Entree Resources Ltd (TO:ETG) has a 20% participating interest in a JV (EJV) covering part of the Oyu Tolgoi (OT) copper mine in Mongolia. The EJV has the characteristics of a royalty with the benefits of a producer, resulting in low financial risk, low capital development risk and low operational risk. The development of Hugo North Extension (HNE) Lift 1 is fully funded by Entrée’s JV partner and all development and operations are managed by Rio Tinto (LON:RIO). We consider that future development of the deeper parts of HNE (also known as HNE Lift 2) and Heruga should follow the same path as HNE Lift 1, providing Entrée shareholders with materially de-risked cash flows for, potentially, several decades.
Black-Scholes hints at value boundaries
Separate from our DCF and in-situ resource values (see section below), we have performed a Black-Scholes analysis and valuation of Entrée’s future production. Using a standard Black-Scholes model derives a value for current HNE Lift 1 production of US$350m and over US$1.9bn if HNE Lift 2 is included. Obviously, the absence of risk in the Black-Scholes method is key, although discounting the option value by over 95% still could allow for such options to be sold for a sum comparable to Entrée’s current market capitalisation (see page 10 for details).
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