Entre takes the long view in Mongolia

Ulaanbaatar — The introduction of windfall taxes on gold and copper last spring coupled with talk of government earn-ins on “strategic” deposits stopped many foreign exploration companies in Mongolia dead in their tracks.

But Entre Gold (ETG-T, EGI-X) — a Vancouver-based junior with prospective copper and gold assets in the Gobi region — bucked the trend and kept its drills turning.

“We looked at it from a long-term viewpoint,” says Entre’s president and chief executive, Greg Crowe. “We had money in our treasury, so we said, ‘let’s carry on with exploration.'”

While seemingly a brazen move at the time, the company’s stubbornness was rewarded recently, with news that Rio Tinto (RTP-N, RIO-L) was stepping in as a strategic investor in Ivanhoe Mines’ (IVN-T, IVN-N, IVN-Q) neighbouring Oyu Tolgoi project.

After Rio Tinto’s involvement in Oyu Tolgoi was announced in mid-October, Entre shares gained as much as 58%, touching $2.07. They currently trade around the $1.70 mark.

But the lift in share price wasn’t solely the result of the new confidence in Mongolia’s investment environment instilled by Rio Tinto’s gesture — Entre has a more direct relationship to the move via its stake in Oyu Tolgoi’s massive Hugo Dummett deposit and a joint-venture agreement with Ivanhoe.

While the majority of Hugo Dummett lies on Ivanhoe’s Oyu Tolgoi property, the downward-dipping northern tip spills onto Entre and Ivanhoe’s joint-venture property.

That northern tip alone has an inferred resource of roughly 190 million tonnes of ore, averaging 1.57% copper and 0.53 gram gold per tonne for 6.5 billion lbs. copper and 3.2 million oz. gold.

What’s more, the deposit is still open to the north, and a stepout hole drilled 1,300 metres north of the property boundary intersected what is thought to be the northernmost tip of the orebody.

Crowe says the hole, which hit mineralization north of and along strike of the inferred resource, implies the deposit extends much farther north than previously thought. The current inferred resource for the northern extension is based on drilling that stops only 625 metres north of the property boundary.

The reason drilling stopped at 625 metres and resumed at 1,300 metres north of the boundary was to avoid a large granitic body above the orebody. The granite makes drilling more difficult and expensive — which is likely why Ivanhoe was planning to shut down drilling in the area until Entre hit mineralization. Ivanhoe now has two drills working in the area.

The story of how Entre was able to secure such a robust and strategic piece of land goes back to when Ivanhoe first acquired Oyu Tolgoi from BHP Billiton (BHP-N, BLT-L) in spring 2000. At the time, the permits for the land farther north weren’t considered as prospective as those in the southern area of Oyu Tolgoi, where early indicators pointed to what has become the Southern Oyu open pit — a separate orebody from the later discovery of Hugo Dummett to the north.

The land that is now Entre’s joint-venture permit was allowed to lapse back into the hands of the Mongolian government, which in turn, sent officials to the 2002 Prospectors and Developers of Canada convention in Toronto. The officials caught the attention of a group of investors at Canaccord Capital who helped established Entre with the aim of securing a property agreement for the Mongolian asset.

By 2003, Entre had acquired the former Ivanhoe properties outright for roughly $14 million. By the following year, the company had an agreement with Ivanhoe that gave Entre $4.6 million in cash, and by 2005, an increased interest from Ivanhoe — which saw it exercise warrants giving it 9.2 million Entre shares. Another agreement with Rio Tinto put a total of $22 million into Entree’s coffers.

Currently, Rio Tinto holds a 9% interest in Entre, but that could increase to 16% if it exercises its warrants. Ivanhoe holds roughly 15% of the company with warrants that could increase its stake to 16%. Rio Tinto and Ivanhoe’s warrants can be exercised at $2.75 per share and $3.00 per share, respectively.

The terms of Ivanhoe’s earn-in agreement on the joint-venture property stipulate that Ivanhoe must spend US$35 million in exploration and development — it has so far spent roughly US$15 million — to earn an 80% interest in any deposit that is deeper than 560 metres. For deposits above 560 metres, it can earn a 70% interest.

Entre has roughly $17 million left in the bank, and Crowe says much of that is earmarked for more exploration on its Mongolian properties. Entre also has an early stage copper and gold exploration property in Arizona.

The company spent roughly $5 million on its Mongolian exploration program in 2006, and is waiting for assay results. When the results are in hand, Crowe says, the company will decide on a strategy for the coming season.

While $5 million on exploration might sound like a good chunk, the figure has to be considered relative to the massive swaths of land that Entre controls.

Its wholly owned portion of the Lookout Hill property — which includes the Ivanhoe joint venture, as well as land surrounding it — amounts to a staggering 1,395 sq. km, a quantity of land so vast that when viewed on a map, Ivanhoe’s 85-sq.-km Oyu Tolgoi looks like a mere postage stamp affixed to an oversized envelope. By comparison, the joint venture land measures 400 sq. km.

Racing the clock

While being in possession of so much land increases Entre’s chances of finding Mongolia’s next big copper and gold porphyry deposit, it also presents a challenge — having that much land can turn into, well, having too much land.

The company is not only faced with the hard work of gaining a firm grasp of the geology of a large area, but it also must do so relatively quickly. The current mineral laws in Mongolia do not allow for Entre to renew its exploration permit once it expires.

That permit had been set to expire in 2008, but revisions to the mineral act call for the extension of existing exploration permits for another two years.

“But because the legislation is so new, we don’t fully understand the mechanics of it yet,” Crowe says. “Our lawyers are looking at it, but the government needs to get the process down on paper.”

Crowe says that with the submission of a feasibility study on a given property, the conversion of an exploration licence into a mining licence is assured.

So while the presence of Hugo Dummett makes the conversion of the exploration licence on the Ivanhoe joint-venture property to the north obvious, the future status of both the joint-ventured property south of Oyu Tolgoi, and Entre’s wholly owned land permits, is up in the air.

Decisions on any future drilling on the joint-ventured land to the south are being made by Ivanhoe, and while the JV agreement does allow Entre to conduct its own exploration, for now, the company is focusing on its wholly owned property to the north and the west — where it must not only find an economic deposit before the exploration permit expires, but also complete a feasibility study on it, if it finds something.

Playing in the company’s favour is the access it gained to Ivanhoe’s geological data as part of its joint-venture agreement.

Crowe says the influx of geological information was one of the most beneficial aspects of the deal with Ivanhoe, as it gave Entre a better understanding of the structural controls in the area.

“By gaining access to Ivanhoe’s expertise — which has taken them close to six years to develop — it was essentially like getting a key and opening a treasure chest.”

Crowe’s optimism is further fuelled by the fact that porphyry systems — like Oyu Tolgoi — are generally regional in scale and often occur as clusters of several deposits spanning many kilometres.

Recent drilling 7.5 km along strike to the north of the joint-venture property boundary hit upon widespread and shallow copper and gold mineralization in the same geological setting as Oyu To
lgoi.

Entre says the holes suggest a northeasterly trending, southeast-dipping, mineralized body of about 125 metres in true thickness with mineralization extending from near surface to a minimum of 450 metres downdip.

That’s significant because the mineralization occurred at a depth of less than 560 metres and if the results are indicators of a larger body that remains above the 560-metre threshold, Entre’s joint-venture agreement with Ivanhoe stipulates that it would have a 30% interest in any deposit, as a opposed to 20% below the threshold.

“Although the copper and gold values encountered to date are sub-economic, similar-grade material was intersected in early stage drilling in areas peripheral to the Southwest Oyu Tolgoi open-pit orebody,” Crowe said in a statement when the drill results were released.

Outside of the joint-venture land, Entre has completed seven diamond-drill holes, totalling 6,170 metres. It has also conducted reverse-circulation drilling on the property.

Roughly 2,000 metres of diamond drilling remain in the 2006 exploration program. Targeted areas include the West Grid, Zone I, II and III — which are all immediately northwest of Oyu Tolgoi — and Ring Dyke in the far western region of its Lookout Hill property.

Entre describes West Grid as “large and geologically complex.” The area is in the early exploration stage, with three drills testing deep, geophysical, geochemical and geological targets.

And while technical difficulties and heavy rainfall interrupted exploration for periods during the course of the year, Entre says drilling is now back on track.

Copper intervals drilled so far have been insignificant but Entre remains bullish on the area, in part because of an induced-polarization (IP) anomaly that remains unexplained.

Lying in the same vicinity of the Western Grid, Zone III has had two drill holes intersect gold mineralization; one of them cutting 1 metre grading 1.78 grams and then another 1 metre averaging 1.51 grams gold farther down-hole.

And while those numbers are not significant, Crowe says drilling has helped the company gain geological knowledge of the area.

As an example of the patience that can be required in exploration, he points out that BHP drilled 23 holes before selling Oyu Tolgoi to Ivanhoe, with Ivanhoe drilling an additional 137 holes before the gold-rich, high-grade core of Southwest Oyu Tolgoi was intersected.

Entre has completed only seven holes to date in the West Grid area.

Drilling at the Ring Dyke zone — which lies roughly 8.5 km northeast of the Bayan Ovoo copper showings in the most southwesterly part of Entre’s landholdings — has partially delineated a large, sulphide-rich epithermal, or high-level porphyry system, underlying an unmineralized Cretaceous cover.

The best reverse-circulation assays returned 5 metres (from 76 metres depth) at 0.06% copper and 5 metres (from 212 metres) grading 0.09% copper.

Entre plans a deeper test of the 2 by 2.5-km area, using a diamond drill next season.

A place called Manlai

About 120 km north of the Lookout Hill property and on strike from Ivanhoe’s Kharmagai copper porphyry project, is Entre’s Manlai project.

While drilling for 2006 has been completed at Manlai, Entre is still awaiting some assay results.

Exploration consisted of a 13-km infill time domain IP survey, eight diamond-drill holes totalling 4,270 metres and additional geological mapping.

Drilling has partially defined a mineralized, porphyry-style stockwork over a roughly 250 by 500-metre area. The zone is still open along strike and at depth.

Rio Tinto has first right of refusal on the early stage exploration property, which the company says has copper surface showings with porphyry style alteration.

Hugo Dummett question

But until one of Entre’s many prospective targets strikes pay dirt, the market will continue to assign value to the company based on its stake in Hugo Dummett, a fact that raises the question: when will its northern extension be mined?

Hugo Dummett is broken into Hugo North and South, and while Ivanhoe says Hugo North is the most attractive target for underground mining, it has enough ore on its property — excluding the joint-venture extension — for a 43-year mine life.

But Crowe points out that there is a history of revising mine plans at Oyu Tolgoi and with Rio Tinto’s new influence on the project, Crowe says that mining of the northern extension could be bumped up.

“Either we wait for them to reach the joint-ventured section and it’s like having a savings account,” he says, “or, they hopefully delineate more mineralization and perhaps change their mind about the mine plan.”

If they don’t, Entre will keep putting the drills in the ground in the hope that the next Hugo Dummett-sized deposit will be found squarely within its permit boundaries.