Operations Report
Copper and Gold
Overview
The past year has been one of significant opportunities and
challenges for both Xanadu and Mongolia. The major challenges
presented themselves in the form of new Mongolian legislation
which seeks to govern foreign investment in three sectors namely
resources, media and financial services. The law was read into
parliament on the eve of the general election and was reported
widely on various news wires. The general election in June 2012
coupled with the foreign investment law proved to be an additional
challenge to the foreign financed exploration sector in Mongolia.
The foreign investment law was perhaps initially negatively
reported in the early news releases with headlines claiming the law
was anti foreign investment or similar. This of course did little to
help foreign listed resource stocks in the country. On the contrary
the new law acknowledges the importance of foreign investment
in Mongolia across a number of sectors and seeks to establish
a framework under which foreign investment proposals can be
reviewed by the government and approved.
The law as drafted is essentially a notification regime where
foreign parties must seek approval to acquire an initial 33.3%
equity interest in a Mongolian company and then seek a second
approval for any transaction above 49% equity interest and 100B
MNT (approximately US$75m) transaction value. The regulations
to implement the law, we believe, are currently being drafted.
Once the regulations have been approved, Xanadu will be able to
submit its application for Oyut Ulaan. Timing on this application is
unknown at this stage but the government agencies understand
the importance of finalising the regulatory framework to enact
the foreign investment law in a timely fashion. This framework
is broadly similar to that already in place in several countries
including Australia and Canada.
At the date of this report the new Mongolian parliament with the
various ministries has been announced with the first sitting of the
newly formed government to occur in October 2012. Pre-election
rhetoric from some candidates did appear to talk to nationalistic
ideals in developing the country’s resource sector but it is likely
this talk will instead turn to how to prioritise developments across
the country. Given the large capital investment required to develop
most mining assets and associated infrastructure, it is difficult
to see any material progression of the sector without material
injections of foreign capital.
Xanadu has refocused its commodity priorities this year to
highlight its copper and gold opportunities. Xanadu’s copper
portfolio consists of four porphyry assets at various stages
of development, with the most recent acquisition, Oyut Ulaan
subject to approval from the Mongolian government and Xanadu
shareholders. Elgen Zost, our principal gold project, is currently
subject to a comprehensive drill program this quarter.
Mongolia holds potential for repeat copper systems similar to
Oyu Tolgoi and our exploration team are working diligently to
define the potential at all of our copper and gold projects. Xanadu
still retains its two thermal coal assets, Khar Tarvaga and Galshar,
but going forward these will not be development projects for the
Figure 1: Xanadu copper and gold projects
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Operations Report
Copper and Gold
Company and will be divested or monetised in some form once
market conditions so permit. Thermal coal in Mongolia has a
promising future given the future energy demands as the country
industrialises, however we believe Xanadu is better placed to
focus its efforts on its base and precious metals portfolio.
The Ulaanbaatar office now comprises some 15 resource
professionals and 12 administration and support staff, including
those working for Ekhgoviin Chuluu LLC (“EC”), the joint venture
vehicle with Noble Group. Dr Andrew Stewart heads up the
geological team whilst Haydn Lynch and Ganbayar Lkhagvasuren
lead the Company’s commercial efforts with assistance from the
Sydney office.
Copper and gold projects
Xanadu has a re-invigorated focus on its copper and gold projects
(Figure 1). We believe both commodity groups have a long term
future in global industrialisation and that constrained supply side
dynamics should ensure prices for both commodities will remain
well supported in the longer term. Xanadu will have undertaken
exploration on all of its copper licences before the 2012 field
season is over. Some of these programs will include inexpensive
field mapping requiring soil sampling or similar whilst others will
require expensive deep diamond drill programs. The recent Oyut
Ulaan porphyry copper and gold acquisition (earning in) may be
subject to exploration this season but a decision on how intensive
that may be is subject to government approvals under the foreign
investment law and subsequent timing of those approvals.
Figure 3: Sharchuluut Uul VIP+PDP Model Interpretation at 290m depth, showing phase (chargeability).
Sharchuluut Uul – Copper (100% owned by Xanadu)
The Sharchuluut Uul (Yellow Mountain) copper-gold-molybdenum
porphyry project is located within the Bulgan Province of northern
Mongolia, approximately 230km northwest of Ulaanbaatar. The
project consists of a cluster of five porphyry-related prospects:
Sharchuluut Uul, Bukhin Gol, Salkhit Khushuu, Modon Khushuu
and Khamartyn. These occur within a 15-kilometre-long, northwest
oriented corridor of porphyry-related alteration and mineralisation
at the north-western extremity of the Erdenet Trend, which hosts
Mongolia’s largest operating copper mine, the Erdenet coppermolybdenum deposit (Figure 2).
Figure 2: Landsat image showing the Erdenet Trend and Sharchuluut Uul
located at the northwest end of the trend
The Sharchuluut Uul porphyry copper project was subject to a
reconnaissance diamond drill program from April of this year with
the final hole completed in June. Five drill holes were completed
for a total of 3,908m with all drill holes reaching their target
depths. Assays have been received for the first three drill holes
but no economic intercepts have been encountered in the first
five holes. However drilling to date has shown that the Sharchuluut
alteration system (lithocap) is large in size, and vector IP
geophysics (Figures 3 and 4) suggests it may extend east-west
with at least 2km strike length (east-west) and be up to 400m
thick in multiple advanced argillic zones, dipping up to 50 degrees
to the north. The general interpretation of the lithocap and
geological structure is shown in cross sections (Figure 5), and
suggests the porphyry source for the advanced argillic alteration
zones lay to the south, or possibly along strike of the lithocap.
It may be concluded the porphyry source has not yet been
discovered, by regional mapping or drilling, therefore exploration
will continue at Sharchuluut in 2013.
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Copper and Gold
Oyut Ulaan Copper Gold Project
On the 10th May 2012, Xanadu Mines executed a terms
sheet with Temujin Mining Corp (“Temujin”), a private Canadian
company, to acquire the prospective Oyut Ulaan copper and gold
Project in the South Gobi region of Mongolia via an option to
purchase Temujin’s wholly owned subsidiary Vantage LLC.
The Oyut Ulaan copper/gold project comprises a tenement
package of some 120km² and is situated approximately 275km
north east of the Oyu Tolgoi mine and only 60km west of the
industrial centre of Sainshand and the main Trans Mongolian
Railway (Figure 6). Oyut Ulaan was explored by Mongolian and
Russian geologists in the 1960’s and later worked on by Ivanhoe
Mines from 2001 to 2009. Ivanhoe rationalised their extensive
copper porphyry exploration licences in the region after deciding to
concentrate solely on the high grade Oyu Tolgoi project resulting
in the transfer of ownership of Oyut Ulaan to Temujin.
Figure 4: Sharchuluut Uul VIP+PDP Model Interpretation with 290m depth,
showing resistivity
Definitive documentation has been executed between parties
and the process to have a mining licence (“ML”) issued over
the project area is well advanced at the time of writing. Xanadu
will earn an initial option over 25% of the licence upon the ML
being granted. As part of the initial 25% earn in Xanadu has
covered expenditures to complete hydrology, environmental and
metallurgical studies on the project area. The balance of the 75%
equity interest will be subject to Xanadu shareholder approval.
This transaction is subject to the new foreign investment law and
hence Xanadu’s options will only convert into ownership once
Figure 6: Regional air magnetic image showing location of the Oyut Ulaan
Project in the north east and the Amgalant and Argalant projects in the central
part of the belt.
Figures 5: Sharchuluut alteration mode
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Copper and Gold
regulatory approval has been granted. As stated in the opening,
the process for the government to progress the law is still being
drafted by the relevant agencies although we are hopeful of
significant progress in the next month.
Commercial terms to acquire the full 100% interest in the project
consist of –
> 3.95 million Xanadu shares;
> A$4.25 million of Xanadu shares priced at a 15 day VWAP for
the period prior to the day Xanadu receives formal approval
from its shareholders approving the transaction;
> Options on a 1 for 2 basis on the above shares at a strike
price equal to a 30% premium of the calculated VWAP price,
with an expiry date of two years;
> 15 million performance rights to be issued to Temujin upon
Xanadu defining a JORC compliant resource over a mineable
area of the project of at least 90Mt at an average 1% copper
equivalent and subject to a favourable pre-feasibility or scoping
study. Once Xanadu is satisfied the threshold criteria has been
met those performance rights will convert into ordinary Xanadu
shares.
As part of the acquisition terms Xanadu has committed to spend
a minimum of US$5 million on the project in the 30 months after
the mining licence is granted.
Amgalant And Argalant Porphyry Copper Projects
Xanadu Mines announced the finalisation of a farm-in agreement
on the extensive Amgalant and Argalant Uul porphyry copper/gold
exploration licenses on 23 January 2012. Under the terms of the
agreement, Xanadu Mines can earn up to 80% of the Amgalant
and Argalant Uul exploration licences by meeting various spending
commitments over 2 years. Xanadu has issued shares to the value
of US$500,000 as consideration for the purchase of the licences.
The two exploration licences, which present a rare opportunity
in the current market for porphyry copper targets, are located
in the south Gobi region of southern Mongolia, approximately
460km southeast of the capital of Ulaanbaatar, in the central
part of the highly prospective south Gobi porphyry belt (Figure 7).
They are approximately 110km northeast of the world-class Oyu
Tolgoi Cu-Au Project and proximal to the large Tsagaan Suvarga
copper‐molybdenum deposit currently being developed. The
southern Mongolian Palaeozoic magmatic belt hosts most of the
known porphyry and intrusion-related mineralisation in the south
Gobi.
Figure 7: Landsat image showing the Solenker epithermal gold district
Elgen Uul – Zost Uul Joint Venture: SE Gobi (Au, Ag)
(80% owned by Xanadu)
The highly prospective gold project is located approximately
750km south-southeast of Ulaanbaatar and within 30km of the
Chinese border. The project is located in the newly recognised
Solenker epithermal gold district (figure 7). The Elgen-Zost
project is a low sulphidation epithermal gold camp of significant
proportions. The greatest potential lies in defining high grade
shoots within the vein systems and management considers that
potential for the discovery of economic gold resources at ElgenZost is excellent. A small program of scout drilling was completed
at Suug and Zost in late 2011 with encouraging results. The
geology and alteration observed in these holes suggests the level
of erosion is low and we are still relatively high in the hydrothermal
system. Higher precious metal grades are thought to exist at
depth. Consequently the main exploration target is high-grade
gold in quartz-adularia veins at depth (below 200m). A 10,000m
reverse circulation drill program commenced at Elgen-Zos in
August 2012.
Both exploration licences Amgalant (15157X) & Argalant (15259X)
were granted in 2008 for 9 years, therefore allowing Xanadu
sufficient time to carry out an extensive exploration and resource
drilling program.
Both exploration licences are large (Amgalant – approximately
109km² and Argalant Uul – approximately 895km²), remain
relatively under explored and occur in a shallowly eroded porphyrytype environment. Initial exploration has identified numerous, large
geophysical anomalies similar to the footprints recognised at Oyu
Tolgoi and could indicate the presence of porphyry mineralisation
at depth.
Both licences are located approximately 110km northeast of the
world-class Oyu Tolgoi Cu-Au Project and proximal to the large
Tsagaan Suvarga copper‐molybdenum deposit currently being
developed
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Coking Coal Joint Venture
Ekhgoviin Chuluu LLC (“EC”)
Nuurstei Licence – Earning 80% .
Xanadu’s coking coal interests are held solely through Ekhgoviin
Chuluu LLC (“EC”), the joint venture vehicle established with Noble
Group in 2011, in which each party holds a 50% equity interest.
EC acquired an additional coal licence in the South Gobi (Khus)
earlier this year and continues to evaluate licence opportunities
as they arise. EC likewise has refocused its country strategy for
coking coal by prioritizing opportunities in the southern region due
to enhanced logistics. EC’s northern and western licence areas
remain valuable assets in the company and will be subject to
further exploration and assessment but Xanadu expect to expend
more effort in the south over the coming twelve months.
Nuurstei, located in northern Mongolia, continues to be an
exploration licence of considerable interest to the EC joint venture.
EC continues to progress the immediately adjoining ground in
order to add to the existing licence area (3,000Ha). Obviously
the timeline for development of Nuurstei will be influenced by the
infrastructure plans of third parties in the region. EC is in dialogue
with those parties and is happy to contribute in an effective and
fulsome manner.
Khus
The Khus licence is located approximately 120km southwest of
Sainshand and 140km north of the Khangi-Mandula port at the
Mongolian-Chinese border. EC acquired the licence in June under
commercial terms which will see EC earn an 80% equity (currently
51%) interest once a JORC resource is defined at EC’s sole cost.
The Khus licence area is approximately 16,000Ha. An initial
phase Reverse Circulation (“RC”) program has been completed
on the licence for over 3,257m. Five of these holes reported
coal intersection of between one and nine metres. Preliminary
coal quality results on RC samples indicate good potential for
bituminous coal. Future exploration programs will drill already
cored holes to test coal quality and step out from known coal
occurrences.
Javkhlant Licence – Earning 80% .
Javkhlant comprises a large, 1,005km² exploration licence
located in the south west Gobi basin along the southern border
with China (within 22km of the Burgastai border crossing).
Following completion of a JORC resource estimate within two
years, EC will earn an 80% interest.
Premium coking coal of both Carboniferous and Permian ages is
known to exist within the south west Gobi basin. Exploration of
the licence in the prior winter proved challenging, with a future
exploration program to commence in September/October 2012.
Figure 9: EC Project Map
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Thermal Coal Projects
Khar Tarvaga And Tugrug (100% Owned By Xanadu)
The Mineral Authority of Mongolia has granted a mining licence
(MV16871) for the Khar Tarvaga Coal Project, covering a total area of
83.5km² (8,350.76Ha). The Khar Tarvaga Project mining licence has
been granted for an initial term of 30 years with an option for two 20year extensions, providing for a total of 70 years of mining operations.
Xanadu has successfully defined a thermal coal resource of 170Mt
to JORC classification code at Galshar. The coal at Galshar is
suitable for power generation and proven coal to liquids (“CTL”)
technologies. In conjunction with Xanadu’s Khar Tarvaga thermal coal
project, the addition of Galshar represents a 51% increase in the
Company’s JORC compliant coal resources inventory to 497Mt.
Xanadu has a 100% interest in the Khar Tarvaga Project, which is
located in the Tov Province in eastern Mongolia approximately 150km
south east of Ulaanbaatar. The project is very well situated, being
proximal to both rail, road and power infrastructure, approximately
36km from the Trans-Mongolian railway.
Xanadu has a 100% interest in this project in the Dornogovi Province
of eastern Mongolia, 65km from a rail spur at the Bor Undor fluorite
mine, which connects to the Trans Mongolian Rail system to China,
and lies only 200km from the China border. The Company has also
commenced the necessary permit process for a Mining Licence.
Drilling by Xanadu at the Khar Tarvaga Project has identified a
significant sub-bituminous coal resource in excess of 327Mt, of which
more than half is indicated status and described as being amenable
to mining by open cut methods.
During the year, Xanadu decided to seek offers of interest in the
Khar Tarvaga and Galshar thermal coal projects. The decision came
after a strategic review recommended increased focus on Xanadu’s
coking coal and copper/gold opportunities in Mongolia. As a result
these assets have been transferred to assets classified as held for
sale. There is no gain or loss impact in the income statement
in relation to assets held for sale.
The coal within the Khar Tarvaga mining licence is a sub-bituminous,
high volatile coal suitable for mine mouth power generation and
potentially gasification as part of a CTL or synthetic natural gas
(“SNG”) production facility.
Competent Person Statement
Galshar Project (100% Owned By Xanadu)
Information on the Company’s exploration results is sourced from
information compiled by Dr. Andrew Stewart. Dr. Stewart is an
The Galshar Thermal Coal Project is located in the Dornogovi Province employee of Xanadu Mines and is a Member of the Australasian
of eastern Mongolia, 250km south east of Ulaanbaatar within the
Institute of Geoscientists and has sufficient experience in the areas
Cretaceous Choir-Nyalga Coal Basin. The coal seams are contained
being reported on to qualify as the “Competent Person” as defined
within the Lower Cretaceous unit of the Khashaat member, which are in the 2004 Edition of the “Australasian Code for the Reporting
hosted within the larger Zuun Bayan Formation which also includes the of Mineral Resources and Reserves”. Dr. Stewart consents to the
Baganuur, Eldev and Shivee Ovoo coal deposits.
information in the form and context in which it appears.
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