Erdene Resource Development - Strong Economics & Exploration Upside in High-Grade Gold Play in Mongolia

• Erdene Resource Development is developing a high-grade gold mine in Mongolia, currently 40% complete and on schedule/budget for completion by end of 2024.
• The company partnered with MMC, Mongolia's largest private mining company, bringing $120 million in funding and local expertise to accelerate development.
• Initial production is estimated at 85,000 ounces per year for 6 years, with a 7-year mine life based on current reserves, at an all-in sustaining cost of $870/oz.
• Exploration has identified multiple deposits totaling nearly 2 million ounces of gold equivalent resources, with potential to significantly expand production and mine life.
• The company sees strong exploration potential in the region, having already made 4 discoveries, and plans to ramp up exploration spending to $5-10 million annually by 2025-2026.

Pioneering High-Grade Gold Production in Mongolia's Emerging Mining District

Erdene Resource Development Corporation (TSX:ERD) is on the cusp of transforming from an exploration company to a gold producer, developing what could become one of the highest-grade open-pit gold mines globally. With its flagship Bayan Khundii Gold Project in southwestern Mongolia nearing completion, Erdene is positioned to capitalize on the current strong gold price environment while unlocking the potential of an emerging gold district.

Project Development Status

The Bayan Khundii Gold Project is progressing rapidly, with construction approximately 40% complete as of August 2024. Peter Akerley, President and CEO of Erdene, provided an update on the project's status:

"We have remained on schedule and on budget. We're aiming to complete the facility by the end of this year. The critical path is really that process plant, and we now have the ball and SAG mill being installed."

This progress indicates that Erdene is on track to meet its targeted timeline for first gold production in Q2 2025. The company's ability to maintain its schedule and budget in the current inflationary environment is a positive sign for investors, potentially reducing execution risk.

Interview with President & CEO, Peter Akerley

Strategic Partnership with MMC

A key catalyst for Erdene's accelerated development has been its partnership with Mining and Metallurgical Company LLC (MMC), Mongolia's largest private mining company. This partnership, finalized in 2023, has brought significant benefits to the project:

• Financial Support: MMC has contributed $120 million through a combination of equity ($40 million) and a senior debt facility ($80 million).
• Operational Expertise: MMC brings extensive in-country mining experience and relationships.
• Infrastructure Development: The partnership has enabled the construction of an overhead transmission line from China, improving the project's power supply.
• Human Resources: MMC is training 120 heavy machinery operators at their existing operations for future deployment at Bayan Khundii.

Akerley emphasized the importance of this partnership, stating:

"When you think about what we're doing here, which isn't a single mine, it really is looking at a sequential build-out of a number of mines. We have what I view as that perfect partner. They brought the money, they brought the expertise, they bring the relationships."

This strategic alliance not only de-risks the current project but also positions Erdene for future growth in the region.

Production Profile & Economics

The Bayan Khundii Gold Project stands out for its high-grade nature, particularly for an open-pit operation. Key metrics include average head grade of 4 g/t gold, initial production of 85,000 ounces of gold per year for the first 6 years of operation. The initial mine life is estimated at 7 years based on current reserves with an all-in sustaining costs (AISC) of $870 per ounce.

These figures position Bayan Khundii as a potentially low-cost producer with strong margins, especially in the current gold price environment exceeding $2,000 per ounce. The project's economics could improve further as Erdene continues to explore and potentially expand the resource base.

Exploration Upside & Growth Potential

While the initial production profile is attractive, Erdene's true value proposition lies in its exploration potential and the possibility of significant production growth. The company has identified several key areas for expansion:

• Near-Mine Expansion: Recent drilling around the Bayan Khundii economic pit has intersected high-grade zones, with some assays returning 50 to over 500 grams per tonne gold in the top 50 meters. This could potentially increase the head grade and expand the pit boundaries.
• Resource Growth: Current gold equivalent resources across all deposits approach 2 million ounces, significantly exceeding the initial reserve base.
• Multiple Deposits: In addition to Bayan Khundii, Erdene has made discoveries at Ulaan, Dark Horse, and Altan Nar, providing opportunities for satellite deposits or standalone operations.
• District-Scale Potential: Erdene controls a 700 square kilometer area of interest in an underexplored region of Mongolia.

Akerley highlighted the exploration potential:

"I've been at this for 35 years, and I haven't seen the prospectivity we have in this part of the globe. For us to have discovered four deposits in a short period of time, three of those sitting at surface, never having really spent the time or had the resources to do deeper exploration, I'm tremendously excited about what else is going to happen here."

The company plans to ramp up exploration spending to $5 million in 2025 and potentially $10 million by 2026, focusing on expanding existing deposits and making new discoveries.

Growth Strategy

Erdene's growth strategy focuses on a phased approach to expanding production:

• Optimize Bayan Khundii: Increase head grades and expand the pit to potentially boost annual production to 100,000 ounces.
• Develop Satellite Deposits: Bring additional nearby deposits into production to supplement the Bayan Khundii plant.
• Build a Second Operation: Develop Altan Nar or another discovery as a standalone complex.
• Continue Exploration: Maintain an aggressive exploration program to feed the project pipeline.

The company aims to double production to around 150,000 ounces per year within the first few years of operations, with further growth potential beyond that.

Financial Position & Capital Allocation

With MMC funding the majority of the Bayan Khundii development, Erdene is well-positioned financially. The company expects to generate significant cash flow once in production, with Akerley noting, "At $2,500 gold, we're looking at $100 million unlevered, split between the two of us."

This strong cash flow generation potential provides flexibility for future capital allocation, including retained earnings for financial stability, increased exploration spending and potential return of capital to shareholders through dividends or share buybacks. The absence of debt on Erdene's balance sheet further enhances this financial flexibility.

Market Valuation & Catalysts

Despite its advanced stage and near-term production potential, Erdene trades at a discount to many of its peers. This valuation gap may close as the company achieves key milestones:

• Completion of construction (expected end of 2024)
• First gold pour (targeted Q2 2025)
• Ramp-up to commercial production
• Resource and reserve updates
• New discoveries from increased exploration activity

As Erdene transitions from developer to producer and demonstrates the potential of its land package, a re-rating of the stock could occur.

Risks & Challenges

While Erdene presents a compelling investment opportunity, investors should be aware of potential risks:

• Country Risk: Although Mongolia's mining sector has matured in recent years, it still carries higher perceived risk than more established mining jurisdictions.
• Single Asset Risk: Initial production will come from a single mine, though this is mitigated by multiple deposits in the portfolio.
• Execution Risk: Any delays or cost overruns in construction could impact the company's timeline and economics.
• Gold Price Sensitivity: The project's economics are leveraged to the gold price, which can be volatile.
• Exploration Risk: While the area is prospective, there's no guarantee that future exploration will yield economic deposits.

The Investment Thesis for Erdene Resource Development:

• Near-term production catalyst: First gold expected Q2 2025
• High-grade, low-cost operation: 4 g/t Au head grade, $870/oz AISC
• Strong financial partner: MMC providing $120 million in funding
• Significant exploration upside: Multiple deposits identified, large land package
• Leveraged to gold price: Strong margins at current gold prices
• Potential for production growth: Targeting 150,000 oz/year within a few years of startup
• Undervalued relative to peers: Potential for re-rating as production approaches

Erdene Resource Development offers investors exposure to a near-term, high-grade gold production opportunity in an emerging mining district. The company's strategic partnership with MMC, strong project economics, and significant exploration potential position it for potential growth and value creation. As Erdene transitions to producer status and continues to unlock the potential of its land package, it may present an attractive opportunity for investors seeking exposure to the gold sector with both near-term catalysts and long-term growth potential.

Macro Thematic Analysis

Erdene Resource Development's Bayan Khundii project is positioned at the intersection of several important macro trends in the gold mining industry:

• High-Grade Focus: With declining gold grades globally, Bayan Khundii's 4 g/t average head grade stands out, potentially offering higher margins and resilience to gold price fluctuations.
• Emerging Jurisdictions: As traditional mining regions become mature, companies are increasingly looking to underexplored areas for new discoveries. Mongolia represents such an frontier, offering the potential for district-scale opportunities.
• ESG Considerations: The project's small footprint (2 hectares) and potential for low emissions due to grid power access align with growing ESG concerns among investors.
• Strategic Partnerships: Erdene's alliance with MMC exemplifies a trend of junior miners partnering with larger, local entities to mitigate development risks and access capital.
• Exploration Renaissance: With many major gold miners facing depleting reserves, there's renewed interest in exploration. Erdene's large, prospective land package is well-positioned to capitalize on this trend.
• Gold as a Safe Haven: Ongoing global economic uncertainties continue to support gold as a safe-haven asset, potentially providing a favorable price environment for new producers.
• Supply Constraints: With few major gold discoveries in recent years and long lead times for mine development, new producers like Erdene may benefit from potential supply shortfalls.

Erdene Resource Development is rapidly advancing its high-grade Bayan Khundii Gold Project in Mongolia towards production in 2025. The company's strategic partnership with MMC has de-risked development and provides a platform for future growth. With strong project economics, significant exploration potential, and a clear growth strategy, Erdene offers investors exposure to a compelling gold opportunity in an emerging mining district. As the company transitions to producer status and continues to demonstrate the potential of its land package, it may present an attractive opportunity for investors seeking both near-term catalysts and long-term growth potential in the gold sector.