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    • Mongolia’s Investment Corporation MONGOLIA METALS REPORT March 2013
    • MICC Equity Research INDUSTRY RESEARCH Kharachin Metals Introduction This is MICC’s new Mongolia’s Metal Industry Report. The following topics will be covered in the report: »» Industry Overview. A general survey of the current and historical figures of the metals mining and exploration industry. »» Betting on Mongolian Metals. A survey of factors that drive the Mongolian metals industry stocks. »» Politics and Oyu Tolgoi. An overview about the current political situation in Mongolia as well as other supply side aspects in the context of Oyu Tolgoi. »» Companies. Brief introduction to the equity investment possibilities in the Mongolian coal mining sector, covering both domestically and foreign listed companies, as well as the major non-public players in this market. Industry Overview Contents Introduction Industry Overview Betting on Metals Politics and OT Entree Gold Centerra Gold Erdene Resources Altan Rio Kincorra Copper Voyager Resources Other Companies Research Analysts Dotno Dashdorj Achbold Battogtokh +976 70112023 2 2 3 5 11 17 22 23 25 27 31 The metals mining industry in Mongolia has been long dominated by the Erdenet copper and molybdenum mine, but attention is now on Oyu Tolgoi. Not long ago the income generated from the Erdenet mine made up 40% of Mongolia’s GDP, but recently coal exports have taken over its share, thus making the country simultaneously more dependent on mineral exports and diversifying the type of minerals it depends on. The giant Oyu Tolgoi copper mine has begun production, and the copper market will again become the key driver behind Mongolia’s already commodity-tied economy. Despite the lack of credible unified sources, interviews with domestic mining and resource experts tell that Mongolia has a proven iron ore reserve of about 660 million tonnes, whereas the probable reserve is over 1 billion. This is not according to JORC or NI 43-101, but based on the Mongolian estimation method. The article estimates that Mongolia has about 0.5% of the iron ore resources in the world. There are 17 known deposits and over 100 different known mineralized areas. Aside from copper and iron ore, many types of metals are extracted in smaller mines across the country. Many are operated by private companies, mostly as joint-ventures with Chinese firms, and information about these are generally not public. Nevertheless, the National Statistics Office (NSO) and the customs records are helpful in showing the overall mining situation in Mongolia. Total exports for the last few years are as follows: [2011 wers 4.8 million tonnes of iron ore in 2011. TABLE HERE] Over the last decade, the Mongolian government has chosen modernization as
    • MICC Research Mongolian Metals Industry the path to follow for the entire country. This coveted rapid economic development comes at the expense of risking the Dutch Disease, and marginalizing those whose traditional pastoral lifestyles are directly threatened by the mushrooming mining activities. This of course, leads to a domestic quarrel that polarizes the political spheres. The pursuit of USA-style middle-class standard-of-living is the default policy objective of all developing countries, Mongolia included. Few could argue that, in Mongolia, the main driving force behind this kind of development is the cash spill-overs from the mines that inevitably need foreign capital and know-how. Thus, in the late 90’s, the government of Mongolia began looking for foreign money to invest in the resource sector at home. Mongolia’s mineral wealth was explored in the decades before the transition to democracy, but few were developed into functioning mines due to the lack of both demand and financing. Now, dozens, if not hundreds, of foreign companies have presences in Mongolia, and explore for minerals despite growing fears of “resource nationalism”. Betting on the Metals Industry Buying mining stocks in Mongolia for short term gain depends largely on the same factors as any other mining stocks - the result of their next announcement. The discovery of new deposit, or a significant expansion of a known one never fails to induce a jump in the price. Aside from these idiosyncratic movements, the general trend had closely followed the price of copper for several years. However, since around November 2011, the prices of Mongolian mining stocks have took a divergence from copper prices, and took on a life of its own. The beginning of this trend can be marked by the request from Mongolian parliamentarians to renegotiate the Oyu Tolgoi Investment Agreement, which had given a 34% equity share in the project to the government. Many events have happened since, but the most important determinant and source of short term shocks seems to be OT. The next section in our report takes a close look at the politics surrounding OT, as we expect the outcome of all the uncertainties around OT will have a big effect on the path of the mining sector in Mongolia. To bet for a longer term, one must think of the future of the mining sector in Mongolia. Most stocks available are for exploration companies, and there is a common assumption among foreign investors that either the exploration company grows into an extraction company, or it gets bought out by a another company from the peer group of Rio Tinto. However, one must not forget that large multi-national mining companies are not likely to be interested in small to medium sized mining projects. They want the next OT. There are, however, China’s state-owned mining giants, that are interested in small to medium sized projects as well. Mongolia’s third-neighbor-policy means that countries other than Russia and China are preferred when foreign investors are chosen. This policy is a tool to maintain its independence, delicately balancing the economic influences from its two giant and competing neighbors. The third neighbor March 4, 2013 3
    • MICC Research Mongolian Metals Industry doctrine is naturally a large part of the government’s approach to mining. Thus, the attempt by China’s state-owned Chalco in 2012 to buy a large majority share in coal mine in Mongolia induced a public outcry so large that an almost inactive bill to limit the FDI was kicked into action and passed by the Parliament within days last spring. The metals sector, of course, is handled under this policy, which is why Rio Tinto was chosen to be the strategic investor for Oyu Tolgoi. The existing copper and iron ore projects are more or less dominated by Russian and Chinese investors, mostly state-owned. At the end of the Companies section, we have included the profiles of some examples of this situation. While Mongolia hopes that Western companies actually carry out the resource projects to the mining stage, it is clear that the multinationals with good reputation such as Rio Tinto and BHP Billiton are only interested in large-scale world-class mines. Thus the question of what is to happen to the smaller deposit is inherent in the future of Mongolia’s metals industry. China actively seeks natural resource projects of all sizes abroad, in Mongolia, in Africa, and everywhere else. Mongolian suspicion of China, on the other hand, is well-known. Thus those looking for buried riches need to strike it big to have a future that is certain enough – in other words, find another OT. To invest in a publically traded metal exploration firm for the long term means to bet not only that they will find an economically extractable deposit, but that it is big enough so that a miner welcome in Mongolia will buy it (in other words, not Chinese). The Mongolian government has steadily increased its transparency since the big transition, but there is a long road ahead. There are no official sources that are publically available that summarizes how many mines are operating, how much resource has been found and who are the investors for the whole industry. Various interviews and news report state different numbers with vague or no citations. Getting an accurate idea of what has been found where is impossible, because many of the Chinese miners operating in Mongolia are not public, obtaining up-to-date information is not possible. In fact, President Ts. Elbegdorj recently stopped the Parliament from passing the new Mining Law due to several concerns, including that the Mongolian government does not have a unified and independent database on the distribution and quantity of mineral resources. March 4, 2013 4
    • MICC Research Mongolian Metals Industry Politics and Oyu Tolgoi Known to the locals as Oyu Tolgoi (Turquiose Hill) for the blueish greencolored rocks found on its surface, the hill in the Gobi became the epicenter of Mongolia’s gold rush. It is known to be the largest copper and gold deposit in Mongolia, and one of the largest in the world. According to Turquiose Hill Resources, “Oyu Tolgoi contains approximately 41 billion pounds of copper and 21 million ounces of gold in measured and indicated resources and an additional 41 billion pounds of copper and 25 million ounces of gold in inferred resources.” The Top 15 Producing Coppper Mines (2020E) 2020E Copper Production (kt) Source: Turquoise Hill Resources Presentation The above graph roughly compares Oyu Tolgoi to the largest copper mines in the world, in terms of three important variables: contained copper resources, forecasted 2020 copper production, and mining costs. We can see that Oyu Tolgoi is one of the largest copper mines in the world, both in terms of resources and production, and it has relatively low cost (although this latter point has become the subject of a political debate in Mongolia.) March 4, 2013 5
    • MICC Research Mongolian Metals Industry The Politics of Oyu Tolgoi: Background For any discussion of the current politics of Oyu Tolgoi, it is helpful to look at the historical context. The initial discoveries at Oyu Tolgoi came at a time when most Mongolians were frustrated with the state of the economy. There was a widespread sense of disillusionment with the results of Mongolia’s transition to market economics. The statistics tell the story: Real GDP Growth 350% 300% 250% 200% 150% 100% 50% 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Inflation 209% 321% 183% 66% 53% 45% 21% Inflation 6% 10% 9% 8% 2% 5% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Real GDP Growth 4% -2% -9% -9% -3% 2% 6% 2% 4% 3% 3% 1% 3% 5% Mongolia experienced a deep recession, along with hyperinflation in the early 1990s, with real GDP falling by 22 percent (by comparison, US real GDP fell by about thirty percent during the Great Depression). Moreover, the economic recovery that followed was slow and uninspiring. Mongolia’s economy was not developed or robust to begin with; it was a centrally planned economy transitioning into market economy. So the recession led to real hardship and poverty for much of the population (those born in Mongolia before the 1980s would remember this well). So when the riches of Oyu Tolgoi were first announced in 2001, it sounded almost too good to be true. It was as if someone dying of thirst in a hot desert looked up and saw an oasis in the distance, and forgot the possibility March 4, 2013 6
    • MICC Research Mongolian Metals Industry of seeing a mirage. Many viewed the copper and gold in the ground as instant wealth, to be dug up, sold, and turned into overnight riches. Expectations were high. Most Mongolians did not have a realistic understanding of what it would require and what it would cost to turn that copper and gold into real economic development. GDP growth picked up starting in 2003. Many families did get out of extreme poverty. However, as of 2011, the share of the population below the poverty line is still relatively high. As estimated by the National Office of Statistics (using methods developed by the World Bank) this number was at thirty percent in 2011. Thus during Parliamentary elections, politicians faced an electorate desperate to get out of poverty. Both of the major parties attempted to take advantage of this. During the 2008 Parliamentary election, for example, the Democratic Party promised to give one million Mongolian tugrugs to every citizen. The Mongolian People’s Revolutionary Party (now the Mongolian People’s Party) shortly came up with a promise of 1.5 million tugrugs for every citizen. The rationale behind these promises were linked to Oyu Tolgoi and the future of Mongolia’s mining industry in general. This rationale is something like the following: Mongolia was about to experience rapid economic development, an important cause of which was the development of Oyu Tolgoi and Tavan Tolgoi (the giant undeveloped coking coal deposit sitting almost next to Oyu Tolgoi). Every citizen was thus promised his or her share of the expanding economic pie. The one million tugrugs—which was a significant amount of money for ordinary Mongolians, especially in 2008—was part of the share each citizen was to receive. The term usreltet hogjil, which means abrupt development or rapid development, was often used during the 2008 and 2012 Parliamentary elections. The use of terms like usreltet hogjil, and the promise of millions of tugrugs being handed out, raised people’s expectations. So when the expectations failed to materialize and the promises appeared to have been broken, people were understandably disappointed. The Politics of Oyu Tolgoi: A National Discussion1 We believe that much of the “resource nationalist” talk, which drove the discussions over the renegotiation of the Oyu Tolgoi Investment Agreement (OT IA), derives from this disappointment. It is more disappointment than nationalism. In 2008, supporting foreign investment and the mining industry was politically acceptable, if not popular, because people largely believed that it would benefit them economically. In 2012, “resource nationalism” was a much more popular position. Our sense is that low income to lower middle class families tend to be against foreign investment. Middle to upper income families, especially those who work in business, tend to be for it. Basically, how you see foreign investment seems to depend on how well you’re doing in this economy. Since we didn’t con- March 4, 2013 1 Discussions mostly extracted from recent issues of The MICC Report, an English weekly newsletter from MICC 7
    • MICC Research Mongolian Metals Industry duct scientific polls, we cannot be sure about public opinion. And there are exceptions, of course, as always. But we believe that the above assertion largely holds true, and we hope that it’s helpful to anyone who wants to understand the political climate in Mongolia. Most Mongolians have discussed Oyu Tolgoi with their family and friends (and on social networking sites), watched the politicians debate it, and read about it in the papers. This national discussion, if we may call it that, is still on-going. Oyu Tolgoi is seen as a national treasure—for most Mongolians, it is not just a business project—and people believe that their own welfare is tied to its fate. A few months ago, this national discussion took the form of a much publicized public debate between two Members of Parliament, S. Ganbaatar (MP-Democrat, arguing against the OT IA) and S. Bayartsogt (MP-Democrat, former Finance Minister, arguing for the OT IA he helped negotiate). The social networks were especially busy during and after this debate. Most Mongolians felt (and the pundits agreed) that Bayartsogt was more knowledgeable and had better prepared for the debate, but that Ganbaatar, confused and flustered though he seemed at times, cared more about them. Bayartsogt’s personal attacks on Ganbaatar were also not well-received. One commentator said, “Isn’t Ganbaatar’s position that of Mongolia—lost and confused? Isn’t Bayartsogt’s position that of Rio Tinto—bullying and patronizing?” All this, needless to say, did not seem to help Rio Tinto’s image in Mongolia. Oyu Tolgoi also undertook an aggressive advertising campaign, which stirred more controversy. Oyu Tolgoi’s billboards claimed (in Mongolian) that 73 percent of the company’s ashig (profits or benefits) would ultimately belong to Mongolians. The advertisement seemed to backfire on Rio Tinto, when some Mongolians said that they didn’t believe it, and that Oyu Tolgoi was trying to “buy public opinion.” President Elbegdorj Takes a Stance Recently, the debate over Oyu Tolgoi increasingly focused on the company’s cost overruns. Mongolian politicians have said that OT’s “initial investment” turned out to be about $2 billion higher than initially estimated by the project’s feasibility study, which increases Mongolia’s liabilities (as a 34 percent shareholder). On February 1st, President Elbegdorj mentioned this when he met with Cabinet and Parliament members to discuss Oyu Tolgoi, and raised what he called “issues in five categories.” After questioning Cabinet members who deal directly with Oyu Tolgoi, including the Minister of Mining Gankhuyag, the President made his own case. What follows is a summary of the President’s speech (quoted from, which we first published in our weekly newsletter, The MICC Report: “First, [it is time for] Mongolia to take its rightful place at [i.e. take control of ] Oyu Tolgoi. We are currently acting like an outsider.” This means that we must demand: (a) direct involvement in the company’s management; (b) involvement in the company’s finances; financial transparency and accountability; (c) March 4, 2013 8
    • MICC Research Mongolian Metals Industry the hiring of Mongolian contractors. Second, management fee at Oyu Tolgoi is about six percent, 2.5 times greater than the world average, while our royalty is only five percent. We cannot accept this. Third, the actual initial investment was two billion dollars more than first estimated. Total investment is now being estimated at $24.4 billion, $9.8 billion more than the previous estimations. Part of this is our liability. The fourth point concerns five smaller issues that we must solve. (a) Rio Tinto must use Mongolian banks and financial institutions; (b) Oyu Tolgoi should use the power plant built at Tavan Tolgoi; (c) we must build an independent laboratory to monitor what comes out of the ground; (d) we must build a plant to make copper concentrates; (e) Oyu Tolgoi must make investments in roads. Fifth, (a) Oyu Tolgoi must make investments for the local community, and build schools, kindergartens, hospitals, and community centres. (b) We must talk to [Rio Tinto] about environmental problems, especially the drawing of Gobi’s water resources. They must eventually use surface water instead of groundwater. (c) We must protect local herders and livestock. (d) We must make sure that equal work gets equal pay.” This was only a brief summary or outline of the speech, which is the most comprehensive speech a Mongolian president has ever given on Oyu Tolgoi or the mining industry. A Bloomberg reporter suggested that the President’s upcoming re-election was the reason for the speech. This is hard to argue with. But it is also hard to view this as a criticism of the President— Mongolia is after all a Democracy, and it is only right for the president to speak for the majority. The New Minerals Law First, a little bit of background: the current Minerals Law was signed in 2006, and became the basis for the Oyu Tolgoi Investment Agreement (OT IA). Both the Minerals Law and the OT IA have been under constant political pressure, especially since 2011, to be amended or changed. It was known for more than a year that a new Minerals Law has been in the works, but the highly sought-after draft (to make it easier, let’s call it the Draft) was always kept a tight secret—until now. On December 7th, the President’s office released Mongolian and English versions of the Draft, dated December 5th, 2012. With 143 articles, the Draft is more than twice as long as the current Minerals Law. It is an ambitious piece of legislation that, in the words of the Mining Journal, “attempts to regulate every part of the mining industry.” It is certainly more comprehensive than any previous legislation dealing with the mining industry. In January, the Office of the President organized a forum to discuss the new Minerals Law, attended by representatives of NGOs, the mining industry, the academia, and the government. From this forum, we want to highlight a point made by Dabaatseren, who is a member of the Minerals Law working group. March 4, 2013 9
    • MICC Research Mongolian Metals Industry He said that when the current Minerals Law was signed into law in 2006, attracting foreign investment was Mongolia’s priority. But now, he believes, attracting foreign investment is not as critical to Mongolia’s economy. Perhaps a lot has already been invested in Mongolia; perhaps Mongolia is now well-known enough for its mineral wealth to still attract some investment; perhaps macroeconomic stability is now more important, and curbing capital inflows is part of that. In any event, no matter what the reasoning is, Mongolian officials seem to think that they have more leverage now than they had in 2006. This is not necessarily our view, but we wanted to highlight the possible motives and reasoning of the working group. So it seems, at least on the surface, that business leaders are on one side (saying that the draft law does too much), NGOs and academics are on the other side (saying that it doesn’t do enough), and government officials are sort of in the middle (aside from the revealing comment Dabaatseren, governmental officials are usually ambiguous). At least all parties agreed that organizing the forum was a positive move. Now we come to the question of likelihood of passage. We believe it’s likely that some form of the new Minerals Law will be signed into law in 2013. Currently, the Democratic Party is in power (they have a majority in the Parliament and the Presidency). Given the President’s support of the Minerals Law (and indeed his own involvement in drafting it), we believe that it is likely the Democrats will back it. If the Democratic Party stands behind the Minerals Law, then they will always find enough votes from the Mongolian People’s Revolutionary Party (MPRP in coalition with the MNDP), and from the Mongolian People’s Party (MPP). The MPRP, we believe, stands even more ready to limit foreign investment than the Democratic Party. But this is hard to tell. We have always argued that unity within the different parties in Mongolia is mostly based on personal relationships, rather than ideologies. So while there is a group of MPs who are definitely for increasing the Mongolia’s share of the profits from Oyu Tolgoi, the group is composed of MPs from all of the major parties. March 4, 2013 10
    • MICC Equity Research Kharachin EQUITY RESEARCH Entrée Gold March 4, 2013 Introduction Stock Information (MNT) Stock Code Price Market Cap 52-week Range Shares Out ETG 0.415 54 0.39-1.4 129 Key Financials (USD) EV Profit Total Debt Cash 50.4 -17.14 5.13 6.61 Key Projects (M&I Cu resources, ‘000 lbs) Hugo North Ext. Heruga (inferred) Ann Mason Analyst Dotno Dashdorj +976 70112023 4,640,000 9,570,000 5,140,000 »» Entrée’s resources are included in Oyu Tolgoi’s development plan. The first production on the joint venture property, Hugo North Extension, is expected as early as 2015, as part of the second phase or OT’s development plan. »» Mining licenses around the Oyu Tolgoi mine site came under scrutiny recently. On February 27th, the mining authorities in Mongolia had cancelled several of Entree mining licenses, citing that they were illegally issued by the incorrect authority in 2009. However, the cancellations have been reversed since then. »» Rio Tinto (NYSE: RIO) owns a total of 23.6% of Entrée. Of these, approximately 13% is held directly, and the remaining through its majority ownership of Turquoise Hill Resources (TSE: TRQ), which owns 11% of Entrée. »» Exploration results at Shivee West, the field immediately west of the OT mining license, were encouraging enough for Entrée to continue the search for gold. Trenching in 2012 apparently has confirmed and expanded the mineralization discovered last year’s drilling. »» Outside of Mongolia, Entrée has several projects at the Yerington copper deposit in Nevada. The NI 43-101 indicated resources at the Entrée’s Ann Mason project here is over 1 billion tonnes of ore2. Entrée filed the Preliminary Economic Assessment (PEA) for this site on Nov 15, 2012. »» Buying Entrée’s stock is equivalent to betting that OT will have enough medium to long term success to continue the project to developing the sections where Entrée’s interests lie. Moreover, the assets in North America are quite unrelated to the Mongolian assets, and we don’t rule out an eventual split in a fashion similar to the recent Erdene-Morien split. Company Overview Entrée Gold holds 20% stakes in two extensions of the famous Oyu Tolgoi deposit, which is expected to begin producing ores in early 2013. These are named Hugo North and Heruga, and Oyu Tolgoi LLC., has formed joint ventures with Entrée to develop both. Aside from these, Entrée also owns 100% of an exploration project named Shivee West, which is immediately west of the Oyu Tolgoi mining license. Entrée also has metals exploration projects in the US, Australia and Peru. A noteworthy project outside of Mongolia is the Ann Mason deposit in Nevada, USA. 2 At 0.2% Cu cut-off. Source:
    • MICC Research Mongolian Metals Industry Entrée has been in Mongolia since its inception in 2002, which began with a letter of intent to explore the fields surrounding the Oyu Tolgoi project. Drillings since 2003 in these deposits proved fruitful, and by 2011, NI 43101 compliant resource estimations were published. Various joint venture and other cooperation agreements with Turquoise Hill (previously Ivanhoe Mines) and Rio Tinto were made to develop these deposits. Today, Rio Tinto and Turquoise Hill Resources hold approximately 13% an 11% of Entrée’s outstanding shares respectively. Entrée’s involvement in the OT deposit had been some source of confusion in the Mongolian media, as various sources reported that either Entrée owned larger ore bodies than Oyu Tolgoi LLC., or that it owns part of Ivanhoe, or that Entrée does not have any ore bodies. These reports never gathered much attention, and Entrée has not been involved in any major publicity scandals so far. Thus, it is reasonable to expect the development of Entrée’s stakes around OT to follow the momentum of the OT project in general. Entrée’s stock price appeared to be more stable than some of the other companies that explore for minerals in Mongolia, but it has fallen consistently since early 2011 nevertheless. As the investment climate in Mongolia has been uncertain since the spring of 2012, it appears that Entrée has been focusing its exploration efforts outside of Mongolia. On October 29, Entrée announced its first resource estimate at the Blue Hill copper deposit located near the Ann Mason copper-molybdenum porphyry deposit in the USA. This follows the October 24 announcement that the preliminary economic assessment of Ann Mason generates USD 1.1 billion NPV, which caused a small spike in stock prices. Key Projects Lookout Hill Lookout Hill includes the three fields around the Oyu Tolgoi mining license: Hugo North Extention, Heruga and Shivee West. While Entrée owns 100% of Shivee West, the other two deposits will be developed through a joint venture with the Oyu Tolgoi LLC formed in 2008. Entrée describes the terms as follows: “Entrée’s joint venture with OTLLC (a subsidiary of Turquoise Hill Resources and the Government of Mongolia) provides that Entrée holds a 20% interest in any mineralization lying below a depth of 560 metres and a 30% interest in any mineralization occurring from surface to a depth of 560 metres. Entrée may choose to be carried through to production by way of debt financing from OTLLC with interest accruing at prime plus 2%. This debt can be repaid in whole or in part from time to time or repayable by Entrée monthly from (and only from) 90% of the available cash Hugo North Extention, 2012 Ore (Mt) NSR (US$/t) Cu (%) Au (g/t) Recovered Metal Cu (‘000 lb) Au (oz) Probable 0.74 1,000,000 March 4, 2013 27 79.4 1.91 500,000 12
    • MICC Research Mongolian Metals Industry Feb 20, 2007 (0.6% CuEq cut off ) Hugo North Tonnage Cu grade Extension (mt) (%) 117 1.8 Indicated Au grade (g/t) CuEq (%) Cu (000 lb) Au (oz) Mo (000 lb) 0.61 2.19 4,640,000 2,290,000 5,650,000 Inferred 0.31 1.35 2,420,000 9,500,000 284,000 Mo grade CuEq Cu Au (oz) (%) (000 lb) Mo (000 lb) 0.014 0.87 17,390,000 95.5 1.15 Heruga, March 30, 2010 (0.6% CuEq cut off ) Tonnage Cu grade Au grade (mt) (%) (g/t) 910 0.48 0.49 Inferred 9,570,000 14,000,000 flow arising from the sale of its share of products as defined within the joint venture agreement. This arrangement ensures that Entrée cannot be diluted from its 20% or 30% position.” The following table shows the NI 43-101 compliant resource and reserve estimations for Entrée’s Lookout Hill deposits: Source: Entrée Gold website The northern part of the Oyu Tolgoi trend is composed of the Hugo Dummet deposit. Entrée’s Hugo North Extension is simply the northern extension of the Hugo Dummet deposit. This mineralization in this section was confirmed in 2005 through drilling results, and resource estimates were announced in 2006 and 2007. The Integrated Development and Operating Plan for Oyu Tolgoi mining complex in 2010 and 2012 include the Hugo North Extension. The Heruga deposit is half of the southern part of the Oyu Tolgoi trend. Exploration results from Oyu Tolgoi LLC., show that the trend is composed of three distinct ore bodies: Hugo Dummet, Southern Oyu and Heruga. Entrée owns only the southern part of Heruga, but the field’s name is simply Heruga nevertheless. This deposit was discovered in 2007 through drilling and induced polarization geophysical anomalies. In 2010, Entrée filed a NI 43-101 technical report on Hugo North Extension and Heruga development options. In this report, the pre-tax NPV of the Heruga project based on it inferred resources and various ore-body size scenarios were estimated to be USD 71 to 289 million . The following picture shows the location of Hugo North Extension and Heruga projects in relation to the Oyu Tolgoi mining license. March 4, 2013 13
    • MICC Research Mongolian Metals Industry Source: Entrée Gold website Shivee West is located immediately west of the Oyu Tolgoi LLC., mining area. Although no NI 43-101 resources have been announced for this area, various exploration results show signs of mineralization. The Shivee West exploration field was converted to a mining license in 2009. The following map shows the location of all three of Entrée’s projects surrounding the Oyu Tolgoi mining area. Source: Entrée Gold website Ann Mason The Ann Mason project includes several deposits in the Yerington cluster in western Nevada. Entrée owns 100% of these projects areas. This project includes the Ann Mason and the Blue Hill deposits, for which Entrée has estimates of indicated and inferred pit-constrained mineral resources. The Pit contrained mineral resource: Ann Mason Deposit (Aug 14, 2012) Cut-off  Tonnage Cu Mo Au Au (% Cu) (Mt) (%) (%) (g/t) (g/t) Indicated Inferred 0.15 0.2 0.25 0.3 0.35 0.15 0.2 0.25 0.3 0.35 1,233 1,137 912 639 388 1,017 873 594 330 152 0.31 0.33 0.35 0.38 0.42 0.27 0.29 0.32 0.36 0.4 0.006 0.006 0.006 0.006 0.007 0.004 0.004 0.004 0.004 0.004 0.02 0.02 0.03 0.03 0.03 0.61 0.65 0.73 0.81 0.86 0.55 0.57 0.6 0.64 0.69 0.61 0.65 0.73 0.81 0.86 Cu (000 lb) Mo (000 lb) 8,530,000 8,150,000 7,020,000 5,370,000 3,580,000 6,160,000 5,590,000 4,200,000 2,600,000 1,340,000 160,000 150,000 120,000 90,000 60,000 100,000 80,000 50,000 30,000 10,000 project also includes Roulette, Blackjack and Minnesota targets, which March 4, 2013 14
    • MICC Research Mongolian Metals Industry Pit contrained mineral resource: Blue Hill Deposit (Jul 31, 2012) TonCut-off  Cu Mo Au Au nage Zone (% Cu) (Mt) (%) (%) (g/t) (g/t) Inferred Oxide Mixed    Oxide/ Mixed SubTotal    Sulfide Cu (000 lb) 0.1 0.1 47.44 24.69 0.17 0.18 ----- ----- ----- 179 370 98 120 0.1 72.13 0.17 --- --- --- 277 490 0.15 49.86 0.23 0.005 0.01 0.3 253 460 have shown signs of mineralization during surface level studies. The following tables show the resource estimations for Ann Mason and Blue Hill deposits: Source: Entrée Gold website Yerington is located in Lyon Douglas counties of Nevada, about 75 km from Reno. Entrée’s involvement in the Yerington cluster is represented in the map below: Source: Entrée Gold website Other Entrée has three other project sites in the United States, two in Australia and one in Peru. All of them are for metals: copper, gold, molybdenum, and iron. March 4, 2013 15
    • MICC Research Mongolian Metals Industry Lordsburg is a Southwest New Mexico copper and gold exploration field on which 12 holes have been drilled in addition to surface level studies in 2008-2009. Entrée entered into an agreement in May 2012 to earn-in 100% of the project from Empirical Discovery LLC., with a condition to drill a minimum amount. Shamrock consists of 54 claims near the Yerington project area, of which Entrée owns 18, and has exploration agreement with the option to purchase the remaining 36. It is a copper skarn exploration project at which some RC drilling were done in 2009 that showed some level of mineralization. Eagle Flat is an exploration project in Mineral County, Nevada, for which Entrée has a mining lease and option to purchase 100% of 58 claims. It is at an early stage, and attracted interest because of copper and gold anomalies in rock chip samples and alteration similar to what is observed at the Ann Mason project. In Australia, Entrée owns 51% of a joint venture agreement with Atlas Iron Limited to develop the Blue Rose metals project in the Olary Region. The joint venture has agreements with WASCO and Bonython Metals Group for the latter companies to earn ownership conditioned upon exploration and development of the resources. There are targets within this project for copper, gold, molybdenum and iron ore. Entrée also owns 100% of the Mystique gold exploration project in western Australia, for which Black Fire Minerals Limited can earn up to 75% interest. Upon surface level surveys and some drilling, Black Fire has not found significant assays. In southern Peru, Entrée can earn 70% from a Peruvian company of the Lukkacha property. Once a Supreme Decree is obtained, Entrée can begin exploration. Lukkacha lies along a structural trend from the Toquepala and Cuajone mines, but no exploration has been conducted here yet. Source: Entrée Gold website March 4, 2013 16
    • MICC Equity Research Kharachin EQUITY RESEARCH Centerra Gold March 4, 2013 Introduction Stock Information (CAD) Stock Code Price Market Cap 52-week Range Shares Out CG 6.5 1,534 6.2-18.96 236 Key Financials (USD) EV/EBITDA EV Profit Total Debt Cash 1.7 1,183 -184 74.62 382.1 Key Projects (Au reserves, million ounces) Kumtor Gatsuurt (M&I resources) Analyst Dotno Dashdorj +976 70112023 4.1 0.43 »» Centerra operated at a net loss of USD 46.8 million for the third quarter of 2012. In the same quarter in 2011, the company had made a profit of USD 83.7 million. »» Centerra’s large gold mine in Kyrgyzstan is far larger than its stakes in Mongolia. In fact, the turmoil surrounding the Kumtor mine in Kyrgyzstan poses a serious risk of a government take-over. »» Centerra raised Kumtor’s reserve calculation. The company announced that the reserves at the mine is 58% larger than previously estimated, which brings the total to 9.7 million ounces of gold. Exports from Kumtor accounts for 12% of Kyrgyzstan’s GDP. »» Centerra’s major project in Mongolia, the Boroo gold mine, has been all but exhausted. The operation has now moved on to using heap-leach method to extract the low-grade ores. »» The local media cover Centerra’s presence in Mongolia in both negative and positive lights. The reclamation at the Boroo site is often praised and treated as an example of how Western companies do much better than their Chinese counterparts. However, local newspapers have been criticizing Centerra’s development of the Gatsuurt project, which is located at Noyon-Uul, which is arguably one of the most important Hunnu-era archaeological sites. Company Overview Centerra is the gold asset spin-off from Cameco. Its main assets are the Kumtor gold mine in Kyrgyzstan and the Boroo gold mine in Mongolia. It is the only Canadian based mining company to operate a major gold mine in Mongolia. The company also has various other exploration projects, including two other gold sites in Mongolia, one in Turkey and one in the Tuva Republic in Russia. However, Centerra announced that it will return its interests in the Oskut project in Turkey to its original owner Eurasia Minerals. Centerra entered the Mongolian mining scene in 2002 when Cameco acquired an initial 52% interest in AGR Limited, an Australian company that owned 95% of the Boroo gold mine in Mongolia. Cameco also received a 61% interest in the Gatsuurt exploration project in this transaction. In 2004, Cameco bought the rest of AGR, and also spun off all of its gold assets, including Boroo and Kumtor, into a separate company named Centerra Gold. Centerra had its IPO on the Toronto Stock Exchange with its current symbol subsequently. In 2009, Cameco sold all of its shares in Centerra Gold at CAD 10.25 per share. Cameco also transferred a total of over 38 million Centerra Gold shares
    • MICC Research Mongolian Metals Industry to Kyrgyzstan’s state-owned entity Kyrgyzaltyn JSC. This means that Kyrgyzaltyn owns about 33% of Centerra Gold. Centerra’s shares have risen since its low period during the 2012 summer, unlike other Mongolia-mining stocks. After its trouble in Kyrgyzstan with protests and risks of nationalization of the Kumtor mine, Centerra’s shares had dropped from its recent maximum of about CAD 12. Boroo mine is regularly mentioned in the Mongolian press in both positive and negative lights. Its proponents generally to highlight its reclamation records and make Centerra an example of how responsible mining is done at western standards. Critics, however, regularly point out the environmental damage caused by the Boroo gold mine. In September, Centerra announced that it has received all permissions necessary to use the heap leach method to mine what remains at Boroo. This, however, caused minimal stir in the Mongolian media. However, recent issues of certain newspapers in Mongolia are drawing attention to the new road leading to Noyon Uul, a historic mountain in the Selenge province where archaeological artifacts from the Hunnu era such as ancient tombs have been found. The October 25 issue of the Daily Post featured a story that claims that Centerra Gold has a camp at this Noyon Uul, and questions the legallity of mining at such a historic site. Key Projects Boroo Boroo is Centerra’s main project in Mongolia. Its commercial production began in 2004, and mining ceased late 2010. The Boroo deposit was discovered in 1910, and had been used sporadically until 1990’s. The Australian company AGR bought an 85% interest in the property in 1998. AGR was eventually fully acquired by Centerra Gold’s predecessor Cameco Gold,. Tonnes (000s)  8,767 Proven 891 Probable Total reserves  9,658 Grade Grams/tonne Contained Gold -ounces (000s)  0.8 2.9 1 215 83 298 In 2001, AGR reported a probable reserve of 9.4 million tonneds of gold at an average grade of 3.76 grams per tonne, which amounted to 1.14 million ounces of gold at a cut-off grade of 1.2 grams per tonne. In 2002, after Cameco began controlling AGR, construction at he mine site began, and production started on March 1, 2004. In September 2012, Boroo received the permission to use heap leach method to extract gold from ore with poor contents. Although no large scale mining projects have ever been concluded in Mongolia, which means that there are no other examples to compare with, Centerra’ reclamation and remediation efforts at Boroo are generally re- March 4, 2013 18
    • MICC Research Mongolian Metals Industry ceiving positive comments from the Mongolian press. Boroo’s oxide ores were exhausted by 2011, and Centerra planned to extract gold from this site through 1) processing stockpiled low grade ore originally intended for heap leach, 2) heap leach once the permanent permission is granted, and 3) prococessing refractory sulfide ore reserve through bio-oxidation or through existing carbon in pulp circuit. The following table shows the production history of the Boroo mine. Production Heap Leach Tonnes ore mined (000s) Tonnes ore mined (000s) Tonnes ore milled (000s) Average Mill feed grade  (grams/tonne) Recovery (%) Ounces of gold poured (000s) Unit Production Total Cash Costs per tonne milled - $ per ounce - $  2003 2004 2005 2006 2007 2008 2009 2010 2011 _ 145 113 _ _ 1,884 2,865 1,850 2,231 _ 3,601 3,082 2,362 2,387 2,549 3,629 3,481 1,694 0 2,416 2,913 2,399 0 2,496 2,077 2,466 2,340 2.9 4.5 4.2 4.3 3.6 2.7 2.6 1.9(6) 1.1 97 4 93.7 246 91.5 286 87 283 85.3 255 77.7 193 72.9 151 71.8 111 _ _ 17.57 23.49 149 183 25.77 24.35 217 244 68.9 59 29.52 33.04 27.08 17.56 382 456 601 694 Source: Centerra website Kumtor The Kumtor mine in Kyrgyzstan that has been the reason for violent protests in 2012. Several hundred people marched in Bishkek, the Kyrgyz capital, to demand the nationalization of the Kumtor mine. Kumtor is located 350 km from Bishkek, but only 60 km from the border with the People’s Republic of China. Between 1997 and 2011, over 8.4 million ounces of gold were produced here. Until the end of 2010, the average gold grade was 4.0 grams per tonne at an average cash cost of USD 278 per ounce. As of 2010, the estimated measured and indicated mineral resources in addition to the proven and probable mineral reserves for Kumtor were 58.6 million tonnes containing 4.1 million ounces of gold3. In June 2004, Cameco transferred its gold assets, including Kumtor, which was previously held by the Government of the Kyrgyz Republic and Cameco Gold, to a new subsidiary named Centerra Gold, and the IPO of Centerra followed shortly after. In 2009, Centerra issued over 18 million of its shares to a state-owned entity of the Kyrgyz Republic, Kyrgyzaltyn JSC. By the end of 2009, Cameco disposed of all of its common shares of Centerra, and transferred over 25 million shares to Kyrgyzaltyn. Thus, Kyrgyzaltyn now owns approximately 33% of Centerra. Kumtor is the only large scale gold mine operated by a Western-based company in Central Asia. As of the technical report published in January 2011, Centerra expects to mine for ores at Kumtor until 2019, extracting over 59 million tonnes of ore in total, and recovering almost 5 million ounces of gold4. March 4, 2013 3 4 At an average gold grade of 2.2 g/t tonne Source: company website, Kumtor NI 43-101 report, March, 2011 19
    • MICC Research Mongolian Metals Industry Gatsuurt Gatsuurt gold deposit is connected to the Boroo mine site by a 55 km road that was constructed in 2010. In late 2012, Centerra Gold received the permission to begin developing the Gatsuurt site. The oxide and the refractory ore from this deposit will be processed at the existing Boroo facility. As of December 2010, the Gatsuurt deposit has a probable reserve of 1.5 million contained ounces of gold, measured and indicated resources were 426 thousand ounces and inferred resources of 491 thousand ounces of contained gold. The Gatsuurt property was initially part of a larger exploration project named Noyon. The projects namesake, the Noyon Mountain, is widely considered the most important Hunnu-era (Xiongnu) archeological site in Mongolia, where artifacts such as tombs of kings were found. Several articles appeared in the Mongolian press in the last few months warn that Centerra is building a road into the mountain, and call for an investigation into why the historical significant site was zoned for mineral exploration in the first place. This event has could further gather attention, although Centerra told the Mongolian press that it did not violate any laws. Gold was originally detected in the Gatsuurt valley during a governmnet mapping program in 1970. The Gatsuurt valley placer deposit was discovered in 1991, and by 1995, mining licenses covering the deposit were issued. In 1996 and 1997, Cascadia acquired three major exploration licenses in the area. Also in 1997, Cameco acquired an initial interest in Cameco, and eventually consolidated 100% interest in the project by 2004. Gatsuurt was one of the gold assets spun off from Cameco when Centerra Gold was created. In 2007, the reserves and resources at Gatsuurt were approved. The followig table shows the reserves at Gatsuurt: Grade Grams/tonne Contained Gold Ounces (000S) -16,349 -2.8 -5,533 -2.4 Inferred resources 5,926 2.6 Tonnes (000s) Proven Probable Measured Indicated Source: Centerra website Altan Tsagaan Ovoo Altan Tsagaan Ovoo is located in the Dornod province, about 800 km east of Ulaanbaatar. Centerra acquired the license on this deposit in 2010, and spent almost USD 19 million between 2010 and 2011. In 2011, over 182 diamond drill holes were completed. Centerra had found gold, silver and March 4, 2013 20
    • MICC Research Mongolian Metals Industry zinc mineralized rocks in three pipe-like bodies here. Other Centerra Gold and a Swedish company named Central Asia Gold AB formed a joint-venture to develop the Kara Beldyr project in the Tuva Republic of Russia. Centerra also was involved in the Oksut project in Turkey, but recently announced that it will back out of the deal. March 4, 2013 21
    • MICC Equity Research Kharachin EQUITY RESEARCH Erdene Resources March 4, 2013 Stock Information (MNT) Stock Code Price Market Cap 52-week Range Shares Out ERD 0.13 7 0.13-0.46 54 Key Financials (CAD) Profit Total Debt Cash -13.8 0.01 5.31 Analyst Dotno Dashdorj +976 70112023 »» November, the company released the assay results of 11 of 17 holes drilled during its most recent program. Three new gold zones were intersected in this program. The highlights include 4.5 metres of 2.4 g/t gold, 19 g/t silver, 2.8% lead and 0.9% zinc, and 94 metres of 0.45 g/t gold, 6 g/t silver, 0.51% lead and 0.42% zinc. »» The assay results from the remaining 6 holes are expected to be released in before the end of 2012. Key Projects (M&I resources, mt) Zuun Mod Altan Nar »» In Nov 2012, Erdene Resources was split into two companies to segregate its projects in North America from the Mongolia based ones. The North American projects are now held by Morien Resources (TSE: MOX). We will only cover the new Erdened Resources (TSE: ERD), which has assets in Mongolia only. 218 N/A »» In April 2012, the 9-hole 200 metre drill program at Altan Nar had confirmed the continuity of the mineralization implied by previous drilling at the section named the Discovery Zone (DZ) where 29 metres of 4.3 g/t gold and 24.1 g/t silver were found. All nine holes had intersected mineralized zones with greater than 1 g/t of gold. »» The development at the Zuun Mod molybdenum-copper deposit continues. Minarco-MineConsult is working on a strategic mine planning study and Eco Trade LLC is doing an Environmental Assessment Study.
    • MICC Equity Research Kharachin EQUITY RESEARCH Altan Rio March 4, 2013 Stock Information (CAD) Stock Code Price Market Cap 52-week Range Shares Out AMO 0.115 6 0.09-0.55 52 Key Financials (USD) Profit Total Debt Cash Key Projects Chandman Yol Khavchuu Analyst Dotno Dashdorj +976 70112023 -1.18 0 0.56 »» Altan Rio is one of the newly listed companies. This stock offer a chance to bet on Mongolia’s continued resource boom through finding more gold and copper deposits. »» The company mainly markets its projects Chandman-Yol and Khavchuu. Drilling programs were conducted at both during earlier months of 2012, but full results are yet to be announced »» The initial results for the 1,902 metre drill program were announced on June 13th, 2012. The program was conducted between March and May at Khavchuu had intersected mineralization, including samples with 11.49 g/t. »» In July, Altan Rio announced that a 3,000m diamond core dilling program will commence at Chandman-Yol in mid-July. The assay results from this program were announced in January, and the company has issued new shares based on the generally positive results. Of the seven holes drilled, the company found no significant results in two. The maximum concentration of mineralization found was 2.5 metres of sample with 5.38 g/t Au from one hole. »» On June 24, 2012, Altan Rio announced that it has fulfilled the conditions for earning in 90% of one of three tenements at the Onon project. Altan Rio already owns 100% of the remaining two. Company Overview Created in 2006 to explore for metals and coal resources in Mongolia, Altan Rio currently has three projects in its portfolio. The company has invested about USD 7 million since 2006. No resource or reserve estimates have been published for Altan Rio’s deposits so far. The company was listed on the Toronto Stock Exchange through an IPO in 2012, through which USD X million were raised. Key Projects Chandman-Yol Located in Khovd province in western Mongolia, this project spans about 1,402 km2. Altan Rio geologists are targeting for a copper-gold porphyry system. The company actively drilled in the area between 2009 and 2011. In addition to the 17 diamond drill holes completed in 2009 and 2010, the company drilled 13 more in 2011. The latest drilling program was considered a success because three new target zones of gold and copper mineralization were identified, according to a press release in January, 2012. Altan Rio drilled 7 more holes at this project at the two interesting locations identified through previous surveys: the Ovoot and Takhilt tar-
    • MICC Research Mongolian Metals Industry gets. The drilling began in August 2012, and the results were announced in January, 2013. Of these, notable results were found at Takhilt, where “five moderately wide spaced holes were completed and several new zones of gold and copper mineralization were intersected, including a shallow intercept beginning at 16.30 m from surface of 8.05 m at 1.77 g/t gold, including 2.5 m @ 5.38 g/t gold.”5 The Chandman-Yol Project is located in mountainous basin and range country in eastern Khovd aimag (province), western Mongolia, about 1,050 km west of the capital Ulaanbaatar. It consists of 9 tenements, all of which are owned 100% by Altan Rio, but 5 tenements are subject to a 2.5% NSR (Net Smelter Return Royalty) to Gallant Minerals, with which Altan Rio had entered into an agreement in 2007. Khavchuu Altan Rio is targeting for Boroo-style orogenic lode gold (and arsenic) systems at this site in Töb province in northern Mongolia. The Khavchuu site is 10 km west of the Boroo gold mine, 140km north from Ulaanbaatar. Drillings in 2011 led to the geologists to find areas to drill further in 2012. The highlights from the drill programs are: ›› Five of the seven holes intersected significant gold and/or arsenic anomalies, the main geochemical indicators for orogenic gold deposits in the Boroo region ›› Hole KH-05 intersected high grade gold (11.49 g/t over 1 m) in a structurally complicated area on the edge of a large Boroo Complex granitoid ›› Holes KH-01 and KH-03 intersected low angle structures that contained Boroo complex granitoids with similar alteration over intervals as broad as 80 meters, with locally anomalous gold The project covers 71.4 km2, and Altan Rio has an option to acquire 100% interest. The exploration license (8835X) was issued in 2004 and is valid until November 26, 2013. Altan Rio entered into an agreement with the Mongolian company Khavchuu Land Mongolia in 2010 to acquire 100% of the project “subject to certain payment and production royalty schedules”. Onon On June 24, 2012, Altan Rio announced that it has fulfilled the conditions for earning in 90% of one of three tenements at the Onon project. Altan Rio already owns 100% of the remaining two. Erdenyn Erel, a private Mongolian company entered several earn-in agreements with Altan Rio to develop the Onon project in August 2008. Altan Rio had to spend USD 900,000 for exploration at this site, cash payments of USD 100,000 and pay Erdenyn Erel 240,000 shares of its own stock to complete the earn-in agreement. The area of the three tenements total to about 137 km2. March 4, 2013 5 Source: Company website, news release on Jan 18th, 2013 24
    • MICC Equity Research Kharachin EQUITY RESEARCH Kincorra Copper March 4, 2013 Introduction Stock Information (CAD) Stock Code Price Market Cap (million USD) 52-week Range Shares Out (millions) KCC 0.02 4 0.02-0.35 203 Key Financials (CAD) Profit Total Debt Cash Key Projects Bronze Fox Analyst Dotno Dashdorj +976 70112023 -2.78 1.78 1.28 »» Kincora Copper Limited explores for copper, gold and other metals in southern parts of Mongolia. The company’s flagship project is Bronze Fox, while there are a number of other projects. Drilling programs were conducted in 2011 and 2012, and several positive results with evidence of mineralization were announced. »» The results of the year 2012 for the 15,800-meter drill program across 40 holes (previous year 12,435m across 23 holes) were announced in 2013. Of the 17,051 total samples, 16,547 results have been received. The company also announced that 35 hole of the 40 drilled in 2012 hit copper and/or gold mineralisation and 13 holes of these contain intersections of >1g/t Au with the highest intersection hitting gold grade of 7.77g/t. A total of 21 holes have intersections of >0.5% Cu, with 8 holes containing intersections of >1% Cu, and the highest intersection returning 4.06% Cu in Hole F72, approximately 2km east of West Kasulu. »» On June 15, 2012, Kincora Copper announced that it has acquired Golden Grouse LLC., Golden Grouse was held by a Mongolian company named Temujin Mining Corp., and it contains exploration licenses adjoining the company’s Bronze Fox project. »» On February 8th, 2013, Kincorra responded to the news reports in Mongolia about the connection of Golden Grouse licenses to criminal cases relating to certain officials. The licenses were included in a list of 107 licenses published by a local newspaper, which were allegedly issued in violation of Mongolian anti-corruption laws, and could be repatriated. Kincorra confirmed that no notice from the government has been received, and no Company Overview Created in mid-2011 to explore for gold and copper resources in Mongolia, Kincora Copper currently has three projects in its portfolio. The wholly owned Bronze Fox, Tourmaline Hills and North Fox projects host an extremely large and strategically located mineralised footprint covering over 40 km2. The company based in Vancouver was listed on the Toronto Stock Exchange Venture Exchange. The projects are situated only 250km from the Chinese border and within 140km of two large scale greenfield copper construction projects: Oyu Tolgoi, invested capital to date approximately US$6 billion and target production of 160,000t/ day; and, Tsagaan Suvarga, estimated capex US$1b and target production of 40,000t/ day.
    • MICC Research Mongolian Metals Industry Key Projects Bronze Fox At the time Kincora Copper was formed and capitalised it owned 75% of the Bronze Fox Project (Buyant License) which included 223km2. In August 2011, the Company acquired the remaining 25% of Bronze Fox that it didn’t already own and in April 2012 it acquired 100% of Golden Grouse LLC, that holds mineral exploration licenses 15075X and 15076X adjoining the Bronze Fox project and includes the Tourmaline Hills and North Fox projects. The acquisition of Golden Grouse consolidated the majority of Ivanhoe’s original landholding in the region, including two of its previous top four priority targets, almost tripling Kincora’s footprint to 62,202 hecaters. The Tourmaline Hills project is considered strategic for potential mine development and drilling has already returned signs of gold and gold-copper mineralizations. Independent consultants determined the potentials of a first phase oxide development project at the West Kasulu prospect at Bronze Fox, which could provide cash flow to be reinvested into further exploration. Extensive near surface oxide mineralisation occurs in the central area of West Kasulu, over an area of approximately 500m by 500m. Several drill hole intersections have grades in excess of 0.30% Cu with at least of 70% of this acid soluble copper. Kincora is investigating through ongoing drilling and column leach test-work the potential for a shallow open pit mine to produce cathode copper by heap leaching of the copper oxide mineralisation. Current metallurgical tests, ongoing infill drilling and desktop reviews for the availability of water and acid are expected to provide visibility as to whether feasibility studies may commence early next year. North Fox Geological mapping over the north licence (15076X) was completed during October and November. 174kms were mapped at 1:50,000 scale. A small zone of Cu and Au mineralisation associated with magnetite-quartztourmaline veins and breccia has been identified. The purpose of this work was to meet the minimum tenement expenditure requirement and also to gather basic geological information, which was previously lacking for the license. Tourmaline Hills Within the western license (15075X), 9 of the 16 holes drilled this year have returned intervals of >1g/t Au, up to 7.7g/t Au and with up to 75g/t Ag locally in the mineralisation zone. One new mineralisation zone appears in the west of Tourmaline Hill (F81 zone with an accumulated 4m @ an average of 2.84g/t Au and up to 75g/t Ag locally) that has an IP signature of about 1.5km strike length remain to be tested. March 4, 2013 26
    • MICC Equity Research Kharachin EQUITY RESEARCH Voyager Resources Limited March 4, 2013 Introduction Stock Information (AUD) Stock Code Price Market Cap (million USD) 52-week Range Shares Out (millions) VOR 0.02 27 0.012-0.066 1,339 Key Financials (AUD) Profit Total Debt Cash Key Projects Khul Morit Khongor Dalitiin Ovoo Analyst Dotno Dashdorj +976 70112023 -6.47 0 1.59 »» Voyager Resources Limited was listed on Australian Securities Exchange on 29 August 1997. The company has been focused on copper and gold projects in Mongolia in recent years, and has been conducting drilling programs in the country sine 2011. »» Main projects. Khul Morit Copper Project, Daltiin Ovor Copper Gold Project, Tsagaan Chuluut Gold Project, Argalant Gold Project, and Khongor Copper Gold Project. »» On 25 of February, 2013, the company announced that Khol Morit drilling exploration returned evidence for mineralizations. The team found samples with intersections of 116 metres at 2.4% copper and 7.2 g/t silver from 30 metres, 75 metres at 2.4% copper and 5.7 g/t silver from 48 metres, and 34 metres at 3.4% copper and 14.7 g/t silver from 92 metres. »» In March 2012, the company announced that 50,000 meters of drilling had been completed at Khul Morit. On February 2013, an update on further drilling included a conclusion that significant intersections of material that are similar to the caps above the Oyu Tolgoi copper deposit. Company Overview Voyager Resources Limited was originally incorporated on 15 November 1996 in Australia. Voyager Resources Limited is now a gold company focused on becoming a Mid Tier gold producer in Mongolia. The Company has recently acquired three gold projects in Mongolia, including the flagship Daltiin Ovor Gold Project. Key Projects Khul Morit (KM) Project Voyager Resources Limited (ASX:VOR) (“the Company”) owns 80% of the KM Copper Project, located in southern Mongolia. The Company’s KM Project is located in the Southwest Gobi Island Arc Terrain, which is one of a number of tectonic terrains that extend across the Gobi and southern regions of Mongolia. Voyager announced that the geological and alteration signatures at Khul Morit has the potential to host a significant copper porphyry system. The following drill results were published in February, 2013: ›› 116 metres at 2.4% copper and 7.2 g/t silver from 30 metres
    • MICC Research Mongolian Metals Industry ›› 75 metres at 2.4% copper and 5.7 g/t silver from 48 metres ›› 34 metres at 3.4% copper and 14.7 g/t silver from 92 metres. Voyager indicated that it is planning to complete a number of hydrogeological drill holes to support the application for a mining license. Daltiin Ovor Gold Project The Daltiin Ovor Gold Project is located approximately 600 km south west of the Mongolian capital of Ulaanbaatar. The property is 792 hectares in size and is situated within the Bayankhongor Gold Belt in south central Mongolia. Gold, silver and copper mineralisation at Daltiin Ovor is associated with a garnet + pyroxene rich skarn exposed in the hinge (North Zone) and western limb (Central and South Zones) of a synclinal fold structure. Trenching, rock chip sampling, soil geochemistry, ground magnetics and an Induced Polarisation geophysical survey have been completed at Daltiin Ovor. A total of 1,837 soil samples have been collected over thirty separate lines, with the lines spaced approximately 50 metres and extending for an average length of about 120 metres. Five trenches (KBT01-05) have been completed across exposures of the skarn mineralisation with the following highlighted results: ›› KBT-01 12 metres at 8.66 g/t gold, 24.42 g/t silver and 0.67% copper, including 7 metres at 14.55 g/t gold, 39.29 g/t silver and 1.05% copper ›› KBT-02 13 metres at 1.45 g/t gold,3.62 g/t silver and 0.2% copper, including 4 metres at 3.08 g/t gold, 6.5 g/t silver and 0.31% copper ›› KBT-03 5 metres at 3.41 g/t gold, 7.4 g/t silver and 0.27% copper ›› KBT-04 10 metres at 7.8 g/t gold, including 3 metres at 19.4 g/t gold Khongor Project Voyager has acquired 100% of the Khongor Copper Gold Porphyry Project in Mongolia. Voyager has completed seven diamond holes to date at the Khongor copper gold project. All holes drilled by Voyager, intersected porphyry style copper gold mineralisation. Samples have been sent to a laboratory for analysis, results are pending. Khongor is located in the South Gobi Arc Terrain. There is a mineralised strike length of +1 kilometre from geological mapping and sampling that is broadly coincidental with a large Induced Polarisation chargeability anomaly that extends for +1,600 by 380 metres. ›› Previous drilling returned extensive zones of mineralisation in diamond core drilling, including: ›› 50 metres at 1.0% copper and 0.3 g/t gold from 64 metres (KPDH09) March 4, 2013 28
    • MICC Research Mongolian Metals Industry ›› 70.3 metres at 0.7% copper and 0.2 g/t gold from surface (KPDH03) ›› Diamond core drilling has also intersected high grade structurally controlled quartz stockwork, that has returned: ›› 5 metres at 2.6% copper and 0.87 g/t gold from 44 metres (KPDH07) ›› 14.1 metres at 2.4% copper and 0.64 g/t gold from 69.9 metres (KPDH09) ›› 9 metres at 2.8% copper and 0.68 g/t gold from 53.3 metres (KPDH13) Surface trenching showed evidence of oxide copper gold mineralisation, results include: ›› 18 metres at 1.33% copper and 0.32 g/t gold (Line 2) ›› 18 metres at 1.84% copper and 0.43 g/t gold (Line 3) Voyager has an Exploration Target for Khongor of 100Mt to 200Mt at 0.7% to 1.0% copper. Daltiin Ovor Gold Project The Company has the right to an earn 80% interest in the Daltiin Ovor Gold Project. Daltiin Ovor is located 600 km south west of the Mongolian capital of Ulaanbaatar and is situated within the Bayankhongor Gold Belt in south centralMongolia. The project has been previously trenched and drilled. The Company is planning to complete approximately 2,000 metres of RC drilling at Daltiin Ovor over the coming weeks with initial results becoming available later in the second quarter. The initial programme is designed to delineate the geometry and nature of high grade gold mineralisation previously intersected in trench sampling. Trenching results included: ›› 12 metres at 8.7 g/t gold, 24g/t silver & 0.67% copper (KBT01) ›› 11.4 metres at 8.8 g/t gold, 14 g/t silver & 0.63% copper (K2) ›› 15 metres at 5.4 g/t gold, 22 g/t silver & 0.5% copper (K1) ›› 10 metres at 7.80 g/t gold (KBT-04) ›› 4.3 metres at 11.7 g/t gold, 11 g/t silver & 0.91% copper (K2) ›› 5 metres at 3.4 g/t gold, 7.4 g/t silver & 0.27% copper (KBT03) ›› 2.2 metres at 14.6 g/t gold, 31 g/t silver & 0.79% copper (K3). Argalant Gold Project Argalant is located within a similar geological setting to the nearby Golden Hills Gold-Copper Project, approximately 900km west Ulaanbaatar. It has “hosts a combined resource of 1.1 million ounces of gold, 7.4 million ounces of silver and 323,000 tonnes of copper,” according to the company. A three-hole exploration drilling in 2005 showed the following results, but March 4, 2013 29
    • MICC Research Mongolian Metals Industry was abandoned: - 49.3m at 0.50% copper from 23.7m (ARDH2005-03) - 1.1m at 1.3g/t gold and 3.27% copper (ARDH2005-01) - 3.0m at 0.70g/t gold & 0.84% copper (ARDH2005-01) Tsagaan Chuluut Gold Project The Company gained the right to acquire 80 percent of the Tsagaan Chuluut Gold Project, located approximately 520 km north east of Ulaanbaatar. According to the company, “there are several active gold mining operations situated along at least 5.5 kilometres of the Tsagaan Chuluut Valley that are directly feeding from the Tsagaan.” Chuluut project area Mineralization at Tsagaan Chuluut includes “gold-rich epithermal veining and porphyry copper gold.” Previous drilling results include: ›› 47m at 0.71 g/t gold and 36m at 0.84 g /t gold (T-97-2) ›› 13m at 1.34 g/t gold and 15m at 1.30 g/t gold (T-97-4) Moreover, a total of 15 reverse circulation drill holes and one diamond core drill hole (TC1D001) have been previously completed: ›› 124 meters at 0.41 g/t gold from surface (TCRC002), including 36 meters at 0.8 g/t Au from 88 meters and 12 meters at 1.52 g/t gold from 112 meters ›› 198 meters at 0.44 g/t gold from surface (TCRC006), including 142 meters at 0.55 g/t gold from 56 meters ›› 138 meters at 0.38 g/t gold from surface (TCRC007), including 50 meters at 0.83 g/t gold from 88 meters ›› 150 meters at 0.55 g/t gold from surface (TCRC015), including 100 meters at 0.78 g/t gold from 48 meters March 4, 2013 30
    • MICC Equity Research Kharachin EQUITY RESEARCH March 4, 2013 Analyst Dotno Dashdorj +976 70112023 Other Companies We have included here information on some larger non-public metals mining companies for your convenience. There are other active companies in the sector, but these tend to be more engaged with providing the public with information. Altain Khuder Altain Khuder is a private Mongolian mining and mineral exploration company operational since 2006. The company operates the Tayan Nuur mine, which is located closest to the Chinese border among all iron ore mines in Mongolia. Export to China officially started in October 2009, to the XinJiang BaYi Steel company, which is a subsidiary of the steel giant BaoSteel. The export agreement with BaYi spans 15 years. In addition, the company had established a trade agreement in 2010 with Jiquan Iron and Steel Co. (JISCO), a large Chinese steel producer. A series of exploration work were completed in 2007-8, but no results are publically available. According to the company’s website, it exports 60% and higher content of fine concentrate that satisfies international market requirements, and is one of the leading mining companies in Mongolia. Tsairt Minerals Tsairt Mineral LLC is a joint venture between Metal Impex (49%), a Mongolian firm and China Non-Ferrous Metal Industry’s Foreign Engineering and Construction Co (NFC in short, 51%). The company develops the Tumurtiin-Ovoo zinc project, in Sukhbaatar province. The joint venture was established in 1998, and the mine and concentrate plant went into production in 2005. According to NFC’s website, the company had produced over 2.2 million tonnes of zinc concentrate by July 2009. The average grade is 13.6%, and the mine life is planned to be 25 years. The company mines 350-400 thousand tonnes of ore a year, and sells about 70 thousand tonnes of 50% zinc concentrate a year. The Tumurtiin-Ovoo mine was included in the list of strategically important deposits in 2006, but the operation continues as normal. Tsairt Minerals was the first company to sign a “Stability Agreement” in 1998, which was amended in 2007. The nature of the amendment meant that the company would pay the same corporate income tax and royalty as all other companies according to the law effective. The deposit was discovered in 1974 by Mongolian and German surveying teams. The feasibility studies for building a mine at the site was first finished in 1980 by a Soviet enterprise, and again by the Mongolians in 1988. Since then, the government had actively encouraged the development of the deposit. In 1980, the resource at the deposit was calculated
    • MICC Research Mongolian Metals Industry to be 9.2 million tonnes of ores (grades B, C1 and C2 according to the Mongolian standards), which was interpreted to be 951 thousand tonnes of pure metal. 90 percent of the ore are sulfides, and the rest are carbonates and silicates. Erdenet The Erdenet Mine is operated by the Erdenet Minind Corporation, a joint venture between the Mongolian and Russian governments. Since production began in 1976, the total output reached 440 million m3 by the end of 2011. The concentrate plant at the site has a capacity to process 26 million tonnes of ore, and produces 530 thousand tonnes of copper concentrate a year. Erdenet also produces molybdenum concentrates. In 2011, Erdenet had a pretax profit of 318.5 million USD, from a revenue of 958.8 million USD. These figures show that the mine is a huge part of Mongolia’s economy, which is measured by a GDP of & billion. March 4, 2013 32
    • ABOUT MICC Mongolia International Capital Corporation (MICC) was established in 2005 as the first investment-banking firm in Mongolia. Mongolia’s rapid economic development and favorable financial environment present unique prospects for investment opportunities and growth potential for companies. In order to enable our clients and investors to take full advantage of these opportunities, MICC offers investment banking, asset management, securities underwriting and brokerage services. In addition, we conduct periodic macroeconomic research, develop analyses of domestic industries and provide equity research on domestic as well as foreign-listed stocks. MICC continues to make history in the Mongolian financial sector. We serve leading companies in the mining, manufacturing, financial, retail trade, airline and construction sectors, and prize our close and long-standing working relationships with our clients. Our goal is to assist both local and international companies realize their strategic goals by offering innovative and efficient financing solutions. CONTACT INFORMATION: Central Tower, Suite 912 Mail Box 42, 2 Sukhbaatar Square, SBD-8 Ulaanbaatar 210620a, Mongolia Tel: +976 7011 2023 +976 7011 2024 Fax: +976 7011 2025 Email: DISCLOSURE This material was prepared independently of the Company by the research analyst(s) named at the beginning of this document, for informational purposes only, and is not intended to address the needs of any specific person or entity. Any forecasts or recommendations made in this report are certified to accurately reflect the exclusive views of the aforementioned research analyst(s), based on all available information, as of the date of publication. The stock price as well as all other financial information are sourced from Bloomberg, where the latest available information was used. The research analyst(s) will not be held responsible for the accuracy or completeness of the information provided in this document. The opinions expressed herein are not intended to be the sole basis upon which investment decisions are made, and neither Mongolia International Capital Corporation nor the Company will assume liability for any losses that may arise from investment activity relating to securities profiled in this report. While no part of the compensation of the research analyst(s) is dependent upon the contents of this report, Mongolia International Capital Corporation is not prohibited from transacting with companies profiled in research reports, and may at the present time or at any time subsequent to the writing of this report be involved in conducting business with the Company.