PROPERTIES

Mongolia

Lookout Hill Property

Entrée’s Lookout Hill property is located in the South Gobi Desert of Mongolia and includes three mining licences (Shivee Tolgoi, Javhlant and Togoot) totaling approximately 89,136 hectares.  Lookout Hill completely surrounds Ivanhoe Mines’ Oyu Tolgoi Project and hosts the Hugo North Extension of the Hugo Dummett copper-gold deposit and the Heruga copper-gold-molybdenum deposit.  These deposits are located within an area subject to a joint venture between Entrée and Oyu Tolgoi LLC, a subsidiary of Ivanhoe Mines Ltd.

The Entrée-Ivanhoe Joint Venture beneficially holds 39,864 hectares consisting of the eastern portion of Shivee Tolgoi and all of Javhlant.  The Joint Venture Property is contiguous with, and on three sides (to the north, east and south) surrounds the Oyu Tolgoi Project.  The 100%-owned portion of Lookout Hill outside of the Joint Venture Property (Lookout Hill West) covers an area of approximately 49,272 hectares and includes the western portion of Shivee Tolgoi (Shivee West) which is not subject to the Entrée-Ivanhoe Joint Venture and all of Togoot.

Heruga and Hugo North Extension Deposits

The 2010 Integrated Development Plan for the Oyu Tolgoi mining complex was released in May 2010, and includes Entrée’s Heruga and Hugo North Extension deposits (see May 11, 2010 news release).  It confirms the near-production and the long-term importance of the Hugo North Extension and Heruga deposits to the mine development. Resource estimates for the two deposits are outlined in the table below, followed by the first underground Mineral Reserve for the Hugo North Extension.  Entrée holds a 20% carried interest to production in these resources through a joint venture with Oyu Tolgoi LLC.

Notes:  Copper Equivalent (CuEq) has been calculated using assumed metal prices of US$1.35/pound for copper, US$650/ounce for gold, and US$10.50 for molybdenum;. The equivalence formula was calculated assuming that gold was 91% of copper recovery. CuEq was calculated using the formula: CuEq = %Cu + ((g/t Au*18.98)+(Mo*0.01586))/29.76.  The contained copper, gold, copper and molybdenum in the tables has not been adjusted for metallurgical recovery. The 0.6% CuEq cut-off is highlighted as the base case resource for underground bulk mining. The mineral reserves are not additive to the mineral resources. Mineral resources that are not mineral reserves do not have demonstrated economic viability. 

Notes:  Metal prices used for calculating the Hugo North Underground NSR are copper US$1.50/lb, gold US$640/oz, and silver US$10.50/oz based on long term metal price forecasts at the beginning of the mineral reserve work. The analysis indicates that the mineral reserve is still valid at these metal prices.  The NSR has been calculated with assumptions for smelter refining and treatment charges, deductions and payment terms, concentrate transport, metallurgical recoveries and royalties. For the underground block cave, all material within the shell has been converted to mineral reserve; this includes low grade Indicated and Inferred material assigned zero grade and treated as dilution.  Only indicated resources were used to report probable reserves.

Lookout Hill West:  100%-owned by Entrée Gold

The 2010 exploration program is currently underway on Entrée’s 100%-owned Shivee West, the western portion of the Shivee Tolgoi mining licence adjacent to the Oyu Tolgoi mine development project.  Previous deep penetrating geophysical work was re-evaluated over the 2009-2010 winter period. The surveys cover a belt of prospective Devonian rocks identified in earlier programs which are geologically similar to the Devonian-aged setting of the Entree-Ivanhoe Mines joint venture deposits, Hugo North Extension and Heruga, and Ivanhoe Mines’ nearby Oyu Tolgoi deposits. Information from the re-evaluation of the geophysics will be combined with further geochemical and geological surface work to generate new drill targets.  Approximately 5,000 metres of follow-up drill testing is planned  as the initial phase of drilling during summer 2010. Entree has budgeted approximately US$4.0 million for this first phase of drilling on Shivee West.
The Togoot licence includes the Nomkhon Bohr coal deposit which is hosted by Permian rocks similar to those at the giant Tavan Tolgoi deposit, 70 kilometres to the northwest.  Multiple thin seams of bituminous to anthracite coal up to several metres thick, are present over a strike length of 1200 metres.  Other coal targets have also been identified on the Togoot licence.

Joint Venture with Ivanhoe Mines

Entrée entered into an arm’s-length Equity Participation and Earn-In Agreement in October 2004 with Ivanhoe Mines Ltd., through its subsidiary, Oyu Tolgoi LLC which holds title to the Oyu Tolgoi mining licence.  The Oyu Tolgoi mining licence is located adjacent to and is surrounded by Entrée’s Lookout Hill property.

The Earn-in Agreement provided that Ivanhoe Mines would have the right, subject to certain conditions outlined in the Earn-in Agreement, to earn a participating interest in a mineral exploration project and, if warranted, a development and mining project on a portion of the Lookout Hill property (“Entrée-Ivanhoe Project Property”; now known as the Joint Venture Property.  Ivanhoe Mines remains the project manager).  Under the Earn-in Agreement, Ivanhoe Mines would conduct exploration activities in an effort to determine if the Oyu Tolgoi mineralized system extended onto the Entrée-Ivanhoe Project Property.  Following execution of the Earn-in Agreement Ivanhoe Mines undertook an aggressive exploration program, which eventually confirmed the presence of two resources on Lookout Hill within the Entrée-Ivanhoe Project Property: the Hugo North Extension indicated and inferred resource to the north of Oyu Tolgoi and the inferred resource of the Heruga Deposit to the south of Oyu Tolgoi. 

As of June 30, 2008, Ivanhoe Mines had expended a total of $35 million on exploration on the Entrée-Ivanhoe Project Property and in accordance with the Earn-In Agreement, Entrée and Ivanhoe Mines formed the Entrée-Ivanhoe Joint Venture.  Ivanhoe Mines has an 80% interest in minerals deeper than 560 metres extracted from below the surface and a 70% interest in minerals above 560 metres.  Entree Gold can elect to be carried to production by Ivanhoe Mines through debt financing at prime +2% (set by the Royal Bank of Canada) with its share of development costs repaid from 90% of future production cash flow.  This stipulation limits dilution of Entrée’s interest as the project progresses.

Investment Agreement between Joint Venture Partner, Oyu Tolgoi LLC, our largest shareholder Rio Tinto, and the Mongolian government

In August 2009, the Mongolian Parliament approved amendments to four laws, including the insertion of a sunset provision to cancel the 3 year old, 68% windfall profits tax on copper and gold effective January 1, 2011. These amendments allowed the Mongolian government, Ivanhoe Mines and Rio Tinto to conclude the negotiations necessary to finalize the long awaited investment agreement.

In October 2009, Ivanhoe Mines Mongolia Inc.(now Oyu Tolgoi LLC) and Rio Tinto International Holdings Ltd. signed the Investment Agreement with the Mongolian government.  The Investment Agreement regulates the relationship between these parties and stabilizes the long term tax, legal, fiscal, regulatory and operating environment to support the development of the Oyu Tolgoi mining complex.  The contract area defined in the Investment Agreement includes the Javhlant and Shivee Tolgoi mining licences, including Shivee West which is 100%-owned by Entrée and not currently subject to the Entrée-Ivanhoe Joint Venture.  Satisfaction of conditions precedent within 6 months of the signing date was specified within the Investment Agreement and was completed March 31, 2010.

With removal of the conditions precedent, the Mongolian government holds a 34% interest in Oyu Tolgoi LLC, which in turn holds (as a participant) an 80% interest in the Entrée-Ivanhoe Joint Venture.