Xanadu on the edge of the new copper-gold frontier in Mongolia

Geologist and mining entrepreneur Robert Friedland has a reputation for going where no human would go in search of mineral resources – a strategy that has paid him billions of dollars over the years. In the early 2000s, his team discovered the Oyu Tolgoi copper-gold deposit in Mongolia’s Gobi Desert, which is of biblical proportions. The discovery would eventually lead to the largest financial venture ever contemplated in Mongolia’s history, and some forecasts suggest over half a billion tons of copper will be produced annually by the middle of the decade.

Now owned and operated by mining giant Rio Tinto, the Oyu Tolgoi mine has become a symbol of Mongolia’s potential as a mineral-rich province, and just like the proverbial orb of light that attracts the moths, Oyu Tolgoi has a group small beacon of hope has drawn to the region in search of its sister deposit, which many believe still lurks somewhere in the Mongolian desert.

One company that has established itself in the vanguard of this group of hopefuls is Xanadu Mines, which tried to create its own legacy in the South Gobi desert back in 2016. The company discovered the significant Kharmagtai copper-gold deposit just two short years later, which today taunts the market with its potential in a region capable of brewing deposits like Oyu Tolgoi. Geologically, Xanadu’s Kharmagtai discovery is just a good tennis ball throw – or 120 km – northwest of Rio’s Oyu Tolgoi. In particular, the Company says that Kharmagtai is still open along strike and at depth, which is notable as it already has a resource of 1.1 billion tonnes containing a whopping 3 million tonnes of copper and 8 million tonnes of gold.

A preliminary scoping study by the PEA states that it is supplying a whopping 50,000 tons of copper per year and a company producing 110,000 ounces of gold per year to start and wait…for at least 30 years.

The Kharmagtai deposit is one of the largest undeveloped copper deposits listed on the ASX, and potentially one of the largest in the world, as commodities equity research firm MST Access states in a recent research report:

“XAM is emerging as a potentially significant global copper and gold producer and the leadership team has extensive experience in the mining industry. The underlying commodity exposure offers a very favorable outlook in our view.”

According to MST, Kharmagtai is becoming an extremely low-cost, long-life mine. The Company says it is targeting an initial all-in-sustaining cost of $1.02 per pound of copper for the first five years and the project is likely to cost around $3.4 billion over its originally planned mine life. Spitting out dollars in free cash flow.

Xanadu estimates that it can bring 200,000 tonnes of copper and 500,000 ounces of gold to market in the first five years of production. Thereafter, production is projected to increase to 50ktpa copper and 110ktpa gold, with AISC increasing to approximately US$1.87 per pound for the remaining 25 years of the mine life.

MST Access also suggests some upward exploration, adding, “…Further exploration potential offers probably the greatest opportunity to delineate higher grade components that can increase metal production rates and reduce unit costs for the same mill throughput and provide higher upfront cash flows to further improve project economics.”

Xanadu isn’t fighting for cash either, having attracted interest from Chinese copper giant Zijin Mining Group. The parties have formed a joint venture to fund the next steps to bring the Kharmagtai project to fruition.

In the first phase of financing, Zijin took a 9.99 percent stake in the company. With FIRB and shareholder approval, Xanadu now awaits Chinese government approval to trigger the second phase financing, bringing Xanadu $7.2 million to the coffers and increasing Zijin’s stake in the company to 19 .99 percent will increase.

In phase three of the funding, Zijin will part with an additional $35 million.

Final approval from the People’s Republic of China is now expected any day, which will trigger phase two and then phase three within ten days of approval.

Zijin’s investment also provides Xanadu with a strategic partner with significant experience in the mining industry and the resources to bring a project of this size online. This is a big vote of confidence in Kharmagtai and a testament to its potential.

MST Access drew attention to this relationship in its report, which was about Zijin, the sixth largest global miner in the world; “This partner not only brings the financial capability and technical expertise to take a project like this to the next phase, but also the logistical connection to the end markets that are “critical to successfully moving a porphyry project into production bring to”.

With funding secured, Xanadu will now invest heavily in further exploration in the South Gobi Desert and seek to develop additional targets around Kharmagtai, while also advancing its 100% owned Red Mountain copper-gold project, also in Mongolia, which is still under construction is an early stage.

When Phase 3 funding finally moves in, Xanadu will ramp up Kharmagtai by completing a pre-feasibility study due in 2024.

Approximately 30,000m of infill drilling is scheduled to be completed at Kharmagtai this year and the resulting data will feed into an initial ore reserve to be delivered when the PFS is complete.

Kharmagtai is one of the few large, long-lived, low-cost copper deposits in the world that can be developed within 5 years, putting Xanadu in the front row seat as the world begins an inevitable battle for copper to keep up with the electric vehicle juggernaut.

The declining trend in copper discoveries, lower copper ore grades and the lack of new projects to replace current production levels have attracted the attention of industry experts. S&P Global is just one to predict that there will be a copper deficit starting in 2026 that will last at least until 2030.

S&P Global analysis underscores the importance of Kharmagtai as one of the few global near-term producers with the potential for massive scale.

While the region of the South Gobi Desert that hosts Xanadu’s Kharmagtai Project was initially thought to be largely without supporting infrastructure in the early days of the Friedland discovery, this appears to no longer be the case. There is now a railway line just 12km from the project, power lines within sight and nearby transport links to the Mongolian-Chinese border.

In an interview with MST Access, Xanadu’s Vice President of Exploration, Andrew Stewart, highlighted the untapped potential of the South Gobi Desert and emphasized that Xanadu is just beginning.

Now we have put together a project [that] really lets us take our gloves off when it comes to exploration as we have no downside risk…now we can really pursue the discoveries…we are looking for a higher, hotter part of the system. We know that the grade increases with depth.

Stewart added that with some cash in the bank and a major mining partner, there are still about 40km to explore at Kharmagtai and the other upcoming Red Mountain project. He says Xanadu can focus on “poke holes in the ground” as it works to build more prospects in the region.

The PFS is scheduled to last 18 months and initial on-site work is planned for 2025. If all goes according to plan, the first batch of copper concentrate could hit the market by 2027, according to management.

There is always a slight pang of excitement that involuntarily stings one’s stomach when a significant discovery is made in the vicinity of another existing discovery that is acknowledged to be of biblical proportions.

It remains to be seen where Kharmagtai will end up as a copper-gold discovery. One thing seems certain though, with a resource already in the billions of tons and an owner that’s pumping in Chinese money and has a penchant for spending it in the ground, this is unlikely to be among the small ones.

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