company. Mr. Scott
did not receive compensation from the Company for acting as a director, and no portion of the total compensation disclosed above
was received by Mr. Scott as compensation for acting as a director.
|
|
|
(6)
|
Mr. Scott was appointed Interim CEO effective November
16, 2015 under an independent contractor agreement dated November 12, 2015. His consulting fee is reported as Other Compensation.
Mr. Scott was appointed President and CEO effective April 1, 2016 under an employment agreement of even date.
|
|
|
(7)
|
Mr. Scott was also the President and CEO of Mason
Resources until its acquisition by Hudbay. The Company is Mr. Scott’s employer and was responsible for paying 100% of Mr.
Scott’s salary for his services to both the Company and Mason Resources, which is reported in "Salary" above.
Pursuant to the Administrative Services Agreement between the Company and Mason Resources, between May 9, 2017 (the effective
date of the Arrangement) and December 19, 2018 (the termination of the Administrative Services Agreement), the Company provided
Mason Resources with access to and the use of 50% of Mr. Scott’s time, and Mason Resources paid the Company 50% of the Company’s
actual cost of Mr. Scott’s salary, bonus and benefits during that period.
|
|
|
(8)
|
Mr. Lo was appointed Interim CFO effective April 1, 2016 under an independent contractor agreement
of even date. His consulting fee is reported as Other Compensation. Mr. Lo was appointed CFO effective November 1, 2016 under an
employment agreement of even date.
|
|
|
(9)
|
Mr. Lo was also the CFO of Mason Resources until its acquisition by Hudbay. The Company is Mr.
Lo’s employer and was responsible for paying 100% of Mr. Lo’s salary for his services to both the Company and Mason
Resources, which is reported in "Salary" above. Pursuant to the Administrative Services Agreement between the Company
and Mason Resources, between May 9, 2017 (the effective date of the Arrangement) and December 19, 2018 (the termination of the
Administrative Services Agreement), the Company provided Mason Resources with access to and the use of 50% of Mr. Lo’s time,
and Mason Resources paid the Company 50% of the Company’s actual cost of Mr. Lo’s salary, bonus and benefits during
that period.
|
|
|
(10)
|
Effective October 1, 2018, Mr. Lo began to provide part-time (65%) services to the Company at an
annual salary of C$150,000.
|
|
|
(11)
|
Ms. McLeod was also the Chief Legal Officer and Corporate Secretary of Mason Resources until its
acquisition by Hudbay. The Company is Ms. McLeod’s employer and was responsible for paying 100% of Ms. McLeod’s salary
for her services to both the Company and Mason Resources, which is reported in "Salary" above. Pursuant to the Administrative
Services Agreement between the Company and Mason Resources, between May 9, 2017 (the effective date of the Arrangement) and December
19, 2018 (the termination of the Administrative Services Agreement), the Company provided Mason Resources with access to and the
use of 50% of Ms. McLeod’s time, and Mason Resources paid the Company 50% of the Company’s actual cost of Ms. McLeod’s
salary, bonus and benefits during that period.
|
|
|
(12)
|
Mr. Cinits was also the Chief Operating Officer of Mason Resources until its acquisition by Hudbay.
The Company was Mr. Cinits’ employer and was responsible for paying 100% of Mr. Cinits’ salary for his services to
both the Company and Mason Resources, which is reported in "Salary" above. Pursuant to the Administrative Services Agreement
between the Company and Mason Resources, between May 9, 2017 (the effective date of the Arrangement) and December 19, 2018 (the
termination of the Administrative Services Agreement), the Company provided Mason Resources with access to and the use of 50% of
Mr. Cinits’ time, and Mason Resources paid the Company 50% of the Company’s actual cost of Mr. Cinits’ salary,
bonus and benefits during that period.
|
|
|
(13)
|
Mr. Cinits ceased to be the Vice President, Corporate Development of the Company effective January
1, 2019.
|
The following table provides the exchange
rates used to convert the value of the option based awards from Canadian dollars to United States dollars as reported above.
|
Name
|
Date of Grant
|
Expiry Date
|
Exercise Price (C$)
|
Options Granted
|
Exchange Rates to US$
|
|
Stephen Scott
|
19-Dec-18
|
18-Dec-23
|
$0.55
|
500,000
|
C$1.36/US$1
|
|
16-Oct-17
|
15-Oct-22
|
$0.52
|
325,000
|
C$1.25/US$1
|
|
22-Nov-16
|
21-Nov-21
|
$0.42
(1)
|
400,000
|
C$1.34/US$1
|
|
Duane Lo
|
19-Dec-18
|
18-Dec-23
|
$0.55
|
250,000
|
C$1.36/US$1
|
|
16-Oct-17
|
15-Oct-22
|
$0.52
|
200,000
|
C$1.25/US$1
|
|
22-Nov-16
|
21-Nov-21
|
$0.42
(1)
|
250,000
|
C$1.34/US$1
|
|
1-Apr-16
|
31-Mar-21
|
$0.39
(1)
|
100,000
|
C$1.30/US$1
|
|
Susan McLeod
|
19-Dec-18
|
18-Dec-23
|
$0.55
|
250,000
|
C$1.36/US$1
|
|
16-Oct-17
|
15-Oct-22
|
$0.52
|
225,000
|
C$1.25/US$1
|
|
22-Nov-16
|
21-Nov-21
|
$0.42
(1)
|
200,000
|
C$1.34/US$1
|
|
Robert Cinits
|
16-Oct-17
|
15-Oct-22
|
$0.52
|
200,000
|
C$1.25/US$1
|
|
22-Nov-16
|
21-Nov-21
|
$0.42
(1)
|
200,000
|
C$1.34/US$1
|
|
|
(1)
|
Pre-Arrangement exercise price.
|
The Company employs Stephen Scott as President
and CEO under an employment agreement dated April 1, 2016, as amended. Under his employment agreement with the Company, Mr. Scott
agreed to a temporary reduction in his annual salary to C$280,000 until December 31, 2017. Effective January 1, 2018, Mr. Scott’s
salary was restored to its original rate of C$325,000 per annum. Under his employment agreement, Mr. Scott is required to provide
the Company with one month’s prior notice in the event he wishes to resign. The Company may terminate his employment without
cause by providing him with 18 months’ working notice, or an amount equal to the salary Mr. Scott otherwise would receive
over the working notice period (or a combination thereof). In the event Mr. Scott’s employment is terminated without cause
or he resigns for Good Reason (as defined below) within the one-year period following a Change of Control (as defined below), Mr.
Scott will be entitled to 24 months’ salary and the aggregate amount of all other remuneration, bonuses and benefits that
he would otherwise have received over the ensuing 24-month period. See "Item 6B. Directors, Senior Management and Employees
– Compensation – Termination and Change of Control Benefits" below.
The Company employs Duane Lo part-time
as Chief Financial Officer under an employment agreement dated November 1, 2016, as amended. Mr. Lo is required to provide the
Company with one month’s prior notice in the event he wishes to resign. The Company may terminate his employment without
cause by providing him with six months’ working notice plus an additional month of working notice for each year of employment
completed, to a maximum of twelve months’ working notice, or an amount equal to the salary Mr. Lo otherwise would receive
over the working notice period (or a combination thereof). In the event Mr. Lo’s employment is terminated without cause or
he resigns for Good Reason within the one year period following a Change of Control, Mr. Lo will be entitled to a lump sum amount
equal to 18 months’ salary based on his original full-time salary of C$225,000 per annum and the aggregate amount of all
other remuneration, bonuses and benefits that he would otherwise have received over the ensuing 18-month period (collectively,
the "Lo Severance Amount"). See "Item 6. Directors, Senior Management and Employees – B. Compensation –
Termination and Change of Control Benefits" below.
The Company employs Susan McLeod as Vice
President, Legal Affairs and Corporate Secretary under an employment agreement dated September 21, 2010, as amended. Ms. McLeod
is required to provide the Company with one month’s prior notice in the event she wishes to resign. The Company may terminate
her employment without cause by providing her with a lump sum amount equal to 18 months’ salary and the aggregate amount
of all other remuneration, bonuses and benefits that she would otherwise have received over the ensuing 18-month period (collectively,
the "McLeod Severance Amount"). Ms. McLeod will be entitled to the Severance Amount in the event she elects to terminate
her employment within 90 days following a Change of Control or as a result of conditions that amount to constructive dismissal.
See "Item 6. Directors, Senior Management and Employees – B. Compensation – Termination and Change of Control
Benefits" below.
The Company employed Robert Cinits as Vice
President, Corporate Development under an amended and restated employment agreement dated June 26, 2014. Effective January 1, 2019
the Company terminated his employment without cause by providing him with twelve months’ salary. See "Item 6. Directors,
Senior Management and Employees – B. Compensation – Termination and Change of Control Benefits" below.
Incentive Plan Awards
The following table is a summary of all
option-based awards and share-based awards to the NEOs that were outstanding at the end of the most recently completed financial
year.
|
|
Option-based Awards
|
Share-based Awards
|
|
Name
|
Number of Securities
underlying
unexercised options
(#)
|
Option
exercise
price
(C$)
(2)
|
Option expiration
date
|
Value of
unexercised
in-the-money
options
(C$)
(1)
|
Number of
shares or units
of shares that
have not vested
(#)
|
Market or payout
value of share-
based awards that
have not vested
(#)
|
|
Stephen Scott
|
500,000
|
$0.30
|
November 15, 2020
|
$125,000
|
Nil
|
Nil
|
|
400,000
|
$0.36
|
November 21, 2021
|
$76,000
|
Nil
|
Nil
|
|
325,000
|
$0.52
|
October 15, 2022
|
$9,750
|
Nil
|
Nil
|
|
500,000
|
$0.55
|
December 18, 2023
|
Nil
|
Nil
|
Nil
|
|
Duane Lo
|
100,000
|
$0.33
|
March 31, 2021
|
$22,000
|
Nil
|
Nil
|
|
250,000
|
$0.36
|
November 21, 2021
|
$47,500
|
Nil
|
Nil
|
|
200,000
|
$0.52
|
October 15, 2022
|
$6,000
|
Nil
|
Nil
|
|
250,000
|
$0.55
|
December 18, 2023
|
Nil
|
Nil
|
Nil
|
|
Susan McLeod
|
225,000
|
$0.18
|
December 22, 2019
|
$83,250
|
Nil
|
Nil
|
|
110,000
|
$0.28
|
December 3, 2020
|
$29,700
|
Nil
|
Nil
|
|
200,000
|
$0.36
|
November 21, 2021
|
$38,000
|
Nil
|
Nil
|
|
225,000
|
$0.52
|
October 15, 2022
|
$6,750
|
Nil
|
Nil
|
|
250,000
|
$0.55
|
December 18, 2023
|
Nil
|
Nil
|
Nil
|
|
Robert Cinits
|
225,000
|
$0.18
|
December 22, 2019
|
$83,250
|
Nil
|
Nil
|
|
110,000
|
$0.28
|
December 3, 2020
|
$29,700
|
Nil
|
Nil
|
|
200,000
|
$0.36
|
November 21, 2021
|
$38,000
|
Nil
|
Nil
|
|
200,000
|
$0.52
|
October 15, 2022
|
$6,000
|
Nil
|
Nil
|
|
|
(1)
|
Calculated using the closing price of the Company’s Common Shares on the TSX on December 31,
2018 (being the last trading day of 2018) of C$0.55 and subtracting the exercise price of in-the-money options.
|
|
|
(2)
|
Post-Arrangement exercise prices.
|
The following table is a summary of all
value vested or earned during the most recently completed financial year for the NEOs.
|
Name
|
Option-based awards – Value
vested during the year
(US$)
(1)
|
Share-based awards – Value
vested during the year
(US$)
|
Non-equity incentive plan
compensation – Value earned
during the year
(US$)
(2)
|
|
Stephen Scott
|
$0
|
Nil
|
$58,642
|
|
Duane Lo
|
$0
|
Nil
|
$26,389
|
|
Susan McLeod
|
$0
|
Nil
|
$29,321
|
|
Robert Cinits
|
$0
|
Nil
|
$26,389
|
|
|
(1)
|
Value vested during the year is calculated by subtracting the exercise price of the option (being
no less than the market price of the Company’s Common Shares on the award date) from the market price of the Company’s
Common Shares on the date the option vested (being the closing price of the Company’s Common Shares on the TSX on the last
trading day prior to the vesting date). $0 vested because all of the stock options vested in full on the award date.
|
|
|
(2)
|
Discretionary cash bonuses paid during 2018, 50% of which
was recovered from Mason Resources under the Administrative Services Agreement.
|
The following table is a summary of options
exercised by NEOs during the most recently completed financial year.
|
Name
|
Options Exercised
(1)
|
Date Exercised
|
Exercise Price (C$)
|
|
Susan McLeod
(2)
|
375,000
|
January 17, 2018
|
$0.47
|
|
150,000
|
September 14, 2018
|
$0.26
|
|
Robert Cinits
(3)
|
325,000
|
February 7, 2018
|
$0.47
|
|
50,000
|
April 9, 2018
|
$0.27
|
|
150,000
|
October 25, 2018
|
$0.26
|
|
|
(1)
|
Under the Plan, an option holder may elect to terminate
an option, in whole or in part and, in lieu of receiving Common Shares to which the terminated option relates (the "Designated
Shares"), receive the number of Common Shares, disregarding fractions, which, when multiplied by the weighted average trading
price of the shares on the TSX during the five trading days immediately preceding the day of termination (the "Fair Value"
per share) of the Designated Shares, has a total dollar value equal to the number of Designated Shares multiplied by the difference
between the Fair Value and the exercise price per share of the Designated Shares.
|
|
|
(2)
|
Ms. McLeod elected to terminate her options and received an aggregate 217,416 Common Shares.
|
|
|
(3)
|
Mr. Cinits elected to terminate his options and received an aggregate 178,492 Common Shares.
|
Termination and Change of Control
Benefits
Stephen Scott
Under the terms of the employment agreement
with Stephen Scott the Company may terminate Mr. Scott’s employment at any time without cause by providing him with 18 months’
working notice, or an amount equal to the salary Mr. Scott otherwise would receive over the working notice period (or a combination
thereof). In the event Mr. Scott’s employment is terminated without cause or he resigns for Good Reason within the one year
period following a Change of Control, Mr. Scott will be entitled to 24 months’ salary and the aggregate amount of all other
remuneration, bonuses and benefits that he would otherwise have received over the ensuing 24-month period (the delivery of notice
of termination of employment without cause or resignation with Good Reason being a "Severance Payment Triggering Event").
If a Change of Control had occurred on December 31, 2018, Mr. Scott would not have had an immediate benefit. If a Severance Payment
Triggering Event had taken place, Mr. Scott would have been entitled to a payment of approximately US$497,582 within 10 days of
the Severance Payment Triggering Event. Mr. Scott would continue to be bound by confidentiality provisions (indefinitely) and non-competition
and non-solicitation provisions for a period of one year following the termination of employment.
"Change of Control" is defined
as:
|
|
(i)
|
the sale, transfer or disposition of the Company’s assets in complete liquidation or dissolution
of the Company;
|
|
|
(ii)
|
the Company amalgamates, merges or enters into a plan of arrangement with another company at arm’s
length to the Company and its affiliates (the "Group"), other than an amalgamation, merger or plan of arrangement that
would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving or resulting entity) more than 50% of the combined voting
power of the surviving or resulting entity outstanding immediately after such amalgamation, merger or plan of arrangement; or
|
|
|
(iii)
|
any person or combination of persons at arm’s length to the Group acquires or becomes the
beneficial owner of, directly or indirectly, more than 20% of the voting securities of the Company, whether through the acquisition
of previously issued and outstanding voting securities, or of voting securities that have not been previously issued, or any combination
thereof, or any other transaction having a similar effect, and such person or combination of persons exercise(s) the voting power
attached to such securities in a manner that causes the Incumbent Directors to cease to constitute a majority of the Board.
|
"Good Reason" is defined as the
occurrence of any of the following without the NEO’s written consent:
|
|
(i)
|
a material change (other than a change that is clearly consistent with a promotion) in the NEO’s
position or duties, responsibilities, reporting relationship, title or office;
|
|
|
(ii)
|
a reduction of the NEO’s salary, benefits or any other form of remuneration or any change
in the basis upon which such salary, benefits or other form of remuneration payable by the Company is determined;
|
|
|
(iii)
|
forced relocation to another geographic area;
|
|
|
(iv)
|
any material breach by the Company of a material provision of the employment agreement; or
|
|
|
(v)
|
the failure by the Company to obtain an effective assumption of its obligations hereunder by any
successor to the Company, including a successor to a material portion of its business.
|
"Incumbent Director" means any
member of the Board who was a member of the Board prior to the occurrence of the transaction, transactions or elections giving
rise to a Change of Control and any successor to an Incumbent Director who was recommended or elected or appointed to succeed an
Incumbent Director by the affirmative vote of a majority of the Incumbent Directors then on the Board.
Susan McLeod
Under the terms of the employment agreement
with Susan McLeod, the Company may terminate Ms. McLeod’s employment at any time without cause by providing Ms. McLeod with
the McLeod Severance Amount. Ms. McLeod is also entitled to the McLeod Severance Amount should she elect to terminate her employment
for Good Reason or should she elect to terminate her employment within 90 days of a Change of Control (in Ms. McLeod’s case,
the delivery of notice of termination of employment without cause or the expiry of one month’s prior written notice of termination
of employment for Good Reason or within 90 days of a Change of Control is a "McLeod Severance Payment Triggering Event").
If a Change of Control had occurred on
December 31, 2018, Ms. McLeod would not have had an immediate benefit. If a McLeod Severance Payment Triggering Event had taken
place, Ms. McLeod would have been entitled to a payment of approximately US$288,262 immediately upon the McLeod Severance Payment
Triggering Event, or in the case of delivery of notice of termination of employment without cause, within 10 days of the McLeod
Severance Payment Triggering Event.
Ms. McLeod would continue to be bound by
confidentiality provisions (indefinitely) and non-competition and non-solicitation provisions for a period of one year following
the termination of employment.
Duane Lo
Under the terms of the employment agreement
with Duane Lo, the Company may terminate his employment at any time without cause by providing him with six months’ working
notice plus an additional month of working notice for each year of employment completed, to a maximum of twelve months’ working
notice, or an amount equal to the salary Mr. Lo otherwise would receive over the working notice period (or a combination thereof).
In the event Mr. Lo’s employment is terminated without cause or Mr. Lo resigns for Good Reason within the one-year period
following a Change of Control, Mr. Lo will be entitled to the Lo Severance Amount.
If a Change of Control had occurred on
December 31, 2018, Mr. Lo would not have had an immediate benefit. If a Severance Payment Triggering Event had taken place, Mr.
Lo would have been entitled to a payment of approximately US$252,144 within 10 days of the Severance Payment Triggering Event.
Mr. Lo would continue to be bound by confidentiality
provisions (indefinitely) and non-competition and non-solicitation provisions for a period of one year following the termination
of employment.
Robert Cinits
Under the terms of the employment agreement
with Robert Cinits, the Company could terminate his employment at any time without cause by providing him with six months’
working notice plus an additional month of working notice for each year of employment completed, to a maximum of twelve months’
working notice, or an amount equal to the salary Mr. Cinits otherwise would receive over the working notice period (or a combination
thereof). The agreement provided that in the event Mr. Cinits’ employment was terminated without cause or Mr. Cinits resigned
for Good Reason within the one-year period following a Change of Control, Mr. Cinits would be entitled to a lump sum amount equal
to 18 months’ salary and the aggregate amount of all other remuneration, bonuses and benefits that he would otherwise have
received over the ensuing 18-month period.
If a Change of Control had occurred on
December 31, 2018, Mr. Cinits would not have had an immediate benefit. If a Severance Payment Triggering Event had taken place,
Mr. Cinits would have been entitled to a payment of approximately US$284,389 within 10 days of the Severance Payment Triggering
Event.
Mr. Cinits’ employment with the Company
was terminated without cause effective January 1, 2019. Mr. Cinits received a payment totaling US$199,359, equal to 12 months’
salary (US$184,724) and accrued vacation pay (US$14,636). Mr. Cinits continues to be bound by confidentiality provisions (indefinitely)
and non-competition and non-solicitation provisions for a period of one year following the termination of employment.
Director Compensation
Directors’ Fees
Annual directors’ fees are paid to non-executive
directors to compensate them for the time and commitment required to act as directors of the Company, serve on standing
committees of the Board, serve on ad hoc or special committees of the Board (if so requested by the Board) and act as Non-Executive
Chair of the Board or chair of certain standing committees.
The annual base retainer payable to non-executive
directors to compensate them for acting as directors of the Company is C$25,000. Lord Howard was paid a total of C$11,584
1
in 2018, which includes the C$25,000 base retainer and additional compensation for acting as the Non-Executive Chair of the
Board, pro-rated to his resignation on February 5, 2018. Commencing February 5, 2018, Mark Bailey received a fee of C$50,000 per
annum, which includes the C$25,000 base retainer and additional compensation for acting as the Non-Executive Chair of the Board
and the chair of the Compensation Committee.
The chair of the Audit Committee receives
an additional cash retainer of C$12,500 per annum; and the chairs of the CGNC and Technical Committee each receive an additional
cash retainer of C$5,250 per annum.
The
directors are reimbursed for expenses incurred on the Company’s behalf.
The
Compensation Committee will periodically review the adequacy and form of non-executive director compensation and ensure that the
compensation realistically reflects the responsibilities and risks involved in being an effective director, and report and make
recommendations to the Board accordingly.
Incentive Stock Options
The awarding of incentive stock options
provides a link between non-executive director compensation and the Company’s share price. It also rewards non-executive
directors for achieving results that improve Company performance and thereby increase shareholder value. Incentive stock options
are an important component of non-executive director compensation for the Company, which doesn’t have any revenue making
it difficult to pay larger cash retainers.
Stock options are generally awarded to
non-executive directors when they join the Board and periodically thereafter. In making a determination as to whether an award
of long-term incentive stock options is appropriate, and if so, the number of options that should be awarded, the Compensation
Committee will consider, among such other factors as it may deem relevant, the value in securities of the Company that the Compensation
Committee intends to award as compensation, current and expected future performance of the director, the potential dilution to
shareholders and the cost to the Company, previous awards made to the director, option awards made to the Company’s executive
officers and the limits imposed by the terms of the Plan and the TSX.
In December 2018, the Compensation Committee
recommended that the Board award incentive stock options to each of the non-executive directors in recognition of the role that
the non-executive directors played in providing strategic input and corporate oversight. The Board approved the Compensation Committee’s
recommendations, and in December 2018 awarded to each of the non-executive directors options to purchase 200,000 Common Shares
at an exercise price of C$0.55 for five years. The terms and conditions of the awards, including vesting provisions and exercise
prices, were determined by the Board at the time of award, in accordance with the terms and conditions of the Plan.
1
Lord
Howard’s compensation is negotiated and settled in British pounds sterling. The exchange rate used to convert 2018 compensation
to C$ is 1.7376.
The following table is a summary of all
compensation provided to the directors of the Company (other than directors who are also NEOs) for the most recently completed
financial year.
|
Name
(1)
|
Fees
earned
(US$)
|
Share-based
awards
(US$)
|
Option-based
awards
(US$)
(2) (3)
|
Non-equity incentive
plan compensation
(US$)
|
Pension
value
(US$)
|
All other
compensation
(US$)
|
Total
(US$)
|
|
Mark Bailey
(4)
|
$36,652
|
Nil
|
$44,755
|
Nil
|
Nil
|
Nil
|
$80,406
|
|
Alan Edwards
|
$22,174
|
Nil
|
$44,755
|
Nil
|
Nil
|
Nil
|
$65,929
|
|
James Harris
|
$22,174
|
Nil
|
$44,755
|
Nil
|
Nil
|
Nil
|
$65,929
|
|
Michael Howard
(4)
|
$8,491
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
$8,491
|
|
Michael Price
(4)
|
$18,326
|
Nil
|
$44,755
|
Nil
|
Nil
|
Nil
|
$62,081
|
|
Anna Stylianides
|
$27,489
|
Nil
|
$44,755
|
Nil
|
Nil
|
Nil
|
$71,244
|
|
|
(1)
|
In addition to being a director of the Company Stephen Scott is a NEO. For disclosure regarding
Mr. Scott’s compensation, please refer to the Summary Compensation Table above.
|
|
|
(2)
|
The Company uses the Black-Scholes option-pricing model for determining fair value of stock options
issued at the grant date. The Company selected the Black-Scholes option-pricing model because it is widely used in estimating option
based compensation values by Canadian and U.S. public companies. The practice of the Company is to grant all option based awards
in Canadian currency, and then convert the grant date fair value amount to U.S. currency for reporting the value of the grants
in the Company’s financials. The conversion rate for each grant is the average of the rates quoted by the Bank of Canada
as its daily average exchange rate of the last day of the three months in the quarter in which the grant is made. The conversion
rate for the purpose of the grants in this table is presented in Note 3 below and is based on the conversion rate on the date of
grant as supplied by the Bank of Canada.
|
|
|
(3)
|
Options were awarded on December 19, 2018 with an exercise price of C$0.55 expiring on December
18, 2023. The exchange rate used to convert the value of the option based awards from C$ to US$ is 1.3642.
|
|
|
(4)
|
Lord Howard retired as Non-Executive Chair of the Board and a director of the Company effective
February 5, 2018. Effective February 5, 2018, Mark Bailey was appointed Non-Executive Chair of the Board, and Michael Price was
appointed as a director of the Company to fill the vacancy created by Lord Howard’s retirement.
|
The following table is a summary of all
option-based awards to the directors of the Company (other than directors who are also NEOs) that were outstanding at the end of
the most recently completed financial year. There were no share-based awards outstanding at the end of the most recently completed
financial year.
|
|
Option-based Awards
|
Share-based Awards
|
|
Name
(1)
|
Number of
Securities
underlying
unexercised
options
(#)
|
Option exercise
price
(C$)
(3)
|
Option expiration
date
|
Value of
unexercised in-
the-money
options
(C$)
(2)
|
Number of
shares or units of
shares that have
not vested
(#)
|
Market or
payout value of
share-based
awards that have
not vested
(#)
|
|
Mark Bailey
(4)
|
100,000
|
$0.18
|
December 22, 2019
|
$37,000
|
Nil
|
Nil
|
|
75,000
|
$0.28
|
December 3, 2020
|
$20,250
|
Nil
|
Nil
|
|
200,000
|
$0.36
|
November 21, 2021
|
$38,000
|
Nil
|
Nil
|
|
150,000
|
$0.52
|
October 15, 2022
|
$4,500
|
Nil
|
Nil
|
|
200,000
|
$0.55
|
December 18, 2023
|
Nil
|
Nil
|
Nil
|
|
Alan Edwards
|
100,000
|
$0.18
|
December 22, 2019
|
$37,000
|
Nil
|
Nil
|
|
75,000
|
$0.28
|
December 3, 2020
|
$20,250
|
Nil
|
Nil
|
|
200,000
|
$0.36
|
November 21, 2021
|
$38,000
|
Nil
|
Nil
|
|
150,000
|
$0.52
|
October 15, 2022
|
$4,500
|
Nil
|
Nil
|
|
200,000
|
$0.55
|
December 18, 2023
|
Nil
|
Nil
|
Nil
|
|
James Harris
|
100,000
|
$0.18
|
December 22, 2019
|
$37,000
|
Nil
|
Nil
|
|
150,000
|
$0.28
|
December 3, 2020
|
$40,500
|
Nil
|
Nil
|
|
200,000
|
$0.36
|
November 21, 2021
|
$38,000
|
Nil
|
Nil
|
|
150,000
|
$0.52
|
October 15, 2022
|
$4,500
|
Nil
|
Nil
|
|
200,000
|
$0.55
|
December 18, 2023
|
Nil
|
Nil
|
Nil
|
|
Michael Howard
(4)
|
100,000
|
$0.18
|
December 22, 2019
|
$37,000
|
Nil
|
Nil
|
|
75,000
|
$0.28
|
December 3, 2020
|
$20,250
|
Nil
|
Nil
|
|
200,000
|
$0.36
|
November 21, 2021
|
$38,000
|
Nil
|
Nil
|
|
150,000
|
$0.52
|
October 15, 2022
|
$4,500
|
Nil
|
Nil
|
|
Michael Price
(4)
|
100,000
|
$0.63
|
February 4, 2023
|
Nil
|
Nil
|
Nil
|
|
200,000
|
$0.55
|
December 18, 2023
|
Nil
|
Nil
|
Nil
|
|
Anna Stylianides
|
100,000
|
$0.32
|
July 12, 2020
|
$23,000
|
Nil
|
Nil
|
|
75,000
|
$0.28
|
December 3, 2020
|
$20,250
|
Nil
|
Nil
|
|
200,000
|
$0.36
|
November 21, 2021
|
$38,000
|
Nil
|
Nil
|
|
150,000
|
$0.52
|
October 15, 2022
|
$4,500
|
Nil
|
Nil
|
|
200,000
|
$0.55
|
December 18, 2023
|
Nil
|
Nil
|
Nil
|
|
|
(1)
|
In addition to being a director of the Company, Stephen
Scott is a NEO. For disclosure regarding Mr. Scott’s option-based awards, please refer to the incentive plan awards section
above.
|
|
|
(2)
|
Calculated using the closing price of the Company’s Common Shares on the TSX on December
31, 2018 (being the last trading day of 2018) of $0.55 and subtracting the exercise price of in-the-money options.
|
|
|
(3)
|
Post-Arrangement exercise prices.
|
|
|
(4)
|
Lord Howard retired as Non-Executive Chair of the Board and a director of the Company effective
February 5, 2018. Effective February 5, 2018, Mark Bailey was appointed Non-Executive Chair of the Board, and Michael Price was
appointed as a director of the Company to fill the vacancy created by Lord Howard’s retirement.
|
The following table is a summary of all
value vested or earned during the most recently completed financial year for the directors of the Company (other than directors
who are also NEOs).
|
Name
(1)
|
Option-based awards – Value
vested during the year
(US$)
(2)
|
Share-based awards – Value
vested during the year
(US$)
|
Non-equity incentive plan
compensation – Value earned
during the year
(US$)
|
|
Mark Bailey
|
$0
(3)
|
Nil
|
Nil
|
|
James Harris
|
$0
(3)
|
Nil
|
Nil
|
|
Michael Howard
|
$0
(3)
|
Nil
|
Nil
|
|
Alan Edwards
|
$0
(3)
|
Nil
|
Nil
|
|
Anna Stylianides
|
$0
(3)
|
Nil
|
Nil
|
|
Michael Price
|
$0
(4)
|
Nil
|
Nil
|
|
|
(1)
|
In addition to being a director of the Company, Stephen
Scott is a NEO. For disclosure regarding Mr.Scott’s compensation, please refer to the summary compensation table above.
|
|
|
(2)
|
Value vested during the year is calculated by subtracting the exercise price of the option (being
no less than the market price of the Company’s Common Shares on the award date) from the market price of the Company’s
Common Shares on the date the option vested (being the closing price of the Company’s Common Shares on the TSX on the last
trading day prior to the vesting date).
|
|
|
(3)
|
200,000 stock options were awarded on December 19, 2018 at an exercise price of C$0.55. $0 vested
because all the stock options vested in full on the award date.
|
|
|
(4)
|
200,000 stock options were awarded on December 19, 2018 at an exercise price of C$0.55. $0 vested
because all the stock options vested in full on the award date. 100,000 stock options were awarded on February 5, 2018 at an exercise
price of C$0.63. 75,000 options vested during the year with the balance vesting in 2019. On the dates that the options vested,
the market price of the Company’s Common Shares was less than the exercise price of the options.
|
The following table is a summary of options
exercised by directors during the most recently completed financial year.
|
Name
|
Options Exercised
(1)
|
Date Exercised
|
Exercise Price (C$)
|
|
Mark Bailey
(2)
|
230,000
|
February 28, 2018
|
$0.47
|
|
75,000
|
December 3, 2018
|
$0.26
|
|
Alan Edwards
(3)
|
230,000
|
February 27, 2018
|
$0.47
|
|
75,000
|
December 7, 2018
|
$0.26
|
|
James Harris
|
255,000
|
January 18, 2018
|
$0.47
|
|
75,000
|
December 10, 2018
|
$0.26
|
|
Michael Howard
(4)
|
255,000
|
March 13, 2018
|
$0.47
|
|
150,000
|
June 20, 2018
|
$0.29
|
|
100,000
|
December 6, 2018
|
$0.26
|
|
|
(1)
|
Under the Plan, an option holder may elect to terminate an option, in whole or in part and, in
lieu of receiving the Designated Shares, receive the number of Common Shares, disregarding fractions, which, when multiplied by
the Fair Value of the Designated Shares, has a total dollar value equal to the number of Designated Shares multiplied by the difference
between the Fair Value and the exercise price per share of the Designated Shares.
|
|
|
(2)
|
Mr. Bailey elected to terminate his options and received an aggregate 73,857 Common Shares.
|
|
|
(3)
|
Mr. Edwards elected to terminate 230,000 of his options and received an aggregate 27,832 Common
Shares.
|
|
|
(4)
|
Lord Howard elected to terminate his options and received an aggregate 154,678 Common Shares.
|
Management Contracts
Management functions of the Company are
substantially performed by directors or executive officers of the Company and not, to any substantial degree, by any other person
with whom the Company has contracted.
The Board is currently comprised of six
directors. The size and experience of the Board is important for providing the Company with effective governance in the mining
industry. The Board’s mandate and responsibilities can be effectively and efficiently administered at its current size. The
Board has functioned, and is of the view that it can continue to function, independently of management as required. Directors are
elected for a term of one year at the annual general meeting. The current directors were elected by the Company’s shareholders
at the Annual General Meeting held on May 23, 2018.
The Board adopted a majority voting policy
in May 2013. If the number of shares "withheld" from voting for the election of a nominee is greater than the number
of shares voted "for" his or her election, the director must submit his or her resignation to the Non-Executive Chair
of the Board promptly after the shareholders’ meeting. The CGNC will consider the resignation and will recommend to the Board
whether or not to accept it. After considering the recommendations of the CGNC, the Board will make its decision as to whether
to accept or reject the resignation in question and the Company will announce the Board’s decision, including any reasons
for the Board not accepting a resignation, within 90 days following the shareholders’ meeting. The policy does not apply
if there is a contested director election or where the election involves a proxy battle.
The Board has considered the relationship
of each director to the Company and currently considers five of the six directors to be independent directors because they are
independent of management and free from any interest and any business or other relationship which could reasonably be expected
to interfere with the director’s ability to act with a view to the best interest of the Company, other than interests and
relationships arising solely from shareholdings. Stephen Scott is not independent by virtue of the fact that he is an executive
officer of the Company.
Procedures are in place to allow the Board
to function independently. At the present time, the Board has experienced directors that have made a significant contribution to
the Company’s success, and the Board is satisfied that it is not constrained in its access to information, in its deliberations
or in its ability to satisfy the mandate established by law to supervise the business and affairs of the Company. Committees meet
independently of management and other directors.
Disclosure of Corporate Governance
Practices
National Instrument 58-101 -
Disclosure
of Corporate Governance Practices
("NI 58-101") requires each reporting issuer to disclose its corporate governance
practices on an annual basis. The Company’s approach to corporate governance is set forth below.
Board of Directors
Section 1.4 of NI 52-110 and NYSE American
Company Guide Section 803A set out the standard for director independence. Under Section 1.4 of NI 52-110 and NYSE American Company
Guide Section 803A, a director is independent if he or she has no direct or indirect material relationship with the Company. A
material relationship is a relationship which could, in the view of the Board, be reasonably expected to interfere with the exercise
of a director’s independent judgment. Section 1.4 of NI 52-110 and NYSE American Company Guide Section 803A also set out
certain situations where a director will automatically be considered to have a material relationship with the Company.
As at December 31, 2018, the Board was
comprised of six directors, five of whom are independent applying the definition set out in section 1.4 of NI 52-110 and NYSE American
Company Guide Section 803A. Stephen Scott is not independent by virtue of the fact that he is an executive officer of the Company.
To the extent that the Board considers
it to be necessary or advisable, a Board meeting will include an in camera session, at which executive directors and members of
management are not in attendance. Since the beginning of the Company’s most recently completed financial year, there have
been five in camera sessions.
Mark Bailey, an independent director, serves
as Non-Executive Chair of the Board, and is responsible for ensuring that the Board discharges its responsibilities in an effective
manner and that the Board understands the boundaries between Board and management responsibilities. The Board has developed a written
position description for the Non-Executive Chair of the Board in order to delineate his or her role and responsibilities. The Non-Executive
Chair of the Board is primarily responsible for acting as the effective leader of the Board and ensuring that the Board’s
agenda enables it to successfully carry out its duties. The Non-Executive Chair of the Board also serves as an "ex officio"
member of each Board committee. More specifically, the Non-Executive Chair of the Board is responsible for:
|
|
(a)
|
Ensuring the Board focuses on the Company’s strategic
performance by working with the CEO and the Board in managing Board meeting agendas and developing the Board’s priorities.
|
|
|
(b)
|
Ensuring that the Board represents and protects the long-term best interests of the Company.
|
|
|
(c)
|
Helping to set the tone and culture of the Company by:
|
|
|
(i)
|
Ensuring the distinct roles and responsibilities of the Board and management are well understood
and respected by both the Board and management;
|
|
|
(ii)
|
Setting the tone for the Board to foster ethical and responsible decision-making, appropriate oversight
of management and best practices in corporate governance; and
|
|
|
(iii)
|
Fostering a spirit of respect, trust and collegiality among directors, and between the Board and
management, where thoughtful, probative questions and thorough discussions are encouraged.
|
|
|
(d)
|
Managing relationships by:
|
|
|
(i)
|
Acting as a liaison between the Board and the CEO, and providing advice, counsel and mentorship
to the CEO and to individual directors;
|
|
|
(ii)
|
Serving as a key interface between directors; and
|
|
|
(iii)
|
Engaging with shareholders, other stakeholders of the Company
and the public where appropriate.
|
|
|
(e)
|
Ensuring the adoption of, and compliance with, procedures so that the Board effectively carries
out its responsibilities in compliance with the mandate of the Board, and conducts its work efficiently and independently from
management.
|
Position Description for CEO
The Board has adopted a written position
description for the CEO, which sets out his or her specific duties and responsibilities. Generally, the CEO, who must be appointed
by the Board and is directly accountable to the Board, is responsible for management of the day to day operation of the business
of the Company and has primary accountability for the profitability and growth of the Company.
Service Contracts with Directors
The Company does not have any service contracts
with any directors.
Orientation and Continuing Education
Board turnover is relatively rare. As a
result, the Board provides ad hoc orientation for new directors.
The CGNC is responsible for encouraging
and facilitating continuing education programs for all directors. The CGNC will also ensure that each director understands the
role of the Board, its committees and its directors, and the basic procedures and operations of the Board. Board members are also
given access to management and other employees and advisors, who can answer any questions that may arise.
Ethical Business Conduct
The Board has adopted a written Code of
Ethics for its directors, officers, employees and consultants, a copy of which may be obtained on the Company’s website at
www.EntreeResourcesLtd.com
, on SEDAR at
www.sedar.com
, or on EDGAR at
www.sec.gov
.
The CGNC is responsible for assisting the
Board in dealing with conflict of interest issues as contemplated by the Code of Ethics, reviewing and updating the Code of Ethics
periodically, ensuring that management has established a system to enforce the Code of Ethics and reviewing management’s
monitoring of the Company’s compliance with the Code of Ethics.
Under the Code of Ethics, members of the
Board are required to disclose any conflict of interest or potential conflict of interest to the entire Board as well as any committee
on which they serve. Directors are to excuse themselves from participation in any decision of the Board or a committee thereof
in any matter in which there is a conflict of interest or potential conflict of interest. However, if the Board determines that
a potential conflict of interest cannot be cured, the individual will be asked to resign from their position with the Company.
Directors are also required to comply with
the relevant provisions of the BCBCA regarding conflicts of interest.
The Board is committed to best practices
in making timely and accurate disclosure of all material information and providing fair and equal access to material information.
The Board has adopted a written Corporate Disclosure and Trading Policy to ensure that the Company and its directors, officers,
employees and consultants satisfy the legal and ethical obligations related to the proper and effective disclosure of corporate
information and the trading of securities with that information.
Standing Committees
The Board has four standing committees,
namely the Audit Committee, the Compensation Committee, the CGNC and the Technical Committee. Their mandates and memberships are
outlined below.
Audit Committee
The Audit Committee meets with the CEO
and CFO of the Company and the independent auditors to review and inquire into matters affecting financial reporting, the system
of internal accounting and financial controls and procedures and the audit procedures and audit plans. The Audit Committee also
recommends to the Board the auditors to be appointed, subject to shareholder approval. In addition, the Audit Committee reviews
and recommends to the Board for approval the annual financial statements, the annual report and certain other documents required
by regulatory authorities. The Audit Committee is composed of Anna Stylianides (chair), James Harris and Michael Price, all of
whom are independent (as defined in NI 52-110 and NYSE American Company Guide Section 803(B)(2)(a)(i)) and financially literate
(as defined in NI 52-110 and NYSE American Company Guide Section 803(B)(2)(a)(iii)). The Board has also assessed the qualifications
of Ms. Stylianides, and has determined that Ms. Stylianides is independent, financially literate and qualifies as a financial expert
(as defined in Item 407(d)(5) of Regulation S-K under the U.S. Exchange Act).
The Board has adopted a written position
description for the chair of the Audit Committee. The chair is generally responsible for overseeing the Audit Committee in its
responsibilities as outlined in the Audit Committee Charter. The chair’s duties and responsibilities include presiding at
each meeting of the Audit Committee, referring specific matters to the Board in the case of a deadlock on any matter or vote, receiving
and responding to all requests for information from the Company or the independent auditors, leading the Audit Committee in discharging
its tasks and reporting to the Board on the activities of the Audit Committee.
The Company’s Annual Information
Form for its financial year ended December 31, 2018 dated March 29, 2019 (the "AIF"), submitted on Form 6-K to the United
States Securities and Exchange Commission on EDGAR, contains additional disclosure regarding the Audit Committee. Please refer
to the section of the AIF entitled "Standing Committees of the Board" for further information.
Compensation Committee
The primary objective of the Compensation
Committee is to discharge the responsibilities of the Board relating to compensation and benefits of the executive officers and
directors of the Company.
The Board has adopted a written position
description for the chair of the Compensation Committee. The chair is generally responsible for overseeing the Compensation Committee
in its responsibilities. The chair’s duties and responsibilities include presiding at each meeting of the Compensation Committee,
leading the Compensation Committee in discharging its tasks and reporting to the Board on the activities of the Compensation Committee.
The Compensation Committee is comprised
of three directors, each of whom, in the judgement of the Board, meets the independence requirements of NYSE American Company Guide
Section 803A. The members of the Compensation Committee are: Mark Bailey (chair), Alan Edwards and James Harris.
Technical Committee
The members of the Technical Committee
consist of Alan Edwards (chair), Mark Bailey, Michael Price and Stephen Scott, each of whom is a professional geologist or mining
engineer or otherwise has sufficient expertise to comprehend and evaluate technical issues associated with the Company’s
properties. Mr. Edwards, Mr. Bailey and Mr. Price are independent directors. Mr. Scott is not independent by virtue of the fact
that he is an 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.
The primary objective of the Technical
Committee is to review and make recommendations to the Board regarding the approval of budgets, exploration programs and other
activities related to the Company’s mining properties. The Board has adopted a Technical Committee Charter, which provides
that the Technical Committee must have at least three members, at least one of whom is independent, and all of whom are engineers
or geoscientists, or otherwise have sufficient expertise to comprehend and evaluate technical issues associated with the Company’s
mining properties. The Technical Committee must meet at least one time per year.
The Board has adopted a written position
description for the chair of the Technical Committee, who should be independent. The chair is generally responsible for overseeing
the Technical Committee in its responsibilities. The chair’s duties and responsibilities include presiding at each meeting
of the Technical Committee, leading the Technical Committee in discharging its tasks and reporting to the Board on the activities
of the Technical Committee.
Corporate Governance and Nominating
Committee
The members of the CGNC are: James Harris
(chair), Alan Edwards and Anna Stylianides.
The primary objective of the CGNC is to
assist the Board in fulfilling its oversight responsibilities by: (a) developing and recommending to the Board corporate governance
guidelines for the Company and making recommendations to the Board with respect to corporate governance guidelines; (b) reviewing
the performance of the Board, Board members, Board committees and management; and (c) identifying individuals qualified to become
Board and Board committee members and recommending such nominees to the Board for election or appointment. Pursuant to the written
CGNC Charter, all members must have a working familiarity with corporate governance practices. The CGNC may form and delegate authority
to subcommittees when appropriate and must meet not less frequently than one time per year.
The Board has adopted a written position
description for the chair of the CGNC. The chair is generally responsible for overseeing the CGNC in its responsibilities. The
chair’s duties and responsibilities include ensuring the independence of the Board in the discharge of its responsibilities,
presiding at each meeting of the CGNC, leading it in discharging its tasks and reporting to the Board on its activities.
Nomination of Directors
The CGNC examines the size and composition
of the Board and recommends adjustments from time to time to ensure that the Board is of a size and composition that facilitates
effective decision making, having due regard for the benefits of diversity. It also identifies and assesses the necessary and desirable
competencies and characteristics for Board membership and regularly assesses the extent to which those competencies and characteristics
are represented on the Board. The CGNC identifies individuals qualified to become members of the Board, actively seeks out such
individuals when there is a vacancy or when so directed by the Board and makes recommendations to the Board for the appointment
or election of director nominees and for membership on other committees of the Board.
Director Skills Matrix
In identifying and considering potential
new candidates for the Board when vacancies arise and as part of the Company’s ongoing Board succession plan, and when evaluating
directors, the CGNC has access to a skills matrix it has developed to identify and assess the Board’s skills. The director
nominees have the skills and experience shown in the following matrix.
|
BOARD OF DIRECTORS EXPERTISE MATRIX
Skill/Experience
|
Number of
Directors (/6)
|
|
Public Company Board Experience
Prior experience as a board member of a
publicly listed company (other than Mason Resources) and knowledge of public company regulatory compliance.
|
6
|
|
Mining Industry Experience
Knowledge of the mining industry, market
and business imperatives, international regulatory environment and stakeholder management
.
|
6
|
|
Mergers & Acquisitions
Experience in mergers and acquisitions.
|
6
|
|
Mining Finance
Experience in finance for the mining industry.
|
6
|
|
Joint Ventures
Experience negotiating and operating in
a joint venture environment.
|
6
|
|
International Experience
Experience working in an organization that
has business in one or more developing nations.
|
6
|
|
Dealing with Governments
Experience in, or a good understanding
of, the workings of governments and public policy domestically and internationally.
|
4
|
|
Executive Experience
Experience working as a senior officer
of a publicly listed company or major organization.
|
5
|
|
Legal
Experience on legal matters with a publicly
listed company or major organization including drafting and negotiating contracts, conducting financings, dealing with regulatory
bodies on securities, corporate or other regulatory matters.
|
3
|
|
Corporate Governance
Knowledge of good corporate governance
practices and policies and experience in implementing them.
|
6
|
|
Financial Literacy
The ability to read and understand a set of
financial statements that present a breadth and level of complexity of accounting issues faced by the Company, or experience in
financial accounting and reporting and corporate finance (familiarity with internal financial controls, Canadian or U.S. GAAP and/or
IFRS).
|
6
|
|
Risk Management
Experience in overseeing policies and processes
to identify a resource company’s principal business risks and to confirm that appropriate systems are in place to mitigate
these risks.
|
5
|
|
Royalty Company Experience
Experience working inside or on the board
of a royalty company.
|
1
|
|
U.S. Compliance
Knowledge of U.S. compliance issues.
|
5
|
|
Business Judgment
Track record of leveraging own experience
and wisdom in making sound strategic and operational business decisions, demonstrates business acumen and a mindset for risk oversight.
|
6
|
|
Corporate Responsibility and Sustainable
Development
Understanding and experience with corporate
responsibility practices and the constituents involved in sustainable development policies.
|
5
|
|
Media Relations
Experience in dealing with the media on
matters relating to operations and public relations issues.
|
4
|
|
Human Resources
Prior or current experience in executive
compensation and the oversight of succession planning, talent planning and retention programs.
|
5
|
Representation of Women on the Board
and in Executive Officer Positions
On May 25, 2015, the Company adopted a
Board Diversity Policy, which confirms the Company’s commitment to achieving and maintaining diversity on the Board, with
a specific emphasis on gender diversity. The Company recognizes and embraces the benefits of having a diverse Board that may draw
on a variety of perspectives, skills, experience and expertise to facilitate effective decision making. The Company also views
diversity at the Board level as an important element in strong corporate governance.
The Company recognizes that gender diversity
is a significant aspect of diversity and acknowledges the important role that women with appropriate and relevant skills and experience
can play in contributing to the diversity of perspective on the Board. However, the Board Diversity Policy does not specifically
call for the identification and nomination of women directors. Candidates will be recommended for appointment or election as directors
based on merit considered against objective criteria, having due regard for the benefits of diversity. The Company believes other
aspects of diversity must also be considered, including skills, experience, education, age, ethnicity, and geographical and cultural
background, to ensure that the Board, as a whole, reflects a range of viewpoints, background, skills, experience and expertise.
New members of the Board are nominated,
or recommended for the Board’s selection, by the CGNC. In fulfilling its responsibilities to identify individuals qualified
to become members of the Board, the CGNC will consider (i) the independence of each nominee; (ii) the experience and background
of each nominee; (iii) having a balance of skills for the Board and its committees to meet their respective mandates; (iv) the
benefits of diversity on the Board, including gender diversity, as outlined in the Company’s Board Diversity Policy; (v)
the level of representation of women on the Board, in order to support the specific objective of gender diversity; (vi) the past
performance of directors being considered for re-election; (vii) applicable regulatory requirements; and (viii) such other criteria
as may be established by the Board or the CGNC from time to time. No fixed targets or quotas relating to the representation of
women on the Board have been adopted, although the CGNC is responsible for setting measurable objectives for promoting diversity,
with a particular emphasis on gender diversity, and recommending them to the Board for approval on an annual basis. One of the
six directors on the Board is a woman (17%).
The Company does not consider the level
of women in executive officer positions when making executive officer appointments, and no fixed targets or quotas relating to
the representation of women in executive officer positions have been adopted. The Board will consider candidates who have been
selected based on the primary considerations of experience, skills, ability, education and compatibility with the Company’s
corporate vision, values and principles, including the Company’s commitment to diversity. One of the Company’s three
executive officers, namely the Vice President, Legal Affairs and Corporate Secretary, is a woman (33%).
Board Assessment and Renewal
The Board undertakes a robust annual assessment
process that includes director reviews conducted through completion of an annual assessment questionnaire regarding the performance
and effectiveness of the Board, each committee and each director, and one-on-one conversations between the Non-Executive Chair
of the Board and the chair of the CGNC. The Non-Executive Chair of the Board will have informal discussions with directors on a
selective basis, as required, to fully understand any concerns raised or recommendations advanced in the assessment process, before
reporting to and leading a discussion among the full Board. Based on the results of the questionnaire and the skills matrix identified
above, the CGNC may recommend adjustments from time to time to ensure necessary and desirable competencies and characteristics
are represented on the Board and the Board is of a size and composition that facilitates effective decision making.
The Company has not adopted a mandatory
retirement age for directors or imposed any restrictions on a director’s ability to stand for re-election. The Company is
of the opinion that imposing such restrictions could put the Company at risk of losing longer serving directors who have an in-depth
knowledge and understanding of the Company and its business. This loss of knowledge and understanding would not necessarily be
in the best interests of the Company or its shareholders. However, to balance the benefits of experience with the need for new
perspective, the Board Diversity Policy provides that periodically, but at least once every three years, the Board will consider
the need for and, if deemed necessary, implement a renewal program intended to achieve what the Board believes to be a desirable
balance of skills, experience, expertise, gender, age and other diversity criteria. In considering and identifying new directors
for nomination, the CGNC will meet to identify the particular skills needed of new recruits. Among other things, the CGNC uses
the skills matrix identified above and the results of the assessment questionnaire and, together with input from the Non-Executive
Chair of the Board and, if appropriate, the CEO, determines the necessary attributes and experience required of a new member which
would represent the best fit for the Board and future needs of the Company. Once a list of key attributes, skills and competencies
for a potential new director is identified, the CGNC then creates a list of possible candidates for consideration and evaluation,
which are then presented to the full Board for further discussion and evaluation. Only after rigorous discussion by the CGNC and
the Board is a short-list of potential Board candidates created, following which the Board works together with the CGNC to develop
the best plan to recruit the preferred candidate(s).
At December 31, 2018, Entrée had
seven full-time employees and one part-time employee based in Vancouver, British Columbia and Ulaanbaatar, Mongolia (2017 –
eight full-time employees; 2016 – 11 full time employees). Entrée also had two part-time consultants based in Vancouver,
British Columbia.
Following the Arrangement, the Company
and Mason Resources entered into the Administrative Services Agreement pursuant to which the Company provided office space, furnishings
and equipment, communications facilities and personnel necessary for Mason Resources to fulfill its basic day-to-day head office
and executive responsibilities on a pro-rata cost-recovery basis. Mason Resources terminated the Administrative Services Agreement
effective December 19, 2018, following completion of its plan of arrangement with Hudbay.
As at March 29, 2019, Entrée had
four full time employees, one part time employee and one part time consultant based in Vancouver, British Columbia and two full
time employees based in Ulaanbaatar, Mongolia.
None of Entrée’s employees
belong to a union or are subject to a collective agreement. Employee relations are considered to be good.
The table below sets out the municipality
of residence and securities held by directors and executive officers as at March 29, 2019.
Name and municipality of
residence
(8)
|
No. of Common
Shares beneficially
owned, directly or
indirectly, or
controlled
(1)
.
|
No. of securities held on a fully-
diluted basis
|
Mark Bailey
(2)
Arizona
U.S.A.
|
611,627
|
Common Shares:
Replacement Warrants:
Stock options:
Total
|
611,627
50,000
800,000
1,461,627
|
James Harris
(3)
British Columbia
Canada
|
983,062
|
Common Shares:
Replacement Warrants:
Stock options:
Total:
|
983,062
67,500
800,000
1,850,562
|
|
Michael Price
London, UK
(4)
|
Nil
|
Common Shares:
Replacement Warrants:
Stock options:
Total:
|
Nil
Nil
300,000
300,000
|
|
Alan Edwards
(5)
Arizona
U.S.A
|
532,783
|
Common Shares:
Replacement Warrants:
Stock options:
Total:
|
532,783
60,975
725,000
1,318,758
|
|
Anna Stylianides
(6)
British Columbia
Canada
|
73,171
|
Common Shares:
Replacement Warrants:
Stock options:
Total:
|
73,171
36,585
725,000
834,756
|
Name and municipality of
residence
(8)
|
No. of Common
Shares beneficially
owned, directly or
indirectly, or
controlled
(1)
.
|
No. of securities held on a fully-
diluted basis
|
|
Stephen Scott
(7)
British Columbia
Canada
|
332,561
|
Common Shares:
Replacement Warrants:
Stock options:
Total:
|
332,561
48,780
1,725,000
2,106,341
|
|
Duane Lo
British Columbia
Canada
|
726,300
|
Common Shares:
Replacement Warrants:
Stock options:
Total:
|
726,300
122,000
800,000
1,648,300
|
|
Susan McLeod
British Columbia
Canada
|
593,665
|
Common Shares:
Replacement Warrants:
Stock options:
Total:
|
593,665
61,000
1,010,000
1,664,665
|
|
|
(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) and Technical
Committee.
|
|
|
(3)
|
Member of the CGNC (chair), Audit Committee and Compensation Committee.
|
|
|
(4)
|
Member of the Audit Committee and Technical Committee.
|
|
|
(5)
|
Member of the Technical Committee (chair), CGNC and Compensation Committee.
|
|
|
(6)
|
Member of the Audit Committee (chair) and CGNC.
|
|
|
(7)
|
Member of the Technical Committee.
|
|
|
(8)
|
Mr. Cinits ceased to be an executive officer of the Company on January 1, 2019. As at December
31, 2018, Mr. Cinits held 227,272 Common Shares, 24,390 Replacement Warrants and 735,000 stock options.
|
To the best of the Company’s knowledge
as at December 31, 2018, directors and executive officers, as a group, beneficially owned, or controlled or directed, directly
or indirectly, 3,975,692 Common Shares (not including Common Shares issuable upon exercise of Replacement Warrants or stock options)
representing 2.3% of the then outstanding Common Shares.
Securities Authorized for Issuance under
Equity Compensation Plans
The following table sets out information
as of the end of the Company’s most recently completed financial year with respect to compensation plans under which equity
securities of the Company are authorized for issuance.
|
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
(a)
|
|
|
Weighted-average exercise
price of outstanding options,
warrants and rights
(C$)
(b)
|
|
|
Number of securities
remaining available for future
issuances under equity
compensation plans
(excluding securities reflected
in column (a))
(c)
(1)
|
|
|
Equity compensation plans approved by securityholders
|
|
|
8,710,000
|
|
|
$
|
0.42
|
|
|
|
8,770,682
|
|
|
Equity compensation plans not approved by securityholders
|
|
|
Nil
|
|
|
|
N/A
|
|
|
|
Nil
|
|
|
Total
|
|
|
8,710,000
|
|
|
$
|
0.42
|
|
|
|
8,770,682
|
|
|
|
(1)
|
The maximum aggregate number of Common Shares issuable
pursuant to options awarded under the Plan and outstanding from time to time may not exceed that number which represents 10% of
the issued and outstanding Common Shares from time to time. The Company shall, at all times while the Plan is in effect, reserve
a sufficient number of Common Shares to satisfy the requirements of the Plan. The Plan also provides that exercised options will
automatically be available for subsequent awards and for the reservation and issuance of additional Common Shares pursuant to
such options. Accordingly, the Plan constitutes both a "rolling" plan and an "evergreen" plan, and its renewal
must be approved by the Company’s shareholders every three years in accordance with the policies of the TSX. The Plan was
last approved on May 1, 2017.
|
|
|
Item 7.
|
Major Shareholders and Related Party Transactions
|
As far as it is known to the Company, other
than identified below, it is not directly or indirectly owned or controlled by any other corporation or by the Canadian Government,
or any foreign government, or by any other natural or legal person.
To the knowledge of the Company’s
directors and senior officers, the following table sets forth certain information as at March 29, 2019, concerning the ownership
of the Company’s Common Shares as to each person known by the directors and senior officers, based solely upon public records
and filings, to be the direct or indirect owner of more than five percent (5%) of the Company’s Common Shares, who owned
more than five percent of the outstanding shares of each class of the Company’s voting securities.
|
Shareholder Name
|
Number of Shares
|
Percentage of Issued Shares
|
|
Rio Tinto International Holdings Limited
|
30,366,129
(1)
|
17.4%
|
|
Sandstorm Gold Ltd.
|
28,559,880
(2)
|
16.3%
|
|
|
(1)
|
Rio
Tinto International Holdings Limited holds 16,566,796 Common Shares directly. It also has a beneficial interest in 13,799,333
C
ommon Shares held by Turquoise Hill Resources Ltd.
|
|
|
(2)
|
Sandstorm also owns 457,317 Replacement Warrants.
|
Changes in ownership by major
shareholders
To the best of the Company’s knowledge
there have been no changes in the ownership of the Company’s shares during the last three fiscal years other than as disclosed
herein.
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 "Item
4. Information on the Company – B. Business Overview – Sandstorm – Amended and Restated Equity Participation
and Funding Agreement" above. 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. Following closing, Sandstorm held
22,985,746 Common Shares or approximately 15.1% of the then issued and outstanding Common Shares of the Company.
On January 11, 2017, Sandstorm acquired
914,634 units of the Company at a price of C$0.41 per unit as part of the larger Non-Brokered Private Placement. See "Item
4. Information on the Company – B. Business Overview – Non-Brokered Private Placement" above. Following closing,
Sandstorm held 23,900,380 Common Shares or approximately 13.8% of the then issued and outstanding Common Shares of the Company.
In the year ended December 31, 2018, Sandstorm
made market purchases through the facilities of the TSX increasing its ownership from 23,900,380 Common Shares to 28,559,880 Common
Shares of the Company, or approximately 16.3% of the outstanding Common Shares of the Company as at December 31, 2018.
As at March 29, 2019, Sandstorm holds 28,559,880
Common Shares (approximately 16.3% of the outstanding Common Shares of the Company) and Replacement Warrants to purchase an additional
457,317 Common Shares.
Voting Rights
The Company’s major shareholders
do not have different voting rights.
Shares Held in the United States
As
of March 15, 2019, there were approximately eight registered holders of the Company’s Common Shares in the United States,
with combined holdings of 39,735,769 Common Shares.
Change of Control
As of the date of this Annual Report, there
were no arrangements known to the Company which may, at a subsequent date, result in a change of control of the Company.
Control by Others
To the best of the Company’s knowledge,
the Company is not directly or indirectly owned or controlled by another corporation, any foreign government, or any other natural
or legal person, severally or jointly.
|
|
B
.
|
Related Party Transactions
|
The
Company entered into no transactions with related parties during the fiscal year ended on December 31, 2018, and has not entered
into a transaction with a related party from January 1, 2019 up to the date of this Annual Report.
Directors and Key Management
Personnel
The Company’s related parties include
its wholly owned subsidiaries and key management personnel. Direct remuneration paid to the Company’s directors and key management
personnel during the years ended December 31, 2018 and 2017 are as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Directors fees
|
|
$
|
142
|
|
|
$
|
153
|
|
|
Salaries and benefits
|
|
$
|
1,143
|
|
|
$
|
929
|
|
|
Share-based compensation
|
|
$
|
461
|
|
|
$
|
410
|
|
As of December 31, 2018, included in
the accounts payable and accrued liabilities balance on the consolidated statement of financial position is $0.2 million due
to the Company’s directors and key management personnel.
Upon a change of control of the Company,
amounts totaling $1.0 million will become payable to certain officers and management of the Company.
Administrative Services Agreement
In May 2017, Mason Resources entered into
the Administrative Services Agreement with Entrée whereby Entrée provided office space, furnishings and equipment,
communications facilities and personnel necessary for Mason Resources to fulfill its basic day-to-day head office and executive
responsibilities on a pro-rata cost-recovery basis. The total amount charged to Mason Resources for the year ended December 31,
2018 was $0.7 million. As of December 31, 2018, included in the receivables balance on the consolidated statement of financial
position is nil due from Mason Resources relating to the Administrative Services Agreement. These transactions occurred in the
normal course of business and were conducted on terms substantially similar to arm’s length transactions.
Transactions with Mason Resources for goods
and services were made on commercial terms through the Administrative Services Agreement.
|
|
|
2018
|
|
|
2017
|
|
|
Executive services
|
|
$
|
421
|
|
|
$
|
268
|
|
|
Corporate overhead
|
|
|
280
|
|
|
|
280
|
|
|
Investor communications
|
|
|
-
|
|
|
|
45
|
|
|
Restructure charge
|
|
|
-
|
|
|
|
175
|
|
On December 19, 2018, Mason Resources terminated
the Administrative Services Agreement with Entrée and paid a termination charge of $0.3 million as required by the terms
of the Administrative Services Agreement.
|
|
C.
|
Interests of Experts and Counsel
|
Not Applicable.
|
|
Item 8.
|
Financial Information
|
|
|
A.
|
Consolidated Statements and Other Financial Information
|
The following financial statements of the
Company are attached to this Annual Report:
|
|
·
|
Independent Auditors’ Report;
|
|
|
·
|
Consolidated Statements of Financial Position as at December 31, 2018, 2017 and January 1, 2017;
|
|
|
·
|
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2018 and 2017;
|
|
|
·
|
Consolidated Statement of Changes in Shareholders’ Equity (Deficiency) for the years ended
December 31, 2018 and 2017;
|
|
|
·
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2018 and 2017; and
|
|
|
·
|
Notes to Consolidated Financial Statements for the years ended December 31, 2018 and 2017.
|
Legal Proceedings
None.
Dividend Policy
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.
None.
|
|
Item 9.
|
The Offer and Listing
|
The Company’s Common 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 is
traded on the TSX under the symbol "ETG". The Company’s Common Shares are also traded on the NYSE American under
the symbol "EGI".
Not Applicable.
The
Company’s outstanding Common Shares are listed on the TSX and are also listed on the NYSE American.
Not Applicable.
Not Applicable.
Not Applicable.
|
|
Item 10.
|
Additional Information
|
Not Applicable.
|
|
B.
|
Memorandum and Articles of Association
|
The Company is continued under the laws
of British Columbia and is governed by the BCBCA. A copy of the Company’s Articles is incorporated by reference into this
Form 20-F as Exhibit 1.3.
The Company’s Articles do not address
the Company’s objects and purposes and there are no restrictions on the business the Company may carry on in the Articles.
The Company is authorized to issue an unlimited
number of Common Shares without par value. 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.
A director or senior officer who has, directly
or indirectly, a material interest in an existing or proposed material contract or transaction of the Company may not vote in respect
of any such proposed material contract or transaction.
The directors may from time to time in
their discretion authorize and cause the Company to:
|
|
(a)
|
borrow money in such amount, in such manner, on such security,
from such sources and upon such terms and conditions as they think fit;
|
|
|
(b)
|
guarantee the repayment of money borrowed by any person or the performance of any obligation of
any person;
|
|
|
(c)
|
issue bonds, debentures, notes and other debt obligations either outright or as continuing security
for any indebtedness or liability, direct or indirect, or obligation of the Company or of any other person; and
|
|
|
(d)
|
mortgage, charge (whether by way of a specific or floating charge), grant a security interest in
or give other security on the undertaking or on the whole or any part of the property and assets of the Company, both present and
future.
|
There are no age considerations pertaining
to the retirement or non-retirement of directors.
A director is not required to hold a share
in the capital of the Company as qualification for his office but shall be qualified as required by the BCBCA, to become or act
as a director.
A director may hold any office or appointment
with the Company (except as auditor of the Company) in conjunction with his office of director for such period and on such terms
(as to remuneration or otherwise) as the Board may determine. The Company must reimburse each director for the reasonable expenses
that he may incur in and about the business of the Company. If a director performs any professional or other services for the Company
that in the opinion of the directors are outside the ordinary duties of a director or shall otherwise be specially occupied in
or about the Company’s business, he may be paid remuneration to be fixed by the Board, or, at the option of such director,
by ordinary resolution, and such remuneration may be either in addition to or in substitution for any other remuneration that he
may be entitled to receive.
Subject to the provisions of the BCBCA,
the Company may indemnify any person. The Company must, subject to the provisions of the BCBCA, indemnify a director, officer or
alternate director or a former director, officer or alternate director of the Company or a person who, at the request of the Company,
is or was a director, alternate director or officer of another corporation, at a time when the corporation is or was an affiliate
of the Company or a person who, at the request of the Company, is or was, or holds or held a position equivalent to that of, a
director, alternate director or officer of a partnership, trust, joint venture or other unincorporated entity (in each case, an
"eligible party"), and the heirs and personal representatives of any such eligible party, against all judgments, penalties
or fines awarded or imposed in, or an amount paid in settlement of, a legal proceeding or investigative action (whether current,
threatened, pending or completed) in which such eligible party or any of the heirs and personal representatives of such eligible
party, by reason of such eligible party being or having been a director, alternate director or officer or holding or having held
a position equivalent to that of a director, alternate director or officer, is or may be joined as a party or is or may be liable
for or in respect of a judgment, penalty or fine in, or expenses related to the proceeding.
All of the authorized Common Shares of
the Company are of the same class and, once issued, rank equally as to dividends, voting powers, and participation in assets. Holders
of Common Shares are entitled to one vote for each Common Share held of record on all matters to be acted upon by the shareholders.
Holders of Common Shares are entitled to receive such dividends as may be declared from time to time by the Board, in its discretion,
out of funds legally available therefore.
Upon liquidation, dissolution or winding
up of the Company, holders of Common Shares are entitled to receive pro rata the assets of the Company, if any, remaining after
payments of all debts and liabilities. No Common Shares have been issued subject to call or assessment. There are no pre-emptive
or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds.
Provisions as to the modification, amendment
or variation of such shareholder rights or provisions are contained in the BCBCA and the Articles. Unless the BCBCA or the Company's
Articles otherwise provide, any action to be taken by a resolution of the shareholders may be taken by an ordinary resolution or
by a vote of a majority or more of the shares represented at the shareholders' meeting.
The BCBCA contains provisions which require
a "special resolution" for effecting certain corporate actions. Such a "special resolution" requires a two-thirds
vote of shareholders rather than a simple majority for passage. The principle corporate actions that require a "special resolution"
include:
|
|
a.
|
transferring the Company's jurisdiction from British Columbia to another jurisdiction;
|
|
|
b.
|
giving financial assistance under certain circumstances;
|
|
|
c.
|
certain conflicts of interest by directors;
|
|
|
d.
|
disposing of all or substantially all of the Company's undertakings;
|
|
|
e.
|
certain alterations of share capital;
|
|
|
f.
|
altering any restrictions on the Company's business; and
|
|
|
g.
|
certain reorganizations of the Company.
|
There are no restrictions on the repurchase
or redemption of Common Shares of the Company while there is any arrearage in the payment of dividends or sinking fund installments.
There is no liability to further capital
calls by the Company.
There are no provisions discriminating
against any existing or prospective holder of securities as a result of such shareholder owning a substantial number of Common
Shares.
No right or special right attached to issued
shares may be prejudiced or interfered with unless the shareholders holding shares of the class or series of shares to which the
right or special right is attached consent by a separate special resolution of those shareholders.
There are no limitations on the rights
to own securities.
There is no provision of the Company’s
Articles that would have an effect of delaying, deferring or preventing a change in control of the Company and that would operate
only with respect to a merger, acquisition or corporate restructuring involving the Company (or any of its subsidiaries).
Shareholder ownership must be disclosed
to Canadian securities administrators and the TSX by any shareholder who owns more than 10% of the Company’s outstanding
Common Shares.
The Company has the following material
contracts:
|
|
1.
|
Arrangement Agreement dated February 28, 2017 between Entrée Gold Inc. and Mason Resources
Corp.
|
See "Item 4. Information
on the Company – B. Business Overview – 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 "Item 4. Information
on the Company – B. Business Overview – Sandstorm – Amended and Restated Equity Participation and Funding Agreement"
above.
|
|
3.
|
Joint Venture Agreement deemed effective June 30, 2008 between Entrée Gold Inc. and Ivanhoe
Mines Mongolia Inc. XXK (now OTLLC).
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Pursuant to Earn-In Agreement,
a joint venture was formed on June 30, 2008 and the parties were required to enter into 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.
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4.
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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.
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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 JVACo title, tenure
and related matters and arbitration.
Canada has no system of exchange controls.
There are no Canadian restrictions on the repatriation of capital or earnings of a Canadian public company to non-resident investors.
There are no laws in Canada or exchange restrictions affecting the remittance of dividends, profits, interest, royalties and other
payments to non-resident holders of the Company’s securities, except as discussed below under "Item 10. Additional Information
– E. Taxation".
There are no limitations under the laws
of Canada or in the organizing documents of the Company on the right of foreigners to hold or vote securities of the Company, except
that the
Investment Canada Act
may require review and approval by the Minister of Industry (Canada) of certain acquisitions
of "control" of the Company by a "non-Canadian". The threshold for acquisitions of control is generally defined
as being one-third or more of the voting shares of the Company. "Non-Canadian" generally means an individual who is not
a Canadian citizen, or a corporation, partnership, trust or joint venture that is ultimately controlled by non-Canadians.
Canadian Federal Income Tax Consequences
The following summarizes the principal
Canadian federal income tax consequences applicable to the holding and disposition of Common Shares in the capital of the Company
by a holder who is, or is deemed to be, a United States resident for the purposes of the
Income Tax Act
(Canada) (the "Tax
Act"), and who holds Common Shares solely as capital property and does not use or hold, and is not deemed to use or hold,
Common Shares in connection with carrying on a business in Canada, referred to in this summary as a "U.S. Holder". This
summary is not applicable to a U.S. Holder that is an insurer carrying on an insurance business in Canada and elsewhere. This summary
is based on the current provisions of the Tax Act, the regulations thereunder, all amendments thereto publicly proposed by the
government of Canada, the published administrative practices of the Canada Revenue Agency, and the current provisions of the Convention
Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended
(the "Canada-U.S. Tax Convention"). Except as otherwise expressly provided, this summary does not take into account any
provincial, territorial or foreign (including without limitation, any United States) tax law or treaty. It has been assumed that
all currently proposed amendments will be enacted substantially as proposed and that there is no other relevant change in any governing
law or practice, although no assurance can be given in these respects.
Each U.S. Holder is advised to obtain
tax and legal advice applicable to such U.S. Holder’s particular circumstances.
Every U.S. Holder is liable to pay a Canadian
withholding tax on every dividend that is or is deemed to be paid or credited to the U.S. Holder on the U.S. Holder’s Common
Shares. The statutory rate of withholding tax is 25% of the gross amount of the dividend paid. The Canada-U.S. Tax Convention reduces
the statutory rate with respect to dividends paid to a U.S. Holder, if that U.S. Holder is eligible for benefits under the Canada-U.S.
Tax Convention. Where applicable, the general rate of withholding tax under the Canada-U.S. Tax Convention is 15% of the gross
amount of the dividend, but if the U.S. Holder is a company that owns at least 10% of the voting stock of the Company and beneficially
owns the dividend, the rate of withholding tax is 5% for dividends paid or credited to such corporate U.S. Holder. The Company
is required to withhold the applicable tax from the dividend payable to the U.S. Holder, and to remit the tax to the Receiver General
of Canada for the account of the U. S. Holder.
A U.S. Holder generally will not be subject
to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a Common Share unless
the Common Share constitutes "taxable Canadian property" of the U.S. Holder for purposes of the Tax Act and the gain
is not exempt from tax pursuant to the terms of the Canada-U.S. Tax Convention.
Provided that the Common Shares are listed
on a "designated stock exchange" for purposes of the Tax Act (which currently includes the TSX) at the time of disposition,
the Common Shares generally will not constitute "taxable Canadian property" of a U.S. Holder, unless at any time during
the 60 month period immediately preceding the disposition: (i) the U.S. Holder, persons with whom the U.S. Holder did not deal
at "arm’s length" for the purposes of the Tax Act, partnerships in which the U.S. Holder or a person with whom
the U.S. Holder did not deal at "arm’s length" for the purposes of the Tax Act holds a membership interest directly
or indirectly through one or more partnerships, or the U.S. Holder together with all such persons, owned 25% or more of the issued
shares of any class of the Company and; (ii) more than 50% of the fair market value of the Common Shares was derived directly or
indirectly from one or any combination of real or immovable property situated in Canada, "Canadian resource properties"
(as defined in the Tax Act), "timber resource properties" (as defined in the Tax Act), or options in respect of, or interests
in, or for civil law rights in, such property whether or not such property exists. Notwithstanding the foregoing, the Common Shres
may otherwise in certain circumstances be deemed to be taxable Canadian property to a U.S. Holder for the purposes of the Tax Act.
Even if a Common Share is considered to
be "taxable Canadian property" to a U.S. Holder, the U.S. Holder may be exempt from tax under the Tax Act if such shares
are "treaty-protected property" for the purposes of the Tax Act. Common Shares owned by a U.S. Holder will generally
be "treaty-protected property" if the gain from the disposition of such shares would, because of the Canada-U.S. Tax
Convention, be exempt from tax under Part I of the Tax Act.
U.S. Holders who may hold Common Shares
as "taxable Canadian property" should consult their own tax advisors.
Certain United States Federal Income
Tax Consequences
The following is a general summary of certain
material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the
acquisition, ownership, and disposition of Common Shares of the Company.
This summary is for general information
purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations
that may apply to a U.S. Holder arising from and relating to the acquisition, ownership, and disposition of Common Shares. In addition,
this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the
U.S. federal income tax consequences to such U.S. Holder, including specific tax consequences to a U.S. Holder under an applicable
tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice
with respect to any U.S. Holder. This summary does not address the U.S. federal alternative minimum, U.S. federal estate and gift,
U.S. state and local, and non-U.S. tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares.
Except as specifically set forth below, this summary does not discuss applicable tax reporting requirements. Each U.S. Holder should
consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state
and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of Common Shares.
No legal opinion from U.S. legal counsel
or ruling from the Internal Revenue Service (the "IRS") has been requested, or will be obtained, regarding the U.S. federal
income tax consequences of the acquisition, ownership, and disposition of Common Shares. This summary is not binding on the IRS,
and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary.
In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S.
courts could disagree with one or more of the positions taken in this summary.
Scope of this Summary
Authorities
This summary is based on the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations (whether final, temporary, or proposed), published rulings
of the IRS, published administrative positions of the IRS, the Canada-U.S. Tax Convention, and U.S. court decisions that are applicable
and, in each case, as in effect and available, as of the date of this document. Any of the authorities on which this summary is
based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive or prospective
basis which could affect the U.S. federal income tax considerations described in this summary. This summary does not discuss the
potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive
or prospective basis.
U.S. Holders
For purposes of this summary, the term
"U.S. Holder" means a beneficial owner of Common Shares that is for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the U.S.;
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized
under the laws of the U.S., any state thereof or the District of Columbia;
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an estate whose income is subject to U.S. federal income taxation regardless of its source; or
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a trust that (1) is subject to the primary supervision of a court within the U.S. and the control
of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury Regulations
to be treated as a U.S. person.
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Non-U.S. Holders
For purposes of this summary, a "non-U.S.
Holder" is a beneficial owner of Common Shares that is not a U.S. Holder or is a partnership. This summary does not address
the U.S. federal income tax consequences to non-U.S. Holders arising from and relating to the acquisition, ownership, and disposition
of Common Shares. Accordingly, a non-U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative
minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences (including the potential application
of and operation of any income tax treaties) relating to the acquisition, ownership, and disposition of Common Shares.
U.S. Holders Subject to Special U.S.
Federal Income Tax Rules Not Addressed
This summary does not address the U.S.
federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including,
but not limited to, U.S. Holders that: (a) are tax-exempt organizations, qualified retirement plans, individual retirement accounts,
or other tax-deferred accounts; (b) are financial institutions, underwriters, insurance companies, real estate investment trusts,
or regulated investment companies; (c) are broker-dealers, dealers, or traders in securities or currencies that elect to apply
a mark-to-market accounting method; (d) have a "functional currency" other than the U.S. dollar; (e) own Common Shares
as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than
one position; (f) acquired Common Shares in connection with the exercise of employee stock options or otherwise as compensation
for services; (g) hold Common Shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property
held for investment purposes); (h) are required to accelerate the recognition of any item of gross income with respect to Common
Shares as a result of such income being recognized on an applicable financial statement; or (i) own or have owned (directly, indirectly,
or by attribution) 10% or more of the total combined voting power or value of the outstanding shares of the Company. This summary
also does not address the U.S. federal income tax considerations applicable to U.S. Holders who are: (a) U.S. expatriates or former
long-term residents of the U.S.; (b) persons that have been, are, or will be a resident or deemed to be a resident in Canada for
purposes of the Tax Act; (c) persons that use or hold, will use or hold, or that are or will be deemed to use or hold Common Shares
in connection with carrying on a business in Canada; (d) persons whose Common Shares constitute "taxable Canadian property"
under the Tax Act; or (e) persons that have a permanent establishment in Canada for the purposes of the Canada-U.S. Tax Convention.
U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders described immediately
above, should consult their own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and
gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of Common Shares.
If an entity or arrangement that is classified
as a partnership (or "pass-through" entity) for U.S. federal income tax purposes holds Common Shares, the U.S. federal
income tax consequences to such partnership and the partners (or owners) of such partnership generally will depend on the activities
of the partnership and the status of such partners (or owners). This summary does not address the tax consequences to any such
partnership or partner (or owner). Partners (or owners) of entities or arrangements that are classified as partnerships for U.S.
federal income tax purposes should consult their own tax advisors regarding the U.S. federal income tax consequences arising from
and relating to the acquisition, ownership, and disposition of Common Shares.
Passive Foreign Investment Company
Rules
If the Company were to constitute a "passive
foreign investment company" under the meaning of Section 1297 of the Code, or a "PFIC", as defined below, for any
year during a U.S. Holder’s holding period, then certain different and potentially adverse rules will affect the U.S. federal
income tax consequences to a U.S. Holder resulting from the acquisition, ownership and disposition of Common Shares. In addition,
in any year in which the Company is classified as a PFIC, such holder will be required to file an annual report with the IRS containing
such information as Treasury Regulations or other IRS guidance may require. A failure to satisfy such reporting requirements may
result in an extension of the time period during which the IRS can assess a tax. U.S. Holders should consult their own tax advisors
regarding the requirements of filing such information returns under these rules, including the requirement to file an IRS Form
8621.
PFIC Status of the Company
The Company generally will be a PFIC if,
for a tax year, (a) 75% or more of the gross income of the Company is passive income (the "income test"), or (b) 50%
or more of the value of the Company’s assets either produce passive income or are held for the production of passive income,
based on the quarterly average of the fair market value of such assets (the "asset test"). "Gross income" generally
includes all sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations
or sources, and "passive income" generally includes, for example, dividends, interest, certain rents and royalties, certain
gains from the sale of stock and securities, and certain gains from commodities transactions.
Active business gains arising from the
sale of commodities generally are excluded from passive income if substantially all (85% or more) of a foreign corporation’s
commodities are stock in trade of such foreign corporation or other property of a kind which would properly be included in inventory
of such foreign corporation, or property held by such foreign corporation primarily for sale to customers in the ordinary course
of business and certain other requirements are satisfied.
For purposes of the PFIC income test and
asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares
of another corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other corporation
and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC
income test and asset test described above, and assuming certain other requirements are met, "passive income" does not
include certain interest, dividends, rents, or royalties that are received or accrued by the Company from certain "related
persons" (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such
related person that is not passive income.
In addition, under certain attribution
rules, if the Company is a PFIC, U.S. Holders will be deemed to own their proportionate share of the stock of any subsidiary of
the Company that is also a PFIC, or a "Subsidiary PFIC", and will be subject to U.S. federal income tax on their proportionate
share of, (a) a distribution on the stock of a Subsidiary PFIC, and (b) a disposition or deemed disposition of the stock of a Subsidiary
PFIC, both as if such U.S. Holders directly held the shares of such Subsidiary PFIC.
The Company believes that it was classified
as a PFIC during the tax year ended December 31, 2018, and may be a PFIC in future tax years. No opinion of legal counsel or ruling
from the IRS concerning the status of the Company as a PFIC has been obtained or is currently planned to be requested. The determination
of whether any corporation was, or will be, a PFIC for a tax year depends, in part, on the application of complex U.S. federal
income tax rules, which are subject to differing interpretations. In addition, whether any corporation will be a PFIC for any tax
year depends on the assets and income of such corporation over the course of each such tax year and, as a result, cannot be predicted
with certainty as of the date of this document. Accordingly, there can be no assurance that the IRS will not challenge any determination
made by the Company (or a Subsidiary PFIC) concerning its PFIC status. Each U.S. Holder should consult its own tax advisor regarding
the PFIC status of the Company and any Subsidiary PFIC.
Default PFIC Rules Under Section 1291
of the Code
If the Company is a PFIC, the U.S. federal
income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of Common Shares will depend on whether
such U.S. Holder makes an election to treat the Company and each Subsidiary PFIC, if any, as a "qualified electing fund",
or "QEF", under Section 1295 of the Code, or a "QEF Election", or a mark-to-market election under Section 1296
of the Code, or a "Mark-to-Market Election". A U.S. Holder that does not make either a QEF Election or a Mark-to-Market
Election will be referred to in this summary as a "Non-Electing U.S. Holder".
A Non-Electing U.S. Holder will be subject
to the rules of Section 1291 of the Code with respect to, (a) any gain recognized on the sale or other taxable disposition of Common
Shares, and (b) any excess distribution received on our Common Shares. A distribution generally will be an "excess distribution"
to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the
average distributions received during the three preceding tax years (or during a U.S. Holder’s holding period for our Common
Shares, if shorter).
Under Section 1291 of the Code, any gain
recognized on the sale or other taxable disposition of Common Shares (including an indirect disposition of the stock of any Subsidiary
PFIC), and any "excess distribution" received on Common Shares, must be ratably allocated to each day in a Non-Electing
U.S. Holder’s holding period for the respective Common Shares. The amount of any such gain or excess distribution allocated
to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any,
would be taxed as ordinary income. The amounts allocated to any other tax year would be subject to U.S. federal income tax at the
highest tax rate applicable to ordinary income in each such year, and an interest charge would be imposed on the tax liability
for each such year, calculated as if such tax liability had been due in each such year. A Non-Electing U.S. Holder that is not
a corporation must treat any such interest paid as "personal interest", which is not deductible.
If the Company is a PFIC for any tax year
during which a Non-Electing U.S. Holder holds Common Shares, the Company will continue to be treated as a PFIC with respect to
such Non-Electing U.S. Holder, regardless of whether the Company ceases to be a PFIC in one or more subsequent tax years. A Non-Electing
U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules of Section
1291 of the Code discussed above), but not loss, as if such Common Shares were sold on the last day of the last tax year for which
the Company was a PFIC.
QEF Election
A U.S. Holder that makes a timely and effective
QEF Election for the first tax year in which its holding period of its Common Shares begins generally will not be subject to the
rules of Section 1291 of the Code discussed above with respect to its Common Shares. A U.S. Holder that makes a timely and effective
QEF Election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of, (a) the net capital gain
of the Company, which will be taxed as long-term capital gain to such U.S. Holder, and (b) the ordinary earnings of the Company,
which will be taxed as ordinary income to such U.S. Holder. Generally, "net capital gain" is the excess of (i) net long-term
capital gain over (ii) net short-term capital loss, and "ordinary earnings" are the excess of (i) "earnings and
profits" over (ii) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on
such amounts for each tax year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such
U.S. Holder by the Company. However, for any tax year in which the Company is a PFIC and has no net income or gain, U.S. Holders
that have made a QEF Election would not have any income inclusions as a result of the QEF Election. If a U.S. Holder that made
a QEF Election has an income inclusion, such U.S. Holder may, subject to certain limitations, elect to defer payment of current
U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest
paid will be treated as "personal interest", which is not deductible.
A U.S. Holder that makes a timely and effective
QEF Election with respect to the Company generally, (a) may receive a tax-free distribution from the Company to the extent that
such distribution represents "earnings and profits" of the Company that were previously included in income by the U.S.
Holder because of such QEF Election, and (b) will adjust such U.S. Holder’s tax basis in our Common Shares to reflect the
amount included in income or allowed as a tax-free distribution because of such QEF Election. In addition, a U.S. Holder that makes
a QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition of Common Shares.
The procedure for making a QEF Election,
and the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF
Election will be treated as "timely" if such QEF Election is made for the first year in the U.S. Holder’s holding
period for our Common Shares in which the Company was a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate
QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such year. If a U.S. Holder does
not make a timely and effective QEF Election for the first year in the U.S. Holder’s holding period for our Common Shares,
the U.S. Holder may still be able to make a timely and effective QEF Election in a subsequent year if such U.S. Holder also makes
a "purging" election to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above)
as if such Common Shares were sold for their fair market value on the day the QEF Election is effective.
A QEF Election will apply to the tax year
for which such QEF Election is timely made and to all subsequent tax years, unless such QEF Election is invalidated or terminated
or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent tax year, the
Company ceases to be a PFIC, the QEF Election will remain in effect (although it will not be applicable) during those tax years
in which the Company is not a PFIC. Accordingly, if the Company becomes a PFIC in another subsequent tax year, the QEF Election
will be effective and the U.S. Holder will be subject to the QEF rules described above during any subsequent tax year in which
the Company qualifies as a PFIC.
U.S. Holders should be aware that there
can be no assurance that the Company will satisfy record keeping requirements that apply to a QEF, or that the Company will supply
U.S. Holders with information that such U.S. Holders require to report under the QEF rules, in event that the Company is a PFIC
and a U.S. Holder wishes to make a QEF Election. Thus, U.S. Holders may not be able to make a QEF Election with respect to their
Common Shares. Each U.S. Holder should consult its own tax advisor regarding the availability of, and procedure for making, a QEF
Election.
A U.S. Holder makes a QEF Election by attaching
a completed IRS Form 8621, including a PFIC Annual Information Statement, to a timely filed U.S. federal income tax return. However,
if the Company does not provide the required information with regard to the Company or any of its Subsidiary PFICs, U.S. Holders
will not be able to make a QEF Election for such entity and will continue to be subject to the rules of Section 1291 of the Code
discussed above that apply to Non-Electing U.S. Holders with respect to the taxation of gains and excess distributions.
Mark-to-Market Election
A U.S. Holder may make a Mark-to-Market
Election only if the Common Shares are marketable stock. Our Common Shares generally will be "marketable stock" if our
Common Shares are regularly traded on, (a) a national securities exchange that is registered with the SEC, (b) the national market
system established pursuant to section 11A of the U.S. Exchange Act, or (c) a foreign securities exchange that is regulated or
supervised by a governmental authority of the country in which the market is located, provided that, (i) such foreign exchange
has trading volume, listing, financial disclosure, and meets other requirements and the laws of the country in which such foreign
exchange is located, together with the rules of such foreign exchange, ensure that such requirements are actually enforced, and
(ii) the rules of such foreign exchange ensure active trading of listed stocks. If our Common Shares are traded on such a qualified
exchange or other market, our Common Shares generally will be "regularly traded" for any calendar year during which our
Common Shares are traded, other than in de minimis quantities, on at least 15 days during each calendar quarter.
A U.S. Holder that makes a Mark-to-Market
Election with respect to its Common Shares generally will not be subject to the rules of Section 1291 of the Code discussed above
with respect to such Common Shares. However, if a U.S. Holder does not make a Mark-to-Market Election beginning in the first tax
year of such U.S. Holder’s holding period for our Common Shares or such U.S. Holder has not made a timely QEF Election, the
rules of Section 1291 of the Code discussed above will apply to certain dispositions of, and distributions on, our Common
Shares.
A U.S. Holder that makes a Mark-to-Market
Election will include in ordinary income, for each tax year in which the Company is a PFIC, an amount equal to the excess, if any,
of (i) the fair market value of our Common Shares, as of the close of such tax year over (ii) such U.S. Holder’s tax basis
in such Common Shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the
excess, if any, of (i) such U.S. Holder’s adjusted tax basis in our Common Shares, over (ii) the fair market value of such
Common Shares (but only to the extent of the net amount of previously included income as a result of the Mark-to-Market Election
for prior tax years).
A U.S. Holder that makes a Mark-to-Market
Election generally also will adjust such U.S. Holder’s tax basis in our Common Shares to reflect the amount included in gross
income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon a sale or other taxable disposition
of Common Shares, a U.S. Holder that makes a Mark-to-Market Election will recognize ordinary income or ordinary loss (not to exceed
the excess, if any, of (i) the amount included in ordinary income because of such Mark-to-Market Election for prior tax years over
(ii) the amount allowed as a deduction because of such Mark-to-Market Election for prior tax years).
A U.S. Holder makes a Mark-to-Market Election
by attaching a completed IRS Form 8621 to a timely filed U.S. federal income tax return. A Mark-to-Market Election applies to the
tax year in which such Mark-to-Market Election is made and to each subsequent tax year, unless our Common Shares cease to be "marketable
stock" or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisor regarding the
availability of, and procedure for making, a Mark-to-Market Election.
Although a U.S. Holder may be eligible
to make a Mark-to-Market Election with respect to our Common Shares, no such election may be made with respect to the stock of
any Subsidiary PFIC that a U.S. Holder is treated as owning, because such stock is not marketable. Hence, the Mark-to-Market Election
will not be effective to eliminate the application of the default rules of Section 1291 of the Code described above with respect
to deemed dispositions of Subsidiary PFIC stock or distributions from a Subsidiary PFIC.
Other PFIC Rules
Under Section 1291(f) of the Code, the
IRS has issued proposed Treasury Regulations that, subject to certain exceptions, would cause a U.S. Holder that had not made a
timely QEF Election to recognize gain (but not loss) upon certain transfers of Common Shares that would otherwise be tax-deferred
(e.g., gifts and exchanges pursuant to corporate reorganizations). However, the specific U.S. federal income tax consequences to
a U.S. Holder may vary based on the manner in which Common Shares are transferred.
Certain additional adverse rules will apply
with respect to a U.S. Holder if the Company is a PFIC, regardless of whether such U.S. Holder makes a QEF Election. For example
under Section 1298(b)(6) of the Code, a U.S. Holder that uses Common Shares as security for a loan will, except as may be provided
in Treasury Regulations, be treated as having made a taxable disposition of such Common Shares.
Special rules also apply to the amount
of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to such special rules, foreign taxes
paid with respect to any distribution in respect of stock in a PFIC are generally eligible for the foreign tax credit. The rules
relating to distributions by a PFIC and their eligibility for the foreign tax credit are complicated, and a U.S. Holder should
consult with their own tax advisor regarding the availability of the foreign tax credit with respect to distributions by a PFIC.
The PFIC rules are complex, and each U.S.
Holder should consult its own tax advisor regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax
consequences of the acquisition, ownership, and disposition of Common Shares.
Ownership and Disposition of Common
Shares
The following discussion is subject to
the rules described above under the heading "Passive Foreign Investment Company Rules".
Distributions on Common Shares
Subject to the PFIC rules discussed above,
a U.S. Holder that receives a distribution, including a constructive distribution, with respect to our Common Shares will be required
to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld
from such distribution) to the extent of the current or accumulated "earnings and profits" of the Company, as computed
for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates if the Company
is a PFIC. To the extent that a distribution exceeds the current and accumulated "earnings and profits" of the Company,
such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder's tax basis in our Common
Shares and thereafter as gain from the sale or exchange of such Common Shares. See "Sale or Other Taxable Disposition of Common
Shares" below. However, the Company may not maintain the calculations of earnings and profits in accordance with U.S. federal
income tax principles, and each U.S. Holder should therefore assume that any distribution by the Company with respect to our Common
Shares will constitute ordinary dividend income. Dividends received on Common Shares generally will not be eligible for the "dividends
received deduction". Subject to applicable limitations and provided the Company is eligible for the benefits of the Canada-U.S.
Tax Convention or the Common Shares are readily tradable on a United States securities market, dividends paid by the Company to
non-corporate U.S. Holders generally will be eligible for the preferential tax rates applicable to long-term capital gains for
dividends, provided certain holding period and other conditions are satisfied, including that the Company not be classified as
a PFIC in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should
consult its own tax advisor regarding the application of such rules.
Sale or Other Taxable Disposition of
Common Shares
Subject to the PFIC rules discussed above,
upon the sale or other taxable disposition of Common Shares, a U.S. Holder generally will recognize capital gain or loss in an
amount equal to the difference between the amount of cash plus the fair market value of any property received and such U.S. Holder's
tax basis in such Common Shares sold or otherwise disposed of. Subject to the PFIC rules discussed above, gain or loss recognized
on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or other disposition,
our Common Shares have been held for more than one year.
Preferential tax rates apply to long-term
capital gain of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term
capital gain of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under
the Code.
Additional Considerations
Additional Tax on Passive Income
Certain U.S. Holders that are individuals,
estates or trusts (other than trusts that are exempt from tax) will be subject to a 3.8% tax on all or a portion of their "net
investment income", which includes dividends on the Common Shares and net gains from the disposition of the Common Shares.
Further, excess distributions treated as dividends, gains treated as excess distributions under the PFIC rules discussed above,
and mark-to-market inclusions and deductions are all included in the calculation of net investment income.
Treasury Regulations provide, subject to
the election described in the following paragraph, that solely for purposes of this additional tax, that distributions of previously
taxed income will be treated as dividends and included in net investment income subject to the additional 3.8% tax. Additionally,
to determine the amount of any capital gain from the sale or other taxable disposition of Common Shares that will be subject to
the additional tax on net investment income, a U.S. Holder who has made a QEF Election will be required to recalculate its basis
in the Common Shares excluding QEF basis adjustments.
Alternatively, a U.S. Holder may make an
election which will be effective with respect to all interests in a PFIC for which a QEF Election has been made and which is held
in that year or acquired in future years. Under this election, a U.S. Holder pays the additional 3.8% tax on QEF income inclusions
and on gains calculated after giving effect to related tax basis adjustments. U.S. Holders that are individuals, estates or trusts
should consult their own tax advisors regarding the applicability of this tax to any of their income or gains in respect of the
Common Shares.
Receipt of Foreign Currency
The amount of any distribution paid to
a U.S. Holder in foreign currency, or on the sale, exchange or other taxable disposition of Common Shares, generally will be equal
to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether
such foreign currency is converted into U.S. dollars at that time). A U.S. Holder will have a basis in the foreign currency equal
to its U.S. dollar value on the date of receipt. Any U.S. Holder who converts or otherwise disposes of the foreign currency after
the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally
will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method.
Each U.S. Holder should consult its own U.S. tax advisors regarding the U.S. federal income tax consequences of receiving, owning,
and disposing of foreign currency.
Foreign Tax Credit
Subject to the PFIC rules discussed above,
a U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on our Common
Shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian
income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar
basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on
a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a
year.
Complex limitations apply to the foreign
tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S.
federal income tax liability that such U.S. Holder’s "foreign source" taxable income bears to such U.S. Holder’s
worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified,
under complex rules, as either "foreign source" or "U.S. source". Generally, dividends paid by a foreign corporation
should be treated as foreign source for this purpose, and gains recognized on the sale of stock of a foreign corporation by a U.S.
Holder should be treated as U.S. source for this purpose, except as otherwise provided in an applicable income tax treaty, and
if an election is properly made under the Code. However, the amount of a distribution with respect to our Common Shares that is
treated as a "dividend" may be lower for U.S. federal income tax purposes than it is for Canadian federal income tax
purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder. In addition, this limitation is calculated separately
with respect to specific categories of income. The foreign tax credit rules are complex, and each U.S. Holder should consult its
own U.S. tax advisor regarding the foreign tax credit rules.
Backup Withholding and Information Reporting
Under U.S. federal income tax law and Treasury
Regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement
in, a foreign corporation. For example, U.S. return disclosure obligations (and related penalties) are imposed on individuals who
are U.S. Holders that hold certain specified foreign financial assets in excess of certain threshold amounts. The definition of
specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also,
unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial
instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign
entity. U.S. Holders may be subject to these reporting requirements unless their Common Shares are held in an account at certain
financial institutions. Penalties for failure to file certain of these information returns are substantial. U.S. Holders should
consult with their own tax advisors regarding the requirements of filing information returns, including the requirement to file
an IRS Form 8938.
Payments made within the U.S. or by a U.S.
payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of, Common Shares will
generally be subject to information reporting and backup withholding tax, at the rate of 24%, if a U.S. Holder, (a) fails to furnish
such U.S. Holder’s correct U.S. taxpayer identification number (generally on IRS Form W-9), (b) furnishes an incorrect U.S.
taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items
subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct
U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding
tax. However, certain exempt persons generally are excluded from these information reporting and backup withholding rules. Any
amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal
income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner.
The discussion of reporting requirements
set forth above is not intended to constitute a complete description of all reporting requirements that may apply to a U.S. Holder.
A failure to satisfy certain reporting requirements may result in an extension of the time period during which the IRS can assess
a tax, and under certain circumstances, such an extension may apply to assessments of amounts unrelated to any unsatisfied reporting
requirement. Each U.S. Holder should consult its own tax advisors regarding the information reporting and backup withholding rules.
|
|
F.
|
Dividends and Paying Agents
|
Not Applicable.
Not Applicable.
We are subject to the informational requirements
of the U.S. Exchange Act and file reports and other information with the SEC. You may read and copy any of our reports and other
information at, and obtain copies upon payment of prescribed fees from, the Public Reference Room maintained by the SEC at 100
F Street, N.E., Washington, D.C. 20549. In addition, the SEC maintains a Website that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the SEC at http://www.sec.gov. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We are required to file reports and other
information with the securities commissions in Canada. You are invited to read and copy any reports, statements or other information,
other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically
available from the Canadian System for Electronic Document Analysis and Retrieval ("SEDAR") (www.sedar.com), the Canadian
equivalent of the SEC's electronic document gathering and retrieval system.
We "incorporate by reference"
information that we file with the SEC, which means that we can disclose important information to you by referring you to those
documents. The information incorporated by reference is an important part of this Annual Report and more recent information supersedes
more dated information contained or incorporated by reference in this Annual Report.
As a foreign private issuer, we are exempt
from the rules under the U.S. Exchange Act prescribing the furnishing and content of proxy statements to shareholders.
We will provide without charge to each
person, including any beneficial owner, to whom a copy of this Annual Report has been delivered, on the written or oral request
of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this Annual
Report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information).
Requests for such copies should be directed to us at the following address: Suite 1650 - 1066 West Hastings Street, Vancouver,
British Columbia, Canada V6E 3X1. The Company is required to file financial statements and other information with the Securities
Commission in each of the Provinces of Canada, except Quebec, electronically through SEDAR which can be viewed at www.sedar.com.
|
|
I.
|
Subsidiary Information
|
Not Applicable.
|
|
Item 11.
|
Quantitative and Qualitative Disclosures about Market Risk
|
Credit risk
The Company’s credit risk is primarily
attributable to cash and cash equivalents and receivables.
The Company limits its credit exposure
on cash and cash equivalents held in bank accounts by holding its key transactional bank accounts with large, highly rated financial
institutions.
The Company’s receivables balance
was not significant and, therefore, was not exposed to significant credit risk.
The carrying amount of financial assets
recorded in the consolidated financial statements, net of any allowances for losses, represents the Company’s maximum exposure
to credit risk.
Liquidity risk
The Company manages liquidity risk by trying
to maintain enough cash balances to ensure that it is able to meet its short term and long-term obligations as and when they fall
due. Company-wide cash projections are managed centrally and regularly updated to reflect the dynamic nature of the business and
fluctuations caused by commodity price and exchange rate movements.
The Company’s operating results may
vary due to fluctuation in commodity price, inflation, foreign exchange rates and certain share prices.
Market risk
The Company is exposed to market risk because
of the fluctuating values of its publicly traded investments. The Company has no control over these fluctuations and does not hedge
its investments. Based on the December 31, 2018 portfolio value, a 10% increase or decrease in market price would result in a $0.1
million change in net loss.
Interest rate risk
The Company’s interest rate risk
arises primarily from the interest received on cash and cash equivalents and on loan payable which is at variable rates. As at
December 31, 2018, with other variables unchanged, a 1% increase in the interest rate applicable to loan payable would result in
an insignificant change in net loss. Deposits are invested on a short-term basis to enable adequate liquidity for payment of operational
and exploration expenditures. The Company does not believe that it is exposed to material interest rate risk on its cash and cash
equivalents.
As at December 31, 2018, the Company has
not entered into any contracts to manage interest rate risk.
Foreign exchange risk
The functional currency of the parent company
is C$. The functional currency of the significant subsidiaries and the reporting currency of the Company is the United States dollar.
As at December 31, 2018, the Company has
not entered into contracts to manage foreign exchange risk.
The Company is exposed to foreign exchange
risk through the following assets and liabilities:
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
January 1, 2017
|
|
|
Cash and cash equivalents
|
|
$
|
6,154
|
|
|
$
|
7,068
|
|
|
$
|
13,391
|
|
|
Investments
|
|
|
912
|
|
|
|
-
|
|
|
|
-
|
|
|
Receivables
|
|
|
-
|
|
|
|
263
|
|
|
|
35
|
|
|
Accounts payable and accrued liabilities
|
|
|
(346
|
)
|
|
|
(247
|
)
|
|
|
(455
|
)
|
|
|
|
$
|
6,720
|
|
|
$
|
7,084
|
|
|
$
|
12,971
|
|
As at December 31, 2018, with other variables
unchanged, a 10% increase or decrease in the value of the USD against the currencies to which the Company is normally exposed (C$)
would result in an insignificant change in net loss.
|
|
Item 12.
|
Description of Securities Other than Equity Securities
|
A. – C.
Not Applicable.
|
|
D.
|
American Depository Receipts
|
The Company does not have securities registered
as American Depository Receipts.