Erdene eyes 2031 start for $687M Mongolia moly project

Erdene Resource Development (TSX: ERD; US-OTC: ERDCF) could bring its $687-million (C$976-million) Zuun Mod molybdenum-copper project in Mongolia into production within five years under an accelerated schedule, President and CEO Peter Akerley says.

The wholly owned project would produce an average of 19.8 million lb. of molybdenum and 27.9 million lb. of copper annually over 34 years. An initial economic study released late Wednesday estimates an after-tax net present value of $745 million, using an 8% discount rate, and a 16% internal rate of return.

“The construction cost estimate is relatively modest for the scale of the project given the economics of operating in Asia,” Akerley said Thursday in emailed answers to The Northern Miner. “This mirrors our experience at Bayan Khundii, where actual construction costs were about half of what would be forecast to build in North America.”

Zuun Mod could become Erdene’s second development centre in its Khundii Minerals District, where the nearby Bayan Khundii gold mine has entered commercial production. The company is seeking a partner for the larger project while anticipating that gold cash flow will become available after Bayan Khundii repays its debt, expected sometime next year.

Erdene shares rose 1.8% on Thursday afternoon in Toronto to C$5.71, valuing the company at about C$374 million. They’ve traded in a 52-week range of C$4.54 to C$10.63.

Partner search

The preliminary economic assessment assumes molybdenum at $25 per lb. and copper at $5 per lb., with payback in the sixth production year. Molybdenum, used to strengthen steel, would generate about 78% of projected revenue.

Using prices the company identified as spot levels, $33 per lb. for molybdenum and $6.50 per lb. for copper, the after-tax value rises to nearly $2 billion and the internal rate of return reaches 28%, with payback in the fourth production year.

“The IRR of 16% should be sufficient to attract financing given the project’s scale and the need for secure Molybdenum supply, particularly in Asia,” Akerley said. “Additionally, the IRR of 28% at current prices is very attractive and is supported by the supply demand fundamentals we see in market.”

Erdene believes the economics and proximity to Asian customers can attract a partner seeking a secure, long-life supply, he said. He didn’t specify how much ownership the company would consider selling.

An offtake agreement with a downstream consumer could help secure construction financing by providing greater certainty about cash flow available to service debt. The terms would depend on when Erdene agreed to lock in prices and how much production it committed, he said.

Five-year path

Resource drilling, engineering, groundwater investigations and environmental and social studies could be completed within two to three years for up to $20 million, Akerley said. That estimate assumes 40,000 metres of drilling.

The amount of drilling required would depend partly on the partner. Asian groups are often comfortable establishing measured and indicated resources for the first five years of operations, while Western partners may seek conversion across the entire deposit, he said. That creates a potential drilling requirement of 8,000 to 40,000 metres.

“Under an accelerated timeline, the drilling and studies would take two years to complete and we have forecast a three year construction period, putting us five years from first production,” Akerley said.

Inferred resources account for about 74% of the proposed plant feed, including 16% during the six-year payback period. Those resources require further drilling to support their conversion to higher-confidence categories and eventual reserves. The assessment is preliminary and doesn’t establish economic viability, Erdene said.

Measured and indicated resources total 407.1 million tonnes grading 0.048% molybdenum and 0.062% copper, containing 427 million lb. of molybdenum and 553.7 million lb. of copper.

Inferred resources add 596.2 million tonnes grading 0.041% molybdenum and 0.056% copper, containing 536.8 million lb. of molybdenum and 733.3 million lb. of copper. The estimate is effective May 1.

Costs, infrastructure

The proposed plant would process 25 million tonnes annually, producing separate molybdenum and copper concentrates. All-in sustaining costs are estimated at $13.89 per lb. of molybdenum after copper credits. Sustaining capital would add $463 million over the operating life, with closure costs estimated at $87 million.

The economics exclude a 1.5% net smelter return royalty held by Versamet Royalties (TSX, Nasdaq: VMET), which can be reduced to 0.5% through a buy-down provision. The study also uses proposed Mongolian legislation to model copper royalties, alongside existing legislation for molybdenum.

Gold cash flow

Zuun Mod lies 35 km east of Bayan Khundii and about 280 km from a railhead at the Mongolia-China border. A regional coal haul road passes within 30 km of the project. The study assumes power would be purchased from a third party.

Bayan Khundii is held through a 50:50 joint venture with Mongolian Mining. Its debt is expected to be repaid sometime in 2027, after which the joint venture is forecast to generate more than $100 million in annual profit, Akerley said. A portion would flow to its owners according to their interests.