Earn-in Agreement with Turquoise Hill/Oyu Tolgoi LLC
In October 2004, Entrée entered into an arm’s-length Equity Participation and Earn-In Agreement (the “Earn-In Agreement”) with Turquoise Hill Resources Ltd. (together with its wholly-owned subsidiaries, “Turquoise Hill”). Under the Earn-In Agreement, Turquoise Hill agreed to purchase equity securities of Entrée, and was granted the right to earn an interest in a 39,807 hectare land package comprising the eastern portion of the Shivee Tolgoi, and all of the Javhlant mining licence (the “Entrée/Oyu Tolgoi JV Property”). Most of Turquoise Hill’s rights and obligations under the Earn-In Agreement were subsequently assigned by it to what was then its wholly-owned subsidiary, Oyu Tolgoi LLC (“OTLLC”). OTLLC is also the title holder of the Oyu Tolgoi mining licence located adjacent to, and surrounded by, the Entrée/Oyu Tolgoi JV Property and Shivee West.
As part of its earn-in obligations under the Earn-In Agreement, OTLLC undertook an exploration program which established the presence of two significant deposits on the Entrée/Oyu Tolgoi JV Property: the Hugo North Extension deposit and the Heruga deposit. These deposits form the northernmost and southernmost parts of the Oyu Tolgoi project, which is a series of deposits containing copper, gold, silver and molybdenum. The Hugo North Extension deposit is within the Shivee Tolgoi mining licence and the Heruga deposit is within the Javhlant mining licence.
On June 30, 2008, OTLLC gave notice to Entrée that it had completed its earn-in obligations by expending a total of $35 million on exploration on the Entrée/Oyu Tolgoi JV Property. As a consequence, OTLLC earned an 80% interest in all minerals extracted below a sub-surface depth of 560 metres from the Entrée/Oyu Tolgoi JV Property and a 70% interest in all minerals extracted from surface to a depth of 560 metres from the Entrée/Oyu Tolgoi JV Property.
Joint Venture Agreement with OTLLC
The Earn-In Agreement provides that at such time as OTLLC completes its earn-in obligations, the parties will enter into a joint venture agreement in the form attached to the Earn-In Agreement. The partners have been operating under the terms of the joint venture agreement since 2008. See "Entrée/Oyu Tolgoi JV Property - Overview".
Amended and Restated Equity Participation and Funding Agreement with Sandstorm Gold
On February 14, 2013, Entrée entered into an Equity Participation and Funding Agreement (the “2013 Agreement”) with Sandstorm Gold Ltd. (“Sandstorm”). Pursuant to the 2013 Agreement, Sandstorm provided a $40 million upfront refundable deposit (the “Deposit”) to Entrée. In return, Entrée agreed to use future payments that it receives from its mineral property interests to purchase and deliver metal credits to Sandstorm’s metal account.
Since the first payments that Entrée receives are expected to come from its interest in the Entrée/Oyu Tolgoi JV Property, the amount of metal credits that Entrée is required to purchase and deliver to Sandstorm, and the timing of such deliveries, are determined with reference to Entrée’s share of production and receipt of payments from the sale of production from the Entrée/Oyu Tolgoi JV Property.
On March 1, 2016, Entrée and Sandstorm entered into an Agreement to Amend, which provides for a 17% reduction in the metal credits that Entrée is required to sell and deliver to Sandstorm under the 2013 Agreement. In return, Entrée refunded 17% of the Deposit by paying $5.5 million in cash and issuing $1.3 million of common shares (thereby reducing the Deposit to $33.2 million). At closing, the parties entered into an Amended and Restated Equity Participation and Funding Agreement dated February 14, 2013, and amended March 1, 2016 (the “Amended Funding Agreement”).
Under the Amended Funding Agreement, Entrée will purchase and deliver gold, silver and copper credits equivalent to:
- 28.1% of Entrée’s share of gold and silver, and 2.1% of Entrée’s share of copper, produced from the Shivee Tolgoi mining licence (excluding Shivee West); and
- 21.3% of Entrée’s share of gold and silver, and 2.1% of Entrée’s share of copper, produced from the Javhlant mining licence.
Upon the delivery of metal credits, Sandstorm will make a cash payment to Entrée equal to the lesser of the prevailing market price and $220 per ounce (“/oz”) of gold, $5/oz of silver and $0.50 per pound (“/lb”) of copper (subject to inflation adjustments). After approximately 8.6 million ounces of gold, 40.3 million ounces of silver and 9.1 billion pounds of copper have been produced from the entire Entrée/Oyu Tolgoi JV Property, the cash payment will be increased to the lesser of the prevailing market price and $500/oz of gold, $10/oz of silver and $1.10/lb of copper (subject to inflation adjustments). To the extent that the prevailing market price is greater than the amount of the cash payment, the difference between the two will be credited against the Deposit (the net amount of the Deposit being the “Unearned Balance”).
This arrangement does not require the delivery of actual metal, and Entrée may use revenue from any of its assets to purchase the requisite amount of metal credits.
Under the Amended Funding Agreement, Sandstorm has a right of first refusal, subject to certain exceptions, on future production-based funding agreements. The Amended Funding Agreement also contains other customary terms and conditions, including representations, warranties, covenants and events of default. The initial term of the Amended Funding Agreement is 50 years, subject to successive 10-year extensions at the discretion of Sandstorm.
The 2013 Agreement provided for a partial refund of the Deposit and a pro rata reduction in the number of metal credits deliverable to Sandstorm in the event of a partial expropriation of Entrée’s economic interest, contractually or otherwise, in the Entrée/Oyu Tolgoi JV Property. The Amended Funding Agreement provides that Entrée will not be required to make any further refund of the Deposit if Entrée’s economic interest is reduced by up to and including 17%. If there is a reduction of greater than 17% up to and including 34%, the Amended Funding Agreement provides Entrée with greater flexibility and optionality in terms of how Entrée will refund a corresponding portion of the Deposit. In the event of a full expropriation, the remainder of the of the Unearned Balance after the foregoing refund must be returned in cash with interest.
Under the Amended Funding Agreement, Sandstorm will vote its shares of Entrée as Entrée’s Board specifies with respect to any proposed acquisition of Entrée, provided the potential acquirer agrees to execute and deliver to Sandstorm a deed of adherence to the Amended Funding Agreement.
Updated: April 2017