Quarterly Report Period Ended September 30, 2006
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
From: November 14, 2006
IVANHOE MINES LTD.
(Translation of Registrants Name into English)
Suite 654 999 CANADA PLACE, VANCOUVER, BRITISH COLUMBIA V6C 3E1
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file annual reports under cover of
Form 20-F or Form 40-F.)
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Form 20-F-
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o
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Form 40-F-
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þ |
(Indicate by check mark whether the registrant by furnishing the information contained in this form
is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934.)
(If Yes is marked, indicate below the file number assigned to the registrant in connection with
Rule 12g3-2(b): 82- .)
Enclosed:
Third quarter Financial Statements, Notes and Managements Discussion & Analysis to September 30,
2006
CFO Certification
CEO Certification
Press release.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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IVANHOE MINES LTD.
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Date: November 14, 2006 |
By: |
/s/ Beverly A. Bartlett
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BEVERLY A. BARTLETT |
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Vice President & Corporate Secretary |
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THIRD QUARTER REPORT
SEPTEMBER 30, 2006
(Prepared in accordance with United States of America
generally accepted accounting principles)
TABLE OF CONTENTS
ITEM 1. Financial Statements
Unaudited Consolidated Balance Sheets at September 30, 2006 and December 31, 2005
Unaudited Consolidated Statements of Operations for the Three and Nine Month Periods
ended September 30, 2006 and 2005
Unaudited Consolidated Statement of Shareholders Equity for the Nine Month Period
ended September 30, 2006
Unaudited Consolidated Statements of Cash Flows for the Three and Nine Month Periods
ended September 30, 2006 and 2005
Notes to the Unaudited Consolidated Financial Statements
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ITEM 2. |
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Managements Discussion and Analysis of Financial Condition and
Results of Operations |
IVANHOE MINES LTD.
Consolidated
Balance Sheets
(Stated in thousands of U.S. dollars)
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September 30, |
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December 31, |
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2006 |
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2005 |
(Unaudited) |
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ASSETS |
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CURRENT |
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Cash and cash equivalents |
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$ |
131,568 |
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$ |
101,681 |
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Accounts receivable |
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19,606 |
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33,350 |
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Inventories |
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4,807 |
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3,547 |
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Prepaid expenses |
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8,085 |
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6,353 |
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Other current assets |
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286 |
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3,286 |
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TOTAL CURRENT ASSETS |
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164,352 |
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148,217 |
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INVESTMENT IN JOINT VENTURE (Note 3) |
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150,825 |
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139,874 |
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LONG-TERM INVESTMENTS (Note 4) |
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27,377 |
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18,417 |
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PROPERTY, PLANT AND EQUIPMENT |
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96,016 |
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85,706 |
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DEFERRED INCOME TAXES |
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61 |
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171 |
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OTHER ASSETS |
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4,221 |
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4,394 |
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TOTAL ASSETS |
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$ |
442,852 |
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$ |
396,779 |
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LIABILITIES |
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CURRENT |
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Accounts payable and accrued liabilities |
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$ |
24,039 |
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$ |
20,594 |
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TOTAL CURRENT LIABILITIES |
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24,039 |
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20,594 |
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LOANS PAYABLE TO RELATED PARTIES (Note 5) |
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5,088 |
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5,088 |
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DEFERRED INCOME TAXES |
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323 |
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315 |
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ASSET RETIREMENT OBLIGATIONS |
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6,285 |
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6,231 |
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TOTAL LIABILITIES |
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35,735 |
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32,228 |
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MINORITY INTERESTS (Note 6) |
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8,928 |
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SHAREHOLDERS EQUITY |
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SHARE CAPITAL (Note 7) |
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Authorized |
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Unlimited number of preferred shares without par value |
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Unlimited number of common shares without par value |
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Issued and outstanding |
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335,660,037 (2005 - 315,900,668) common shares |
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1,159,741 |
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994,442 |
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ADDITIONAL PAID-IN CAPITAL |
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44,113 |
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25,174 |
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ACCUMULATED OTHER COMPREHENSIVE INCOME |
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3,902 |
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6,711 |
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DEFICIT |
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(800,639 |
) |
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(670,704 |
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TOTAL SHAREHOLDERS EQUITY |
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407,117 |
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355,623 |
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TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS EQUITY |
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$ |
442,852 |
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$ |
396,779 |
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APPROVED BY THE BOARD:
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/s/ John Weatherall
Director
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/s/ Kjeld Thygesen
Director |
The accompanying notes are an integral part of these consolidated interim financial
statements.
IVANHOE MINES LTD.
Consolidated Statements of Operations
(Stated in thousands of U.S. dollars, except for share and per share amounts)
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Three months ended September 30, |
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Nine months ended September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(Unaudited) |
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OPERATING EXPENSES |
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Exploration |
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$ |
(65,111 |
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$ |
(28,884 |
) |
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$ |
(131,962 |
) |
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$ |
(87,119 |
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General and administrative |
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(9,094 |
) |
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(7,263 |
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(29,912 |
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(17,975 |
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Accretion |
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(103 |
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(89 |
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(307 |
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(266 |
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Depreciation |
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(1,098 |
) |
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(485 |
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(3,241 |
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(1,704 |
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Mining property care and maintenance |
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(1,091 |
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(481 |
) |
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(2,791 |
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(2,232 |
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OPERATING LOSS |
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(76,497 |
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(37,202 |
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(168,213 |
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(109,296 |
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OTHER INCOME (EXPENSES) |
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Share of income from joint venture (Note 3) |
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8,991 |
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7,965 |
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11,047 |
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23,477 |
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Interest income |
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1,653 |
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1,293 |
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4,343 |
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2,556 |
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Foreign exchange (losses) gains |
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(371 |
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7,111 |
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4,148 |
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8,234 |
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Share of loss of significantly influenced investees |
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(673 |
) |
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(383 |
) |
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(673 |
) |
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(1,004 |
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Dilution gain on investment in significantly influenced investee |
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72 |
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72 |
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Gain on sale of other mineral property rights |
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2,724 |
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Gain on sale of long-term investments |
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115 |
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Write-down of carrying value of long-term investment (Note 4 (c)) |
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(1,000 |
) |
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(1,000 |
) |
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(1,438 |
) |
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LOSS BEFORE TAXES AND OTHER ITEMS |
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(67,825 |
) |
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(21,216 |
) |
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(147,552 |
) |
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(77,356 |
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Provision for income taxes |
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(159 |
) |
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(82 |
) |
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(609 |
) |
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(212 |
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Minority interests (Note 6) |
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25 |
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|
657 |
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3,369 |
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1,658 |
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NET LOSS FROM CONTINUING OPERATIONS |
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(67,959 |
) |
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(20,641 |
) |
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(144,792 |
) |
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(75,910 |
) |
NET INCOME AND GAIN ON SALE FROM
DISCONTINUED OPERATIONS (Note 2) |
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1,514 |
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6,378 |
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14,857 |
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27,992 |
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NET LOSS |
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$ |
(66,445 |
) |
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$ |
(14,263 |
) |
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$ |
(129,935 |
) |
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$ |
(47,918 |
) |
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BASIC AND DILUTED (LOSS) EARNINGS PER SHARE FROM
CONTINUING OPERATIONS |
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$ |
(0.20 |
) |
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$ |
(0.07 |
) |
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$ |
(0.44 |
) |
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$ |
(0.25 |
) |
DISCONTINUED OPERATIONS |
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0.00 |
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0.02 |
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0.04 |
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0.09 |
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$ |
(0.20 |
) |
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$ |
(0.05 |
) |
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$ |
(0.40 |
) |
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$ |
(0.16 |
) |
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000s) |
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335,336 |
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314,011 |
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327,326 |
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302,006 |
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The accompanying notes are an integral part of these consolidated interim financial
statements
IVANHOE MINES LTD.
Consolidated Statement of Shareholders Equity
(Stated in thousands of U.S. dollars, except for share amounts)
(Unaudited)
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Accumulated |
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Share Capital |
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Additional |
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Other |
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Number |
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Paid-In |
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Comprehensive |
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of Shares |
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Amount |
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Capital |
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Income |
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Deficit |
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Total |
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Balances, December 31, 2005 |
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315,900,668 |
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|
$ |
994,442 |
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$ |
25,174 |
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$ |
6,711 |
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$ |
(670,704 |
) |
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$ |
355,623 |
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Net loss |
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(129,935 |
) |
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(129,935 |
) |
Other comprehensive loss (unrealized loss on
available-for-sale securities) (Note 4) |
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(2,809 |
) |
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(2,809 |
) |
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Comprehensive loss |
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(132,744 |
) |
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Shares issued for: |
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Private placement, net of issue costs of $8,162 |
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18,400,000 |
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158,993 |
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158,993 |
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Exercise of stock options |
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1,327,493 |
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6,089 |
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(2,031 |
) |
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4,058 |
|
Bonus shares |
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16,666 |
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|
97 |
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97 |
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Share purchase plan |
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15,210 |
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120 |
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120 |
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Dilution gain on issuance of shares by a subsidiary |
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4,439 |
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4,439 |
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Stock compensation charged to operations |
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16,531 |
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|
16,531 |
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Balances, September 30, 2006 |
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335,660,037 |
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$ |
1,159,741 |
|
|
$ |
44,113 |
|
|
$ |
3,902 |
|
|
$ |
(800,639 |
) |
|
$ |
407,117 |
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|
The accompanying notes are an integral part of these consolidated interim financial
statement
IVANHOE MINES LTD.
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
|
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|
2006 |
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|
2005 |
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|
2006 |
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|
2005 |
|
(Unaudited) |
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|
OPERATING ACTIVITIES |
|
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Net loss |
|
$ |
(66,445 |
) |
|
$ |
(14,263 |
) |
|
$ |
(129,935 |
) |
|
$ |
(47,918 |
) |
Items not involving use of cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Depreciation |
|
|
1,098 |
|
|
|
485 |
|
|
|
3,241 |
|
|
|
1,704 |
|
Stock-based compensation |
|
|
2,924 |
|
|
|
2,050 |
|
|
|
16,531 |
|
|
|
5,739 |
|
Bonus shares |
|
|
97 |
|
|
|
|
|
|
|
97 |
|
|
|
|
|
Accretion expense |
|
|
103 |
|
|
|
89 |
|
|
|
307 |
|
|
|
266 |
|
Unrealized foreign exchange losses (gains) |
|
|
377 |
|
|
|
(7,003 |
) |
|
|
(3,805 |
) |
|
|
(8,262 |
) |
Share of income from joint venture, net of cash distribution |
|
|
(8,991 |
) |
|
|
(7,965 |
) |
|
|
(11,047 |
) |
|
|
(13,477 |
) |
Share of loss of significantly influenced investees |
|
|
673 |
|
|
|
383 |
|
|
|
673 |
|
|
|
1,004 |
|
Dilution gain on investment in significantly influenced investee |
|
|
(72 |
) |
|
|
|
|
|
|
(72 |
) |
|
|
|
|
Net income and gain on sale from discontinued operations |
|
|
(1,514 |
) |
|
|
(6,378 |
) |
|
|
(14,857 |
) |
|
|
(27,992 |
) |
Gain on sale of long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115 |
) |
Write-down of carrying value of long-term investments |
|
|
1,000 |
|
|
|
|
|
|
|
1,000 |
|
|
|
1,438 |
|
Gain on sale of other mineral property rights |
|
|
|
|
|
|
|
|
|
|
(2,724 |
) |
|
|
|
|
Deferred income taxes |
|
|
56 |
|
|
|
(8 |
) |
|
|
118 |
|
|
|
(17 |
) |
Minority interests |
|
|
(25 |
) |
|
|
(657 |
) |
|
|
(3,369 |
) |
|
|
(1,658 |
) |
Net change in non-cash operating working capital items (Note 8 (b)) |
|
|
3,752 |
|
|
|
(9,280 |
) |
|
|
(7,967 |
) |
|
|
(9,844 |
) |
|
Cash used in operating activities of continuing operations |
|
|
(66,967 |
) |
|
|
(42,547 |
) |
|
|
(151,809 |
) |
|
|
(99,132 |
) |
Cash provided by operating activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,592 |
|
|
Cash used in operating activities |
|
|
(66,967 |
) |
|
|
(42,547 |
) |
|
|
(151,809 |
) |
|
|
(96,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations |
|
|
|
|
|
|
|
|
|
|
34,674 |
|
|
|
15,000 |
|
Purchase of long-term investments |
|
|
(500 |
) |
|
|
(2,199 |
) |
|
|
(2,451 |
) |
|
|
(6,309 |
) |
Proceeds from sale of other mineral property rights |
|
|
|
|
|
|
|
|
|
|
2,724 |
|
|
|
|
|
Proceeds from sale of long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,539 |
|
Cash reduction on commencement of equity accounting (Note 4 (a)) |
|
|
(4,202 |
) |
|
|
|
|
|
|
(4,202 |
) |
|
|
|
|
Expenditures on property, plant and equipment |
|
|
(7,823 |
) |
|
|
(13,140 |
) |
|
|
(26,559 |
) |
|
|
(22,000 |
) |
Proceeds from (expenditures on) other assets |
|
|
140 |
|
|
|
(660 |
) |
|
|
217 |
|
|
|
(1,898 |
) |
Other |
|
|
5 |
|
|
|
|
|
|
|
95 |
|
|
|
(2,078 |
) |
|
Cash (used in) provided by investing activities of continuing operations |
|
|
(12,380 |
) |
|
|
(15,999 |
) |
|
|
4,498 |
|
|
|
(12,746 |
) |
Cash used in investing activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(502 |
) |
|
Cash (used in) provided by investing activities |
|
|
(12,380 |
) |
|
|
(15,999 |
) |
|
|
4,498 |
|
|
|
(13,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of share capital |
|
|
630 |
|
|
|
328 |
|
|
|
163,171 |
|
|
|
121,609 |
|
Minority interests investment in subsidiaries |
|
|
8,884 |
|
|
|
1,000 |
|
|
|
10,309 |
|
|
|
1,000 |
|
|
Cash provided by financing activities of continuing operations |
|
|
9,514 |
|
|
|
1,328 |
|
|
|
173,480 |
|
|
|
122,609 |
|
Cash used in financing activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37 |
) |
|
Cash provided by financing activities |
|
|
9,514 |
|
|
|
1,328 |
|
|
|
173,480 |
|
|
|
122,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
(381 |
) |
|
|
6,987 |
|
|
|
3,718 |
|
|
|
8,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH INFLOW |
|
|
(70,214 |
) |
|
|
(50,231 |
) |
|
|
29,887 |
|
|
|
21,064 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
201,782 |
|
|
|
183,773 |
|
|
|
101,681 |
|
|
|
112,478 |
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
131,568 |
|
|
$ |
133,542 |
|
|
$ |
131,568 |
|
|
$ |
133,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS IS COMPRISED OF: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash on hand and demand deposits |
|
$ |
43,912 |
|
|
$ |
21,374 |
|
|
$ |
43,912 |
|
|
$ |
21,374 |
|
Short-term money market instruments |
|
|
87,656 |
|
|
|
112,168 |
|
|
|
87,656 |
|
|
|
112,168 |
|
|
|
|
$ |
131,568 |
|
|
$ |
133,542 |
|
|
$ |
131,568 |
|
|
$ |
133,542 |
|
|
Supplementary cash flow information (Note 8)
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
1. |
|
SIGNIFICANT ACCOUNTING POLICIES |
|
(a) |
|
Basis of preparation |
|
|
|
|
These unaudited interim consolidated financial statements have been prepared in
accordance with United States of America generally accepted accounting principles (U.S.
GAAP). The accounting policies followed in preparing these consolidated financial
statements are those used by the Company as set out in the audited financial statements
for the year ended December 31, 2005, except that on January 1, 2006, the Company
adopted the provisions of SFAS No. 123(R), Share-Based Payment, on a modified
prospective basis. The adoption of SFAS No. 123 (R) did not have an impact on the
Companys consolidated financial position and results of operations (Note 7). In the
case of Ivanhoe Mines Ltd. (the Company), U.S. GAAP differs in certain respects from
accounting principles generally accepted in Canada (Canadian GAAP) as explained in
Note 9. |
|
|
|
|
Certain information and note disclosures normally included for annual consolidated
financial statements prepared in accordance with U.S. GAAP have been omitted. These
interim consolidated financial statements should be read together with the Companys
audited financial statements for the year ended December 31, 2005. |
|
|
|
|
In the opinion of management, all adjustments considered necessary (including
reclassifications and normal recurring adjustments) to present fairly the financial
position, results of operations and cash flows at September 30, 2006 and for all periods
presented, have been included in these financial statements. The interim results are
not necessarily indicative of results for the full year ending December 31, 2006, or
future operating periods. For further information, see the Companys annual
consolidated financial statements, including the accounting policies and notes thereto,
included in the Annual Information Form. |
|
|
|
|
The Company operates in a single reportable segment, being exploration and development
of mineral properties. |
|
|
|
|
References to Cdn$ refer to Canadian currency and $ to United States currency. |
|
|
(b) |
|
Principles of consolidation |
|
|
|
|
For purposes of these consolidated financial statements, the Company and its
subsidiaries and joint venture are collectively referred to as Ivanhoe Mines. |
|
|
|
|
Jinshan Gold Mines Inc. (Jinshan) ceased being a subsidiary of the Company in August
2006. From September 1, 2006 it has been accounted for as an equity investment (Note 4
(a)). |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
1. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(c) |
|
Recent accounting pronouncements |
|
|
|
|
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial
Instrumentsan amendment of FASB Statements No. 133 and 140 (SFAS 155). This Statement
amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, and FASB Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS 155 resolves issues addressed
in Statement 133 Implementation Issue No. D1, Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets. This Statement will be effective
for financial instruments acquired or issued by the Company after the beginning of its
2007 fiscal year. The Company expects that the adoption of this Statement will not have
a material effect on its financial condition or results of operations. |
|
|
|
|
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156,
Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140
(SFAS 156). This Statement provides guidance addressing the recognition and measurement
of separately recognized servicing assets and liabilities, common with mortgage
securitization activities, and provides an approach to simplify efforts to obtain hedge
accounting treatment. SFAS 156 is effective after the beginning of an entitys fiscal
year that begins after September 15, 2006. The Company expects that the adoption of this
Statement will have no impact on its financial condition or results of operations. |
|
|
|
|
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). This interpretation clarifies the recognition threshold and
measurement of a tax position taken on a tax return, and requires expanded disclosure
with respect to the uncertainty in income taxes. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the impact, if
any, that adoption of FIN 48 will have on its financial condition or results of
operations. |
|
|
|
|
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157). This Statement defines fair value, establishes
guidelines for measuring fair value and expands disclosures regarding fair value
measurements. SFAS 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting pronouncements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company
expects that adoption of SFAS 157 will not have a material impact on its financial
condition or results of operations. |
|
|
|
|
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108
provides guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality assessment. SAB
108 permits companies to record the cumulative effect of initially applying this
approach in the first fiscal year ending after November 15, 2006 by recording necessary
correcting adjustments to the carrying values of assets and liabilities as of the
beginning of that year with the offsetting adjustment recorded to the opening balance of
retained
earnings. The Company expects that adoption of SAB 108 will not have a material impact
on its financial condition and results of operations. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
2. |
|
DISCONTINUED OPERATIONS |
|
|
|
In February 2005, Ivanhoe Mines disposed of the Savage River Iron Ore Project (the
Project). |
|
|
|
Ivanhoe Mines sold the Project for two initial payments totalling $21.5 million, plus a
series of five contingent, annual payments that commenced on March 31, 2006. The annual
payments are based on the annual iron ore pellet tonnes sold and an escalating price formula
based on the prevailing annual Nibrasco/JSM pellet price. |
|
|
|
To date, Ivanhoe Mines has received $49.7 million in proceeds from the sale of the Project.
The first initial payment of $15.0 million was received in 2005 and the second initial
payment of $6.5 million was received in January 2006. In March 2006, Ivanhoe Mines received
its first contingent annual payment of $28.0 million with an additional $0.2 million
adjustment received in April 2006. This $28.2 million payment included $7.9 million in
contingent income which was recognized in the first quarter of 2006 for tonnes sold during
the quarter. |
|
|
|
At September 30, 2006, Ivanhoe Mines has accrued $6.9 million as receivable in relation to
the tonnes of iron ore sold during the six month period ended September 30, 2006. This
amount will form part of the second contingent annual payment to be received in March 2007. |
|
|
|
The following table presents summarized financial information related to discontinued
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 (1) |
Revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18,031 |
|
Cost of operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,965 |
) |
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203 |
) |
|
OPERATING PROFIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,668 |
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Foreign exchange losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(285 |
) |
|
INCOME BEFORE TAXES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,399 |
|
Recovery of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
NET INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,406 |
|
Contingent income |
|
|
1,514 |
|
|
|
6,378 |
|
|
|
14,857 |
|
|
|
12,319 |
|
Gain on sale of Savage River Project |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,267 |
|
|
NET INCOME AND GAIN ON
SALE FROM DISCONTINUED
OPERATIONS |
|
$ |
1,514 |
|
|
$ |
6,378 |
|
|
$ |
14,857 |
|
|
$ |
27,992 |
|
|
|
|
|
(1) |
|
Net income for the nine month period ended September 30, 2005, includes only two
months of results for the Project as it was sold on February 28, 2005. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
3. |
|
INVESTMENT IN JOINT VENTURE |
|
|
|
Ivanhoe Mines investment in Myanmar Ivanhoe Copper Company Limited (JVCo) (Myanmar)
(50% owned), which is subject to joint control, is accounted for using the equity method. |
|
|
|
During 2006 there have been developments regarding certain circumstances that were reported in
the Companys 2005 annual consolidated financial statements. |
|
|
|
In Myanmar, all air and sea imports and exports require prior approval from the
Myanmar Trade Council. During the third quarter, JVCo obtained the necessary import
permits from the Trade Council for its previously ordered mining equipment. The
equipment arrived at the minesite at the beginning of August 2006 and was commissioned in
September 2006. |
|
|
|
|
During the third quarter, JVCo paid $8.7 million (net $4.4 million to
Ivanhoe Mines) in commercial tax on export sales to the Myanmar tax authorities for tax
claimed retroactively for the period April 2004 to March 31, 2005. Previously, in the
second quarter, JVCo paid $8.1 million (net $4.0 million to Ivanhoe Mines) in commercial
tax for the period January 1, 2003 to March 31, 2004. Both these amounts had been
previously accrued. |
|
|
|
|
At September 30, 2006, JVCos accounts payable balance included $17.3 million (net $8.6
million to Ivanhoe Mines) in commercial tax for the period April 1, 2005 to September 30,
2006. JVCo believes that the tax provisions in the S&K mine joint venture agreement
clearly exempt the mines copper exports from all tax of a commercial tax nature. In
September 2006, JVCo received an unfavourable ruling from the tax authorities on its appeal
regarding the application of this tax for the 2003/2004 tax year. In October 2006, JVCo
filed a second appeal with the tax authorities for the 2003/2004 tax year and filed a first
appeal regarding the application of tax on the 2004/2005 year. |
|
|
|
|
During the second quarter, JVCo increased its provision for income tax for the 2005
and 2006 tax years, which cover the period from April 1, 2004 to September 30, 2006.
JVCo had filed its 2003 and 2004 returns on the basis that it would receive a 50%
exemption on the 30% corporate tax rate; however, this did not occur. This ruling by the
tax authorities is being appealed. Notwithstanding the appeal, JVCo has increased its
accrued income tax payable to reflect this potentially increased tax rate. |
|
|
|
|
During the third quarter, JVCo remitted the previously accrued, $16.6 million (net $8.3
million to Ivanhoe Mines) in income tax for 2004/2005 tax year. At September 2006, JVCos
accounts payable balance included $31.8 million (net $15.9 million to Ivanhoe Mines) in
income tax for the period April 2005 to September 2006. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
3. |
|
INVESTMENT IN JOINT VENTURE(Continued) |
|
|
|
The following tables summarize Ivanhoe Mines 50% share of the financial position of JVCo as
at September 30, 2006 and December 31, 2005 and its share of the results of operations and
cash flows for the three and nine month periods ended September 30, 2006 and 2005. |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Cash and cash equivalents |
|
$ |
42,819 |
|
|
$ |
22,843 |
|
Accounts receivable |
|
|
3,451 |
|
|
|
11,364 |
|
Inventories |
|
|
16,429 |
|
|
|
16,754 |
|
Prepaid expenses |
|
|
2,955 |
|
|
|
1,558 |
|
Property, plant and equipment |
|
|
147,069 |
|
|
|
128,405 |
|
Deferred income tax assets |
|
|
610 |
|
|
|
432 |
|
Other assets |
|
|
1,569 |
|
|
|
1,585 |
|
Accounts payable and accrued liabilities |
|
|
(29,730 |
) |
|
|
(14,784 |
) |
Deferred income tax liabilities |
|
|
(28,700 |
) |
|
|
(11,321 |
) |
Other liabilities |
|
|
(5,647 |
) |
|
|
(16,962 |
) |
|
SHARE OF NET ASSETS OF JOINT VENTURE |
|
$ |
150,825 |
|
|
$ |
139,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue (1) |
|
$ |
18,858 |
|
|
$ |
15,439 |
|
|
$ |
43,941 |
|
|
$ |
46,197 |
|
Cost of operations |
|
|
(3,647 |
) |
|
|
(4,633 |
) |
|
|
(11,988 |
) |
|
|
(12,716 |
) |
Depreciation and depletion |
|
|
(950 |
) |
|
|
(1,401 |
) |
|
|
(3,308 |
) |
|
|
(4,357 |
) |
General and administrative |
|
|
(122 |
) |
|
|
(110 |
) |
|
|
(202 |
) |
|
|
(321 |
) |
Interest expense |
|
|
(75 |
) |
|
|
(129 |
) |
|
|
(226 |
) |
|
|
(421 |
) |
|
OPERATING PROFIT |
|
|
14,064 |
|
|
|
9,166 |
|
|
|
28,217 |
|
|
|
28,382 |
|
Interest income |
|
|
236 |
|
|
|
65 |
|
|
|
682 |
|
|
|
229 |
|
Foreign exchange (losses) gains |
|
|
(601 |
) |
|
|
97 |
|
|
|
(620 |
) |
|
|
(38 |
) |
|
INCOME BEFORE TAXES |
|
|
13,699 |
|
|
|
9,328 |
|
|
|
28,279 |
|
|
|
28,573 |
|
Provision for income taxes |
|
|
(4,708 |
) |
|
|
(1,363 |
) |
|
|
(17,232 |
) |
|
|
(5,096 |
) |
|
SHARE OF INCOME
FROM JOINT VENTURE |
|
$ |
8,991 |
|
|
$ |
7,965 |
|
|
$ |
11,047 |
|
|
$ |
23,477 |
|
|
|
|
|
|
|
(1) |
|
- 2006 revenue is net of commercial tax. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Cash flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From operating activities |
|
$ |
3,577 |
|
|
$ |
10,283 |
|
|
$ |
32,837 |
|
|
$ |
19,270 |
|
For investing activities |
|
|
(2,904 |
) |
|
|
(2,586 |
) |
|
|
(12,861 |
) |
|
|
(4,561 |
) |
For financing activities |
|
|
|
|
|
|
(3,750 |
) |
|
|
|
|
|
|
(7,500 |
) |
|
|
|
$ |
673 |
|
|
$ |
3,947 |
|
|
$ |
19,976 |
|
|
$ |
7,209 |
|
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
December 31, 2005 |
|
|
Equity |
|
Cost/Equity |
|
Unrealized |
|
Fair/Equity |
|
Equity |
|
Cost/Equity |
|
Unrealized |
|
Fair/Equity |
|
|
Interest |
|
Basis |
|
Gain |
|
Value |
|
Interest |
|
Basis |
|
Gain |
|
Value |
Investments in company subject
to significant influence: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinshan Gold Mines Inc. (a) |
|
|
48.6 |
% |
|
$ |
10,318 |
|
|
|
N/a |
|
|
$ |
10,318 |
|
|
|
N/a |
|
|
|
N/a |
|
|
|
N/a |
|
|
|
N/a |
|
|
Investments available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intec Ltd. |
|
|
10.1 |
% |
|
$ |
1,446 |
|
|
$ |
3,804 |
|
|
$ |
5,250 |
|
|
|
12.5 |
% |
|
$ |
1,446 |
|
|
$ |
1,331 |
|
|
$ |
2,777 |
|
Entrée Gold Inc. |
|
|
14.8 |
% |
|
|
10,157 |
|
|
|
(76 |
) |
|
|
10,081 |
|
|
|
15.0 |
% |
|
|
10,157 |
|
|
|
5,380 |
|
|
|
15,537 |
|
Asia Now Resources Corp. |
|
|
2.0 |
% |
|
|
103 |
|
|
|
174 |
|
|
|
277 |
|
|
|
3.1 |
% |
|
|
103 |
|
|
|
|
|
|
|
103 |
|
Redox Diamonds Ltd. (b) |
|
|
14.6 |
% |
|
|
1,451 |
|
|
|
|
|
|
|
1,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind Energy Group Inc. (c) |
|
|
22.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,157 |
|
|
$ |
3,902 |
|
|
$ |
17,059 |
|
|
|
|
|
|
$ |
11,706 |
|
|
$ |
6,711 |
|
|
$ |
18,417 |
|
|
|
|
|
|
|
|
$ |
23,475 |
|
|
$ |
3,902 |
|
|
$ |
27,377 |
|
|
|
|
|
|
$ |
11,706 |
|
|
$ |
6,711 |
|
|
$ |
18,417 |
|
|
|
|
|
|
|
(a) |
|
On August 31, 2006, Jinshan completed a private placement which diluted Ivanhoe
Mines investment in Jinshan to 48.9%. As a result of this transaction, Ivanhoe Mines
ceased consolidating Jinshan on August 31, 2006 and commenced equity accounting for its
investment. During September 2006, Ivanhoe Mines recorded a $0.7 million equity loss on
this investment. |
|
|
(b) |
|
During the three month period ended June 30, 2006, Ivanhoe Mines purchased 8.3
million units of Redox Diamonds Ltd. (Redox) at a cost of $1.5 million. Each unit
consists of one Redox common share and one Redox share option exercisable until April
2008 to purchase an additional Redox common share at a price ranging from Cdn$0.30 to
Cdn$0.35. |
|
|
(c) |
|
During the nine month period ended September 30, 2006, Ivanhoe Mines purchased 1.0
million common shares of Wind Energy Group Inc. (Wind Energy), in two $0.5 million
tranches, at a cost of $1.0 million. In September 2006, Ivanhoe Mines recorded an
impairment provision of $1.0 million against this investment based on an assessment of
the underlying book value of Wind Energys net assets. |
5. |
|
LOANS PAYABLE TO RELATED PARTIES |
|
|
|
These loans are payable to the Chairman of the Company or a company controlled by him.
They are non-interest bearing, unsecured and repayable in U.S. dollars. Repayment of these
loans has been postponed until Ivanhoe Mines receives an aggregate of $111.1 million from the
sale of the Savage River Project. At September 30, 2006, proceeds received from the sale of
the Project totaled $49.7 million (Note 2). |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
6. |
|
MINORITY INTERESTS |
|
|
|
At September 30, 2006, there were minority interests in the Bakyrchik Mining Venture
(BMV) (Kazakhstan) (70% owned) and Asia Gold Corp (Asia Gold) (Canada) (45% owned).
Jinshan ceased being consolidated on August 31, 2006 (Note 4 (a)). |
|
|
|
Currently, losses applicable to the minority interest in the BMV and Asia Gold are being
allocated to Ivanhoe Mines since those losses exceed the minority interest in the net assets
of the BMV and Asia Gold. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interests |
|
|
Asia Gold |
|
Jinshan |
|
BMV |
|
Total |
Balances, December 31, 2005 |
|
$ |
1,581 |
|
|
$ |
7,347 |
|
|
$ |
|
|
|
$ |
8,928 |
|
|
Minority interests share of loss |
|
|
(2,063 |
) |
|
|
(1,306 |
) |
|
|
|
|
|
|
(3,369 |
) |
Increase in minority interest arising
from share issuances by subsidiary |
|
|
482 |
|
|
|
5,388 |
|
|
|
|
|
|
|
5,870 |
|
Commencement of equity accounting
for investment in Jinshan |
|
|
|
|
|
|
(11,429 |
) |
|
|
|
|
|
|
(11,429 |
) |
|
Balance, September 30, 2006 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
(a) |
|
Equity Incentive Plan |
|
|
|
|
The Company has an Employees and Directors Equity Incentive Plan (the Equity
Incentive Plan). This plan authorizes the Board of Directors of the Company to grant
options, which vest over a period of years, to directors and employees of Ivanhoe Mines
to acquire Common Shares of the Company at a price based on the weighted average
trading price of the Common Shares for the five days preceding the date of the grant. |
|
|
|
|
On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based
Payment, on a modified prospective basis. Prior to January 1, 2006, the Company
recorded compensation costs using the fair value based method in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation. |
|
|
|
|
Under SFAS No. 123 (R), the value of each option award is estimated on the date of
grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing
model requires the input of subjective assumptions, including the expected term of the
option award and stock price volatility. The expected term of options granted is
derived from historical data on employee exercise and post-
vesting employment termination behavior. Expected volatility is based on the historical
volatility of our stock. These estimates involve inherent uncertainties and the
application of management judgment. In addition, we are required to estimate the
expected forfeiture rate and only recognize expense for those options expected to vest.
As a result, if other assumptions had been used, our recorded stock-based compensation
expense could have been materially different from that reported. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
7. SHARE CAPITAL (Continued)
|
(a) |
|
Equity Incentive Plan (Continued) |
|
|
|
|
During the three and nine months ended September 30, 2006, 400,000 and 8,419,000 stock
options were granted, respectively (2005: 225,000 and 975,000). The weighted average
grant-date fair value of the stock options granted during the three and nine months
ended September 30, 2006 was Cdn$2.55 and Cdn$4.33, respectively (2005: Cdn$4.87 and
Cdn$4.97). The fair value of these options was determined using the Black-Scholes
option pricing model, using the following weighted average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Risk-free interest rate |
|
|
4.06 |
% |
|
|
3.65 |
% |
|
|
4.12 |
% |
|
|
3.72 |
% |
Expected life |
|
2.8 years |
|
|
5 years |
|
|
3.3 years |
|
|
5.0 years |
|
Expected volatility |
|
|
50 |
% |
|
|
60 |
% |
|
|
50 |
% |
|
|
61 |
% |
Expected dividends |
|
$Nil |
|
$Nil |
|
$Nil |
|
$Nil |
|
|
|
A summary of stock option activity and information concerning options available for
grant under the Companys Equity Incentive Plan, options outstanding, and exercisable
options at September 30, 2006 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
Options |
|
Number of |
|
Weighted |
|
|
Available |
|
Common |
|
Average |
|
|
for Grant |
|
Shares |
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
(Expressed in |
|
|
|
|
|
|
|
|
|
|
Canadian dollars) |
|
Balances, December 31, 2005 |
|
|
8,305,936 |
|
|
|
7,416,700 |
|
|
$ |
7.27 |
|
Increase in amount authorized |
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(8,419,000 |
) |
|
|
8,419,000 |
|
|
|
9.37 |
|
Options exercised |
|
|
|
|
|
|
(1,354,100 |
) |
|
|
3.61 |
|
Options cancelled |
|
|
97,600 |
|
|
|
(97,600 |
) |
|
|
7.76 |
|
Shares issued under bonus plan |
|
|
(16,666 |
) |
|
|
|
|
|
|
|
|
Shares issued under share
purchase plan |
|
|
(15,210 |
) |
|
|
|
|
|
|
|
|
|
Balances, September 30, 2006 |
|
|
2,952,660 |
|
|
|
14,384,000 |
|
|
$ |
8.84 |
|
|
|
|
|
At September 30, 2006, the U.S. dollar equivalent of the weighted average exercise
price was $7.91. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
7. SHARE CAPITAL (Continued)
|
(a) |
|
Equity Incentive Plan (Continued) |
|
|
|
|
The following table summarizes information about stock options outstanding at September
30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
Weighted |
Range of |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
Exercise |
|
Number |
|
Remaining |
|
Exercise Price |
|
Number |
|
Exercise Price |
Prices |
|
Outstanding |
|
Life (in years) |
|
Per Share |
|
Exercisable |
|
Per Share |
(Expressed in |
|
|
|
|
|
|
|
|
|
(Expressed in |
|
|
|
|
|
(Expressed in |
Canadian |
|
|
|
|
|
|
|
|
|
Canadian |
|
|
|
|
|
Canadian |
dollars) |
|
|
|
|
|
|
|
|
|
dollars) |
|
|
|
|
|
dollars) |
$2.31 to $3.50
|
|
|
934,100 |
|
|
|
1.23 |
|
|
$ |
3.19 |
|
|
|
777,200 |
|
|
$ |
3.17 |
|
$3.51 to $6.75
|
|
|
293,500 |
|
|
|
1.92 |
|
|
|
6.75 |
|
|
|
237,500 |
|
|
|
6.75 |
|
$6.76 to $7.69
|
|
|
1,591,400 |
|
|
|
3.55 |
|
|
|
7.24 |
|
|
|
561,066 |
|
|
|
7.30 |
|
$7.70 to $8.20
|
|
|
2,050,000 |
|
|
|
5.69 |
|
|
|
7.90 |
|
|
|
1,018,000 |
|
|
|
7.87 |
|
$8.21 to $8.99
|
|
|
1,090,000 |
|
|
|
3.32 |
|
|
|
8.64 |
|
|
|
485,000 |
|
|
|
8.62 |
|
$9.00 to $10.51
|
|
|
7,120,000 |
|
|
|
6.27 |
|
|
|
9.72 |
|
|
|
1,803,500 |
|
|
|
9.70 |
|
$10.52 to $12.70
|
|
|
1,305,000 |
|
|
|
6.51 |
|
|
|
12.20 |
|
|
|
780,500 |
|
|
|
12.62 |
|
|
|
|
|
14,384,000 |
|
|
|
5.27 |
|
|
$ |
8.84 |
|
|
|
5,662,766 |
|
|
$ |
8.42 |
|
|
|
|
|
As at September 30, 2006, there was $25.3 million of total unrecognized compensation
cost related to unvested stock options. This cost is expected to be recognized over a
weighted-average period of approximately 1.71 years. |
|
|
(b) |
|
Share Purchase Warrants |
|
|
|
|
At September 30, 2006, the Company had 5,760,000 share purchase warrants outstanding
that were issued in 2004. These warrants entitle the holder to acquire one-tenth of a
common share of the Company at any time on or before February 15, 2007, at a price of
$8.68 per common share. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
8. SUPPLEMENTARY CASH FLOW INFORMATION
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Income taxes paid |
|
|
12 |
|
|
|
183 |
|
|
|
399 |
|
|
|
277 |
|
(b) Net change in non-cash operating working capital items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
(7,116 |
) |
|
$ |
(1,403 |
) |
|
$ |
(11,685 |
) |
|
$ |
(1,929 |
) |
Inventories |
|
|
1,298 |
|
|
|
680 |
|
|
|
(1,260 |
) |
|
|
627 |
|
Prepaid expenses |
|
|
(4,791 |
) |
|
|
(890 |
) |
|
|
(2,169 |
) |
|
|
(1,296 |
) |
Other current assets |
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
|
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
14,361 |
|
|
|
(7,667 |
) |
|
|
4,147 |
|
|
|
(7,246 |
) |
|
|
|
$ |
3,752 |
|
|
$ |
(9,280 |
) |
|
$ |
(7,967 |
) |
|
$ |
(9,844 |
) |
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES |
|
|
|
As indicated in Note 1, these consolidated financial statements have been prepared in
accordance with U.S. GAAP, which, in the case of the Company, conform in all material
respects with Canadian GAAP, except as set forth below. |
|
|
|
|
Consolidated Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Total assets in accordance with U.S. GAAP |
|
$ |
442,852 |
|
|
$ |
396,779 |
|
Reverse equity accounting for investment in joint venture (a) |
|
|
64,077 |
|
|
|
43,067 |
|
Reversal of amortization of other mineral property interests (b) |
|
|
6,329 |
|
|
|
6,329 |
|
Adjustment to carrying value of long-term investments (c) |
|
|
|
|
|
|
(6,711 |
) |
|
Total assets in accordance with Canadian GAAP |
|
$ |
513,258 |
|
|
$ |
439,464 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities in accordance with U.S. GAAP |
|
$ |
35,735 |
|
|
$ |
32,228 |
|
Reverse equity accounting for investment in joint venture (a) |
|
|
64,077 |
|
|
|
43,067 |
|
Income tax effect of U.S. GAAP adjustments for: |
|
|
|
|
|
|
|
|
Reversal of amortization of other mineral property interests (b) |
|
|
882 |
|
|
|
882 |
|
|
Total liabilities in accordance with Canadian GAAP |
|
$ |
100,694 |
|
|
$ |
76,177 |
|
|
|
|
|
|
|
|
|
|
|
Total minority interests in accordance with U.S.
and Canadian GAAP |
|
$ |
|
|
|
$ |
8,928 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity in accordance with U.S. GAAP |
|
$ |
407,117 |
|
|
$ |
355,623 |
|
Decrease in the deficit for: |
|
|
|
|
|
|
|
|
Reversal of amortization of other mineral property interests (b) |
|
|
5,447 |
|
|
|
5,447 |
|
Other comprehensive income (c) |
|
|
|
|
|
|
(6,711 |
) |
|
Total shareholders equity in accordance with Canadian GAAP |
|
$ |
412,564 |
|
|
$ |
354,359 |
|
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
|
|
|
Consolidated Statements of Operations
(in thousands, except for share and per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net (loss) from continuing operations in accordance with
U.S. GAAP |
|
$ |
(67,959 |
) |
|
$ |
(20,641 |
) |
|
$ |
(144,792 |
) |
|
$ |
(75,910 |
) |
Dilution gain on issuance of shares by a subsidiary (d) |
|
|
3,954 |
|
|
|
473 |
|
|
|
4,439 |
|
|
|
473 |
|
|
Net (loss) from continuing operations in accordance with
Canadian GAAP |
|
$ |
(64,005 |
) |
|
$ |
(20,168 |
) |
|
$ |
(140,353 |
) |
|
$ |
(75,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations in accordance
with U.S. GAAP |
|
$ |
1,514 |
|
|
$ |
6,378 |
|
|
$ |
14,857 |
|
|
$ |
27,992 |
|
Gain on sale of Savage River Project (e) |
|
|
|
|
|
|
(3,483 |
) |
|
|
|
|
|
|
(19,691 |
) |
|
Net income from discontinued operations in accordance
with Canadian GAAP |
|
$ |
1,514 |
|
|
$ |
2,895 |
|
|
$ |
14,857 |
|
|
$ |
8,301 |
|
|
Net (loss) in accordance with Canadian GAAP |
|
$ |
(62,491 |
) |
|
$ |
(17,273 |
) |
|
$ |
(125,496 |
) |
|
$ |
(67,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding under
Canadian GAAP (in thousands) |
|
|
335,336 |
|
|
|
314,011 |
|
|
|
327,326 |
|
|
|
302,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share in accordance
with Canadian GAAP from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.19 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.25 |
) |
Discontinued operations |
|
|
|
|
|
|
0.01 |
|
|
|
0.05 |
|
|
|
0.03 |
|
|
|
|
$ |
(0.19 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.38 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
Under Canadian GAAP, the components of shareholders equity would be as follows: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Share capital |
|
$ |
1,164,671 |
|
|
$ |
999,372 |
|
Additional paid-in capital |
|
|
32,452 |
|
|
|
17,952 |
|
Accumulated other comprehensive income (c) |
|
|
3,902 |
|
|
|
|
|
Deficit |
|
|
(788,461 |
) |
|
|
(662,965 |
) |
|
|
|
$ |
412,564 |
|
|
$ |
354,359 |
|
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
|
|
|
Consolidated Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Cash used in operating activities in accordance with
U.S. GAAP |
|
$ |
(66,967 |
) |
|
$ |
(42,547 |
) |
|
$ |
(151,809 |
) |
|
$ |
(96,540 |
) |
Reverse equity accounting for investment in
joint venture (a) |
|
|
3,577 |
|
|
|
10,283 |
|
|
|
32,837 |
|
|
|
19,270 |
|
|
Cash used in operating activities in accordance with
Canadian GAAP |
|
|
(63,390 |
) |
|
|
(32,264 |
) |
|
|
(118,972 |
) |
|
|
(77,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by investing activities in accordance
with U.S. GAAP |
|
|
(12,380 |
) |
|
|
(15,999 |
) |
|
|
4,498 |
|
|
|
(13,248 |
) |
Reverse equity accounting for investment in
joint venture (a) |
|
|
(2,904 |
) |
|
|
(2,586 |
) |
|
|
(12,861 |
) |
|
|
(4,561 |
) |
|
Cash used in investing activities in
accordance with Canadian GAAP |
|
|
(15,284 |
) |
|
|
(18,585 |
) |
|
|
(8,363 |
) |
|
|
(17,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities in
accordance with U.S. GAAP |
|
|
9,514 |
|
|
|
1,328 |
|
|
|
173,480 |
|
|
|
122,572 |
|
Reverse equity accounting for investment in
joint venture (a) |
|
|
|
|
|
|
(3,750 |
) |
|
|
|
|
|
|
(7,500 |
) |
|
Cash provided by (used in) financing activities in accordance
with Canadian GAAP |
|
|
9,514 |
|
|
|
(2,422 |
) |
|
|
173,480 |
|
|
|
115,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(381 |
) |
|
|
6,987 |
|
|
|
3,718 |
|
|
|
8,280 |
|
|
Net cash inflow (outflow) in accordance with Canadian GAAP |
|
|
(69,541 |
) |
|
|
(46,284 |
) |
|
|
49,863 |
|
|
|
28,273 |
|
Cash, beginning of period in accordance with Canadian GAAP |
|
|
243,928 |
|
|
|
197,134 |
|
|
|
124,524 |
|
|
|
122,577 |
|
|
Cash, end of period in accordance with Canadian GAAP |
|
$ |
174,387 |
|
|
$ |
150,850 |
|
|
$ |
174,387 |
|
|
$ |
150,850 |
|
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
|
(a) |
|
Investment in Joint Venture |
|
|
|
|
Under U.S. GAAP, Ivanhoe Mines has accounted for its joint venture interest in JVCo
(Note 3) using the equity method. Under Canadian GAAP, interests in joint ventures are
accounted for on a proportionate consolidation basis. |
|
|
|
|
Under Canadian GAAP, the carrying amount of Ivanhoe Mines investment and its share of
equity of JVCo is eliminated and replaced with Ivanhoe Mines proportionate share of
each line item of JVCos assets, liabilities, revenue and expenses which is included in
the corresponding line items of Ivanhoe Mines financial statements. All intercompany
balances and transactions would be eliminated. Note 3 discloses the asset,
liabilities, revenues and expenses of JVCo that would have been included in the
corresponding line items on Ivanhoe Mines financial statements had Canadian GAAP been
applied. |
|
|
(b) |
|
Other mineral property interests |
|
|
|
|
Under U.S. GAAP, where mineral property interests are, at the date of acquisition,
without economically recoverable reserves, these costs are generally considered to be
exploration costs that are expensed as incurred. Under Canadian GAAP, the costs of the
acquisition of mineral property interests are capitalized. |
|
|
|
|
In accordance with EITF 04-02, Whether Mining Rights are Tangible or Intangible Assets,
the Company classifies its mineral exploration licenses as tangible assets and there is
no difference between Canadian and U.S. GAAP. Prior to January 2004, the costs of
acquisition of Ivanhoe Mines mineral exploration licenses were classified as
intangible assets under U.S. GAAP and amortized over the term of the licenses. As a
result, for Canadian GAAP purposes, the $6,329,000, net of deferred income taxes of
$882,000, in amortization or write-offs of other mineral property interests under U.S.
GAAP has been reversed. |
|
|
(c) |
|
Financial Instruments |
|
|
|
|
On January 1, 2006, the Company adopted CICA Section 1530, Comprehensive Income,
Section 3855, Financial Instruments Recognition and Measurement, Section 3861,
Financial Instruments Disclosure and Presentation and Section 3865, Hedges. These
new standards increased harmonization between U.S. and Canadian GAAP. |
|
|
|
|
Under U.S. and Canadian GAAP, portfolio investments are classified as
available-for-sale securities, which are carried at market value (Note 4). The
resulting unrealized gains or losses are included in the determination of comprehensive
income, net of income taxes where applicable. Prior to adopting Sections 3855 and
1530, these investments were carried at their original cost less provisions for
impairment under Canadian GAAP. Upon adoption, the Company recorded a retroactive
balance representing the unrealized gains on available-for-sale securities of
$6,711,000 at January 1, 2006. Available-for-sale securities generated comprehensive
gain of $465,000 and a loss of $2,809,000 under both Canadian and U.S. GAAP for the
three and nine month periods ended September 30, 2006. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
|
(d) |
|
Dilution gain on investment in subsidiary |
|
|
|
|
Under U.S. GAAP, dilution gain on investment in a subsidiary of $3,954,000 and
$4,439,000 for the three and nine month periods ended September 30, 2006 was accounted
for as part of additional paid-in capital. Under Canadian GAAP, the dilution gain was
included in the net loss for the three and nine month periods ended September 30, 2006. |
|
|
(e) |
|
Gain on Sale of Savage River Project |
|
|
|
|
Under U.S. GAAP, the net book value of ABM when it was sold in February 2005 was $11.2
million, whereas under Canadian GAAP it was $30.9 million. At September 30, 2005,
total proceeds from the sale were $33.8 million. Therefore, under Canadian GAAP the
gain on sale was $19.7 million less than under U.S. GAAP. |
|
|
(f) |
|
Income taxes |
|
|
|
|
Under U.S. GAAP, deferred income taxes are calculated based on enacted tax rates
applicable to future years. Under Canadian GAAP, future income taxes are calculated
based on enacted or substantively enacted tax rates applicable to future years. This
difference in GAAP did not have any effect on the financial position or results of
operations of the Company for the three and nine month periods ended September 30, 2006
and 2005. |
|
(a) |
|
On October 18, 2006, Ivanhoe Mines and Rio Tinto Plc (Rio Tinto) announced that
they had reached an agreement to form a strategic partnership whereby Rio Tinto would
invest in Ivanhoe Mines and form a joint Ivanhoe Mines Rio Tinto Technical Committee,
to engineer, construct and operate Ivanhoe Miness Oyu Tolgoi project in Mongolia. This
agreement creates a defined path for Rio Tinto to become the largest shareholder in
Ivanhoe Mines. |
|
|
|
|
On October 27, 2006, Rio Tinto completed the first private placement tranche under the
agreement consisting of 37.1 million shares at a price of $8.18 per share, for proceeds
totalling $303.4 million. Rio Tinto now owns approximately 9.95% of Ivanhoe Mines
issued share capital. |
|
|
|
|
The agreement provides for Rio Tinto to make additional investments in the equity
of Ivanhoe Mines, under defined conditions, of up to approximately US$1.5 billion.
Ivanhoe Mines has agreed to use at least 90% of the proceeds received from Rio Tinto to
finance the development of Oyu Tolgoi. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
10. |
|
SUBSEQUENT EVENTS (Continued) |
|
(a) |
|
(Continued) |
|
|
|
|
Further investments by Rio Tinto in Ivanhoe Mines will be structured in the
following stages: |
|
|
|
Rio Tinto will take up a second tranche private placement following the
satisfactory conclusion of an Investment Agreement between Ivanhoe Mines and the
Mongolian Government. Rio Tinto has the option to exercise the second tranche
earlier. This second tranche will consist of 46.3 million shares at a subscription
price of US$8.38 per share, for proceeds totalling US$388.0 million. Completion of
second tranche and an additional top-up right, will give Rio Tinto up to 19.9% of
Ivanhoe Mines issued share capital. |
|
|
|
|
In addition to the two private placements, Rio Tinto has been granted
non-transferable warrants over approximately 92 million Ivanhoe Mines shares in
two equal tranches of approximately 46 million shares at various exercise
prices. When exercised, the warrants will result in additional funds to Ivanhoe
Mines of up to US$808 million that, when combined with the private placements,
will total approximately US$1.5 billion. These warrants entitle Rio Tinto to
increase its interest in Ivanhoe Mines to up to 33.35% of the companys fully
diluted issued share capital. Exercise of the warrants is conditional on the
approval of Ivanhoe Mines shareholders at a special meeting to be convened on
November 30, 2006. |
|
|
|
Pursuant to the private placement agreement with Rio Tinto, Ivanhoe Mines has also
agreed to dispose of its interest in JVCo (Note 3), and any other assets held by
Ivanhoe Mines in the Union of Myanmar, by February 1, 2007. If such disposition does
not occur by that date, Rio Tinto has the right to cause Ivanhoe Mines to transfer all
of its Myanmar assets into a trust of which none of Rio Tinto, Robert M. Friedland, the
Company, their respective affiliates, any person related to any of them, or persons
resident or controlled by residents of Myanmar are trustees or beneficiaries. In
consideration for such transfer, Ivanhoe Mines would receive a promissory note issued
by the trust in an amount not less than US$40 million plus 50% of the cash receivable
from the Myanmar assets at the time of sale. Ivanhoe Mines would be entitled to
additional compensation from any such future sale of the Myanmar assets by the trust in
an amount to be determined but not less than 50% of the amount by which such sale
proceeds exceed the amount outstanding under the promissory note. |
|
|
(b) |
|
In July 2006, Ivanhoe Mines and Asia Gold Corp. (Asia Gold) signed a definitive
agreement whereby Asia Gold will acquire Ivanhoe Mines Coal Division by issuing
82,576,383 shares of Asia Gold to Ivanhoe Mines. This reorganization was approved by Asia
Golds shareholders on August 8, 2006. This transaction remains subject to the
fulfillment of certain conditions precedent, including the completion of the transfer of
certain mineral exploration licenses in Mongolia that are currently held by Ivanhoe
Mines. The reorganization will result in Ivanhoe Mines owning approximately 90% of Asia
Golds issued and outstanding share capital |
|
|
|
|
On November 1, 2006, Asia Gold and Ivanhoe Mines announced that the Mongolian
authorities have accepted applications filed by Ivanhoe Mines to transfer the ownership
of these licenses. The companies have agreed not to set a time limit on the completion
of the formal license transfer process that has been initiated. |
|
|
|
|
As part of the agreement, Ivanhoe Mines extended to Asia Gold an interim line of credit
of US$10.0 million (which can be increased to US$15.0 million by mutual agreement). At
September 30, 2006, $4.0 million has been drawn down by Asia Gold from this facility. |
|
|
|
|
|
|
|
|
|
|
|
Share Information
|
|
Investor Information |
3 |
|
![(IVANHOE MINES LOGO)](o33797o3379701.gif)
Interim Report
For the three and
nine months ended
September 30, 2006
|
|
Common shares of Ivanhoe Mines Ltd.
are listed for trading under the symbol IVN on the New York Stock
Exchange, NASDAQ and the Toronto Stock Exchange. |
|
All financial reports, news
releases and corporate information can be accessed on our web site at www.ivanhoe-mines.com |
|
|
|
|
|
|
|
At
November 14, 2006 the Company had 373.1 million common
shares issued and outstanding and warrants and stock options
outstanding for 107 million additional common shares.
|
|
Transfer Agents and Registrars
CIBC Mellon Trust Company
320 Bay Street
Toronto, Ontario, Canada
M5H 4A6
Toll free in North America:
1-800-387-0825 |
|
Contact Information
Investors: Bill Trenaman
Media : Bob Williamson
Suite 654-999 Canada Place
Vancouver, BC, Canada V6C 3E1
E-mail : [email protected]
Tel : (604) 688-5755 |
INTRODUCTION
This management discussion and analysis of the financial position and results of operations
(MD&A) of Ivanhoe Mines Ltd. should be read in conjunction with the unaudited consolidated
financial statements of Ivanhoe Mines Ltd. and the notes thereto for the three and nine months
ended September 30, 2006, and with the audited consolidated financial statements of Ivanhoe Mines
Ltd. and the notes thereto for the year ended December 31, 2005. These financial statements have
been prepared in accordance with generally accepted accounting principles (GAAP) in the United
States of America. Differences between Canadian and U.S. GAAP that would have materially affected
the Companys reported financial results are set out in Note 9. In this MD&A, unless the context
dictates otherwise, a reference to the Company refers to Ivanhoe Mines Ltd. and a reference to
Ivanhoe Mines refers to Ivanhoe Mines Ltd., together with its subsidiaries and joint ventures. The
effective date of this MD&A is November 14, 2006.
Additional information about the Company, including its Annual Information Form, is available at
www.sedar.com.
Page 1 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Ivanhoe Mines and Rio Tinto form strategic partnership to develop Mongolian copper-gold
resources Subsequent to the end of the quarter, on October 18, 2006, a wholly-owned subsidiary of
world mining leader Rio Tinto plc (Rio Tinto) agreed to form a strategic partnership by investing
in the Company and, through an Ivanhoe-Rio Tinto Technical Committee, will jointly engineer,
construct and operate Ivanhoe Mines Oyu Tolgoi copper-gold mining complex in Mongolias South Gobi
region. The agreement creates a defined path for Rio Tinto to become the largest shareholder in the
Company.
Rio Tinto purchased approximately 37.1 million shares of the Company at a price of US$8.18,
representing a 25% premium to the Companys closing price on October 17, 2006 and a premium of 30%
to the Companys 20-day moving-average share price prior to October 17 of US$6.29. Rio Tinto now
owns approximately 9.95% of the Companys issued share capital.
The agreement between the Company and London-based Rio Tinto (RTP: NYSE; RIO: LSX, ASX) provides
for Rio Tinto to make additional investments in the equity of the Company, under defined
conditions, of up to approximately US$1.5 billion. The Company has agreed to use at least 90% of
the proceeds received from Rio Tinto to finance the development of the Oyu Tolgoi Project.
Further investments by Rio Tinto in the Company will be structured as follows:
Rio Tinto will take up a second tranche private placement following the satisfactory conclusion of
an Investment Agreement between Ivanhoe Mines and the Government of Mongolia on terms mutually
acceptable to the Company and Rio Tinto. Rio Tinto has the option to purchase the second tranche
earlier. This second tranche will consist of approximately 46.3 million shares at a subscription
price of US$8.38, giving total proceeds to the Company of a further US$388 million. The
subscription price represents a 33% premium to the Companys 20-day moving-average share price of
US$6.29, and 28% to the closing price on October 17, 2006. Completion of the first and second
tranches, and an additional top-up right, will give Rio Tinto up to 19.9% of the Companys enlarged
issued share capital, for a total combined investment of at least US$691 million.
In addition to the two private placements, Rio Tinto has been granted non-transferable warrants to
purchase approximately 92 million shares of the Company in two equal tranches of approximately 46
million shares at various exercise prices. When exercised, the warrants will result in
additional funds to the Company of up to US$808 million that, when combined with the private
placements, will total approximately US$1.5 billion. These warrants entitle Rio Tinto to increase
its interest in the Company to up to 33.35% of the Companys fully diluted share capital. Exercise
of the warrants is conditional on the approval of the Companys shareholders at a special meeting
to be convened in Vancouver, B.C., Canada, on November 30, 2006.
The agreement also provides that Ivanhoe Mines will have access to Rio Tintos expertise in
developing and operating world-class mines.
Page 2 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition, Rio Tinto is joining Ivanhoe Mines in current talks with the Government of Mongolia
for a long-term Investment Agreement that will confirm a tax, legal and fiscal framework for the
development of the Oyu Tolgoi Project. A working group of government officials was appointed in
September, 2006, to work with Ivanhoe Mines and prepare a draft Investment Agreement to be
submitted for cabinet consideration. For a discussion on the significance to the Company of
reaching a successful conclusion to the forthcoming Investment Agreement negotiations, refer to the
heading Risk and Uncertainties.
Joint Technical Committee established to manage Oyu Tolgoi Project As part of their agreement,
Rio Tinto and the Company have agreed to cooperate on the construction and operation of the Oyu
Tolgoi Project. The first technical review meeting will be held in mid-November, providing Rio
Tinto representatives with their first opportunity to provide their input into the project
development. Particular attention will be paid to details of the planned underground mine at Oyu
Tolgoi.
In addition:
|
§
|
|
Rio Tinto and Ivanhoe Mines are establishing a Technical Committee to manage all
aspects of the engineering, construction, development and operation of the Oyu Tolgoi
Project. The Technical Committee consists of two representatives of Ivanhoe Mines, two
representatives of Rio Tinto and a fifth member who will act as committee chairman and
senior manager of the Oyu Tolgoi Project. |
|
|
§
|
|
John Macken, the Company President and CEO, will serve as Technical Committee chairman
and senior project manager for the first five years as the project ramps up to full
production. During this period, unanimous consent of all Technical Committee members will
be required for certain specified decisions, including acquisitions, or budgetary
commitments exceeding US$100 million and material amendments to the long-term Oyu Tolgoi
mine plan. After five years, Rio Tinto will have the right to appoint the subsequent
chairman and senior project manager. |
|
|
§
|
|
Rio Tinto will make available, at cost during the first five years, its engineering,
mining and metallurgical staff to assist Ivanhoe Mines in the mine planning, engineering,
design and construction of the Oyu Tolgoi Project. In consultation with the Technical
Committee, Rio Tinto also will second appropriate employees to the Oyu Tolgoi Project, as
required. |
Tom Albanese appointed as first Rio Tinto nominee to the Companys board of directors As part of
the private placement agreement, Rio Tinto will nominate directors to the Companys board in
proportion to Rio Tintos holding of the Companys issued share capital.
Rio Tintos first appointee to the board is Tom Albanese, Director, Group Resources, and head of
Exploration. He was formerly Rio Tintos chief executive in charge of its copper operations.
Page 3 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The private placement agreement requires that when Rio Tinto is entitled to nominate more than one
director, half of the Companys nominees will be independent directors as defined under applicable
securities laws.
Standstill agreement For a period of five years, Rio Tintos right to increase its interest in
the Companys share capital, except through the second tranche private placement and the exercise
of the warrants, is restricted to no more than an additional 6.65% of the issued share capital of
the Company. Rio Tinto has also agreed that, during such five year period, its total interest in
the Companys issued share capital shall not exceed an aggregate holding of 40%.
These restrictions may be waived with prior agreement from the board of directors of the Company
and will not apply in the event that Rio Tinto exercises a right of first refusal to purchase any
shares Robert M. Friedland might choose to sell to any party other than institutional shareholders
during the five-year period. Mr. Friedland, who has continued to hold all of his shares of the
Company for the past 13 years, has stated that he has no intention of selling shares. The
restriction on share purchases will be waived if a third party announces a takeover offer for the
Company.
Please see the Companys Material Change Report filed on SEDAR on October 25, 2006 for a more
detailed description of the terms and conditions of the Companys private placement agreement with
Rio Tinto. A copy of the private placement agreement has also been filed on SEDAR. These
documents can be accessed at www.sedar.com.
Reserve
and Resource estimates To date, Ivanhoe Mines has identified the following mineral
resources for the Oyu Tolgoi Project based on a 0.60% copper equivalent cut-off:
|
|
|
101,590,000 tonnes of measured resources grading 0.64% copper and 1.10 grams per tonne
(g/t) gold; |
|
|
|
|
1.046,970,000 tonnes of indicated resources grading 1.34% copper and 0.42 g/t gold; and |
|
|
|
|
1,250,550,000 tonnes of inferred resources grading 1.04% copper and 0.24 g/t gold. |
This does not include an additional 190,160,000 tonnes of inferred resources grading 1.57% copper
and 0.53 g/t gold identified on the adjoining Shivee Tolgoi joint-venture property.
Within the Southern Oyu open-pit deposits, a portion of the measured and indicated mineral
resources has been upgraded to the proven and probable mineral reserve categories as follows:
|
|
|
127,000,000 tonnes of proven reserves at 0.58% copper and o.93 g/t gold; and |
|
|
|
|
803,000,000 tonnes of probable reserves at 0.48% copper and 0.27 g/t gold. |
Reference is made to the Companys Annual Information Form dated March 30, 2006 for additional
details regarding these mineral resource and mineral reserve estimates including the key
assumptions and parameters upon which the estimates are based.
Page 4 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Oyu Tolgoi Project Development Update Work on Shaft # 1, a 6.7-metre-diameter exploration and
production shaft at Oyu Tolgoi, is continuing on plan. The shaft sinking, presently averaging 3.1
metres per day, has reached a depth of approximately 600 metres below surface. The sinking of Shaft
#1 to a planned depth of 1,340 metres below surface
is expected to be completed in late-2007, with underground drifting and drilling occurring in 2007
and 2008. The completion of this shaft will allow for the early exploitation of a high-grade upper
portion of the Hugo North deposit, as well as expedite the conversion of the current Hugo North
resources into proven and probable reserves.
Preliminary construction activities involving site preparation, excavation for concentrator
foundations and the construction of accommodation facilities are in progress. These activities, in
conjunction with engineering and procurement efforts, are seen as critical to minimizing any
schedule risk associated with the project.
Surface preparations for Shaft #2, a ten-metre-diameter production and service shaft, were
completed during the quarter and permits for shaft sinking have been applied for. The Technical
Committee will finalize the location and development plan for this shaft before beginning with the
pre-sinking excavation, which is expected to continue through the first quarter of 2007.
Construction of the head frame and hoisting facilities is planned to begin next spring.
The next stage in the overall development of Ivanhoe Mines Oyu Tolgoi flagship project will be
securing all remaining governmental approvals. It is expected that the first production could
begin within 30 months of the receipt of these approvals, giving a potential start-up date of
mid-2009, subject to confirmations of delivery dates on key long-term-time equipment.
The Government of Mongolia met its publicly stated commitment to finalize important changes to
specific taxation and minerals legislation early in July 2006. This was an important development as
the Government of Mongolia had previously publicly stated that it wanted to have the revised laws
approved by Parliament before it negotiated an Investment Agreement with the Company.
Representatives for Rio Tinto are expected to be appointed to the Companys negotiation team
shortly. The finalization of an Investment Agreement with the Government of Mongolia will be a
very important milestone toward the development of Oyu Tolgoi.
Formal Investment Agreement discussions with a nine-member Government appointed Working Group began
in August, 2006. The State Secretary of the Ministry of Finance is chairing the Working Group.
Other members are representatives of designated ministries of the Government of Mongolia, including
the Ministry of Finance, the Ministry of Industry and Trade, the Ministry of Nature and Environment
and the Ministry of Justice and Home Affairs.
Once a draft Investment Agreement has been prepared and approved by the Working Group, it will be
submitted to the consideration of the Cabinet and recommended for approval.
The Company has made a concerted effort in recent months to build a broad, general understanding
among the Government, Members of Parliament, civic groups and the
Page 5 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
general public of the Oyu Tolgoi
Project and the benefits it will bring to Mongolia and its citizens. The Company considers this to
be a critical support activity for the finalization of the Investment Agreement.
Mongolia: Coal Division merger with Asia Gold In the second quarter, the Company announced a plan
to transfer the Companys Mongolian Coal Division to Asia Gold Corp. (TSX-V: ASG) in exchange for
approximately 82.6 million shares of Asia Gold.
On August 8th, the minority shareholders of Asia Gold voted 99% in favor of approving the merger
transaction. Closing of the transaction is subject to the fulfillment of certain conditions
precedent, including completion of the transfer of certain mineral exploration licenses in
Mongolia.
During the past month, the Cadastral Office of the Mineral Resources and Petroleum Authority of
Mongolia accepted applications filed by Ivanhoe Mines to transfer the ownership of the relevant
licences in accordance with the provisions of Mongolias revised Minerals Law. Ivanhoe Mines and
Asia Gold have agreed to extend the closing date of the Coal Division merger transaction in order
to accommodate the unanticipated delays in completing the formal licence transfer process. It is
expected that the transaction will be completed after the formal licence transfer process in
Mongolia is concluded.
Myanmar: S&K Copper Mine Joint Venture Copper cathode production for the S&K Mine in Q306
totalled 5,980 tonnes, representing a decrease of 30% over Q305. The copper price on the London
Metal Exchange (LME) averaged $3.48 a pound in Q306, compared to $1.70 a pound in Q305,
representing an increase of 105%.
During the quarter, the S&K Mines operations still suffered from a shortage of supplies, tires and
chemical reagents due to delays in obtaining the necessary import permits. Total tonnage moved in
Q306 decreased by 28% compared to Q305. Total cathode production in Q306 decreased by 30% due
mainly to a 26% decrease in tonnages placed on the heaps and a 37% decrease in copper grades.
At the end of Q306, the S&K Mine had $85.6 million in cash, representing a $1.3 million increase
over the balance at the end of the previous quarter.
During the quarter, the Company continued its discussions with interested parties regarding the
possible sale of its interest in the S&K Mine. Ivanhoe Mines has a 50% interest in the company that
owns and operates the S&K Mine. The Companys agreement with Rio Tinto provides for the
divestiture by Ivanhoe Mines of its joint venture interest in the Monywa Copper Project.
Australia: Cloncurry Project The Cloncurry Project covers an area of more than 1,450 square
kilometres in northwestern Queensland in Australias storied Mount Isa-Cloncurry mining district.
Since acquiring the property in September 2003 Ivanhoe Mines initially has focused on three high
potential copper gold targets: Mt Dore, Swan and Amethyst Castle. Ten holes, totalling 4,621
metres, were drilled in the quarter.
In Q306, diamond drilling on the Iron Oxide Copper Gold (IOCG) mineralized systems at Swan and
Amethyst Castle yielded encouraging geological information and
Page 6 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
several drill intercepts of
haematite matrix sulphide-bearing hydrothermal breccias, indicating that Ivanhoe Mines exploration
might have clipped the top of deeper copper-gold-uranium bodies.
At Amethyst Castle, RC drilling into geophysical targets (mainly induced polarization targets)
yielded intercepts of copper, gold and uranium in the eastern side of the breccia body. This
drilling was followed by a diamond drilling program, with four holes completed during the quarter
and two additional holes drilled after September. The diamond core has confirmed the presence at
Amethyst of a large-scale breccia body hosting IOCG mineralization, with associated uranium.
Further drilling is planned after assay results are received.
At the Swan prospect, six holes were drilled for a total of 3,142 metres, with targets designed to
explore the large magnetic anomaly. The southern side of the anomaly proved to be less mineralized
than the northern side and drilling now is extending mineralization to the northeast. Copper and
gold mineralization is associated with widespread intense albitisation (red rock), which is
overprinted by pyroxene, magnetite, pyrite and chalcopyrite veinlets. Common native copper and
chalcocite (supergene?) also have been observed. Swan is located within a large, distinctive
magnetic anomaly that also underlies the former Mt. Elliot mine and Swell and northern Gossan
prospects. This deep-seated feature appears to have a circular form, with a diameter of
approximately one kilometre. Preliminary drilling and the widespread sodium-calcium alteration at
these targets indicate they are all related to one large mineralized system that remains to be
tested at depth. Extensive drilling is being planned to test this concept. Testing for potential
oxide and primary copper-gold resources at Swan will be evaluated by pattern drilling, initially at
100-metre drill centres.
In October, drilling moved onto a third prospect, Metal Ridge North, where surface copper
geochemical anomalies, combined with magnetic and conductivity features, are the target for a
three-hole diamond-drill program and a 20-hole RC-drill program. The mineralization occurs along a
northerly trend for several kilometres and appears to be associated with carbonaceous shales that
also display widespread, intense albitisation.
During the quarter, a comprehensive review of 30 years of previous exploration was conducted. This
resulted in the recognition of numerous new target areas, most of which have IOCG signatures.
There are more than 100 known mineral occurrences and prospects within Ivanhoe Mines tenements.
Some of these are centred on uranium occurrences that were only partially explored during the
1970s. The historic Kuridala copper mining district, situated in the northern part of Ivanhoe
Mines tenements, has numerous copper, gold and uranium prospects that will be studied further in
preparation for extensive drilling. Universal Tracking Systems has been engaged to fly a
6,000-line-kilometre survey over selected parts of Ivanhoe Mines land package, particularly those
with associated uranium, to enhance drill target selection.
The number of quality IOCG targets that require drill testing is extraordinary and a very
significantly increased exploration program is being planned for Q406 and 2007. A dedicated
corporate management team, including specialist consultants, will be assembled to take the
Cloncurry Project forward into 2007.
Page 7 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
China: Jinshan Gold Mine nearing commercial production On September 12, 2006, Jinshan Gold Mines
Inc. (Jinshan), a company that is approximately 48% owned by Ivanhoe Mines, announced it had
received the Mining Permit for its CSH (217) gold
mine in China, which will authorize the start of commercial gold mining operations. The permit was
granted by the Ministry of Land and Resources in Beijing.
Jinshan expects that it will be capable of commencing commercial gold production in early 2007 at
an estimated annual rate of approximately 120,000 ounces.
Senior gold executive appointed During the third quarter, David Woodall was appointed President
of the Ivanhoe Mines gold operations. His responsibilities will include overseeing the advancement
of the Ivanhoe Mines gold exploration and mine development projects, which include, among others,
the Bakyrchik gold mine development project in Kazakhstan and the Cloncurry IOCG gold, copper
project in Australia.
Mr. Woodall, 46, has more than 21 years of professional experience in mining operations. Prior to
joining Ivanhoe Mines, he acquired extensive mine management experience at underground and open-pit
mines in Canada, Australia, Fiji and China. Among numerous mine operation assignments, he worked as
Mine General Manager for Placer Dome Inc. at the Musselwhite gold mine in Ontario, Canada, the
Kanowna Belle gold mine in Western Australia and the Osborne copper and gold mine in Australia. He
also worked in senior mine management positions with Robe River Pty Ltd., Sino Gold Limited and WMC
Resources.
Financial Results During the quarter, the Company recorded a net loss of $66.4 million (or
$0.20 per share), compared to a net loss of $14.3 million (or $0.05 per share) in Q305.
The increase in the loss from 2005 to 2006 was primarily due to a $36.2 million increase in
exploration expenses. This includes shaft sinking and engineering and development costs that have
been expensed and not capitalized. The Company will reassess the accounting treatment of
engineering and development costs as a result of the Rio Tinto financing. Going forward, a portion
of these costs may be capitalized. Results for the quarter were also affected by a $1.0 million
increase in income from the Monywa Copper joint venture, less a $7.5 million decrease in foreign
exchange gains and a $4.9 million decrease in income from discontinued operations. Exploration
costs are charged to operations in the period incurred and often constitute the bulk of the
Companys operations loss for that period.
Page 8 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion, analysis and financial review is comprised of ten sections:
|
1. |
|
Review of operations. |
|
|
2. |
|
Summary of quarterly results. |
|
|
3. |
|
Cash resources and liquidity. |
|
|
4. |
|
Share capital. |
|
|
5. |
|
Outlook. |
|
|
6. |
|
Contractual obligations and off-balance-sheet arrangements. |
|
|
7. |
|
Critical accounting estimates and recent accounting pronouncements. |
|
|
8. |
|
Risks and uncertainties. |
|
|
9. |
|
Related-party transactions. |
|
|
10. |
|
Cautionary statements. |
REVIEW OF OPERATIONS
SELECTED FINANCIAL INFORMATION
($ in millions of U.S. dollars, except per share information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Quarter ended September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Exploration expenses |
|
|
(65.1 |
) |
|
|
(28.9 |
) |
|
|
(132.0 |
) |
|
|
(87.1 |
) |
General and administrative costs |
|
|
(9.1 |
) |
|
|
(7.3 |
) |
|
|
(29.9 |
) |
|
|
(18.0 |
) |
Share of income from joint venture |
|
|
9.0 |
|
|
|
8.0 |
|
|
|
11.0 |
|
|
|
23.5 |
|
Foreign exchange (losses) gains |
|
|
(0.4 |
) |
|
|
7.1 |
|
|
|
4.1 |
|
|
|
8.2 |
|
Net (loss) from continuing operations |
|
|
(68.0 |
) |
|
|
(20.6 |
) |
|
|
(144.8 |
) |
|
|
(75.9 |
) |
Net income from discontinued operations |
|
|
1.5 |
|
|
|
6.4 |
|
|
|
14.9 |
|
|
|
28.0 |
|
Net (loss) |
|
|
(66.4 |
) |
|
|
(14.3 |
) |
|
|
129.9 |
|
|
|
(47.9 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.20 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.44 |
) |
|
$ |
(0.25 |
) |
Discontinued operations |
|
$ |
0.00 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
0.09 |
|
Total assets |
|
|
442.9 |
|
|
|
413.8 |
|
|
|
442.9 |
|
|
|
413.8 |
|
EXPLORATION
In Q306, Ivanhoe Mines expensed $65.1 million in exploration and development activities,
compared to $28.9 million in Q305. The majority of the $65.1 million was spent on Ivanhoe Mines
Mongolian properties ($61.1 million compared to $24.7 million in Q305). Approximately
$56.5 million of the $61.1 million was spent on the Oyu Tolgoi Project and various coal exploration
activities in the South Gobi region of Mongolia. The remaining 8% was mainly spent on regional
reconnaissance, license holding fees and general, in-country administrative charges.
Page 9 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Expenditures capitalized in Q306 totalled approximately $2.4 million, compared to $12.3 million in
Q305. The bulk of the capital expenditures in Q306 were spent in Mongolia.
|
a) |
|
Oyu Tolgoi Project, Mongolia |
|
|
|
|
The comments below relating to the development and exploration activities at the Oyu Tolgoi
Project are based on activities carried out during the third quarter and reflect
managements current plans but do not incorporate any discussions with Rio Tinto. The first
technical review meeting with representatives of Rio Tinto is planned to be held in
November 2006. This will be the first time that Rio Tinto personnel will have the
opportunity to provide their input into the project development, particularly with regard
to the underground mine development of the Hugo North deposit. Key topics of discussion
will include the projected location for Shaft #2, future plans for the sub-level cave
(SLC) mine and the expected depth and production capacity of the first large lift at Hugo
North. |
|
|
|
|
i) Oyu Tolgoi Integrated Development Plan (IDP) |
|
|
|
|
Mine Planning Update Planning and development activities continued to focus on assessing
both the benefits of a low volume, high value starter mine in Hugo North and its impacts on
the longer term mine plan. Analysis has been undertaken to evaluate the relative benefits
of an initial SLC as compared to undertaking a small block cave in the same area. The
latter alternative would effectively replace the Hugo Lift #1, previously proposed in the
IDP, with a smaller, higher grade SLC approach resulting in a reduction in the initial
capital cost estimate. Future planning efforts will focus in optimizing the depth and
production profile for Lift #2. |
|
|
|
|
Engineering, procurement and construction activities for the Oyu Tolgoi Project continued
to progress throughout the quarter. The surface facilities excavation of Hugo Shaft #2 is
complete and, to date, the sinking of Hugo Shaft #1 has reached a depth of approximately
600 metres. |
|
|
|
|
The Company continues to focus on health, safety, environment and security issues at the
Oyu Tolgoi site, community relations and sustainable development for local Mongolian
communities near the Oyu Tolgoi site. |
|
|
|
|
Planning & Development Current plans are to complete studies required to bring the SLC
starter mine to feasibility level. The information gathered for the SLC starter mine may
prove sufficient to fulfill the geotechnical and geologic data requirements for the
preparation of a feasibility study for the Hugo North deposit. The anticipated benefits of
developing the underground SLC starter mine include: |
|
§
|
|
A reduction in the initial capital costs and technical risks associated with
the planned large underground block cave mining operation; |
|
|
§
|
|
An expected enhancement in the overall Oyu Tolgoi Project value by planning to
mine high grade copper and gold mineralization earlier than previously estimated; |
Page 10 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
§
|
|
The generation of a significant source of near-term, cash-flow that can be used
to fund development of the larger Hugo North block cave mining operation; and, |
|
|
§
|
|
An expected reduction, of up to one year, in the time to complete the
underground exploration and development program for the SLC starter mine. This
reduction is as a result of expected shorter and shallower underground drifting
distances than previously projected by the IDP. |
Scoping studies during the quarter have shown the ability to develop either a small,
high-grade SLC scenario or a block cave scenario focusing on a high grade copper envelope
on the southern end of Hugo North resulting in a reduction of about half the initial
capital cost that was envisaged for the larger first Lift #1 proposed in the original IDP
study.
Hugo Shaft #1 During the quarter, commissioning and sinking activities for Shaft #1
continued along with the planning for final construction activities. Sinking of Shaft #1
reached a depth of 515 metres at the end Q306, representing an advance of 115 metres
during the quarter. JS Redpath, the company contracted to develop both Hugo Shaft #1 and
Hugo Shaft #2, have completed a bid evaluation for the underground equipment and issued a
technical recommendation.
Hugo Shaft #2 During the quarter, the surface facilities excavation for Shaft #2, a
ten-metre-diameter production and service shaft, was nearly completed and permits for shaft
sinking have been applied for. At the end of Q306, the excavation reached a depth of 26
metres. Drilling and blasting of the top of the shaft are needed to complete the
excavation works and enable construction of the headframe to commence.
During the quarter, JS Redpath joined the Shaft #2 construction team and assumed the
responsibility for the coordination of site works associated with Shaft #2. The Technical
Committee will finalize the development plan for this shaft before beginning with the
pre-sinking excavation, which is expected to continue through the first quarter of 2007.
Construction of the head frame and hoisting facilities is planned to begin next spring.
Recent exploration on the west flank of the Hugo North deposit has extended the high grade
copper/gold mineralization on the Western side of the Hugo North deposit commonly referred
to as the West Gold zone, approximately 500 metres further south southwest than
previously expected. Geotechnical implications on the current location of Shaft #2 are
being assessed as the long-term potential of the Hugo North deposit that is expected to be
amenable to block cave mining extends deeper and to the west.
Procurement Various meetings were held during the quarter covering primary crusher,
flotation, regrind, concentrates thickeners and filtration. Orders for certain key long
lead items were tendered.
Page 11 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Project Estimate During Q306, Ivanhoe Mines initiated a significant change to the scope
of the project. The original single line milling process proposed in the
IDP is being changed to two milling lines, initially each of a smaller capacity. Although
this amendment is expected to increase capital costs, it will result in a significant
reduction in the level of technical risks associated with the project.
Increases in concrete and steel costs and the strengthening of the Chinese currency against
the U.S. dollar are also expected to contribute to an increase in the initial capital cost
estimate.
Other Activities The final draft of the site geotechnical report dealing with seismic
conditions of the Oyu Tolgoi site is currently being prepared. Detailed engineering quotes
for the construction of road access to the Mongolia/China border were ongoing during the
quarter. Supplementary Environmental Impact Assessment (EIA) documentation is being
compiled, and the cultural heritage survey and report is now complete with significant
sites identified.
ii) Oyu Tolgoi Exploration.
Drilling
program In Q306, Ivanhoe Mines completed a nine-infilldrill-hole program
planned for the southern portion of the Hugo North deposit. These holes were targeted on
a 600 metres strike length of the greater than 2% copper grade shell extending vertically
300 metres to 400 metres up from the starter SLC zone that is currently being investigated.
Results of this drilling program confirm both the geology and high copper grades across
the 100 metres to 200 metres width of the greater than 2% copper shell. They also indicate
that the high grade mineralization may continue further up dip than previously recognized.
Drilling was also completed on the west flank of the Hugo North deposit commonly referred
to as the West Gold zone. Two sections, 300 metres apart, were drilled with a fan of three
holes per section using navi-drill techniques. Results of the six holes extend the high
grade copper/gold mineralization on the Western side of the Hugo North deposit,
approximately 500 metres further south southwest than previously expected. More
importantly the holes have significantly reduced the volume of a barren, late mineral
granodiorite dyke once interpreted as filling the projected strike extension and limiting
the up dip extension of the mineralization. The combination of these two factors could
have a significant effect on the dimensions of the southern portion of the proposed block
caves. The resource update will incorporate the mineralization delineated by these holes.
Exploration and sterilization drilling two kilometres east of a proposed airport site on
the Entrée Gold Shivee Tolgoi joint-venture property (Entrée JV), which is located
approximately six kilometres north of the northern end of the Hugo North extension, has
resulted in the discovery of basaltic volcanic and quartz monzodiorite intrusive rocks of
similar age and composition to the Oyu Tolgoi deposits. Weak copper and gold
mineralization intersected in three drill holes within these rocks suggests that the Oyu
Tolgoi mineral system extends north.
Page 12 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Ongoing drilling is using one drill rig to continue
exploration for higher grade mineralization.
|
|
|
Geotechnical drilling with the objective to further define the geotechnical
characteristics of the Hugo North deposit will continue through Q406. Three holes have
been collared immediately north of the Entrée JV property line. The objective of drilling
south into the axis of Ivanhoe Mines 100% owned Hugo North deposit is to provide
pre-feasibility level information on the caving characteristics of the deposit. |
|
|
b) |
|
Other Mongolian copper/gold exploration projects. |
|
|
|
|
During Q306, Ivanhoe Mines continued its exploration efforts on various other Mongolian
prospects. During this period, project work focused on the Baruun Tal and Undur Naran
porphyry targets, located 50 kilometres west of Ivanhoe Mines Kharmagtai Project and 20
kilometres northeast of the Oyut Ulaan Project respectively. Limited trenching, soil
geochemistry and ground magnetic surveys carried out during Q306 at both these projects is
summarized below: |
|
|
|
|
Undur Naran project Trenching at Undur Naran totaled 3,768 metres (13 trenches) and
targeted the North and the Central zones, two areas of sub-cropping stockworked syenites
that returned anomalous gold and copper rock-chip assays. The most significant intercepts
are associated with stockwork quartz-sulphide veins. Further mapping and rock-chip
sampling is planned at the Undur Naran project. |
|
|
|
|
Baruun Tal project The numerous prospects at the Baruun Tal project, including the BTT
and the BTU prospect, are located along a 12 kilometres by 5 kilometres area, much of which
is under cover. Trenching totaled 7,625 metres over 32 trenches and was mostly in the areas
under cover along strike from anomalous rock-chip samples. Trench intercepts at the BTT
prospect were generally narrow and of low grade. At the BTU prospect, a 20 by 100 metres
wide area of sheeted to stockwork quartz-hematite-malachite-chalcopyrite veins, hosted in
silica-sericite-albite altered monzodiorite, returned 6 metres at 0.43%, including 2 metres
at 10.60 parts per million (ppm) gold. Narrow intercepts were also recorded from other
prospects. Trench results are under review and no further fieldwork is planned at the
Baruun Tal project for this year. |
|
|
|
|
Other new medium priority targets include Baga Haich, near Tsagaan Tolgoi, where
granite-hosted quartz-chalcopyrite veins outcrop over a 560 by 360 metres area. Eleven of
the 67 samples assayed 0.24 % to 1.78 % copper, whilst 18 returned 104 to 6340 ppm
molybdenum. |
|
|
|
|
The tenement relinquishment program was ongoing throughout 2006. At the end of the
quarter, 1.2 million hectares of the approximately 8.8 million hectares held at the
beginning of 2006 had been relinquished; whilst an additional 3.1 million hectares are
earmarked for relinquishment. The objective of future reconnaissance efforts is to further
decrease the existing tenements holdings. |
Page 13 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
c) |
|
Mongolian coal projects. |
|
|
|
|
Coal Division merger with Asia Gold On August 8, 2006, Asia Golds minority
shareholders approved the proposed merger transaction under which Ivanhoe Mines will
transfer its Mongolian Coal Division to Asia Gold in exchange for
approximately 82.6 million common shares of Asia Gold (for further details see heading d)
Other iv) Mongolia: Asia Gold Corp (Asia Gold)). |
|
|
|
|
Nariin Sukhait Nariin Sukhait is located in the southwest corner of the Omnogovi Aimag
(province) of Mongolia. The deposit is within the Gurvantes Soum (township), 320 kilometres
southwest of the provincial capital of Dalanzadgad and 950 kilometres south of the nations
capital Ulaanbaatar. Nariin Sukhait is located 45 kilometres north of the Mongolia-China
border. At present one north/south 450-kilometre long rail line has been built within China
up to the China/Mongolia border. A second east/west railway line to Ceke has been started
with an estimated late 2008 completion date. |
|
|
|
|
A four month drilling and exploration program at Nariin Sukhait was concluded in July 2006
and 113 holes were drilled. The emphasis was to better delineate the coal within the mine
design area, extend the ore body along strike and down dip, add quality data and to
increase the known resource. Drilling for hydrology and geotechnical information was also
carried out. Results will be interpreted and a new geological report will be generated by
year end. A new mine plan will also be developed. In Q106 total coal resources contained
in two separate fields, the South-East Field and the West Field, were estimated at 124.0
million tonnes of Measured plus Indicated resources, (79.5 million tonnes of Measured
resources and 44.5 million tonnes of Indicated resources). An additional Inferred resource
of approximately 33.8 million tonnes was also calculated. Coal samples from the 2006
program were shipped to Tianjin, China for quality testing. Initial results have been
positive with confirmations of steam, semi soft and metallurgical qualities within the coal
at Nariin Sukhait. Quality modeling will also be carried out to determine the product
distribution. |
|
|
|
|
Norwest Corporation is assisting the Company in planning the mine development at Nariin
Sukhait. The mine plan is expected to support an operation capable of producing four
million tonnes of saleable coal per year. Ultimate capacity is planned to be reached in 5
years. This mine plan will be used by Asia Gold as the basis for applying for the mining
licence required for the operations of the Nariin Sukhait Project. A detailed EIA is being
completed and expected to be submitted along with the mining application. Newly enacted
Mongolian laws provides a ten-year tax protection guarantee for projects exceeding $50
million in investment made within the first five years of the project life. The Nariin
Sukhait project is expected to qualify for a ten year Investment Agreement. |
|
|
|
|
The project is scheduled to start development and construction work following the closing
of the Coal Division merger transaction with Asia Gold and the issuance of the required
permits. Plans for the delivery of mining equipment are in place. Coal production is
projected nine months following the start of pre-stripping |
Page 14 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
|
operations. Initial coal
production for the first twelve months of operations is projected at one million tonnes. |
|
|
|
|
The airstrip and infrastructure, located approximately 2 kilometres from the mine site,
have been completed. A test flight and landing was carried out by the Mongolian Civil
Aviation Authority and the airstrip was certified for operation in
September 2006. A camp facility has been designed and will be built approximately 1.5
kilometres from the airstrip. It will house all mine workers in a rotating work schedule
as well as management and visitors. |
|
|
|
|
Letters of intent for the sale of up to four million tonnes of coal per year were signed
with two Chinese companies. |
|
|
|
|
Tsagaan Tolgoi Coal Project This project is located approximately 105 kilometres west of
the Oyu Tolgoi Project. In 2004 significant coal thicknesses were encountered along a
strike length of six kilometres as a result of deep-trenching efforts and a drilling
program that included a total of 46 drill holes. During the quarter, a 73 drill-hole
program was completed at Tsagaan Tolgoi. The geological model will be updated and
incorporated in a technical report prepared in accordance with National Instrument 43-101. |
|
|
|
|
The objective of the drilling program is to delineate sufficient thermal coal resources to
support the preparation of a formal study on the development of long-life, coal-fired power
plant. This plant is projected to have the capacity to supply electricity to the Oyu Tolgoi
Project and the residents of the sparsely populated southern part of Mongolia. Earlier this
year Norwest Corporation developed a preliminary mine design and mine plans. Preliminary
engineering on various power plant options using Tsagaan Tolgoi coal for fuel was also
completed during the quarter. |
d) Other
|
i) |
|
Kazakhstan: Bakyrchik Project. |
|
|
|
|
During Q306 the mine facilities continued under care and maintenance status and the
necessary winterization activities were completed. Expenditures for the quarter totalled
$1.1 million compared to $0.5 million in Q305. |
|
|
|
|
As part of the Sale and Purchase Agreement and Subsoil Use Contract amendments, which
extended the investment commitment and exploration license by 5 years, the exploration
portion of the work program, approved by the Ministry of Energy and Natural Resources,
started at the end of September 2006. |
|
|
|
|
As a result, the roasting plant construction activities continued to be suspended except
for the completion of some minor construction work, such as the reconstruction of the gold
room. The project group is updating the capital cost of the roasting plant in order to
incorporate the impact of inflation in current construction costs. |
Page 15 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
|
The metallurgical testing laboratory continued to conduct optimization tests on Bakyrchik
ores. All results to date indicate that whole ore roasting remains a viable option
available for Bakyrchik double refractory ores. During the quarter, tailings stabilization
tests using cement were performed. Also, the mining engineering group continued to
supervise the paste fill plant design work carried out by a local design institute. |
|
|
|
|
In Q306, the Company sent senior geologists from Mongolia to Bakyrchik to review the mine
geology and exploration potential of the project area. A program of diamond drilling and
surface exploration will be prepared and submitted to the appropriate authorities for
approval. It is the Companys intention to re-establish a team of Kazakh geologists at the
mine site assisted by key senior geologists seconded from the exploration team at Oyu
Tolgoi. Once the approvals are received for this work and work permits provided for the
key personnel, the work should commence. |
|
|
|
|
Financing alternatives, including a possible public offering of a company holding the
Bakyrchik Project, are currently being considered. |
|
|
ii) |
|
China: Inner Mongolia. |
|
|
|
|
Advanced Exploration Program A total of 2,995 metres of diamond drilling (22 holes) were
completed and 16.9 infill line kilometres (683 soil samples) were taken from the primary
Anomaly Five target area. Holes were targeted on zones with anomalous surface and soil
gold-silver geochemistry and all zones have been adequately tested by the completed
program. Gold and gold-silver mineralized vein zones were intercepted in several holes,
however, the narrow (15 centimetres to 70 centimetres), erratic nature of mineralization
and lack of gold-silver grade continuity within veins and lodes has downgraded the
property. No further work is planned in Q406. |
|
|
|
|
Reconnaissance Exploration Program Two potential gold-silver-copper targets were
identified. |
|
|
|
|
Follow-up exploration, consisting of detailed geological-structural mapping, systematic
rock chip sampling, trenching and ground geophysics will be completed over both prospects
in early 2007, with an aim of defining drill targets for testing in the later part of 2007. |
|
|
iii) |
|
Australia: Cloncurry. |
|
|
|
|
The Cloncurry Project covers an area of more than 1,450 square kilometres in northwestern
Queensland in Australias storied Mount Isa-Cloncurry mining district. Since acquiring the
property in September 2003 Ivanhoe Mines initially has focused on three high potential
copper gold targets: Mt Dore, Swan and Amethyst Castle. Ten holes, totalling 4,621 metres,
were drilled in the quarter. |
|
|
|
|
In Q306, diamond drilling on the Iron Oxide Copper Gold (IOCG) mineralized systems at
Swan and Amethyst Castle yielded encouraging geological information and several drill
intercepts of haematite matrix sulphide-bearing hydrothermal |
Page 16 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
breccias, indicating that Ivanhoe Mines exploration might have clipped the top of deeper
copper-gold-uranium bodies. |
|
|
|
At Amethyst Castle, RC drilling into geophysical targets (mainly induced polarization
targets) yielded intercepts of copper, gold and uranium in the eastern side of the breccia
body. This drilling was followed by a diamond drilling program, with four holes completed
during the quarter and two additional holes drilled after September. The diamond core has
confirmed the presence at Amethyst of a large-scale breccia body hosting IOCG
mineralization, with associated uranium. Further drilling is planned after assay results
are received. |
|
|
|
At the Swan prospect, six holes were drilled for a total of 3,142 metres, with targets
designed to explore the large magnetic anomaly. The southern side of the anomaly proved to
be less mineralized than the northern side and drilling now is extending mineralization to
the northeast. Copper and gold mineralization is associated with widespread intense
albitisation (red rock), which is overprinted by pyroxene, magnetite, pyrite and
chalcopyrite veinlets. Common native copper and chalcocite (supergene?) also have been
observed. Swan is located within a large, distinctive magnetic anomaly that also underlies
the former Mt. Elliot mine and Swell and northern Gossan prospects. This deep-seated
feature appears to have a circular form, with a diameter of approximately one kilometre.
Preliminary drilling and the widespread sodium-calcium alteration at these targets indicate
they are all related to one large mineralized system that remains to be tested at depth.
Extensive drilling is being planned to test this concept. Testing for potential oxide and
primary copper-gold resources at Swan will be evaluated by pattern drilling, initially at
100-metre drill centres. |
|
|
|
In October, drilling moved onto a third prospect, Metal Ridge North, where surface copper
geochemical anomalies, combined with magnetic and conductivity features, are the target for
a three-hole diamond-drill program and a 20-hole RC-drill program. The mineralization
occurs along a northerly trend for several kilometres and appears to be associated with
carbonaceous shales that also display widespread, intense albitisation. |
|
|
|
During the quarter, a comprehensive review of 30 years of previous exploration was
conducted. This resulted in the recognition of numerous new target areas, most of which
have IOCG signatures. There are more than 100 known mineral occurrences and prospects
within Ivanhoe Mines tenements. Some of these are centered on uranium occurrences that
were only partially explored during the 1970s. The historic Kuridala copper mining
district, situated in the northern part of Ivanhoe Mines tenements, has numerous copper,
gold and uranium prospects that will be studied further in preparation for extensive
drilling. Universal Tracking Systems has been engaged to fly a 6,000-line-kilometre survey
over selected parts of Ivanhoe Mines land package, particularly those with associated
uranium, to enhance drill target selection. |
|
|
|
The number of quality IOCG targets that require drill testing is extraordinary and a very
significantly increased exploration program is being planned for Q406 and |
Page 17 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
2007. A dedicated corporate management team, including specialist consultants, will be
assembled to take the Cloncurry Project forward into 2007. |
|
iv) |
|
Mongolia: Asia Gold Corp. (Asia Gold). |
|
|
|
Coal Transaction On August 8, 2006 the minority shareholders of Asia Gold approved the
acquisition of Ivanhoe Mines Mongolian Coal Division. The acquisition agreement provides
for Asia Gold to acquire the Coal Division in exchange for approximately 82.6 million Asia
Gold shares. The proposed transaction would result in Asia Gold becoming a majority-owned
(88.8% on a fully diluted basis), publicly-traded subsidiary of the Company, with coal and
mineral exploration divisions. |
|
|
|
Asia Gold and the Company have agreed to extend, on an indefinite basis, the closing date
for the transaction to take into account unanticipated delays in obtaining regulatory
approval in Mongolia for the transfer of certain coal exploration licenses. The
transaction is expected to close following receipt from the Mongolian authorities of
approval for these license transfers. |
|
|
|
Mongolia Exploration Exploration results from the Khongor porphyry copper-gold project in
southern Mongolia confirm a mineralized strike length of 2 kilometres. About half of this
strike length (Khongor North) is located within the West Falcon Gobi Property, a
joint-venture property with BHP Billiton World Exploration Inc. (BHP Billiton). The
balance is located on the Tsakhir license, referred to as Khongor South, which is optioned
by Asia Gold from Solomon Resources Limited and Gallant Minerals Ltd. |
|
|
|
In August 2006, further work was completed to improve the resolution of the induced
polarization survey conducted in April 2006. The phase two drilling program, which was
completed in early July 2006, intersected high grade mineralization and further mapping,
sampling and ground magnetic surveys have defined four new drill targets. Two new zones of
strong quartz stock work were also discovered in August 2006. |
|
|
|
Pursuant to an Option Agreement with BHP Billiton dated June 30, 2005, BHP Billiton can
earn a 50% interest in the West Falcon Gobi Property by spending $3.5 million on
exploration prior to December 31, 2007, and an additional 20% interest by funding a
feasibility study up to a maximum value of $45 million. |
|
|
|
After a Falcon airborne gravity gradiometer survey, BHP Billiton mobilized a multipurpose
drill rig to test for the presence of favorable coal targets and directly test for the
depth extension of coal seams. A total of 34 holes were drilled. |
|
|
|
Bulgaria Exploration In the joint venture agreement with Hereward Ventures Bulgaria AD,
Asia Gold can earn up to an 80% interest in certain licenses by completing two $2 million
exploration programs. On September 21, 2006 Asia Gold completed the first stage and has
earned a 51% participating interest in the joint venture. Asia Gold now has the option to
earn an additional 29% interest in |
Page 18 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
the four licenses, for a total of 80%, by spending an additional $2 million in exploration
expenditures before March 2009. |
|
|
|
A nine-hole diamond drilling program totalling 1,441 metres with was completed in July
2006. The drilling program targeted the Tashlaka Main and Tashlaka South prospects gold
system. The drill results were encouraging and further drilling is required to fully test
the extent of mineralization. Soil sampling and trenching were also being conducted on
other parts of the licenses. |
|
|
|
Indonesia Effective September 7, 2006 a definitive Joint Venture Agreement and
Cooperation Agreement was signed with Harita Mineral. Under the terms of this agreement,
Asia Gold can earn up to an 85% interest in the Kaputusan prospect by spending $300,000 on
exploration during the first year of the joint venture. |
|
|
|
Camp construction, line cutting and logistical preparation has been established on the
Kaputusan porphyry copper-gold project. A first-stage exploration program comprising
geological mapping, an IP geophysical survey and trenching began in March 2006. Detailed
geological mapping by Asia Gold has confirmed the presence of a porphyry copper-gold
mineralization and new trenches are now being dug to extend the mineralized zones. A
3,000-metre diamond drill program is being planned for 2007. |
|
|
|
Qualified Persons The Oyu Tolgoi Project and the Nariin Sukhait Project have been
identified as the mineral projects that are material to Ivanhoe Mines. |
|
|
|
Disclosure of a scientific or technical nature in this MD&A in respect of each of these
mineral resource properties of Ivanhoe Mines was prepared by or under the supervision of
the qualified persons (as that term is defined in NI 43-101) listed below: |
|
|
|
|
|
Property |
|
Qualified Person |
|
Relationship to the Company |
Oyu Tolgoi Project
|
|
Charles P.N. Forster
|
|
Employee |
Nariin Sukhait Project
|
|
Steven Kerr
(Norwest
Corporation)
|
|
Independent consultant |
Page 19 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INVESTMENT IN JOINT VENTURE
MONYWA COPPER PROJECT (S&K MINE), MYANMAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended September 30, |
|
|
|
Total Operation |
|
|
Companys 50% net share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
(decrease) |
|
|
2006 |
|
|
2005 |
|
|
(decrease) |
|
Total tonnes moved (1) |
|
Tonnes(000s) |
|
|
2,405 |
|
|
|
3,357 |
|
|
|
(28 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Tonnes of ore to heap |
|
Tonnes(000s) |
|
|
1,602 |
|
|
|
2,151 |
|
|
|
(26 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Ore grade |
|
CuCN% |
|
|
0.32 |
% |
|
|
0.51 |
% |
|
|
(37 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Strip ratio |
|
Waste/Ore |
|
|
0.45 |
|
|
|
0.56 |
|
|
|
(20 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Cathode production |
|
Tonnes |
|
|
5,980 |
|
|
|
8,497 |
|
|
|
(30 |
%) |
|
|
2,990 |
|
|
|
4,249 |
|
|
|
(30 |
%) |
Tonnage sold |
|
Tonnes |
|
|
5,649 |
|
|
|
8,222 |
|
|
|
(31 |
%) |
|
|
2,825 |
|
|
|
4,111 |
|
|
|
(31 |
%) |
Average sale price received |
|
US$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.51 |
|
|
$ |
1.80 |
|
|
|
95 |
% |
Sales |
|
US$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,858 |
|
|
|
15,439 |
|
|
|
22 |
% |
Cost of operations |
|
US$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,647 |
|
|
|
4,633 |
|
|
|
(21 |
%) |
Operating profit |
|
US$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,064 |
|
|
|
9,166 |
|
|
|
53 |
% |
Unit cost of operations |
|
US$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.59 |
|
|
$ |
0.51 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine month period ended September 30, |
|
|
|
Total Operation |
|
|
Companys 50% net share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
(decrease) |
|
|
2006 |
|
|
2005 |
|
|
(decrease) |
|
Total tonnes moved (1) |
|
Tonnes(000s) |
|
|
7,934 |
|
|
|
10,256 |
|
|
|
(23 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Tonnes of ore to heap |
|
Tonnes(000s) |
|
|
6,442 |
|
|
|
6,679 |
|
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Ore grade |
|
CuCN% |
|
|
0.37 |
% |
|
|
0.53 |
% |
|
|
(30 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Strip ratio |
|
Waste/Ore |
|
|
0.25 |
|
|
|
0.49 |
|
|
|
(49 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Cathode production |
|
Tonnes |
|
|
14,406 |
|
|
|
27,218 |
|
|
|
(47 |
%) |
|
|
7,203 |
|
|
|
13,609 |
|
|
|
(47 |
%) |
Tonnage sold |
|
Tonnes |
|
|
13,849 |
|
|
|
26,647 |
|
|
|
(48 |
%) |
|
|
6,925 |
|
|
|
13,324 |
|
|
|
(48 |
%) |
Average sale price received |
|
$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.44 |
|
|
$ |
1.66 |
|
|
|
108 |
% |
Sales |
|
$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,941 |
|
|
|
46,197 |
|
|
|
(5 |
%) |
Cost of operations |
|
$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,988 |
|
|
|
12,716 |
|
|
|
(6 |
%) |
Operating profit |
|
$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,217 |
|
|
|
28,382 |
|
|
|
(1 |
%) |
Unit cost of operations |
|
US$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.79 |
|
|
$ |
0.43 |
|
|
|
81 |
% |
|
|
|
(1) |
|
Includes ore and waste material |
Copper prices on LME averaged $3.48 per pound in Q306, compared to $1.70 per pound in Q305 and
$3.29 per pound in Q206, representing an increase of 105% and 6% respectively. All exports of
copper currently are being settled using the average LME copper price for the second month
following the month of shipment. In Q306 the mine sold 5,649 tonnes of copper cathode, a 30%
increase over Q206 and a 31% decrease from Q305. A reduction in copper production is forecasted
for Q406 due to anticipated shortages of chemicals.
Mine operations during the quarter continued to be affected by a shortage of trucking capacity
caused by delays in obtaining the necessary import permits. Total tonnage moved in Q306 decreased
by 28% compared to Q305. Total cathode production in Q306 decreased by 30% primarily due to a
26% decrease in tonnages placed on the heaps and a 37% decrease in copper grades.
Page 20 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During Q306 the unit operating cash costs increased by approximately 15% compared to Q305. The
net increase in operating cash costs was mainly attributed to increases in fuel and power less
decreases in chemical used in the leaching process.
In early Q306, the management of the S&K Mine was able to obtain from the Myanmar authorities the
necessary import permits for its previously ordered equipment. The equipment arrived at the mine
site at the beginning of August 2006 and was commissioned in September 2006.
In September 2006, a decision of first appellate order was issued by Myanmar authorities affirmed
the imposition of a commercial tax on all S&K Mines export sales since April 1, 2003. The
management of the Company believes that its S&K Mines joint venture agreement exempts its Myanmar
operations from such tax applicable on export sales. Additional appeals were filed in Q406 with
the Myanmar tax authorities. The management of the S&K Mine is also in the process of appealing an
income tax assessment for the periods ending March 31, 2005 and 2006. Notwithstanding the various
commercial and income tax appeals, the Company has recorded provisions to provide for the potential
impact of these assessments to the operations of the S&K Mine.
At the end of Q306, the S&K Mine had $85.6 million in cash.
DISCONTINUED OPERATIONS
In February 2005, the Company sold its Savage River mining operations (Savage River) located
in Tasmania, Australia for two initial payments totalling $21.5 million (received by January 31,
2006), plus a series of five contingent, annual payments that commenced on March 31, 2006. On
March 31, 2006, Ivanhoe Mines received its first contingent annual payment of $28.0 million with an
additional $0.2 million adjustment received in April 2006. This $28.2 million payment included
$7.9 million in contingent income recognized in the first quarter of 2006.
To date, Ivanhoe Mines has received $49.7 million in proceeds from the sale of the Project.
At September 30, 2006, Ivanhoe Mines has accrued $6.9 million as receivable in relation to the
second contingent annual payment due in March 2007. This amount is based upon the actual tonnes of
iron ore sold during the six month period ended September 30, 2006 and the escalating price
formula.
In June 2006, the mines concentrator was damaged by a fire. As a result, pellet production for
the 12-month-period ended March 31, 2007 is estimated by the management of Savage River to total
1.8 million tonnes down from a previous estimate of 2.2 million tonnes. Also, based on the 3%
reduction in pellet prices negotiated in Q206, the Company is expecting to receive approximately
$20.3 million in total pellet premium at the end of March 2007, representing approximately a 28%
reduction from the
year ended March 31, 2006. Under the Companys agreement to sell the mine, this
Page 21 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
reduction will be
recouped in future years as the fire did not impact Savage Rivers current reserves.
ADMINISTRATIVE AND OTHER
General and administrative
The $1.8 million increase in general and administrative expenditures in Q306 was primarily due to
a $0.9 million increase in stock-based compensation charges.
Interest income
Interest income increased by $0.4 million in Q306 due to holding higher amounts of cash and cash
equivalents and earning higher rates of interest on Canadian dollar investments.
Foreign exchange (losses) gains
In Q306, Ivanhoe Mines incurred a $0.4 million foreign exchange loss, compared to a $7.1 million
gain in Q305.
Share of loss of significantly influenced investees
On August 31, 2006, Jinshan completed a private placement which diluted the Companys investment in
Jinshan. As a result of this transaction, the Company ceased consolidation of Jinshan from August
31, 2006 and commenced equity accounting for its investment. During September 2006, the Company
recorded a $0.7 million loss on this investment.
Page 22 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY OF QUARTERLY RESULTS
The following table summarizes our quarterly results for the last eight financial quarters:
(Expressed in millions of U.S. dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
Sept 30 |
|
|
Jun 30 |
|
|
Mar 31 |
|
|
Dec 31 |
|
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
2005 |
|
|
Exploration expenses |
|
|
(65.1 |
) |
|
|
(39.9 |
) |
|
|
(27.0 |
) |
|
|
(40.1 |
) |
General and administrative |
|
|
(9.1 |
) |
|
|
(9.8 |
) |
|
|
(11.0 |
) |
|
|
(5.8 |
) |
Share of (loss) income from joint venture |
|
|
9.0 |
|
|
|
(2.4 |
) |
|
|
4.5 |
|
|
|
(0.5 |
) |
Gain (loss) on foreign exchange |
|
|
(0.4 |
) |
|
|
4.7 |
|
|
|
(0.2 |
) |
|
|
(0.4 |
) |
Net (loss) from continuing operations |
|
|
(68.0 |
) |
|
|
(45.7 |
) |
|
|
(31.1 |
) |
|
|
(49.8 |
) |
Net income from discontinued operations |
|
|
1.5 |
|
|
|
5.4 |
|
|
|
7.9 |
|
|
|
7.9 |
|
Net (loss) |
|
|
(66.4 |
) |
|
|
(40.3 |
) |
|
|
(23.2 |
) |
|
|
(41.8 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operation |
|
|
(0.20 |
) |
|
|
(0.14 |
) |
|
|
(0.10 |
) |
|
|
(0.16 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
Total |
|
|
(0.20 |
) |
|
|
(0.12 |
) |
|
|
(0.07 |
) |
|
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept 30 |
|
|
Jun 30 |
|
|
Mar 31 |
|
|
Dec 31 |
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
Exploration expenses |
|
|
(28.9 |
) |
|
|
(33.8 |
) |
|
|
(24.4 |
) |
|
|
(24.2 |
) |
General and administrative |
|
|
(7.3 |
) |
|
|
(5.9 |
) |
|
|
(4.8 |
) |
|
|
(6.2 |
) |
Share of income from joint venture |
|
|
8.0 |
|
|
|
7.8 |
|
|
|
7.7 |
|
|
|
6.5 |
|
Gain (loss) on foreign exchange |
|
|
7.1 |
|
|
|
1.7 |
|
|
|
(0.6 |
) |
|
|
3.5 |
|
Net (loss) from continuing operations |
|
|
(20.6 |
) |
|
|
(31.1 |
) |
|
|
(24.2 |
) |
|
|
(26.6 |
) |
Net income from discontinued operations |
|
|
6.4 |
|
|
|
5.9 |
|
|
|
15.7 |
|
|
|
9.5 |
|
Net (loss) |
|
|
(14.3 |
) |
|
|
(25.2 |
) |
|
|
(8.5 |
) |
|
|
(17.1 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operation |
|
|
(0.07 |
) |
|
|
(0.10 |
) |
|
|
(0.08 |
) |
|
|
(0.08 |
) |
Discontinued operations |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
0.05 |
|
|
|
0.03 |
|
|
Total |
|
|
(0.05 |
) |
|
|
(0.08 |
) |
|
|
(0.03 |
) |
|
|
(0.05 |
) |
|
CASH RESOURCES AND LIQUIDITY
At September 30, 2006, consolidated working capital was $140.3 million, including cash of
$131.6 million, compared with working capital of $127.6 million and cash of $101.7 million at
December 31, 2005. Following receipt of Rio Tintos investment, the Companys cash position at the
end of October 2006 was approximately $410 million.
Operating activities The $67.0 million of cash used in operating activities from continuing
operations in Q306 primarily was the result of $65.1 million in exploration expenditures,
approximately $6.2 million in general and administration costs (net of non-cash stock-based
compensation) and $3.8 million net inflows from working capital items.
Investing activities In Q306, $12.4 million was used in investing activities, mainly consisting
of $7.8 million invested in property plant and equipment acquisitions and a
Page 23 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
$4.2 million cash
reduction on commencement of equity accounting for the Companys investment in Jinshan.
Financing activities Financing activities of $9.5 million in Q306 were primarily due to proceeds
received by subsidiaries upon the issuance of shares to minority interests.
SHARE CAPITAL
At November 14, 2006, the Company had a total of 373.1 million common shares issued and
outstanding. In addition, the Company had the following share purchase warrants and incentive
stock options outstanding:
|
|
|
5.76 million share purchase warrants exercisable until February 15, 2007 to purchase up
to 576,000 common shares of the Company at $8.68 per share. Each 10 share purchase
warrants entitle the holder to purchase one common share. During 2006, the expiry date of
these share purchase warrants was extended from February 2006 until February 2007; |
|
|
|
|
approximately 14 million incentive stock options outstanding, with a weighted average
exercise price per share of Cdn$8.93. Each option is exercisable to purchase a common
share of the Company at prices ranging from Cdn$2.31 to Cdn$12.70 per share. |
|
|
|
|
on October 27, 2006, Rio Tinto was granted non-transferable warrants over approximately
92 million Company shares in two equal tranches of approximately 46 million shares at
various exercise prices. When exercised, the warrants will result in additional funds to
the Company of up to US$808 million that, when combined with the private placements, will
total approximately US$1.5 billion. These warrants entitle Rio Tinto to increase its
interest in the Company to up to 33.35% of the Companys fully diluted issued share
capital.
Exercise of the warrants is conditional on the approval of the Companys shareholders at a
special meeting to be convened on November 30, 2006. |
OUTLOOK
During Q306, the Company has devoted its management and financial resources to furthering the
exploration and development of the Oyu Tolgoi Project. The Company has continued to explore for
minerals in other parts of Mongolia, Eastern Asia and Australia. The Company also is assessing the
development potential, extent, and value of its strategically located coal resources discovered on
Ivanhoe Mines exploration concessions in southern Mongolia.
Page 24 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Strategic Partnership with Rio Tinto Plc On October 18, 2006 the Company announced that it had
entered into a strategic partnership with Rio Tinto Plc. The first tranche of Rio Tintos
investment in the Company closed on October 27, 2006 resulting in Rio Tinto now holding an initial
9.95% equity investment in the Company. The investment of Rio Tinto in the Company is structured
in the following stages:
|
|
|
On October 27, 2006, Rio Tinto purchased approximately 37.1 million shares of the
Company at a price of $8.18. This investment gave Rio Tinto 9.95% of the Companys
issued share capital as enlarged by the placement, for a total investment of $303
million. |
|
|
|
|
Rio Tinto will take up a second tranche private placement following the
satisfactory conclusion of an Investment Agreement between Ivanhoe Mines and the
Government of Mongolia on terms mutually acceptable to the Company and Rio Tinto. Rio
Tinto has the option to purchase the second tranche earlier. This second tranche will
consist of approximately 46.3 million shares at a subscription price of $8.38, giving
total proceeds to the Company of a further $388 million. Together, the first and
second tranches, an additional top-up right, will give Rio Tinto 19.9% of the
Companys enlarged issued share capital for a total combined investment of at least
$691 million. |
|
|
|
|
As part of the first tranche private placement, Rio Tinto also received
non-transferable warrants in two equal tranches exercisable to purchase up to 92
million shares additional shares of the Company at various exercise prices. If
exercised, the warrants will result in additional funds to the Company of up to $808
million that, when combined with the private placements, will total approximately $1.5
billion. These warrants entitle Rio Tinto to increase its interest in the Company to
up to 33.35% of the Companys fully diluted share capital. Exercise of the warrants is
conditional on the approval of the Companys shareholders at a special meeting that is
to be convened on November 30, 2006. |
The strategic partnership with Rio Tinto is expected to provide sufficient funds for the Company to
build Oyu Tolgoi at the current planned production levels. The Company has agreed to use a minimum
of ninety percent of the proceeds of Rio Tintos investment for the development of Oyu Tolgoi.
Based on the Companys financial position at September 30, 2006, adjusted for the Rio Tinto equity
investment, the Company believes that existing funds should be sufficient to fund its minimum
obligations including planned Australian and Bakyrchik obligations and general corporate activities
for at least the next 12 months. Should the Company be unable to negotiate an Investment Agreement
that is acceptable to Rio Tinto with the result that Rio Tinto elects not to proceed with the
second tranche private placement, Ivanhoe Mines may delay, postpone or curtail certain of its
planned activities for 2007 and thereafter. The Company will continue to assess the need for
project financing relating to the development of power and other infrastructure related activities.
Page 25 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company cannot predict how soon the negotiations for an Investment Agreement can be finalized.
Accordingly, there can be no assurance that an Investment Agreement containing all of the terms
sought by Ivanhoe Mines and Rio Tinto can be obtained in the foreseeable future, or at all. In
addition, there can be no assurance that the Company will be able to close future financings,
including private placement and warrant transactions with Rio Tinto, obtain project financing or
otherwise raise capital before its existing cash resources are expended. See Risks and
Uncertainties.
Investment Agreement with the Government of Mongolia During Q306, the Company devoted
considerable attention to assessing the impacts of the excess profit tax passed by the Mongolian
Parliament in May 2006 and the revisions to the Minerals Law and the Tax Law, passed in July 2006.
The final Mongolian text of these legislative enactments was released in August 2006 with the
Government of Mongolia stating that it would not release a definitive English translation of the
new laws. The Company has reviewed available translations of the revised Minerals Law and Tax Law
to assess the effect that the changes will have on the Ivanhoe Mines plan to develop the Oyu
Tolgoi Project.
Based on this review, the Company has determined that the underlying value of the Oyu Tolgoi
Project, as presented in the September 2005 Integrated Development Plan, has not been materially
affected.
Following passage of the amended Minerals Law and Tax Law, the Company and the Government of
Mongolia resumed negotiations on a formal, long-term Investment Agreement. In August 2006, the
Government of Mongolia established a Working Group of representatives from the ministries of
Finance, Industry and Trade, Justice and Home Affairs and Nature and Environment to work with
Ivanhoe Mines on a formal Investment Agreement. To date, the Company has met with the Working
Group on one occasion to discuss the Oyu Tolgoi Project and the Companys plans, the resolution of
remaining issues necessary for the satisfactory conclusion of the Investment Agreement,
particularly in light of the amendments to the Minerals Law and the Tax Law, and the process
forward to achieve a prompt resolution of the Investment Agreement.
The Investment Agreement is intended to be a comprehensive agreement that will create a stable tax
and fiscal environment, cover arrangements for essential infrastructure, including roads, water and
the supply of interim and long-term electrical power, and to confirm the Companys commitments to
maximize opportunities to educate, train and employ Mongolians.
While there have been some initial discussions between Ivanhoe Mines and the Working Group, the
Companys strategic partnership with Rio Tinto will likely result in changes to its negotiating
team. Representatives of Rio Tinto are expected to be appointed to the Companys negotiation team
shortly. Once a draft Investment Agreement has been prepared by the Working Group, it will be
submitted to the Mongolian Governments Cabinet for approval.
Page 26 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Amendments to Minerals Law and Tax Law
Significant amendments to the Minerals Law and Tax Law include the following:
Strategic Deposits The Government of Mongolia has the option to acquire interests in mineral
deposits deemed to be strategic. The law defines a strategic deposit as one with potential to
have an impact on Mongolias national security, economic and social development, with minerals that
are in strong international demand; or a deposit capable of annual mineral production that exceeds
five percent of Mongolias gross domestic product. The Government will have a qualified right to
acquire an interest of 1) up to 34% in strategic deposits discovered through privately financed
exploration; and 2) up to 50% in deposits that were discovered through the use of state funds
during the former Soviet era. The Oyu Tolgoi discoveries on the Companys licenses, and on the
adjoining Entrée Gold joint-venture property, were financed entirely by private capital. The
Companys coal discoveries in the Nariin Sukhait region, and at Tsagaan Tolgoi, west of the Oyu
Tolgoi Project, also have been funded solely by private capital.
The Minerals Law states that any acquisition of a state interest in a mining project will be
subject to negotiation with the license holder as part of the Investment Agreement process.
Although specific provisions of the revised Minerals Law need to be addressed, the extent of state
participation will be determined in part on a project-by-project basis by the proportion of the
project capital that the state is prepared to invest. It is anticipated that the Government of
Mongolia will initiate a process to develop regulations that address and provide greater meaning to
the amended Minerals Law.
Increased royalty
The Governments royalty on all metals was doubled to 5.0%.
Lower tax rates
The 30% income tax rate on personal and corporate income was reduced to 10% and 25% respectively.
The value added tax was reduced from 15% to 10%.
Amendments to license maturity
The term of an exploration license was increased from seven to nine years. The maximum term for a
mining license was reduced from 100 years to 70 years. At this time, it is not clear if those
amendments will apply retroactively to existing licenses.
Employment requirements
A license holder is obligated to employ no more than 10% foreign citizens and faces a monthly
surcharge of ten times the minimum monthly salary for each foreign citizen employee above the 10%
limit.
Listing requirements
Entities holding a mining license for a deposit classified as being of strategic importance now are
required to list at least 10% of their shares on the Mongolian Stock Exchange. It is uncertain, at
present, how this requirement will be implemented in practice.
Page 27 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Amendments to the maximum duration of Investment Agreements
Another favorable aspect of the amended Minerals Law is that the maximum duration of Investment
Agreements has been set as follows:
|
|
|
Investment between $50-$100 million 10-year term |
|
|
|
|
Investment between $100-$300 million 15-year term |
|
|
|
|
Investment greater than $300 million 30-year term. |
The Oyu Tolgoi Project qualifies for an Investment Agreement with a thirty-year term.
Other income tax amendments
Amendments to the Tax Law also include the introduction of a 10% investment tax credit, the
introduction of a three-year loss-carry-forward and improved depreciation allowances. These
amendments are expected to compensate for the elimination of the tax holidays that previously
applied only to foreign-owned companies, and not to domestic entities.
Excess Profit Tax In May 2006, an excess profit tax was approved by the Mongolian Parliament.
The tax, at a rate of 68%, will apply to sales revenue, net of all selling and treatment charges,
which exceeds certain threshold levels for copper and gold.
Based on the Companys initial assessment, the effective price at which the tax will apply to Oyu
Tolgoi copper is currently estimated to be $1.45 per pound, since the legislated base price of
$1.18/lb along with the cost of external smelting and realization costs can be deducted from sales
proceeds.
Clarification received from the Government also has confirmed that the new tax would not be applied
to copper smelted in Mongolia and would not apply to the gold contained in a copper concentrate.
Oyu Tolgoi will be a producer of copper concentrate, and gold produced at Oyu Tolgoi will be
contained in copper concentrate.
In meetings with senior Government representatives, the Company reaffirmed its willingness to work
with the Government to have downstream smelting capacity built in Mongolia. The IDP financial
results, released in September 2005, were based on metal prices that are below the metal-price
thresholds set by this new tax on revenue. As a result, the management of the Company believes
that the new tax on revenue should not compromise the basis for the development of the Oyu Tolgoi
Project.
Asset rationalization Pursuant to the private placement agreement with Rio Tinto, the Company has
agreed to consult with Rio Tinto and to use its best efforts to formulate timetables and strategies
for the orderly disposition of all of its non-core assets situated outside of Mongolia. The
Company is continuing to explore opportunities to rationalize non-core assets through potential
disposition alternatives involving the outright or partial sale of non-core project interests, the
formation of one or more joint ventures in respect of certain non-core projects or other
transactions that would dilute or eliminate the Companys interest in, and relieve the Company of
financial obligations in respect of, such non-core projects.
Page 28 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pursuant to the private placement agreement with Rio Tinto, Ivanhoe Mines has also agreed to
dispose of its interest in the Monywa Copper Project, and any other assets held by Ivanhoe Mines in
the Union of Myanmar, by February 1, 2007. If such disposition does not occur by that date, Rio
Tinto has the right to cause Ivanhoe Mines to transfer all of its Myanmar assets into a trust of
which none of Rio Tinto, Robert M. Friedland, the Company, their respective affiliates, any person
related to any of them, or persons resident or controlled by residents of Myanmar are trustees or
beneficiaries. In consideration for such transfer, Ivanhoe Mines would receive a promissory note
issued by the trust in an amount not less than US$40 million plus 50% of the cash receivable from
the Myanmar assets at the time of sale. Ivanhoe Mines would be entitled to additional compensation
from any such future sale of the Myanmar assets by the trust in an amount to be determined but not
less than 50% of the amount by which such sale proceeds exceed the amount outstanding under the
promissory note.
In 2005, the Company signed an MOU with three large established Korean corporations with the intent
to sell a significant portion of the Companys interest in the S&K Mine. The MOU, which is
non-binding, is subject to completion of due diligence, currently ongoing, and various approvals,
including approval from Myanmar governmental authorities.
The Companys principal objectives are to generate, or otherwise preserve, cash and to devote more
managerial and financial resources to the Oyu Tolgoi Project. There can be no assurance that any
disposition of non-core assets presently under consideration will occur on a timely basis, or at
all.
CONTRACTUAL OBLIGATIONS and OFF BALANCE SHEET ARRANGEMENTS
As of September 30, 2006, there were no significant changes in our contractual obligations and
commercial commitments from those reported in our Managements Discussion and Analysis for the year
ended December 31, 2005.
At the end of September 30, 2006, the Company did not have any off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future effect on the results of operations or
financial condition of the Company.
CRITICAL ACCOUNTING ESTIMATES and RECENT ACCOUNTING PRONOUNCEMENTS
The preparation of financial statements in conformity with GAAP in the United States of
America requires the Company to establish accounting policies and to make estimates that affect
both the amount and timing of the recording of assets, liabilities, revenues and
Page 29 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
expenses. Some of
these estimates require judgments about matters that are inherently uncertain. The Companys
significant accounting policies and the estimates derived there from identified as being critical
are substantially unchanged from those disclosed in its MD&A for the year ended December 31, 2005.
On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based Payment,
on a modified prospective basis. Prior to January 1, 2006, the Company recorded compensation costs
using the fair value based method in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation.
RISKS AND UNCERTAINTIES
The following have been identified as material risks and uncertainties with respect to Rio
Tintos equity investment in the Company pursuant to the private placement agreement:
As a result of the rights to acquire common shares and other rights granted to Rio Tinto under the
private placement agreement, Rio Tinto has the ability to significantly influence the business and
affairs of the Company.
The first tranche private placement, together with the additional rights granted to Rio Tinto to
obtain additional common shares pursuant to the second tranche private placement and the exercise
of the warrants, will give Rio Tinto the voting power to significantly influence the policies,
business and affairs of the Company and the outcome of any significant corporate transaction or
other matter, including a merger, business combination or a sale of all, or substantially all, of
the Companys assets. Subject to certain limited exceptions, Rio Tinto also has a right of first
refusal with respect to any proposed disposition by the Company of an interest in the Oyu Tolgoi
Project. Rio Tintos share position in the Company and its right of first refusal with respect to
the Oyu
Tolgoi Project may have the effect of delaying, deterring or preventing a transaction involving a
change of control of the Company in favour of a third party that otherwise could result in a
premium in the market price of the common shares in the future.
Rio Tinto will also be able to significantly influence the management, development and operation of
the Oyu Tolgoi Project through its representatives on the Technical Committee, which will manage
all aspects of the Oyu Tolgoi Project. Provided Rio Tinto maintains a minimum level of
shareholding in the Company, Rio Tintos appointees to the Technical Committee will have a veto
over certain specified material decisions during the five year period following closing of the
first tranche private placement and, thereafter, Rio Tinto appointees will represent a majority of
the members of the Technical Committee and will thereby be entitled to control the ongoing
decisions made by the Technical Committee.
Page 30 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company may be unsuccessful in obtaining an Investment Agreement with the Government of
Mongolia on terms that are acceptable to Rio Tinto.
Certain concessions and accommodations that the Company is seeking from the Government of Mongolia
respecting taxation, fiscal, legal and other matters germane to the development and operation of
the Oyu Tolgoi Project may be inconsistent with, or not recognized by, the prevailing laws of
Mongolia and the Government of Mongolia may be unable or unwilling to take the executive or
legislative action necessary in order to grant all of the concessions and accommodations sought by
the Company to be included in an Investment Agreement for the Oyu Tolgoi Project. Rio Tintos
obligation to complete the second tranche private placement is subject to the Company obtaining an
Investment Agreement on terms acceptable to Rio Tinto. Until an Investment Agreement with the
Government of Mongolia is actually finalized and approved, it is not possible to predict to what
extent the Company will be successful in negotiating and obtaining terms and conditions in an
Investment Agreement that is acceptable to Rio Tinto. Any significant delay in successfully
concluding such an agreement will have the effect of extending the exercise dates of Rio Tintos
warrants.
If the second tranche private placement is not completed and the warrants are not exercised, there
can be no assurance that the Company will be capable of raising the additional funding that it
needs to develop the Oyu Tolgoi Project into operating mines.
The ongoing development of the Oyu Tolgoi Project depends upon the Company having access to the
financial resources necessary to fund the requisite development expenditures. If the second tranche
private placement is not completed and/or the warrants are not exercised by Rio Tinto, there is no
assurance that the Company will be successful in obtaining financing from other sources necessary
for development of the Oyu Tolgoi Project, on favourable terms or at all. Failure to obtain such
additional financing on a timely basis may cause the Company to postpone its development plans,
forfeit rights in some or all its properties or joint ventures or reduce or terminate some or all
of its planned operations.
New directors of the Company appointed by Rio Tinto may be officers and/or directors of Rio Tinto
Group companies or other mineral resource companies and there is the potential that such directors
will encounter conflicts of interest while acting in the capacity of directors of the Company.
Rio Tinto is entitled to nominate directors to the board of directors of the Company in proportion
to its holdings of the Companys issued and outstanding common shares from time to time. Certain
of these nominees are or may be directors or officers of, or have significant shareholdings in, Rio
Tinto companies or other mineral resource companies and, to the extent that such companies may
engage in business relationships with the Company, the directors of the Company appointed by Rio
Tinto may have conflicts of interest in negotiating and concluding terms of such relationships.
Such companies may also compete with the Company for the acquisition of mineral property interests.
In the event that any such conflict of interest arises, a director who has such a conflict must
disclose the conflict to a meeting of the directors of the Company and abstain from voting for or
against the approval of such a participation or such terms. In appropriate cases, the
Page 31 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Company will
establish a special committee of independent directors to review a matter in which several
directors, or management, may have a conflict. In accordance with the Yukon Business Corporations
Act, the directors of the Company are required to act honestly, in good faith and in the best
interests of the Company. In determining whether or not the Company will participate in a
particular program and the interest therein to be acquired by it, the directors will primarily
consider the potential benefits to the Company, the degree of risk to which the Company may be
exposed and its financial position at the time.
Except as disclosed above, material risks and uncertainties affecting Ivanhoe Mines, their
potential impact, and the Companys principal risk management strategies are substantially
unchanged from those disclosed in its MD&A for the year ended December 31, 2005.
RELATED-PARTY TRANSACTIONS
The Companys related-party transactions in Q306 are substantially unchanged from the
disclosure in its MD&A for the year ended December 31, 2005.
CAUTIONARY STATEMENTS
LANGUAGE REGARDING RESERVES AND RESOURCES
Readers are advised that National Instrument 43-101 of the Canadian Securities Administrators
requires that each category of mineral reserves and mineral resources be reported separately. For
detailed information related to Company resources and reserves,
readers should refer to the Annual Information Form of the Company for the year ended December 31,
2005, and other continuous disclosure documents filed by the Company since January 1, 2006, at
www.sedar.com.
NOTE TO UNITED STATES INVESTORS CONCERNING ESTIMATES OF MEASURED, INDICATED AND INFERRED RESOURCES
This document, including the documents incorporated by reference herein, has been prepared in
accordance with the requirements of securities laws in effect in Canada, which differ from the
requirements of United States securities laws. Without limiting the foregoing, this document,
including the documents incorporated by reference herein, uses the terms measured, indicated
and inferred resources. United States investors are advised that, while such terms are recognized
and required by Canadian securities laws, the SEC does not recognize them. Under United States
standards, mineralization may not be classified as a reserve unless the determination has been
made that the
Page 32 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
mineralization could be economically and legally produced or extracted at the time
the reserve determination is made. United States investors are cautioned not to assume that all or
any part of measured or indicated resources will ever be converted into reserves. Further,
inferred resources have a great amount of uncertainty as to their existence and as to whether
they can be mined legally or economically. It cannot be assumed that all or any part of the
inferred resources will ever be upgraded to a higher category. Therefore, United States investors
are also cautioned not to assume that all or any part of the inferred resources exist, or that they
can be mined legally or economically. Disclosure of contained ounces is permitted disclosure
under Canadian regulations; however, the SEC only permits issuers to report resources as in place
tonnage and grade without reference to unit measures. Accordingly, information concerning
descriptions of mineralization and resources contained in this document, or in the documents
incorporated by reference, may not be comparable to information made public by United States
companies subject to the reporting and disclosure requirements of the SEC. National Instrument
43-101 Standards of Disclosure for Mineral Projects (NI 43-101) is a rule developed by the
Canadian Securities Administrators that establishes standards for all public disclosure an issuer
makes of scientific and technical information concerning mineral projects. Unless otherwise
indicated, all reserve and resource estimates contained in or incorporated by reference in this
document have been prepared in accordance with NI 43-101. These standards differ significantly from
the requirements of the SEC, and reserve and resource information contained herein and incorporated
by reference herein may not be comparable to similar information disclosed by U.S. companies. NI
43-101 permits a historical estimate made prior to the adoption of NI 43-101 that does not comply
with NI 43-101 to be disclosed using the historical terminology if the disclosure: (a) identifies
the source and date of the historical estimate; (b) comments on the relevance and reliability of
the historical estimate; (c) states whether the historical estimate uses categories other than
those prescribed by NI 43-101; and (d) includes any more recent estimates or data available.
Page 33 of 34
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements made herein, other than statements of historical fact relating to Ivanhoe
Mines, are forward-looking statements. These include, but are not limited to, statements respecting
anticipated business activities, planned expenditures, corporate strategies, proposed acquisitions
and dispositions of assets, discussions with third parties respecting material agreements,
participation in projects and financing, the expected timing and outcome of Ivanhoe Mines
discussions with representatives of the Government of Mongolia for an Investment Agreement in
respect of the Oyu Tolgoi Project, the impact of amendments to the laws of Mongolia and other
countries in which Ivanhoe Mines carries on business, the estimated cost of bringing the Oyu Tolgoi
Project into commercial production, anticipated future production and cash flows, target milling
rates, the outcome of Ivanhoe Mines discussions with its joint venture partner in the Monywa
Copper Project and with certain governmental authorities in Myanmar aimed at resolving impediments
to the ongoing operation and potential expansion of the project, the possibility of having to
record, in the future, a significant reduction of the projects carrying value on the Companys
financial statements and other statements that are not historical facts. When used in this MD&A,
the words such as could, plan, estimate, expect, intend, may, potential, should and
similar expressions, are forward-looking statements. Although Ivanhoe Mines believes that its
expectations reflected in these forward-looking statements are reasonable, such statements involve
risks and uncertainties and no assurance can be given that actual results will be consistent with
these forward-looking statements. Forward-looking statements are based on the opinions and
estimates of management at the date the statements are made, and are subject to a variety of risks
and uncertainties and other factors that could cause actual events or results to differ materially
from those projected in the forward-looking statements. Important factors that could cause actual
results to differ from these forward-looking statements include those described under the heading
Risks and Uncertainties elsewhere in this MD&A. The reader is cautioned not to place undue
reliance on forward-looking statements.
This MD&A also contains references to estimates of mineral reserves and mineral resources. The
estimation of reserves and resources is inherently uncertain and involves subjective judgments
about many relevant factors. The accuracy of any such estimates is a function of the quantity and
quality of available data, and of the assumptions made and judgments used in engineering and
geological interpretation, which may prove to be unreliable. There can be no assurance that these
estimates will be accurate or that such mineral reserves and mineral resources can be mined or
processed profitably. Mineral resources that are not mineral reserves do not have demonstrated
economic viability. The Company does not assume the obligation to revise or update these
forward-looking statements after the date of this document or to revise them to reflect the
occurrence of future unanticipated events, except as may be required under applicable securities
laws.
Page 34 of 34
FORM
52-109F2 CERTIFICATION OF INTERIM FILINGS
I, Tony Giardini, Chief Financial Officer of Ivanhoe Mines Ltd., certify that:
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1. |
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I have reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings) of
Ivanhoe Mines Ltd., (the issuer) for the interim period ended September 30, 2006; |
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2. |
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Based on my knowledge, the interim filings do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated or that is necessary
to make a statement not misleading in light of the circumstances under which it was made,
with respect to the period covered by the interim filings; |
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3. |
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Based on my knowledge, the interim financial statements together with the other
financial information included in the interim filings fairly present in all material
respects the financial condition, results of operations and cash flows of the issuer, as
of the date and for the periods presented in the interim filings; and |
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4. |
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The issuers other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures for the issuer, and we have designed such
disclosure controls and procedures, or caused them to be designed under our supervision,
to provide reasonable assurance that material information relating to the issuer,
including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the interim filings are being prepared. |
Date: November 14, 2006
/s/ Tony Giardini
Tony Giardini
Chief Financial Officer
Ivanhoe Mines Ltd.
FORM
52-109F2 CERTIFICATION OF INTERIM FILINGS
I, John Macken, Chief Executive Officer of Ivanhoe Mines Ltd., certify that:
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1. |
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I have reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings) of
Ivanhoe Mines Ltd., (the issuer) for the interim period ended September 30, 2006; |
|
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2. |
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Based on my knowledge, the interim filings do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated or that is necessary
to make a statement not misleading in light of the circumstances under which it was made,
with respect to the period covered by the interim filings; |
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3. |
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Based on my knowledge, the interim financial statements together with the other
financial information included in the interim filings fairly present in all material
respects the financial condition, results of operations and cash flows of the issuer, as
of the date and for the periods presented in the interim filings; and |
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4. |
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The issuers other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures for the issuer, and we have designed such
disclosure controls and procedures, or caused them to be designed under our supervision,
to provide reasonable assurance that material information relating to the issuer,
including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the interim filings are being prepared. |
Date: November 14, 2006
/s/ John Macken
John Macken
Chief Executive Officer
Ivanhoe Mines Ltd.
November 14, 2006
IVANHOE MINES ANNOUNCES Q3 2006 RESULTS
SENIOR RIO TINTO EXECUTIVE JOINS IVANHOE BOARD FOLLOWING FORMATION
OF AN IVANHOE MINES-RIO TINTO STRATEGIC PARTNERSHIP
TO DEVELOP IVANHOES MONGOLIAN COPPER-GOLD RESOURCES
SINGAPORE Ivanhoe Mines today announced its results for the third-quarter of 2006. (All figures
are in US dollars unless otherwise stated).
The major event was the announcement on October 18, 2006, that world mining leader Rio Tinto had
agreed to form a strategic partnership by investing in Ivanhoe and, through an Ivanhoe-Rio Tinto
Technical Committee, will jointly engineer, construct and operate Ivanhoes Oyu Tolgoi copper-gold
mining complex in Mongolias South Gobi region. The agreement creates a defined path for Rio Tinto
to become the largest shareholder in Ivanhoe Mines.
Rio Tinto purchased approximately 37.1 million Ivanhoe shares at a price of US$8.18, representing a
25% premium to Ivanhoe Mines closing price on October 17, 2006, and a premium of 30% to Ivanhoes
20-day moving-average share price prior to October 17 of US$6.29. Rio Tinto now owns approximately
9.95% of Ivanhoe Mines issued share capital.
The agreement between Ivanhoe Mines (IVN: TSX, NYSE & NASDAQ) and London-based Rio Tinto (RTP:
NYSE; RIO: LSX, ASX) provides for Rio Tinto to make additional investments in the equity of Ivanhoe
Mines, under defined conditions, of up to approximately US$1.5 billion. Ivanhoe has agreed to use
at least 90% of the proceeds received from Rio Tinto to finance the development of Oyu Tolgoi.
Further investments by Rio Tinto in Ivanhoe Mines will be structured in the following stages:
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Rio Tinto will take up a second tranche private placement following the
satisfactory conclusion of an Investment Agreement between Ivanhoe and the Mongolian
Government on terms mutually acceptable to the company and Rio Tinto. Rio Tinto has the
option to purchase the second tranche earlier. This second tranche will consist of
approximately 46.3 million shares at a subscription price of US$8.38, giving total proceeds
to Ivanhoe of a further US$388 million. The subscription price represents a 33% premium to
Ivanhoes 20-day moving-average share price of US$6.29, and 28% to the closing price on
October 17, 2006. Completion of the first and second tranches, and an additional top-up
right, will give Rio Tinto up to 19.9% of Ivanhoes enlarged issued share capital, for a
total combined investment of at least US$691 million. |
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In addition to the two private placements, Rio Tinto has been granted
non-transferable warrants to purchase approximately 92 million Ivanhoe shares in two equal
tranches of approximately 46 million shares at various exercise prices. When exercised, the
warrants will result in additional funds to Ivanhoe of up to US$808 million that, when
combined with the private placements, will total approximately US$1.5 billion. These warrants
entitle Rio Tinto to increase its interest in Ivanhoe to up to 33.35% of the companys fully
diluted share capital. Exercise of the warrants is conditional on the approval of Ivanhoe
shareholders at a special meeting to be convened in Vancouver, B.C., Canada, on November 30,
2006. |
2
The partnership agreement also provides that Ivanhoe and the Mongolian Government will have access
to Rio Tintos expertise in developing and operating world-class mines.
In addition, Rio Tinto is joining Ivanhoe in current talks with the Mongolian Government for a
long-term Investment Agreement that will confirm a tax, legal and fiscal framework for the
development of the Oyu Tolgoi project. A working group of government officials has been appointed
to work with Ivanhoe to prepare a draft Investment Agreement to be submitted for cabinet
consideration.
Joint Technical Committee established to manage Oyu Tolgoi Project
As part of their agreement, Rio Tinto and Ivanhoe have agreed to cooperate on the construction and
operation of Oyu Tolgoi. The first technical review meeting is being held this week, providing Rio
Tinto representatives with their first opportunity to provide their input into the project
development. Particular attention will be paid to details of the planned underground mine at Oyu
Tolgoi.
In addition:
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Rio Tinto and Ivanhoe have established a Technical Committee to manage all
aspects of the engineering, construction, development and operation of the Oyu Tolgoi
complex. The Technical Committee will consist of two representatives from Ivanhoe, two
representatives from Rio Tinto and a fifth member who will act as committee chairman and
senior manager of the Oyu Tolgoi project. |
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John Macken, Ivanhoe President and CEO, will serve as Technical Committee
chairman and senior project manager for the first five years as the project ramps up to full
production. During this period, unanimous consent of all Technical Committee members will be
required for certain specified decisions, including acquisitions, or budgetary commitments
exceeding US$100 million and material amendments to the long-term Oyu Tolgoi mine plan. After
five years, Rio Tinto will have the right to appoint the subsequent chairman and senior
project manager. |
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Rio Tinto will make available, at cost during the first five years, its
engineering, mining and metallurgical staff to assist Ivanhoe in the mine planning,
engineering, design and construction of the Oyu Tolgoi project. In consultation with the
Technical Committee, Rio Tinto also will second appropriate employees to the Oyu Tolgoi
project, as required. |
Tom Albanese is Rio Tintos first representative on Ivanhoes board of directors
As part of the private placement agreement, Rio Tinto will nominate directors to the Ivanhoe board
in proportion to Rio Tintos holding of Ivanhoes issued share capital.
Rio Tintos first nominee Tom Albanese, Director, Group Resources, and head of Exploration
joined the Ivanhoe board on November 10, 2006. Mr. Albanese, 48, is responsible for Rio Tintos
Exploration, Operational and Technical Excellence, Human Resources, External Affairs and Global
Business Services. Mr. Albanese was formerly Rio Tintos Chief Executive, Copper & Exploration.
Before joining Rio Tinto in 1993, he held a number of positions with Nerco Minerals.
The private placement agreement requires that when Rio Tinto is entitled to nominate more than one
director, half of the companys nominees will be Independent Directors as defined under applicable
securities laws to continue to maintain the highest standards of Canadian and US corporate
governance practices.
3
Standstill agreement
For a period of five years, Rio Tintos right to increase its interest in the companys share
capital, except through the second tranche private placement and the exercise of the warrants, is
restricted to no more than an additional 6.65% of the issued share capital of the company. Rio
Tinto has also agreed that, during such five-year period, its total interest in the companys
issued share capital shall not exceed an aggregate holding of 40%.
These restrictions on share purchases may be waived with prior agreement from the Ivanhoe board of
directors and will not apply in the event that Rio Tinto exercises a right of first refusal to
purchase any shares Robert M. Friedland, Ivanhoe Mines Chairman, might choose to sell to any party
other than institutional shareholders during the five-year period. Mr. Friedland, who has continued
to hold all of his Ivanhoe shares for the past 13 years, has stated that he has no intention of
selling shares. The restriction on share purchases will be waived if a third party announces a
takeover offer for Ivanhoe Mines.
Mongolia: Oyu Tolgoi Project Development Update
Work on Shaft # 1, a 6.7-metre-diameter exploration and production shaft at Oyu Tolgoi, is
continuing on plan. The shaft sinking, presently averaging 3.1 metres per day, has reached a depth
of approximately 600 metres below surface. The sinking of Shaft #1 to a planned depth of 1,340
metres below surface is expected to be completed in late-2007, with underground drifting and
drilling occurring in 2007 and 2008. The completion of this shaft will allow for the early
exploitation of a high-grade upper portion of the Hugo North deposit, as well as expedite the
conversion of the current Hugo North resources into proven and probable reserves.
Preliminary construction activities involving site preparation, excavation for concentrator
foundations and the construction of accommodation facilities are in progress. These activities, in
conjunction with engineering and procurement efforts, are seen as critical to minimizing any
schedule risk associated with the project.
Surface preparations for shaft #2, a 10-metre-diameter production and service shaft, were completed
during the quarter and permits for shaft sinking have been applied for. The Technical Committee
will finalize the location and development plan for this shaft before work begins on the
pre-sinking excavation, which is expected to continue through the first quarter of 2007.
Construction of the head frame and hoisting facilities is planned to begin next spring.
The next stage in the overall development of Ivanhoes Oyu Tolgoi flagship project will be the
securing of all remaining governmental approvals. It is expected that the first production could
begin within 30 months of the receipt of these approvals, giving a potential start-up date of
mid-2009, subject to confirmation of delivery dates on key long-lead-time equipment.
The Mongolian Government met its publicly stated commitment to finalize important changes to
specific taxation and minerals legislation early in July 2006. This was an important development as
the Mongolian Government had previously publicly stated that it wanted to have the revised laws
approved by parliament before it negotiated an Investment Agreement with Ivanhoe. Representatives
for Rio Tinto are expected to be appointed to the companys negotiation team shortly. The
finalization of an Investment Agreement with the Mongolian Government will be a very important
milestone toward the development of Oyu Tolgoi.
Formal Investment Agreement discussions with a nine-member Government-appointed working group began
in August 2006. The State Secretary of the Ministry of Finance is chairing the working group.
Other members are representatives of designated Mongolian Government ministries, including the
4
Ministry of Finance, the Ministry of Industry and Trade, the Ministry of Nature and Environment and
the Ministry of Justice and Home Affairs. The working group will prepare a draft Investment
Agreement and submit it to the Cabinet for consideration.
Ivanhoe Mines has made a concerted effort in recent months to build a broad, general understanding
among the Government, Members of Parliament, civic groups and the general public of the Oyu Tolgoi
Project and the benefits it will bring to Mongolia and its citizens. Ivanhoe considers this to be a
critical support activity for the finalization of the Investment Agreement.
Mongolia: Coal Division merger with Asia Gold
In the second quarter, Ivanhoe announced a plan to transfer the companys Mongolian Coal Division
to Asia Gold Corp. (ASG: TSX-V) in exchange for approximately 82.6 million shares of Asia Gold.
On August 8, 2006, the minority shareholders of Asia Gold voted 99% in favour of the merger
transaction. Closing of the transaction is subject to the fulfillment of certain conditions
precedent, including completion of the transfer of certain mineral exploration licenses in
Mongolia.
During the past month the Cadastral Office of the Mineral Resources and Petroleum Authority of
Mongolia accepted applications filed by Ivanhoe to transfer the ownership of the relevant licences
in accordance with the provisions of Mongolias revised Minerals Law. Ivanhoe Mines and Asia Gold
have agreed to extend the closing date of the coal division merger transaction to accommodate the
unanticipated delays in completing the formal licence transfer process. It is expected that the
transaction will be completed after the formal licence transfer process in Mongolia is concluded.
Myanmar: Monywa Copper Project Joint Venture
Copper cathode production for the S&K Mine at the Monywa Copper Project in Q306 totalled 5,980
tonnes, representing a decrease of 30% over Q305. The copper price on the London Metal Exchange
(LME) averaged $3.48 a pound in Q306, compared to $1.70 a pound in Q305, representing an increase
of 105%.
During the quarter, S&K operations continued to be hampered by a shortage of supplies, tires and
chemical reagents due to delays in obtaining the necessary import permits. Total tonnage moved in
Q306 decreased by 28% compared to Q305. Total cathode production in Q306 decreased by 30% due
mainly to a 26% decrease in tonnages placed on the heaps and a 37% decrease in copper grades.
At the end of Q306, the S&K Mine had $85.6 million in cash, representing a $1.3 million increase
over the balance at the end of the previous quarter.
During the quarter, Ivanhoe Mines continued its discussions with interested parties on the possible
sale of an interest in the S&K Mine. Ivanhoe has a 50% interest in the company that owns and
operates the S&K Mine. Ivanhoes agreement with Rio Tinto provides for the divestiture by Ivanhoe
of its joint venture interest in the Monywa Copper Project.
Australia: Cloncurry Project
The Cloncurry Project covers an area of more than 1,450 square kilometres in northwestern
Queensland in Australias storied Mount Isa-Cloncurry mining district. Since acquiring the property
in September, 2003, Ivanhoe Mines initially has focused on three high-potential copper gold
targets: Mt. Dore, Swan and Amethyst Castle. Ten holes, totalling 4,621 metres, were drilled in the
quarter.
5
In Q306, diamond drilling on the Iron Oxide Copper Gold (IOCG) mineralized systems at Swan and
Amethyst Castle yielded encouraging geological information and several drill intercepts of
haematite matrix sulphide-bearing hydrothermal breccias, indicating that Ivanhoes exploration
might have clipped the top of deeper copper-gold-uranium bodies.
At Amethyst Castle, RC drilling into geophysical targets (mainly induced polarization targets)
yielded intercepts of copper, gold and uranium in the eastern side of the breccia body. This
drilling was followed by a diamond drilling program, with four holes completed during the quarter
and two additional holes drilled after September. The diamond core has confirmed the presence at
Amethyst of a large-scale breccia body hosting IOCG mineralization, with associated uranium.
Further drilling is planned after assay results are received.
At the Swan prospect, six holes were drilled for a total of 3,142 metres, with targets designed to
explore the large magnetic anomaly. The southern side of the anomaly proved to be less mineralized
than the northern side and drilling now is extending mineralization to the northeast. Copper and
gold mineralization is associated with widespread intense albitisation (red rock), which is
overprinted by pyroxene, magnetite, pyrite and chalcopyrite veinlets. Common native copper and
chalcocite (supergene?) also have been observed. Swan is located within a large, distinctive
magnetic anomaly that also underlies the former Mt. Elliot mine and Swell and northern Gossan
prospects. This deep-seated feature appears to have a circular form, with a diameter of
approximately one kilometre. Preliminary drilling and the widespread Na-Ca alteration at these
targets indicate they are all related to one large mineralized system that remains to be tested at
depth. Extensive drilling is being planned to test this concept. Testing for potential oxide and
primary copper-gold resources at Swan will be evaluated by pattern drilling, initially at 100-metre
drill centres.
In October, drilling moved onto a third prospect, Metal Ridge North, where surface copper
geochemical anomalies, combined with magnetic and conductivity features, are the target for a
three-hole diamond-drill program and a 20-hole RC-drill program. The mineralization occurs along a
northerly trend for several kilometres and appears to be associated with carbonaceous shales that
also display widespread, intense albitisation.
During the quarter, a comprehensive review of 30 years of previous exploration was conducted. This
resulted in the recognition of numerous new target areas, most of which have IOCG signatures. There
are more than 100 known mineral occurrences and prospects within the Ivanhoe tenements. Some of
these are centred on uranium occurrences that were only partially explored during the 1970s. The
historic Kuridala copper mining district, situated in the northern part of Ivanhoes tenements, has
numerous copper, gold and uranium prospects that will be studied further in preparation for
extensive drilling. Universal Tracking Systems has been engaged to fly a 6,000-line-kilometre
survey over selected parts of Ivanhoes land package, particularly those with associated uranium,
to enhance drill target selection.
The number of quality IOCG targets that require drill testing is extraordinary and a very
significantly increased exploration program is being planned for Q4 and 2007. A dedicated corporate
management team, including specialist consultants, will be assembled to take the Cloncurry projects
forward into 2007.
China: Jinshan Gold Mine Nearing Commercial Production
On September 12, 2006, Jinshan Gold Mines Inc., a company that is approximately 48% owned by
Ivanhoe Mines, announced it had received the Mining Permit for its CSH (217) gold mine in China,
which will authorize the start of commercial gold mining operations. The permit was granted by the
Ministry of Land and Resources in Beijing.
Jinshan expects that it will be capable of commencing commercial gold production in early 2007 at
an
6
estimated annual rate of approximately 120,000 ounces.
Senior Gold Executive Appointed
During the third quarter, David Woodall was appointed President of Ivanhoes gold operations. His
responsibilities will include overseeing the advancement of the companys gold exploration and mine
development projects, which include, among others, the Bakyrchik gold mine development project in
Kazakhstan and the Cloncurry IOCG gold, copper project in Australia.
Mr. Woodall, 46, has more than 21 years of professional experience in mining operations. Prior to
joining Ivanhoe Mines, he acquired extensive mine management experience at underground and open-pit
mines in Canada, Australia, Fiji and China. Among numerous mine operation assignments, he worked as
Mine General Manager for Placer Dome at the Musselwhite gold mine in Ontario, Canada, the Kanowna
Belle gold mine in Western Australia and the Osborne copper and gold mine in Australia. He also
worked in senior mine management positions with Robe River, Sino Gold and WMC Resources.
Financial Results
During the quarter, Ivanhoe Mines recorded a net loss of $66.4 million (or $0.20 per share),
compared to a net loss of $14.3 million (or $0.05 per share) in Q305. The increase in the loss
from 2005 to 2006 was primarily due to a $36.2 million increase in exploration expenses. This
includes shaft sinking and engineering and development costs at Oyu Tolgoi that have been expensed
and not capitalized. The company will reassess the accounting treatment of the engineering and
development costs as a result of the Rio Tinto transaction. Going forward, a portion of these costs
may be capitalized. Results for the quarter also were affected by a $1.0 million increase in income
from the Monywa Copper joint venture, less a $7.5 million decrease in foreign exchange gains and a
$4.9 million decrease in income from discontinued operations. Exploration costs are charged to
operations in the period incurred and often constitute the bulk of the companys operations loss
for that period.
Ivanhoes results for the Q306 and the first nine months of 2006 are contained in the unaudited
Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition
and Results of Operations, available on the SEDAR website at
www.sedar.com and Ivanhoes website at
www.ivanhoe-mines.com.
Ivanhoe shares are listed on the Toronto, New York and NASDAQ stock exchanges under the symbol IVN.
7
SUMMARY OF QUARTERLY RESULTS
The following table summarizes Ivanhoes quarterly results for the last eight financial
quarters.
(Expressed in millions of U.S. dollars, except per share amounts)
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Quarter ended |
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Sept 30 |
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Jun 30 |
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Mar 31 |
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Dec 31 |
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2006 |
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2006 |
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2006 |
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2005 |
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Exploration expenses |
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(65.1 |
) |
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(39.9 |
) |
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(27.0 |
) |
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(40.1 |
) |
General and administrative |
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(9.1 |
) |
|
|
(9.8 |
) |
|
|
(11.0 |
) |
|
|
(5.8 |
) |
Share of (loss) income from joint venture |
|
|
9.0 |
|
|
|
(2.4 |
) |
|
|
4.5 |
|
|
|
(0.5 |
) |
Gain (loss) on foreign exchange |
|
|
(0.4 |
) |
|
|
4.7 |
|
|
|
(0.2 |
) |
|
|
(0.4 |
) |
Net (loss) from continuing operations |
|
|
(68.0 |
) |
|
|
(45.7 |
) |
|
|
(31.1 |
) |
|
|
(49.8 |
) |
Net income from discontinued operations |
|
|
1.5 |
|
|
|
5.4 |
|
|
|
7.9 |
|
|
|
7.9 |
|
Net (loss) |
|
|
(66.4 |
) |
|
|
(40.3 |
) |
|
|
(23.2 |
) |
|
|
(41.8 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operation |
|
|
(0.20 |
) |
|
|
(0.14 |
) |
|
|
(0.10 |
) |
|
|
(0.16 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
Total |
|
|
(0.20 |
) |
|
|
(0.12 |
) |
|
|
(0.07 |
) |
|
|
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept 30 |
|
|
Jun 30 |
|
|
Mar 31 |
|
|
Dec 31 |
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
Exploration expenses |
|
|
(28.9 |
) |
|
|
(33.8 |
) |
|
|
(24.4 |
) |
|
|
(24.2 |
) |
General and administrative |
|
|
(7.3 |
) |
|
|
(5.9 |
) |
|
|
(4.8 |
) |
|
|
(6.2 |
) |
Share of income from joint venture |
|
|
8.0 |
|
|
|
7.8 |
|
|
|
7.7 |
|
|
|
6.5 |
|
Gain (loss) on foreign exchange |
|
|
7.1 |
|
|
|
1.7 |
|
|
|
(0.6 |
) |
|
|
3.5 |
|
Net (loss) from continuing operations |
|
|
(20.6 |
) |
|
|
(31.1 |
) |
|
|
(24.2 |
) |
|
|
(26.6 |
) |
Net income from discontinued operations |
|
|
6.4 |
|
|
|
5.9 |
|
|
|
15.7 |
|
|
|
9.5 |
|
Net (loss) |
|
|
(14.3 |
) |
|
|
(25.2 |
) |
|
|
(8.5 |
) |
|
|
(17.1 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operation |
|
|
(0.07 |
) |
|
|
(0.10 |
) |
|
|
(0.08 |
) |
|
|
(0.08 |
) |
Discontinued operations |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
0.05 |
|
|
|
0.03 |
|
|
Total |
|
|
(0.05 |
) |
|
|
(0.08 |
) |
|
|
(0.03 |
) |
|
|
(0.05 |
) |
|
Information contacts:
Investors: Bill Trenaman: +1.604.688.5755 / Media: Bob Williamson: +1.604.688.5755
Forward-Looking Statements: This document includes forward-looking statements. Forward-looking
statements include, but are not limited to, statements concerning estimates of the planned
development and engineering at the Oyu Tolgoi project, statements concerning the expected timing
and outcome of Ivanhoe Mines discussions with representatives of the Government of Mongolia for an
Investment Agreement in respect of the Oyu Tolgoi project, statements relating to planned sale of
the Mongolian Coal Division to Asia Gold, statements relating to expected production from the
Nariin Sukhait coal project, statements relating to future, contingent payments for the sale of
Savage River mine, statements relating to the continued advancement of Ivanhoe Mines projects and
other statements which are not historical facts. When used in this document, the words such as
could, plan, estimate, expect, intend, may, potential, should, and similar
expressions are forward-looking statements. Although Ivanhoe believes that its expectations
reflected in these forward-looking statements are reasonable, such statements involve risks and
uncertainties and no assurance can be given that actual results will be consistent with these
forward-looking statements. Important factors that could cause actual results to differ from these
forward-looking statements are disclosed under the heading Risk Factors and elsewhere in the
corporations periodic filings with Canadian and US securities regulators.