Erdene Resource Development (ERD) - Plant Construction to Begin

Erdene Resource Development Corporation is a Canada-based resource company that is focused on the acquisition, exploration, and development of precious and base metals in Mongolia. The company's projects include Bayan Khundii, Altan Nar, Dark Horse, Zuun, and Khuvyn Khar. The company is listed on the Toronto Stock Exchange (TSX-V: ERD) and the Mongolian Stock Exchange (MSE: ERDN).

Matt Gordon caught up with Peter Akerley, President, CEO, and Director Erdene Resource Development. Peter has over 3 decades of experience in mineral exploration, corporate financing, project development, and management of publicly-listed resource companies. He is one of the founders and principles of Erdene Resource Development and has held the position of President and CEO since March 2003.

He is a geologist that has worked extensively in foreign jurisdictions including North America, South America, and Asia, with a recent focus on Mongolia, where he led the technical team through the confirmation of a major molybdenum and copper deposit, the discovery and definition of the Altan Nar gold deposit and the recent discovery of the Bayan Khundii gold project. He previously served on the Board and Special Committee of Temex Resources Corporation. His educational credentials include a B.Sc. degree from St. Mary's University in Halifax, specializing in geology along with an Institute of Corporate Directors Audit Committee Effectiveness course. 

Company Overview

Erdene Resource Development Corp. engages in the exploration and development of deposits in Mongolia and North America. The company was founded in 2000 and is headquartered in Dartmouth, Nova Scotia. Anian Resources LLC, Erdene International Exploration Inc, Erdene Energy Xxk, Erdene Gold International Inc, ERD Aggregate Corporation, and Erdene Mongol Xxk are the company's subsidiaries. 

Erdene Resource Development is focused on the large Bayan Khundii gold district in Mongolia. The company is taking a two-pronged strategy by continuing to grow the resources with a 2Moz target in 2022. The company is also looking to enter into initial production during the construction period with a 65,000oz yearly supply. 

Renewed Covid Restrictions

Following the steep increase in Omicron cases in the past few months, Mongolia has seen the enforcement of fresh restrictions. This includes a 10-day quarantine period which is expected to continue through February. Additionally, China's zero Covid policy has led to a reduction in the transport of goods and materials at the China-Mongolia border. Erdene Resource Development is taking a measured approach to commence operations in 2022, taking the potential closures and movement restrictions into consideration. 

The company has hired expat professionals within Mongolia that are available on-site. The company conducted a job fair in the local sub-province and also opened a project office. It is expected that the China border restrictions can significantly impact the timing and cost when it comes to the movement of goods. The company is focused on protecting shareholder value and creating returns in an event where delays have a major impact on operations. It is expected that border restrictions will be reduced in Q2 2022. The company intends to continue operations as planned and enter production by 2023. The company seeks to maintain transparency with its shareholders in terms of border issues. 

Erdene Resource Development is looking to continue operations as per the schedule, however, it is facing slowdowns in the issuance of permits. The company was issued a DEIA (Detailed Environmental Impact Assessment) in December last year and recently got a stability agreement issued. The procurement process is ongoing. The company had ordered a communication circuit in Q3 2021 along with a gold drill and elution circuits. The latter 2 have the longest lead times. The company continues to work through major contracts along with hiring new employees. It hasn't observed any slowdowns, however, the company is being cautious in case of unforeseen circumstances. 

It is expected that by mid-to-late 2022, there will be between 600-700 construction workers along with cranes for construction. There is a possibility of delays in the delivery of equipment through the Chinese border. The company is assessing the ongoing situation on a daily basis as the delays can lead to a potential loss of millions of dollars. The Chinese border has been closed for the past few months and this has impacted coal shipments. The company anticipates that the borders will start opening up as the second quarter approaches. 

Inflation Considerations

Erdene Resource Development isn't concerned about inflation. This is because even though inflation has a major impact on the mining industry, the company has a robust project that features exceptionally high grades. The company's project is planned to produce $40M yearly in free cash flow through a 65,000oz per year supply. Based on recent discoveries, the company is looking to push the yearly production rates higher. This ensures that the project is capable of enduring capital and operating cost fluctuations caused due to inflation. The company is looking to minimize the impact of delays caused by border restrictions by taking a cautionary approach. 

China is the least expensive option for equipment supply compared to other countries. The company is also looking for alternative supply options such as sourcing structural steel from smaller suppliers in Mongolia. It has also looked at the possibility to ship the gold drill and the elution circuit through Russia. However, even with the alternatives in place, the shipping and delivery would take longer due to the ongoing Covid restrictions. 

Cash Position

Erdene Resource Development currently has CAD$7M in cash flow with relatively low monthly expenses. It expects to stretch the funds into Q2 while working towards acquiring the proceeds from the debt financing. The company successfully raised $5M on the Mongolian exchange, which was shortly followed by a DEIA approval. The company presently has 7,000 Mongolian shareholders. The company's Mongolian Stock  Exchange listing helped increase its social license. 

Mongolian investors often complain that foreign companies operating in the country don't offer opportunities for locals to invest in their country's resources. The MSE listing made Erdene Resource Development the first dual-listed company. The company has had two $5M capital raises on the Mongolian Stock Exchange. The company believes in sharing benefits with thousands of Mongolian citizens, a decision that has led to a positive response from politicians and influential people within Mongolia. 

Erdene Resource Development has observed an increase in development costs in recent times as its Feasibility Study was based on 2020 prices. This is predominantly due to the 20%-30% jump in steel prices over the past 18 months. Steel prices ties into 30% of the company's capital costs. The company is currently in the final tendering process and has put out the work packages for all major components. It is expected that the impact of price increases in steel and other materials will be evident in Q1 2022. 

In November 2020, Erdene Resource Development executed a mandate letter with the Export Development Canada (EDC) for up to a $55M senior secured debt facility for the development of the Bayan Khundii Gold Project. This debt is conditional where the financing is based on the satisfactory completion of due diligence, expected to conclude in Q2 2021. It has a 10% contingency. 

Erdene Resource Development's team is currently running ground operations. The company is looking to initiate early construction that includes roadwork, a temporary camp, a permanent camp, and warehouse facilities. The company's development plans are going as per schedule. It is anticipating a heavy construction period heading into spring. The company expects to push construction in mid-2022 and aim for first gold in early 2023. 

The Mongolian government announced a tax stabilization certificate a few years ago as part of the country's new investment law. This certificate ensures that the royalties and taxes remain stable. Erdene Resource Development was recently issued a tax stabilization certificate by the Mongolian National Development Agency. This certification enables a lock-in of maximum tax and royalty rate over the life of the mine. 

Erdene Resource Development has a market cap between $130M-$140M. The company has seen a good performance in the previous year where its share price was up by a few percentage points. 

Production Numbers

The 65,000oz yearly production is a baseline that was used in the company's Feasibility Study. The company has uncovered a new gold resource at the Dark Horse asset. This resource is at-surface high-grade oxides that feature zones with higher than 5g/t average grades. The company is looking to introduce a CIP (Carbon in Pulp) plant for extraction. Erdene Resource Development has a resource at the Altan Nar deposit, located 16km north which is also being considered for a CIP plant installation. The company has plans to reassess the production at both these deposits and target a 75,000oz-80,000oz yearly supply by year 2 of production. 

The company had accelerated the drilling at Dark Horse to attain an M&I (Measured and Indicated) resource within the oxide zone. The drill operations took place in November-December and the samples are currently being analyzed in the lab. The company is looking to quickly define the resource so that it can be a part of the financial and debt financing discussions, adding a higher degree of certainty. Following this, the company is planning to add the Altan Nar reserves to the resource. 

The company is looking to upscale its base production numbers from 65,000oz/year to 75,000oz/year as it moves towards initial development. The company is looking to reach a steady-state of producing 75,000oz-80,000oz by the third year of production. 

Targets 2022 and Beyond

Erdene Resource Development anticipates a delay of 2-3 months as it approaches production. This can be due to the Covid closures leading to a delay in the supply of equipment. The company aims to be one of the top new gold districts in the world. The company anticipates growth in its production profile to 150,000-200,000oz yearly within the 3-5 year timeframe. The initial startup and discoveries will enable the company to provide safety and security for investors through incoming cash flow while simultaneously preventing dilution. 

The company's shareholder base has shown support for its plan to grow ounces. The company anticipates that raising capital for exploration will be a non-issue. It already has a 2Moz resource and is looking to carry out drilling at the Altan Nar and Bayan Khundii discoveries to develop an inferred resource. The company seeks to pull these resources into reserves and utilize the additional capital towards resource development. 

It is important to note that a large portion of the existing 2Moz resource was discovered within the past 12 months, while the 2 new discoveries at the Altan Nar and Bayan Khundii deposits were made recently. 

Erdene Resource Development is currently in discussion with various entities for financing that complements the EDC's senior debt financing. These discussions include sub-debt, equity, and project-level investments. The company's deposits are shovel-ready and feature high grades, leading to an increased interest from the market. The company does not have concerns for project financing, it is looking for the best route to raise capital while protecting its shareholders. 

Additionally, the company is involved in discussions with commercial banks and Mongolian companies that have expressed strong interest in investment and potential partnerships for the project. The company is looking to raise capital through either equity, debt, or partnerships. A major portion of Mongolian wealth has been generated in the mining industry, mainly through coal mining exports to China. This has led to a large number of experienced Mongolian companies within the mining space. Erdene Resource Development is looking for potential investments and services from these experienced companies. 

Erdene Resource Development has opened an office in Ulaanbaatar, Mongolia, and is currently hiring new employees. According to the company, the Mongolian mining industry has matured significantly in the past 10-20 years. There are contract-type mining arrangements where the contractor brings in one-third of the total employees. 

The company has been successful in achieving its 2021 goals in terms of permits, financing, construction, and exploration. The company's interests are aligned with the management team and the board. Its major goal is to observe a re-rating through production. The company anticipates that its valuation will grow 2-3 times once it enters production. 

The company also anticipates that the growth potential of the Bayan Khundii district will enable it to grow multi-folds in both valuation and share value. The company forecasts that gold will reach a $1,800-$2,200 price range next year.

‍To find out more, go to the Erdene Resource Development website