High Margin Gold Project 98% Built To Generate $200M Annual Free Cash Flow

• Erdene Resource Development is 98-99% complete on construction of their Bayan Khundii gold mine in Mongolia, targeting first gold production in early-mid September 2025 with commercial production by mid-November
• The company expects to produce approximately 85,000 ounces annually at 4 grams per ton head grade with 90-95% recovery, generating around $200 million CAD in annual after-tax free cash flow at current gold prices
• Total project capex came in at $115 million USD (15% over initial $100M target) with $45 million still undrawn from available facilities, providing a comfortable buffer through first cash flow
• Management has identified significant expansion potential including 40 meters of 7 g/t intersections 200 meters west of the pit and plans $10 million annual exploration budget to develop a 10+ year mine life
• The company approved a 6:1 share consolidation to attract larger institutional investors and plans to rapidly repay debt within 14 months while evaluating plant expansion to increase capacity by 30-40%

Erdene Resource Development (TSX:ERD) stands at a pivotal moment as the company prepares to transition from developer to producer at its flagship Bayan Khundii gold project in Mongolia. In a comprehensive interview, CEO Peter Akerley outlined the company's near-term production timeline, robust financial position, and ambitious expansion plans that could establish Erdene as a significant player in Mongolia's emerging gold sector.

Construction 98% Completion

The Bayan Khundii project has achieved remarkable construction progress, reaching 98-99% completion as of late June 2025. Akerley emphasized the rapid development timeline, noting, 

"I stood out there last October on the soon-to-be foundations of some of these facilities and we were just breaking ground, and today we're substantially complete." 

The company expects to complete final electrical and piping work through July, followed by dry commissioning in August and wet commissioning later that month.

The construction milestone represents the culmination of intensive permitting processes with the Mongolian government. Since December, Erdene has successfully navigated approvals for 19 facilities, with the final critical permit being the chemical usage authorization for cyanide operations. This permit, which Akerley described as "significant" in Mongolia, received regulatory recommendation and awaits ministerial sign-off in the coming weeks.

The company has invested heavily in infrastructure beyond the processing plant itself. The $115 million USD total capital expenditure included construction of a 370-person accommodation village with full dining and fitness facilities, alongside a Cessna Caravan landing strip for direct site access. This comprehensive approach reflects management's commitment to operational efficiency and workforce retention in Mongolia's remote mining regions.

Production Timeline & Targets

Erdene's production schedule targets first gold pour by end of August with initial commercial gold production in early-to-mid September. The company defines commercial production as achieving 85% of capacity at 95% of the targeted 4 grams per ton head grade, expecting to reach this milestone by mid-November 2025. Akerley projected initial monthly production of approximately 3,000 ounces in the first 30 days, ramping to 6,500-7,000 ounces per month at commercial production.

The production profile reflects a carefully planned ramp-up strategy incorporating both the Bayan Khundii and Altan Nar deposits. Akerley explained the blending approach: 

"We have 3.8 grams gold from Bayan Khundii and we have 7 grams from Altan Nar, so 4 grams is the overall head grade of the combined resource." 

The higher-grade Altan Nar material, contributing 40,000 ounces at seven grams per ton, will be integrated in year three to maintain consistent head grades while accessing deeper pit areas.

Recent infill drilling has provided encouraging results that may exceed feasibility study projections. The company completed 918 holes for the first six months of production, followed by an additional 200 holes after discovering the ore body footprint in the top 15 meters appeared larger than initially modeled. This additional drilling revealed improved continuity in ultra-high-grade zones, potentially delivering both higher tonnage and grade reconciliation.

Financial Position & Cash Flow Projections

Erdene's financial structure provides substantial flexibility for the transition to production and future growth. The company secured $170 million in total funding through a combination of $40 million equity, $80 million shareholder loan from partner Mongolian Mining Corporation (MMC), and $50 million working capital facility from Mongolia's largest commercial bank. With $45 million still undrawn and only $10-15 million required to complete construction, management maintains a comfortable $30-35 million buffer extending potential runway to mid-November if needed.

At current gold prices, Akerley projects the operation will generate approximately $200 million CAD in annual after-tax free cash flow. The company's debt repayment strategy prioritizes rapid deleveraging, with management targeting full debt retirement within 14 months of achieving steady-state production. This aggressive repayment schedule reflects confidence in the project's cash generation capability and management's desire to optimize the capital structure for future expansion initiatives.

The company also benefits from a strategic 5% net smelter return (NSR) royalty held by Erdene beyond the 50/50 joint venture structure, activating after 400,000 ounces of production around mid-year five. Akerley noted this royalty could generate "approaching $20 million Canadian annually" at current gold prices, representing significant value that extends beyond the immediate production profile.

Interview with CEO, Peter Akerley

Expansion Potential and Resource Development

Perhaps most compelling for investors is Erdene's expansion potential within what management characterizes as a new high-grade gold district. The company has identified multiple targets within close proximity to the existing operation, including exceptionally high-grade intersections just 200 meters west of the current pit. Akerley highlighted recent drilling results: "We had 40 meters of seven grams, highest grade intersections we've had to date just last October."

The expansion opportunity extends across multiple prospects within the broader district. North of the pit, drilling returned 40 meters of four grams per ton, while the Altan Nar trend extends one kilometer with limited regional exploration to date. An additional target 500 meters west yielded 350 meters of one gram per ton material not yet incorporated into resource calculations.

Management has completed scoping studies for plant expansion that would increase capacity by 30-40% through addition of gravity circuits, an additional ball mill, and expanded elution capacity. This expansion could target 110,000-120,000 ounces annually by late 2027, utilizing readily available ore west of the current pit. Akerley emphasized the scalability: 

"We have half a million ounces in the pit at $1,800 gold; move that gold price to $3,000, there's a tremendous amount of resource that comes into the west."

Operational Infrastructure & Risk Management

Erdene has implemented comprehensive infrastructure to support sustained operations in Mongolia's challenging environment. The company constructed a 240-kilometer overhead transmission line to the Chinese border, providing reliable power supply with sufficient capacity to support potential plant doubling. This infrastructure investment offers operational cost benefits, with Akerley noting that expansion could reduce kilowatt-hour costs by approximately half, translating to 10-15% decreases in all-in sustaining costs.

Risk mitigation extends to equipment redundancy and supply chain management. The company installed duplicate jaw crushers providing double the required capacity, while maintaining comprehensive spare parts inventory including two months of backup supply for critical components. Chemical storage facilities represent what Akerley described as "probably second to none in Mongolia," ensuring reagent security for continuous operations.

The equipment selection reflects a global sourcing strategy balancing quality and cost considerations. Jaw crushers, SAG and ball mills sourced from Synic, while the elution circuit came from KOMO in Australia and South Africa. Akerley explained the rationale: 

"Anything that we felt needed some higher accuracy, higher quality, we've sourced those parts around the world."

Strategic Positioning & Market Access

Erdene's positioning as Mongolia's emerging gold producer comes at a favorable time for precious metals markets and international investor interest in the jurisdiction. The company recently completed a 6:1 share consolidation approved by over 99% of shareholders, specifically targeting larger institutional investors who typically require minimum share prices for investment mandates. Akerley explained the strategic rationale: 

"Large institutions in the US will not look at a share price that is less than a dollar."

The consolidation coincides with increased marketing efforts targeting European and North American institutional investors as the company transitions to production. Management views the production milestone as validation of Mongolia's mining potential, with Akerley noting: 

"We went out there, discovered a new minerals district that geologists had never walked on before and we're hitting world-class grades in three-plus prospects."

Mongolia's regulatory environment has proven navigable for Erdene, particularly given the partnership with MMC, which employs 2,000 people at operations in eastern Mongolia. This relationship has facilitated local hiring, training, and operational knowledge transfer. Akerley emphasized the partnership benefits: "It's a good mix of western and Mongolian ways and we can do things quickly and efficiently."

The Investment Thesis for Erdene Resource Development

• Imminent Production with Strong Cash Generation: First gold production expected September 2025, targeting 85,000 ounces annually with projected $200M CAD after-tax free cash flow at current gold prices
• Robust Financial Position: $45M undrawn from facilities provides substantial buffer, with aggressive debt repayment strategy targeting full retirement within 14 months of production
• Significant Expansion Potential: Multiple high-grade targets within district including 40m of 7 g/t intersections 200m from pit, supporting 10+ year mine life with 30-40% capacity expansion potential
• Strategic Infrastructure Investment: 240km transmission line and comprehensive facilities provide platform for district-wide development with potential cost reductions for future expansion
• Proven Management Execution: Delivered construction 98-99% complete on time, successfully navigated Mongolian permitting, and established strong local partnerships through MMC relationship
• Undervalued Asset Base: Recent 6:1 consolidation positions company for institutional investment recognition while maintaining significant upside through exploration success and gold price leverage
• 5% NSR Royalty Upside: Strategic royalty structure provides additional $20M CAD annual cash flow from year five, offering leveraged exposure to district expansion beyond immediate production

Macro Thematic Analysis

Erdene Resource Development exemplifies the compelling investment opportunity within Mongolia's emerging gold mining sector, representing a rare combination of near-term production, high-grade resources, and district-scale expansion potential. The company's success validates Mongolia as a viable mining jurisdiction for international investors, particularly as geopolitical tensions drive increased focus on diversified supply sources outside traditional mining regions.

The broader thematic centers on Mongolia's transformation from frontier exploration territory to established mining jurisdiction, supported by improving infrastructure, regulatory frameworks, and international partnerships. Erdene's partnership with Mongolian Mining Corporation demonstrates successful local collaboration models, while the company's ability to secure financing from international development banks validates the jurisdiction's investment credentials.

Mongolia's strategic location between China and Russia provides unique advantages for resource development, offering proximity to Asian commodity markets while maintaining political independence. The country's mineral endowment, including significant gold, copper, and coal resources, positions it as a critical supplier for global commodity demand, particularly as decarbonization efforts increase demand for mining inputs.