Erdene Resource Development Corporation — Management Reports 2020

May 27, 2020

Letter to Shareholders

ERDENE RESOURCE DEVELOPMENT CORPORATION

May 27, 2020

Dear Fellow Shareholders,

Despite the uncertainty in our world today, we have a tremendous opportunity to generate strong returns for our investors and to make a positive impact within our communities and for our regional and national stakeholders in Mongolia. Our management and directors are deeply invested in the Company and driven to create shareholder value and to improve livelihoods for all stakeholders.

That opportunity is underpinned by an experienced, socially conscious team in the Mongolia exploration and mining industry ( People ); a successful track record of discovery in an underexplored new gold district ( Growth ), and a highly capable team of developers advancing an economically robust, high-grade open-pit mine to production ( Value ). This opportunity is presented in a period of strong fundamentals supporting the gold price. The recent strategic investment by the European Bank for Reconstruction and Development (EBRD) and the long-term support of our loyal shareholders, place us in a favourable position to raise the capital to take advantage of the exciting opportunities in front of us. This is the foundation for the emergence of Mongolia’s premier gold mining company.

Strategic Vision

My strategic vision, as President and CEO, is for Erdene to become Mongolia’s leading hard rock gold producer, developer, and explorer, delivering tangible benefits to all our stakeholders.

Our strategy is designed to maximize near-term value creation and minimize shareholder dilution while advancing clear opportunities for growth. At the Bayan Khundii (Rich Valley) gold deposit, we are completing studies and will soon move to the construction of a project with excellent economics and a relatively simple development pathway, making it an ideal platform for growth in this new gold district. Bayan Khundii is a moderate scale, low capital cost, open-pit mine, with top decile gold grades that will quickly generate cashflow.

We will continue advancing the development pipeline opportunistically until we establish cashflow – at which time we can accelerate the definition of the multitude of opportunities in the district. This includes preparing Altan Nar (Golden Sun) for resource expansion drilling, feasibility and mine development and exploring Khar Mori (Dark Horse) and other prospects to build a robust pipeline of future gold developments in the Khundii Gold District (KGD). With the recent receipt of the Bayan Khundii and Altan Nar mining licenses, valid for up to 70 years, we have the security of tenure on our deposits and prospects. Furthermore, our long operating history in southwest Mongolia and our commitment to local cooperation support our ability to maintain our social license to operate.

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Letter to Shareholders

ERDENE RESOURCE DEVELOPMENT CORPORATION

Khundii Gold District's Rapidly Expanding Gold Resource

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3.0 1,200,000
Inferred M&I
2.6
2.5 2.3 1,000,000
2.0
2.0 1.8 2.1 800,000
M&I
839,000
1.8
1.7
1.5 600,000
Inferred 1.5 751,000
1.0 400,000
318,000
0.5 200,000
291,000 289,000
102,000
186,000
72,000
0.0 0
2015 March 2018 May 2018 Sept 2019 Oct
Grade (g/t) Resource (oz)
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*Note: M&I is Measured and Indicated Resources; for details of the current (2019) resource categorization, please refer to “Khundii Gold Project NI 43-101 Technical Report”, December 4, 2019, authored by Ms. M Phifer, Messrs. C. Norton, J. Clark, A Kelly, H. Ghaffari, M. Horan and M. Fawcett.

People and Culture

In every business, people make the difference between success and failure. Erdene’s people are the reason we discovered the KGD and its multitude of deposits and prospects. Our team performs with professionalism, honesty, and respect, and our corporate culture has deep roots and reliable continuity of personnel. Our people work diligently to achieve business results, and at the same time, raise the bar on corporate responsibility to make a positive difference locally. This approach has built the trust and support of stakeholders necessary for business success. We strive to make the best decisions based on a fair assessment of investor returns, shared stakeholder benefits, and proactive risk management.

Our team has developed new competencies over the past year as the Company has focused on the Bayan Khundii transition to production through an integrated project management approach. Our original team, with strengths in exploration, community relations, government affairs and corporate management, has been complemented by individuals with Mongolian and international mine building and operating experience. Our team is managing an experienced group of consultants for the technical studies, construction readiness and permitting required to develop the initial Bayan Khundii gold mine in the KGD.

Our management team is supported by our Board’s Technical Committee, chaired by director Hedley Widdup. Hedley brings nearly 20 years of mining industry experience, working as a geologist at several large Australian mines and, more recently, as an investment manager at Lion Selection Group, a Melbourne-based mining investment fund. He is joined on the Technical Committee by David Mosher, former President and CEO of High River Gold Mines, which

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ERDENE RESOURCE DEVELOPMENT CORPORATION

developed and operated gold mines in Canada, Burkina Faso, and Russia, and Kenneth MacDonald, a mining executive with over 40 years of experience.

Erdene also benefits from its strong Board of Directors, which, in addition to Hedley, David and Kenneth, includes Cameron McRae, the past President of Oyu Tolgoi, where he led the construction and start-up of the US$6 billion copper-gold mine in Mongolia, Dr. Anna Biolik, Canada’s first ambassador to Mongolia, Layton Croft, a mining executive with over 25 years of Mongolian experience, and John Byrne, seasoned finance and business professional. This group, as well as the Canadian and Mongolian management teams, have the skills to realize Erdene’s strategic vision of turning our discovery into a profitable mine while continuing to develop new high-value assets in the KGD.

Social Licence

Erdene’s goal is to create value for all stakeholders through the discovery and development of resources in Mongolia. We are mindful of our economic, social, and environmental impacts, and we are committed to sustainable development. Our cooperation programs at the local and provincial levels focus on improving livelihoods, education, and public health, including our annual scholarship program. Our deep relationships and maturing partnerships with community stakeholders serve to build and maintain our social license to operate, a top priority as we proceed towards mine construction and production and continue with exploration.

We recently completed an Environmental and Social Impact Assessment (ESIA) of Bayan Khundii, led by Sustainability East Asia LLC. Given our commitment to industry-leading, fit-for-purpose mitigation and operations management, the benefits of the project are expected to outweigh its anticipated residual impacts from the operations. The Mongolian statutory Detailed Environmental Impact Assessment (DEIA) for Bayan Khundii, built upon the ESIA, is largely complete in advance of the public consultation. The ESIA will be available for public consultation in Mongolia over the next two months.

We have also continued our partnership with the University of British Columbia (UBC), under the leadership of Dr. Nadja Kunz and Dr. Jocelyn Fraser. In late 2019, UBC was awarded a competitive grant for research studying local procurement practices in greenfield mining projects, partnering with ERD. Erdene is committed to making a difference in the communities closest to our site and leveraging UBC’s research to maximize our local purchases.

Our efforts to share value led to the first cross-listing of a public company in Mongolia, attracting over 1,000 Mongolian retail investors. As part of this listing, every citizen living near the development was granted an ownership position in the Company. We have been consistently recognized for our efforts, including being awarded “Exploration Company of the Year” at Mines and Money Asia in 2018 and being recognized as the “Leading Geological Company During the Past Five Years” by the Mongolian Ministry of Mining and Heavy Industry in 2019. Personally, I was extremely humbled to receive the “Polar Star Award” from the Mongolian Government in 2019, the highest state honour that can be awarded to a non-citizen of Mongolia.

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Letter to Shareholders

ERDENE RESOURCE DEVELOPMENT CORPORATION

Value

We began 2019 with the finalization of the Preliminary Economic Assessment (PEA) study for the Khundii Gold Project, prepared by RPM Global. Based on the PEA’s robust results, we proceeded immediately to a Pre-Feasibility Study (PFS) led by Tetra-Tech Inc., which included an updated PEA for Altan Nar, the outcomes of which were equally compelling.

Our plans for the initial development of the KGD envision a high-grade, open-pit mine beginning at the surface at Bayan Khundii before expanding northward into adjacent zones. This development includes conventional crushing, grinding and separation through a Carbon in Pulp (CIP) plant at 1,800 tonnes per day (600,000 tonnes per annum). We will produce a significant amount of gold, forecast to average at least 60,000 ounces per year.

Highlights from the PFS are presented below:

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Reference: “Khundii Gold Project NI 43-101 Technical Report”, December 4, 2019, authored by Ms. M Phifer, Messrs. C. Norton, J. Clark, A Kelly, H. Ghaffari, M. Horan and M. Fawcett.

The high grade of the ore mill feed, averaging 3.7 g/t gold, enables a relatively small plant to produce a proportionally large gold output. According to our analysis, Bayan Khundii ore grade is three times the average grade for open-pit mines around the world, meaning lower comparative capital and operating costs.

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Letter to Shareholders

ERDENE RESOURCE DEVELOPMENT CORPORATION

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Gold Grade (g/t)
7.00
6.00
5.00
4.00 Bayan Khundii World average grade
3.00 deposit average for open pit gold
LOM head grade [2] mines [1]
2.00 3.73 g/t 1.03 g/t
1.00
-
1. Source: Wood MacKenzie Global Gold Mine Cost database for open pit gold mines, August 2018.
2. Refer to Erdene’s news release dated October 21, 2019 for additional information on the Pre-Feasibility Study.
ERDENE
Koka Gounkoto Olimpiada Tanjianshan Fekola Ariab Nzema El Limon-Guajes New Liberty Buzwagi Asanko - Obotan Namoya Sukhaybarat Thunderbox Youga Iduapriem Runruno Simberi Merian Creston Mascota Belaya Gora Malartic Karma Copler Sadiola Gold Mountain Kalgold (Goldridge) Veladero Bald Mountain La Zanja Shewushan La Herradura Round Mountain Antas
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The initial pit at Bayan Khundii will be excavated to approximately 150 metres by year seven, with an approximate stripping ratio of 10:1. This pit contains 3.5 million tonnes (Mt) of mineral reserves (1.1 Mt Proven, 2.4 Mt Probable) with an average grade of 3.7 g/t gold (4.4 g/t gold Proven, 3.4 g/t gold Probable), equating to 422,000 ounces of contained gold (165,000 Proven, 256,00 Probable) that will be processed at a recovery rate of more than 91%, based on studies completed to date.

In December 2019, we launched the Bankable Feasibility Study (BFS) and Front-End Engineering and Design (FEED) work simultaneously for Bayan Khundii, and we plan to announce the BFS results in mid-2020.

Once the BFS is complete, the permitting process will continue, and the process of securing project finance will begin in earnest. The project finance structure is an important element in protecting shareholder value. The process is now being formalized with the expected appointment of financing advisors before BFS delivery. We are estimating 18 months from the delivery of BFS and commencement of earthworks to plant commissioning, assuming permitting and project finance proceeds as expected.

The KGD’s proximity to China provides cost and delivery advantages, resulting in expected lower capital expenditures. Additionally, Mongolia has a growing contract mining market. Several vendors have proposed to supply electricity under a power purchase agreement, shifting potential capital costs into operating costs and allowing Erdene to focus on its core business – delivering first gold from BK while advancing growth opportunities in the surrounding district.

On the labour front, Mongolia has almost two decades of international standard experience in the hard rock mining industry, leading to a large pool of experienced potential employees. We believe our corporate culture and our attention to providing a people-centric work environment, from our planned recreational facilities in our accommodation village through to the safety culture we employ, will attract the premier segment of the Mongolian mining labour force.

As noted above, in August 2019, we received the Bayan Khundii mining license, and in April 2020, the Altan Nar mining license. Mongolian mining licenses are valid for an initial 30-year term, with provisions to renew for two additional

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20-year terms, providing security of tenure. We have also registered water reserves with flow rates sufficient to supply the processing plant and obtained land use permits for the construction of all infrastructure.

Growth

While we are rapidly developing Bayan Khundii, we continue to explore the broader KGD to leverage our first-mover advantage. The opportunity in front of us is the result of more than a decade of grassroots exploration in southwestern Mongolia. We targeted this area, which had received no previous systematic modern exploration, after investing significant time and resources across Mongolia, including east of the KGD, where the Company holds a mining licence on its large Zuun Mod Molybdenum-Copper deposit. The area hosts the full spectrum of arc-related base and precious metal systems, including copper-molybdenum porphyries, intermediate sulphidation/carbonate base metal gold deposits, and low sulphidation epithermal gold and gold-silver systems. The initial discovery developed from identifying satellite imagery based anomalies and follow up systematic regional exploration, which led to discovery drill holes and the first established resources in the KGD at our Altan Nar deposit. This was followed by the discovery of Bayan Khundii, and the recent identification of the Dark Horse (Khar Mori) gold prospect.

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Our 2019 infill drill program at Bayan Khundii included some of our best intersects to date including, 112 metres averaging 5.9 g/t gold, including 8 metres of 45 g/t gold and 1 metre intervals of 81 g/t gold, 95 g/t gold and 129 g/t gold. Step-out drilling during this program extended the mineralized zone by 350 metres from the pit limits in the PFS, demonstrating the potential to expand the resources following commissioning. In addition, drilling indicated a number of discreet, shallow, high-grade veins. Although these veins are not expected to be material to the overall volume of resources, mining these could prove valuable in the initial production phase. These veins will receive additional drilling prior to mining to fully define opportunities for higher grade feed material in the initial mining phase.

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Letter to Shareholders

ERDENE RESOURCE DEVELOPMENT CORPORATION

Altan Nar, which received limited exploration over the past two years as we focused on Bayan Khundii technical studies, was the target of our Q4 2019 Altan Nar exploration program. Highlights of this program included 45.7 g/t gold, 93.4 g/t silver, 1.54% lead and 3.40% zinc over 7 metres beginning at approximately 70 metres vertical depth, all within 23 metres grading 17 g/t gold. The current Altan Nar deposit provides significant optionality for the BK gold development with over 300,000 ounces of indicated resources at 2 g/t gold located in shallow deposits from which a significant portion could be delivered as future feed for the BK plant, 16 kilometres south.

We also completed a successful surface program on under-explored portions of the Khundii mining license in late 2019. As a result, we discovered the Dark Horse gold prospect, a 1.5 by 2 kilometre area connected to the adjacent Altan Arrow gold prospect. Dark Horse is approximately 3.5 kilometres north of Bayan Khundii and displays many of the same characteristics of the Bayan Khundii deposit – similar geologic and structural setting, white mica alteration, and high-grade gold-bearing quartz-adularia veins as well as spatially associated granitoid intrusives and tourmaline alteration. After collecting a 32.9 g/t gold rock chip sample hosted by massive tourmaline cut by quartz stockwork veins at Dark Horse in Q4 2019, follow-up geologic mapping and geochemical rock chip and soil sampling identified multiple samples grading greater than 5 g/t gold, including an 87.8 g/t gold rock chip sample hosted within quartz-adularia veins. The only drilling in the vicinity were two holes, approximately 300 metres northwest, which intersected the highest grades in the area – two meters each of 23 g/t gold and 70 g/t gold.

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Figure Reference: ERD press release “Erdene Intersects 23 metres of 17 g/t Gold at Altan Nar and Expands New Dark Horse (Khar Mori) Gold Prospect on Khundii License”, February 4, 2020.

In early 2020 we commenced independent compilation, modelling, and interpretation work on both Dark Horse and Altan Nar and are currently finalizing plans for 2020 exploration and future drilling.

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Letter to Shareholders

ERDENE RESOURCE DEVELOPMENT CORPORATION

We are in a unique position, controlling a 100% interest in high-grade, near-surface gold deposits in an emerging greenfield district. However, even at our flagship KGD, drilling has been limited to approximately 150-metre depths. Given the relatively limited work to date, the degree of success is compelling and demonstrates the high probability of further discovery. Mongolia is known as the land of the blue sky!

Financial Position and Markets

To finance our work and the achievements described above, we raised C$12 million over the past year. The highlight was the strategic US$5 million convertible loan investment by the EBRD. The EBRD is the largest foreign direct investor in the country, having committed almost €2 billion to projects in Mongolia over the past two decades. We view the EBRD’s investment in Erdene as an endorsement of our team, the economic viability of Bayan Khundii and the entire KGD, and our approach to social and environmental performance. Additionally, we raised approximately C$6 million through private placements, largely sourced from long-term shareholders of the Company, including management and directors. We have a strong and stable base of shareholders who support our evolution from explorer to developer and into a gold miner.

Funds raised over the past year have been used for the Bayan Khundii PEA, PFS and BFS and associated drilling and the repurchase of a 1% net smelter return royalty from Sandstorm Gold Limited that closed in April 2019. Funds on hand will support us through the delivery of the BFS. We have begun strategic discussions on Bayan Khundii project finance and given robust economics and the relative simplicity of the development, we are optimistic that we will be able to quickly arrange the required financing.

Over the past several months, the gold sector has witnessed a significant increase in investor interest and a corresponding rise in gold prices. Many economists have issued bullish price projections in response to COVID-19 fiscal stimulus. The Bayan Khundii Gold Project is highly levered to gold prices, with each US$100/oz change in gold price translating into a US$24 million shift in project value, based on the PFS model.

Summary

In recent years our Company has fulfilled the first phase of our strategic vision – the discovery of large, high-grade precious metal deposits in Mongolia’s underexplored southwestern region. We are now successfully advancing into the next phase of our vision – the development of a profitable gold mine.

Over the past 12 months, Erdene has announced the results of two major economic studies and secured key permits for building and operating a mine at Bayan Khundii. We returned some of our best exploration results to date at Altan Nar and discovered a high-potential prospect in the KGD at Dark Horse. We also secured a strategic investment from the EBRD, and we further strengthened our mutually beneficial relationships and social license to operate with local, regional and national stakeholders. We are well positioned to become Mongolia’s leading hard rock gold producer, developer and explorer.

Near-term, Bayan Khundii is our catalyst for shareholder and stakeholder value creation within the KGD. Bayan Khundii will become a scalable, high-grade gold mine utilizing conventional processing, with a forecasted high return on investment. This approach minimizes operational and financial risks, protects current shareholder capital, and is expected to provide near-term cash flows to reinvest in further exploration, acquisition and strategic growth. We have a tremendous opportunity to create value, and I look forward to what the next year will bring as we move towards first gold and new discoveries.

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Letter to Shareholders

ERDENE RESOURCE DEVELOPMENT CORPORATION

Despite our success over the past year, we, like the entire world, have been impacted by COVID-19. In January, we adopted protective measures to safeguard our staff, stakeholders, and operations in recognition of the emerging threat that soon became a global pandemic. At the time, no one could have anticipated the unprecedented social and economic disruptions that COVID-19 would have on all of us. However, the Government of Mongolia has taken a proactive approach in managing the pandemic, allowing us to remain largely on track for our delivery of the Bayan Khundii BFS in mid-2020. In my native Nova Scotia, the situation has been further compounded by other tragedies that have impacted the lives of many and amplified the importance and sacrifice of those employed in the health care, policing, and military professions. On behalf of our management and directors, I would like to recognize the importance and sacrifices of our front line workers, and thank them for the effort they make to allow the rest of us to safely go about our work and carry on in our daily lives.

Sincerely,

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Peter C. Akerley President and CEO May 27, 2020

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Letter to Shareholders

ERDENE RESOURCE DEVELOPMENT CORPORATION

Qualified Person

Peter Dalton, P.Geo. (Nova Scotia), Senior Geologist for Erdene, is the Qualified Person as that term is defined in National Instrument 43-101 and has reviewed and approved the technical information contained in this letter.

Forward-Looking Information

Certain information regarding Erdene contained in this letter may constitute forward-looking information within the meaning of applicable securities laws. Forward-looking information may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other statements that are not statements of fact, including statements regarding the announcement of the results of the Bankable Feasibility Study, plans for future exploration and development work on Erdene’s properties, project financing for Bayan Khundii, and projected gold prices. Although Erdene believes that the expectations reflected in such forward-looking information are reasonable, it can give no assurance that such expectations will prove to have been correct. Erdene cautions that actual performance will be affected by several factors, most of which are beyond its control, and that future events and results may vary substantially from what Erdene currently foresees. Factors that could cause actual results to differ materially from those in forward-looking information include potential impacts of COVID-19 on Erdene’s operations, ability to obtain required third party approvals, market prices, exploitation and exploration results, continued availability of capital and financing and general economic, market or business conditions. The forward-looking information in this letter is expressly qualified in its entirety by this cautionary statement. The information contained herein is stated as of the date of this letter and is subject to change after that date. Erdene does not assume the obligation to revise or update this forward-looking information, except as may be required under applicable securities laws.

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