Southern Gobi Belt

History

Exploration in the Southern Gobi copper belt has been cyclical, occurring in three major waves and has yielded globally significant results as Figure 6 illustrates.

Stage 1

Initially, large state-sponsored geological survey style exploration took place from the 1960’s, generating regional data sets that included mineral occurrences, such as Erdenet and Tsagaan Suvarga.

Stage 2

Early exploration by western companies during the ten-year period from 1996-2006 led to the discovery of the Oyu Tolgoi deposits.

As discussed in length in the 2018 published book, “Discovery of Oyu Tolgoi – A case study of Mineral & Geological Exploration” (Sergei Diakov, Samand Sanjdorj & Galsan Jamsrandorj), this initial period of western exploration was pioneered by the Erdenet-Magma Joint Venture, and then BHP post its takeover of Magma Copper.

These efforts lead to BHP identifying and securing the Oyu Tolgoi project (from the Mongolian State) and undertaking a 23-hole drill program in 1997 and 1998 for a total of 3,789 metres of drilling.

Figure 1. The (limited) outcrop at Central Oyu
Southern Gobi Belt History 1
Source: Discovery of Oyu Tolgoi – A case study of Mineral & Geological Exploration, with thanks to Sergei Diakov

Figure 2.  BHP’s representative Sergei Diakov at PDAC 1999 displaying Oyu Tolgoi
Southern Gobi Belt History 2
Source: Discovery of Oyu Tolgoi – A case study of Mineral & Geological Exploration, with thanks to Sergei Diakov

Due to both corporate and technical factors, BHP offered up Oyu Tolgoi for partnership. The spacing of 400 metres between holes, longest only 280 metres, with 8 holes intersecting significant internals of mineralisation with the south and west open, coupled with “narrowly focusing on the Chilean model of copper porphyry by BHP had played a “disservice” to Oyu Tolgoi at its initial stage1 (preventing the upside potential of the hypogene mineralisation) provided an interesting exploration proposition.

In 2000, Ivanhoe Mines (now Turquoise Hill Resources) formed an agreement with BHP for Oyu Tolgoi and in late 2001 announced the “discovery” hole OTD150 with 590 metres at 1.1 g/t Au and 0.8% Cu at Southwest Oyu (see Figure 4).

In 2002, hole OTD270 changed the profile of the project confirming the high-grade preserved porphyry potential to the north with 638 metres at 1.6% Cu at Hugo Dummett.

Figure 3.  Oyu Tolgoi Case Study
Southern Gobi Belt History 4

Figure 4. “Discovery Hole”: A geophysical/hypogene target
Southern Gobi Belt History 5

In May’05, a joint-venture partnership was announced between Ivanhoe and BHP to use BHP’s proprietary FalconTM airborne gravity gradiometer system and explore approximately 28,000km2 of Ivanhoe’s non-core exploration ground in southern Mongolia. Ivanhoe’s advanced exploration and development-stage projects — Oyu Tolgoi, Kharmagtai, Yellow Hills and Bronze Fox — were not included in the Falcon Gobi Project. BHP’s Peter Leaman (now Kincora’s Senior VP of Exploration) ran this JV, with significant input from BHP’s chief geophysicist Barry de Wet (now Kincora’s consultant geophysicist).

From left to right: D Hernandez (BHP), R Friedland (Ivanhoe), P Leaman (BHP), C Forster (Ivanhoe), M Salamon & M Randolph (BHP)
Southern Gobi Belt History 3
Source: Discovery of Oyu Tolgoi – A case study of Mineral & Geological Exploration, with thanks to Sergei Diakov

In 2006, Ivanhoe struck a strategic partnership agreement with Rio Tinto regarding Oyu Tolgoi.

Significant regional exploration continued through 2009. Ivanhoe, under Robert Friedland’s leadership, was responsible for the major exploration efforts during this secondary phase and put Mongolia on the international capital markets radar.

At one point Ivanhoe’s land inventory totalled 126,626 km2, about the same size as Japan, representing the largest landholding in the mining industry, and Robert famously lead the largest drilling program in the global exploration industry’s history at Oyu Tolgoi.

This relatively brief period of western lead district scale exploration yielded very significant results, both for Mongolia and within the global copper industry.

The emergence of the copper and coal districts of the Southern Gobi, starting to deliver these previously untapped resources to the international markets, resulted in Mongolia becoming the fastest growing economy in the world.

Oyu Tolgoi is the largest development project in Mongolia’s history and once the ongoing construction of the underground is completed is expected to account of a third of Mongolia’s GDP and be the third largest copper mine in the world (with potentially a hundred year mine life). The construction of the second large porphyry in the belt, the privately owned Tsagaan Suvarga open pit commenced with many recognising the underexplored potential of the Tsagaan Suvarga Devonian age intrusive complex for further significant discoveries.

During this second phase of exploration, it was almost mandatory for the coal and copper majors to be seeking an entry into the respective Gobi belt for both commodities - like Ecuador is now for copper.

Why the focus on this region?

  • It was driven by the emerging Tier 1 assets;
  • Recognition of very limited exploration, but very prospective geology (see Figure 6);
  • District scale land being available and new land becoming available; with young licenses, security of tenure to explore and ability convert to a mining license/operation in a timely manner;
  • Location of being on the doorstep and within trucking distance to the largest consumer of both commodities, China;
  • Relatively low barrier to entry from an infrastructure perspective; proven by the rapid and continued emergence of OT and Erdenes Taven Tolgoi - flat Gobi, sparsely populated, access to water and power

Figure 6. This second phase of exploration, the first lead by western companies on a district scale in Mongolia, yielded globally significant new copper discoveries with 9% of contained metal discovered globally over that period
Southern Gobi Belt History 6
 

Stage 3

Exploration in the Southern Gobi has been very significantly impacted by the Mongolian legislative environment and global commodity cycles. Post the Ivanhoe and BHP JV regional work programs, exploration mainly focused on specific prospects and has been largely driven by junior exploration companies and various private groups with some advancements by various majors across the wider belt.

Figure 7. The Gobi’s license coverage during the last period of district scale exploration versus now
Southern Gobi Belt History 7

Extensive exploration and geological data have been collected during this period and understanding of the regional geology and controls on mineralization significantly advanced. These included an understanding of the local geology of the Oyu Tolgoi porphyry systems as well as other copper occurrences such as Tsagaan Suvarga, Kharmagtai and Bronze Fox, amongst others.

The then Ivanhoe released the majority of its extensive regional landholding following windfall tax legislation (announced May’06) and during extended negotiations with the Mongolian Government to form the Oyu Tolgoi Investment Agreement for the open pit development (secured Oct’09). The repeal of the Mongolian copper and gold windfall profits tax only occurred in Aug’09 (effective January 1, 2011) with reform to the Mongolian Minerals Law in July 2014 leading to the repeal of the 5-year moratorium for issuing new exploration licenses (since mid’2010) only in January 2015 with intermediate periods of limited ground being subsequently made available in a largely hap hazard way.

Such a licensing system, unlike the success of the system that opened up exploration activities during the first wave of western company exploration, has impeded the ability of new entrants, attracting foreign direct investment, and limited exploration activities largely to existing players.

At the moment exploration efforts are largely limited to some postage scale level exploration activities of Rio Tinto (on Oyu Tolgoi/Turquoise Hill Resources, Entrée and Rio Tinto owned licenses), Xanadu Mines, a foreign private group (owners of the Ikh Shankh project) and Kincora Copper (latter commencing the first modern systematic district scale exploration in this belt).

During the last commodity cycle the majority of international players in the copper and coal sectors were seeking an entry into the Southern Gobi belts, with renewed interest again following deleveraging of balance sheets, Oyu Tolgoi Stage 2 recommencement/project financing and favourable outlook for copper.

Note: 1 “Discovery of Oyu Tolgoi – A case study of Mineral & Geological Exploration” (Sergei Diakov, Samand Sanjdorj & Galsan Jamsrandorj)

Formation of Kincora Copper

Kincora Copper Limited was formed in mid Jul’11 following the closure of the transaction between Origo Partners and a TSXV listed shell company called Brazilian Diamond Ltd, raising C$12.1m via a private placement and “reversing” the Bronze Fox license (15000X) into what then became known as Kincora.

The Bronze Fox license was originally part of the original Ivanhoe Bronze Fox project, which in 2005 was designated as one of four, alongside Oyu Tolgoi, Kharmagtai and Nariin Sukhait, high priority targets for large scale porphyry and skarn copper mineralization amongst its 126,626 km2land holding held in the wider Gobi region and excluded from the Falcon Gobi JV with BHP (retained 100% by Ivanhoe).

The license was a highly rated as a large-scale exploration target with mineralization identified over 40km2 of a 223.2 km2 total area, featuring numerous target zones of copper, gold, chrome and molybdenum along with extensive copper mineralization from surface with unknown potential at depth and across the majority of its land package (only ~10% of the license has been explored in meaningful detail).

Previous drilling included 72 holes totaling over 12,000 metres, which confirmed continuous mineralization on a 9km strike, predominately at the Kincora named “West Kasulu” target (Ivanhoe named “Bronze Fox” target, with East Fox on the eastern section of the intrusive) and a large low-grade copper-gold feature from surface to depth (generally returning between 0.4% and 0.9% copper equivalent).

In 2012, Kincora acquired Golden Grouse LLC, a Forbes & Manhattan controlled company, to consolidate the rest of the original “Ivanhoe” Bronze Fox project (which hosted the Ivanhoe known “West Fox” and “Tourmaline Hills” prospects), including the Western license and extension of the West Kasulu target. The consolidated license portfolio now included the Bronze Fox Intrusive Complex and Tourmaline Hills Intrusive Complex, almost tripling Kincora’s footprint from 223.2km2 to 622km2.

Shortly after completing the Golden Grouse transaction and having only completed one field seasons’ exploration, the licenses Kincora acquired were revoked by the Government of Mongolia as part of the 106-exploration dispute (a court case involving former government employees which the license holders were not party to). This resulted in a $6.95 million impairment from the Company’s balance sheet in 2013, and after leading the industries lobby efforts to resolve the 106-license dispute, in March 2015 these licenses returned to Kincora as new with tenure of up to 12 years.

The two-year dispute significantly impeded Kincora’s exploration efforts, corporate discussions and strategy over this period, particularly with the West Kasulu target within the Bronze Fox Intrusive Complex spreading across both the Eastern and Western licenses. For only one field season, in 2012, was Kincora not impeded with its exploration efforts in the Bronze Fox district, which resulted in the most favorable exploration results to date in the region at the West Kasulu prospect. Exploration on the Bronze Fox and Western license border returned over 800 metres at over 0.40% copper equivalent, including 37 meters at over 1% copper equivalent. Furthermore, 9 of the 15 holes drilled in 2012 at the Tourmaline Hills gold prospect in the Western license have returned intervals of at least 1g/t Au, up to 7.7g/t Au and up to 75g/t Ag locally in the mineralization zone, often with elevated copper values.

Active artisanal mining during the summer is common at the Tourmaline Hill and Southwest prospects, and various Bronze Age pits/workings evidenced at the former in the Western license. Approximately 1/3 of all holes previously drilled at Bronze Fox across both the eastern and western licenses have returned intervals of at least 1g/t gold.

In 2013, when only having undisputed access to the 15000X, Kincora had 14 confidentially agreements in place with most industry groups active in the copper sector, which resulted in a period of exclusivity in 2014.

Feedback from industry groups at the time was that there were three major sovereign risk impediments:

  1. the dispute with the Government for the development of the underground at Oyu Tolgoi;
  2. our Golden Grouse licenses having been revoked as part of the 106-license dispute; and,
  3. uncertainty relating to the minerals law, with no new exploration licenses having been issued since 2010 due to a moratorium.

All these items were in time resolved, with these Mongolia specific impediments overshadowed by the downturn in the global commodity cycle, which saw the last of the long-standing groups such as Anglo American and Teck Resources close their Mongolia regional offices in Dec’15.

In 1Q’16, Kincora secured a new exploration license from the direct application system operated by the Mongolian government, named Ulaan Khudag (Red Well), associated with a known outcropping copper-gold porphyry system, located as close as 15 km along the mineralized trend from the Rio Tinto controlled Oyu Tolgoi project. An identified contact zone continues to the eastern and western sections of the license, the margin just to the east returning a previous 2% copper and 0.25g/t gold sample with anomalous values also to the west.

IBEX Transaction

In May’16 Kincora announced it has reached agreement regarding Ibex Land Mongolia LLC and Ibex Mongolia LLC (“IBEX”), entities indirectly controlled by High Power Exploration Inc.(“HPX”), which resulted in Kincora more than tripling its landholding in the Southern Gobi copper belt, totaling over 1,500km2. This transaction was closed in Nov’16.

Background to the IBEX transaction

  • IBEX’s portfolio is focused on porphyry targets to the east and south of Kincora’s existing licenses with the consolidated landholding now being the dominant position in the Oyu Tolgoi-Tsagaan Suvarga (Devonian) copper belt.
  • A large and high quality regional geophysical and surface geochemical dataset supporting various style targets: i. Devonian porphyries; ii. “Traditional” gold rich copper porphyries; and, iii. epithermal and Carlin-style gold deposits.
  • Consolidates a regional portfolio in an underexplored but potentially world-class gold rich copper province analogous to exploring the majority of the Northern Chile copper belt from the 1970’s.
  • Strengthened team with discovery experience and complementary skill sets for exploration through to project development internationally and in Mongolia.
  • Fully winterized camp, fleet, permitted landing strip, IT and exploration equipment.
  • Kincora issued to HPV 5,895,000 common shares and 2,947,500 warrants a exercise price of $0.54 (equal to 1.8 times the price per security of the July 28th, 2016, private placement of Kincora) and a term of 24 months. There is no cash consideration relating to the IBEX transaction.
  • It is intended that these Kincora securities will ultimately be held by the shareholders of HPV, the largest of whom are HPX Techco Inc. (“HPX Techco”) as to 65.78%, a subsidiary of High Power Exploration Inc., a private company, and GoviEx Uranium Inc., a TSX venture exchange listed company, as to 21.64%.
  • HPV will have certain rights to maintain their ownership percentages by participating in further capital raisings and, at a threshold of share ownership, have the right to a board seat.
  • A Relationship Agreement with HPX Techco was executed which provides Kincora conditional access to HPX’s suite of geophysical technologies.
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