Mongolian hurdles don’t faze Ivanhoe (September 08, 2008)

VANCOUVER — In spite of everything, it seems Ivanhoe Mines (IVN-T, IVN-N) is committed to Mongolia.

The major and its joint-venture partner Rio Tinto (RTP-N, RIO-L) have been trying for years to get a development permit for their massive Oyu Tolgoi copper-gold deposit in the Mongolian portion of the Gobi Desert but attempts to rewrite the country’s mineral exploitation legislation combined with multiple government changes have stymied their efforts.

The two companies submitted a draft investment agreement to the government in July 2007 and are still waiting for an answer. But the wait has actually been much longer — discussions around an investment agreement started four years ago and have now spanned four different administrations.

A new government was elected in late June and the partners are hopeful that completion of an investment agreement for the deposits that contain 987 tonnes of gold and more than 32 million tonnes of copper will be a priority for the new government. The project, which is expected to cost roughly US$2.7 billion to develop, would include a power plant and smelter. The draft agreement includes a US$900-million loan to the Mongolian government to provide it with 34% ownership and the promise that 90% of the workforce would be Mongolian.

Still, the two miners wait. But it is clear that Ivanhoe nevertheless believes in Mongolia’s mineral potential so completely that it is willing to deal with whatever political hurdles are thrown its way.

The company’s commitment was on display again in mid-July when Ivanhoe completed its earn-in on Entre Gold’s (ETG-T, EGI-X)Lookout Hill project.

By spending US$35 million on exploration since signing the earn-in agreement in late 2004, Ivanhoe has earned a 70% interest in mineralization above 560 metres depth and an 80% interest in mineralization below 560 metres. Ivanhoe and Entre now co-own the project and their agreement stipulates that Entre has the right to require Ivanhoe to finance its share of subsequent joint-venture costs through to production, to be repaid from production cash flow. The right ensures Entre cannot be diluted out of its interest due to an inability to finance.

Through private placements associated with the earn-in agreement, Ivanhoe owns almost 15% of Entre. And in conjunction with its investment in Ivanhoe as part of their Oyu Tolgoi JV agreement, Rio Tinto also invested in Entre and holds roughly 16%.

Lookout Hill is also in the south Gobi Desert. In fact, the 1,790-sq.- km property completely surrounds Ivanhoe’s Oyu Tolgoi. And one of the two copper-gold deposits at Lookout Hill is the Hugo North Extension, the northern extension of the Oyu Tolgoi Hugo Dummett deposit onto the Copper Flats portion of Entre’s property.

March 2007 saw an updated resource estimate for Hugo North. The deep deposit now hosts 117 million indicated tonnes grading 1.8% copper and 0.61 gram gold per tonne and 95.5 million inferred tonnes averaging 1.15% copper and 0.31 gram gold, using a 0.6% copper cutoff grade. The porphyry-style mineralization intrusions in a highly elongate deposit. Mineralization starts at between 900 and 1,200 metres depth.

Ivanhoe also outlined a significant resource at Heruga, which sits along strike of Hugo North and Hugo Dummett but to the south. The copper-gold-molybdenum porphyry deposit hosts 760 million inferred tonnes grading 0.48% copper, 0.55 gram gold per tonne and 0.0142% molybdenum, also using a 0.6% copper cutoff grade.

In general, gold-rich copper mineralization is capped by a molybdenum-rich shell. Copper sulphides occur in both disseminations and in veins and fractures; molybdenite mineralization correlates with areas of stronger quartz-sericite alteration. The deposit strikes for 1.6 km; its vertical thickness varies from 400 to 800 metres and its width from 20 to 300 metres. But Heruga is also a deep deposit: the shallowest portion of most sections starts at 500 to 600 metres depth. The deposit remains open to the south, east, and north and three drills are currently turning. means that the Oyu Tolgoi structural trend stretches over 20 km.

Since delineating Hugo North, Ivanhoe has spent time exploring other parts of the large Lookout Hill property. Those efforts resulted in a copper-gold discovery 7 km north of Copper Flats. The new zone, called Ulaan Khud, extends the known mineralized strike to more than 10 km.

As for new developments at Oyu Tolgoi, a resource estimate for SouthGobi Energy Resources’ (SGQ-V, SGQRF-O)Tsagaan Tolgoi coal deposit indicates it hosts coal in sufficient quality and quantity to power a mine at the massive copper-gold project. Tsagaan Tolgoi lies 115 km east of Oyu Tolgoi across the desert and now is known to host measured and indicated coal resources of 36.4 million tonnes, plus 9 million tonnes of inferred coal.

The project has eight main coal seams, plus multiple sub-seams, with apparent thicknesses varying from 1.2 to 24.7 metres. The coal is ranked as high-volatile B and C bituminous.

Ivanhoe used to own all of South- Gobi’s coal projects and licences. In order to increase the valuation for these assets the major poured all its coal assets into SouthGobi, which debuted on the TSX Venture Exchange in May 2007. Ivanhoe retains a majority stake in the company, holding 81%.

SouthGobi also owns the Ovoot Tolgoi open-pit coal mine, in southern Mongolia, which began production in May.