During a recent Mines and Money virtual networking event, it was suggested to managing director and CEO of Xanadu Mines Andrew Stewart that there is no better place for an exploration project to be located than Mongolia during a global pandemic. Speaking to RGN shortly after, Stewart reiterates the minimal impact COVID-19 has had on life in Mongolia – the vast and sparsely populated central Asian country where Xanadu is advancing three district scale copper exploration projects in the South Gobi Desert. “I was in Mongolia in January on a site visit with our new chairman [Colin Moorhead] and not long after that we started to see some cases reported out of Wuhan in China. Mongolia quickly closed its borders in response to the outbreak,” says Xanadu’s boss. Mongolia has reported just 140 cases of COVID-19 and 0 deaths at the time of writing in late May, and is one of the only places in the world where society has functioned almost as normal since March, bar the closure of schools.
Getting ahead of the game
As a result of Mongolia’s swift response and subsequent containment of the virus, Xanadu has been able to continue its operations while other mining companies around the world have been forced to step back due to government-directed lockdown orders of varying length and severity.
In particular, the company has been very active of late at its second tier Red Mountain porphyry copper-gold project, having signed an earn-in agreement with the Japan Oil, Gas and Metals National Corporation (JOGMEC) for the project’s development in March.
While on-ground exploration activities have commenced at the highly prospective Red Mountain project, Xanadu has also strived to comply with stringent health and safety procedures to reduce the potential of the virus spreading on site.
“Our number one priority is health and safety for our employees and contractors in the communities we work in, so we have implemented a few health and safety programmes in light of COVID-19. In addition, while ensuring the operational integrity of the business, we’ve also been proactive in making corporate decisions.”
The first half of 2020 included a strategic refresh and a corporate restructure, providing a laser focus for a company that has in the past been criticised for getting distracted from its core business.
Xanadu’s strategy is now clearly that of an exploration company, described as looking for globally significant copper-gold porphyry orebodies in Mongolia. Following discovery and definition, Xanadu creates liquidity events for its shareholders and exits those projects, refreshing its exploration portfolio to do it all over again.
Linked to this refresh, non-essential activities in 2020 have been cancelled or deferred by Xanadu’s leadership and several cross-control procedures relating to cash flow management have also been implemented. One of the targets set by the refreshed board of directors was a 35% reduction in administration costs in 2020, which would equate to considerable savings of US$1.3 million on the same outlay in 2019.
“However, there is still considerable uncertainty in the near term environment and we don’t fully understand what the magnitudes of the forward capital investment decisions are going to be globally, so it’s important we put that plan into action,” Stewart stresses.
Copper – the king of all metals
One unintended effect of the COVID-19 outbreak has been the portrayal of a rapidly decarbonising world following the onset of wide-scale economic lockdowns in March, and this has further highlighted the importance of copper – ‘the king of all metals’, according to Stewart – in delivering long-term carbon emission reductions in line with the Paris Climate goals.
The importance of copper in a range of green energy applications – from electric vehicles and the lithium-ion batteries powering them to wind turbines and solar panels – has been well documented in recent years, but Stewart is keen to stress the effectiveness of copper in medical applications, particularly in preventing the spread of deadly bacteria and viruses like COVID-19.
“Another thing the virus has shown us is that we should be moving towards copper in all medical equipment. Stainless steel is often used in medical settings but the material has many holes that bacteria and superbugs can hide in. Copper just doesn’t have that structure so it’s a better material for surgical equipment in my view.”
In addition, an early-stage US Government-funded study showed that the virus that causes COVID-19 remained viable for up to two to three days on plastic and stainless steel surfaces, compared to just four hours on copper.
With governments around the world responding to the economic threat posed by the COVID-19 pandemic with debt-laden stimulus packages, Xanadu is aiming to position itself strongly for an uptick in the copper market, particularly with its flagship Kharmagtai copper-gold project.
Marching on at Kharmagtai
The company delivered a 400% increase in contained copper and a 249% increase in contained gold within the open cut resource at Kharmagtai between 2015 and 2018, with the current mineral resource estimate standing at 598 million tonnes (Mt) containing 1.9 Mt of copper and 4.3 million ounce (Moz) of gold, with a high grade core of 54Mt at 0.86% copper equivalent.
Recent drilling in Q1 further demonstrates the existence of extensive high-grade sections at Kharmagtai, after a pivotal drill intercept at Stockwork Hill revealed that the higher grade zone extends to the East and remains open in that direction.
“One thing we are demonstrating at Kharmagtai is the Tier 1 nature of the project. We can demonstrate the scale and we have that but continuing to grow the high–grade is a focus for us because that’s the early payback from that material. It shows that there’s not only material coming to surface and the open cut pit is going to drive the underground in the future.”
Mineralisation at Kharmagtai is hosted by very old terrain that has been dismembered by faults, which has meant that Xanadu has had to piece the geological puzzle back together in order to build out the resource in recent years.
However, Stewart says the geological team has now built up what the business calls ‘brownfields knowledge’ at Kharmagtai. “This means the risk of drill holes is reduced, so we can be a lot more predictive with our drill holes. That then feeds into very low discovery costs.”
Mongolian drilling excellence
Since it started exploration drilling in South Gobi, Xanadu has spent time building a local supply chain and the company been vindicated in its decision to work with Mongolian drilling contractors, not least because it has been able to continue operating during the time that Mongolia closed its borders in response to the COVID-19 outbreak.
“We have capacity with a team in Mongolia and a company called Litho. They’ve been able to drill holes down to 1,500 metres with no issues. In 25 years of experience I haven’t experienced crews that are more talented and have the skill levels to drill some of these holes. They’ve been amazing and provided very cost-effective exploration.”
Xanadu completed a scoping study for the open pit segment of the Kharmagtai project in April 2019, which was an important step in depicting a viable 10-year open cut project with a low strip ratio, along with a healthy NPV and IRR. This undertaking will provide the basis for something special, according to Stewart.
“The rationale of the scoping study was purely to show that we already have a project and now can take on a lot more risk as we try to make this into a Tier 1 asset. At the time of the study, the resource was only a quarter drilled, so the scoping study has essentially de-risked our expansion drilling.”
Throughout the rest of the year, Xanadu will continue to progress and fund exploration drilling at Kharmagtai, which is located approximately 265 km West of the Red Mountain project. In Mid-May, the company reported that exploration activities had commenced at Red Mountain in conjunction with JOGMEC.
Teaming up with JOGMEC
The on-ground programme has been designed to collect baseline data over the large district to prepare drill targets, in anticipation of the discovery of another Tier 1 copper-gold porphyry deposit.
Meanwhile, the JV itself will allow JOGMEC to earn up to a 51% beneficial interest in the project by funding up to $7.2 million in exploration expenditure over the next four years.
“While Kharmagtai is the engine room for our growth, this JV will allow us to progress Red Mountain in the background at the same time while protecting dilution of the company,” Stewart says.
“We’re a small company and have our hands on two potential Tier 1 assets in the South Gobi. This is a rare situation that requires a funding solution to help us through and working with a great group like JOGMEC is a way of doing this.”
As an investment destination Mongolia has had a storied history down the years, but its reputation has been unequivocally enhanced by Rio Tinto’s construction of the world-class Oyu Tolgoi copper-gold mine in record time.
Oyu Tolgoi was a landmark development that helped Mongolian authorities grasp the potential of its underexplored copper belts in generating strong tax revenues through further mining projects. “I think mining is now a dominant part of the economy here and Mongolia relies on it.
“There is still a slight perception issue associated with Mongolia but this will change as more mining projects go through. We are happy working with Mongolian stakeholders to develop these projects and I personally feel that working here is easy.”
The next stage
Overall, Stewart is very pleased with Xanadu’s progress in advancing the Kharmagtai and Red Mountain projects during the last 12 months and feels that the next stage for the company will involve bringing in a cornerstone investor for Kharmagtai within the next 18 months.
“However, there is a lot of exploration to do in the meantime and our idea is to really advance Kharmagtai to a Tier 1 asset, and we have a clear and concise strategy to do that. It’s about putting the funding in place now.”