2006 Proxy Statement and Year End Financials
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:
March 31, 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.)
Form 20-F-o Form 40-F- 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.)
Yes: o No: þ
(If Yes is marked, indicate below the file number assigned to the registrant in connection with
Rule 12g3-2(b): 82- .)
Enclosed:
Management Proxy Circular
Proxy
Supplemental Return Card
Electronic Consent
2005 year end financial statements, notes and MD&A
TABLE OF CONTENTS
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: March 31, 2006 |
By: |
/s Beverly A. Bartlett
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BEVERLY A. BARTLETT |
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Corporate Secretary |
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Notice of Annual Meeting of the Shareholders
and
Management Proxy Circular
of
IVANHOE MINES LTD.
DATED: March 30, 2006
IVANHOE MINES LTD.
Notice of Annual General Meeting of Shareholders
May 12, 2006
NOTICE IS HEREBY GIVEN that an Annual General Meeting of shareholders of Ivanhoe Mines Ltd. (the
Corporation) will be held on Friday, May 12, 2006, at 9:00 AM local time, in the Ceperly/Walker
Room of the Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia for the
following purposes:
1. |
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to receive the annual report of the directors to the shareholders; |
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2. |
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to receive the audited consolidated financial statements of the Corporation for the year
ended December 31, 2005 and the auditors report thereon; |
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to elect directors for the ensuing year; |
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to appoint auditors for the ensuing year and to authorize the directors to fix the auditors
remuneration; |
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to consider, and if thought advisable, to pass an ordinary resolution authorizing the
Corporation to amend and restate the Employees and Directors Equity Incentive Plan (the
Incentive Plan) to increase the maximum number of Common Shares of the Corporation which
may be allocated for issuance pursuant to the terms and conditions of the Incentive Plan from
29,000,000 to 32,000,000 Common Shares; and |
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to transact such other business as may properly come before the meeting or any adjournment
thereof. |
The Board of Directors has fixed March 24, 2006 as the Record Date for the determination of
shareholders entitled to notice of, and to vote at, this Annual General Meeting and at any
adjournment thereof.
A Management Proxy Circular, Form of Proxy, the Audited Consolidated Financial Statements and
Managements Discussion and Analysis for the year ended December 31, 2005 and return envelope
accompany this Notice of Meeting.
A shareholder, who is unable to attend the Meeting in person and who wishes to ensure that
such shareholders shares will be voted at the Meeting, is requested to complete, date and
execute the enclosed form of proxy and deliver it by facsimile, by hand or by mail in accordance
with the instructions set out in the form of proxy and in the Management Proxy Circular.
Dated at Vancouver, British Columbia, this 30th day of March, 2006.
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BY ORDER OF THE BOARD |
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Beverly A. Bartlett |
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Corporate Secretary |
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IVANHOE MINES LTD.
World Trade Centre
Suite 654 999 Canada Place
Vancouver, British Columbia, V6C 3E1
MANAGEMENT PROXY CIRCULAR
SOLICITATION OF PROXIES
This Management Proxy Circular is furnished to the holders of common shares (shareholders)
of IVANHOE MINES LTD. (the Corporation) by management of the Corporation in connection with the
solicitation of proxies to be voted at the Annual General Meeting (the Meeting) of the
shareholders to be held at 9:00 AM , local time, on May 12, 2006 in the Ceperly/Walker
Room of the Terminal City Club, 837 West Hastings Street, Vancouver, British Columbia, and at any
adjournment thereof, for the purposes set forth in the Notice of Meeting.
The solicitation of proxies by management will be primarily by mail, but proxies may be
solicited personally or by telephone by directors, officers and regular employees of the
Corporation. All costs of this solicitation will be borne by the Corporation.
The Board of Directors of the Corporation has fixed the close of business on March 24, 2006 as the
record date, being the date for the determination of the registered shareholders entitled to
receive notice of, and to vote at, the Meeting (the Record Date).
Unless otherwise stated, the information contained in this Management Proxy Circular is as of March
30, 2006. All dollar amounts are expressed in Canadian dollars (Cdn.$) or United States dollars
(U.S.$) as indicated.
APPOINTMENT OF PROXYHOLDERS
A shareholder entitled to vote at the Meeting may, by means of a proxy, appoint a proxyholder or
one or more alternate proxyholders, who need not be shareholders, to attend and act at the Meeting
for the shareholder and on the shareholders behalf.
The individuals named in the enclosed form of proxy are directors and/or officers of the
Corporation. A shareholder may appoint, as proxyholder or alternate proxyholder, a person or
persons other than any of the persons designated in the enclosed form of proxy, and may do so
either by inserting the name or names of such persons in the blank space provided in the enclosed
form of proxy or by completing another proper form of proxy.
A shareholder forwarding the enclosed proxy may indicate the manner in which the appointee is to
vote with respect to any specific item by checking the appropriate space. If the shareholder giving
the proxy wishes to confer a discretionary authority with respect to any item of business, then the space opposite the item is
to be left blank. The shares represented by the proxy submitted by a shareholder will be voted in
accordance with the directions, if any, given in the proxy.
An appointment of a proxyholder or alternate proxyholders will not be valid unless a form of proxy
making the appointment, signed by the shareholder or by an attorney of the shareholder authorized
in writing, (a Proxy) is deposited with CIBC Mellon Trust Company, by facsimile (604) 688-4301 or
(416) 368-2502, by mail to P.O. Box 1900,
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Vancouver, British Columbia, V6E 3X1, or 200 Queens Quay
East, Unit 6, Toronto, Ontario, M5A 4K9, or by hand, to Suite 1600, The Oceanic Plaza, 1066
Hastings Street, Vancouver, British Columbia, V6E 3K9 or 200 Queens Quay East, Unit 6, Toronto,
Ontario, M5A 4K9 not less than 48 hours (excluding Saturdays, Sundays and statutory holidays)
before the Meeting or the adjournment thereof at which the Proxy is to be used.
REVOCATION OF PROXIES
A shareholder who has given a Proxy may revoke the Proxy
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by depositing an instrument in writing executed by the shareholder or by the
shareholders attorney authorized in writing |
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with CIBC Mellon Trust Company, not less than 48 hours
(excluding Saturdays, Sundays and statutory holidays) before the Meeting or
the adjournment thereof at which the Proxy is to be used, |
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(ii) |
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at the registered office of the Corporation at any time up to
and including the last business day preceding the day of the Meeting, or an
adjournment thereof, at which the Proxy is to be used, |
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with the chairman of the Meeting on the day of the Meeting
or an adjournment thereof, or |
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in any other manner provided by law. |
A revocation of a Proxy will not affect a matter on which a vote is taken before the revocation.
EXERCISE OF DISCRETION
The persons named in the enclosed form of proxy will vote the shares in respect of which they are
appointed in accordance with the direction of the shareholders appointing them. In the absence of
such direction in respect of a particular matter, such shares will be voted in favour of such
matter. The enclosed form of proxy confers discretionary authority upon the persons named therein
with respect to amendments or variations to matters identified in
the Notice of Meeting and with respect to other matters which may properly come before the Meeting.
As of the date of this Management Proxy Circular, management of the Corporation knows of no such
amendments, variations or other matters to come before the Meeting. However, if any other matters
which are not now known to management should properly come before the Meeting, the proxy will be
voted on such matters in accordance with the best judgment of the named proxies.
VOTES NECESSARY TO PASS RESOLUTIONS
The Corporations by-laws provide that the quorum for the transaction of business at the Meeting is
at least one individual present at the commencement of the Meeting holding, or representing by form
of proxy the holder or holders of, common shares carrying, in the aggregate, not less than
thirty-three and one-third percent (33-1/3%) of the votes eligible to be cast at the Meeting.
- 4 -
Under the Yukon Business Corporations Act (the YBCA) a majority of the votes cast by shareholders
at the Meeting is required to pass an ordinary resolution and a majority of two-thirds of the votes
cast at the Meeting is required to pass a special resolution.
Shareholders will also be asked to elect directors and appoint auditors for the ensuing year. If
there are more nominees for election as directors or appointment as the Corporations auditors than
there are vacancies to fill, those nominees receiving the greatest number of votes will be elected
or appointed, as the case may be, until all such vacancies have been filled. If the number of
nominees for election or appointment is equal to the number of vacancies to be filled, all such
nominees will be declared elected or appointed by acclamation.
At the Meeting, shareholders will be asked to consider and, if deemed warranted, to pass an
ordinary resolution, the full text of which is set out under Particulars of Matters to be Acted
Upon Equity Incentive Plan Resolution in this Management Proxy Circular (the Equity Incentive
Plan Resolution), authorizing the Corporation to amend and restate the Employees and Directors
Equity Incentive Plan to increase the maximum number of Common Shares of the Corporation which may
be allocated for issuance pursuant to the terms and conditions of such plan from 29,000,000 to
32,000,000 Common Shares. The Equity Incentive Plan Resolution is an ordinary resolution and, as
such, requires approval by a majority of the votes cast by shareholders at the Meeting.
VOTING BY NON-REGISTERED SHAREHOLDERS
Only registered shareholders of the Corporation or the persons they appoint as their proxies are
permitted to vote at the Meeting. Most shareholders of the Corporation are non-registered
shareholders (Non-Registered Shareholders) because the shares they own are not registered in
their names but are instead registered in the name of the brokerage firm, bank or trust company
through which they purchased the shares. Shares beneficially owned by a Non-Registered Shareholder
are registered either: (i) in the name of an intermediary
(an Intermediary) that the Non-Registered Shareholder deals with in respect of the shares of the
Corporation (Intermediaries include, among others, banks, trust companies, securities dealers or
brokers and trustees or administrators of self-administered RRSPs, RRIFs, RESPs and similar plans);
or (ii) in the name of a clearing agency (such as The Canadian Depository for Securities Limited)
of which the Intermediary is a participant. In accordance with applicable securities law
requirements, the Corporation will have distributed copies of the Notice of Meeting, this
Management Proxy Circular, the form of proxy and the request form (collectively, the Meeting
Materials) to the clearing agencies and Intermediaries for distribution to Non-Registered
Shareholders.
Intermediaries are required to forward the Meeting Materials to Non-Registered Shareholders unless
a Non-Registered Shareholder has waived the right to receive them. Intermediaries often use service
companies to forward the Meeting Materials to Non-Registered Shareholders. Generally,
Non-Registered Shareholders who have not waived the right to receive Meeting Materials will either
be given:
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a voting instruction form which is not signed by the Intermediary and which,
when properly completed and signed by the Non-Registered Shareholder and returned to
the Intermediary or its service company, will constitute voting instructions (often
called a voting instruction form) which the Intermediary must follow. Typically, the
voting instruction form will consist of a one page pre-printed form. Sometimes, instead
of the one page pre-printed form, the voting instruction form will consist of a regular
printed proxy form accompanied by a page of instructions which contains |
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a removable label with a bar-code and other information. In order for the form of proxy to validly
constitute a voting instruction form, the Non-Registered Shareholder must remove the
label from the instructions and affix it to the form of proxy, properly complete and
sign the form of proxy and submit it to the Intermediary or its service company in
accordance with the instructions of the Intermediary or its service company; or |
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a form of proxy which has already been signed by the Intermediary (typically
by a facsimile, stamped signature), which is restricted as to the number of shares
beneficially owned by the Non-Registered Shareholder but which is otherwise not
completed by the Intermediary. Because the Intermediary has already signed the form of
proxy, this form of proxy is not required to be signed by the Non-Registered
Shareholder when submitting the proxy. In this case, the Non-Registered Shareholder
who wishes to submit a proxy should properly complete the form of proxy and deposit it
with the Corporation, c/o CIBC Mellon Trust Company, Suite 1600, The Oceanic Plaza,
1066 Hastings Street, Vancouver, British Columbia, V6E 3K9 or 200 Queens Quay East,
Unit 6, Toronto, Ontario, M5A 4K9. |
In either case, the purpose of these procedures is to permit Non-Registered Shareholders to direct
the voting of the shares of the Corporation they beneficially own. Should a Non-Registered
Shareholder who receives one of the above forms wish to vote at the Meeting in person (or have
another person attend and vote on behalf of the Non-Registered Shareholder), the Non-Registered
Shareholder should strike out the persons named in the form of proxy and insert the Non-Registered
Shareholder or such other persons name in the blank space provided. In either case, Non-Registered
Shareholders should carefully follow the instructions of their Intermediary, including those
regarding when and where the proxy or voting instruction form is to be delivered.
A Non-Registered Shareholder may revoke a form of proxy or voting instruction form given to an
Intermediary by contacting the Intermediary through which the Non-Registered Shareholders common
shares of the Corporation are held and following the instructions of the intermediary respecting
the revocation of proxies. In order to ensure that an Intermediary acts upon a revocation of a
proxy form or voting instruction form, the written notice should be received by the Intermediary
well in advance of the Meeting.
VOTING SHARES AND PRINCIPAL HOLDERS
The Corporations authorized capital consists of an unlimited number of Common Shares without
par value and an unlimited number of Preferred Shares without par value.
As of March 30, 2006, the Corporation had issued 316,624,073 fully paid and non-assessable Common
Shares without par value, each carrying the right to one vote. As of such date, no Preferred
Shares were issued or outstanding.
A holder of record of one or more Common Shares on the securities register of the Corporation on
the Record Date who either attends the Meeting personally or deposits a Proxy in the manner and
subject to the provisions described above will be entitled to vote or to have such share or shares
voted at the Meeting, except to the extent that
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the shareholder has transferred the ownership of any such share after the
Record Date, and
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the transferee produces a properly endorsed share certificate for, or otherwise
establishes ownership of, any of the transferred shares and makes a demand to CIBC
Mellon Trust Company no later than 10 days before the Meeting that the transferees
name be included in the list of shareholders in respect thereof. |
To the knowledge of the directors and senior officers of the Corporation, the only persons who
beneficially own, directly or indirectly, or exercise control or direction over shares carrying
more than 10% of the voting rights attached to the outstanding Common Shares of the Corporation,
the approximate number of Common Shares so owned, controlled or directed and the percentage of
voting shares of the Corporation represented by such shares and the share ownership by the current
directors and senior officers of the Corporation as a group are:
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Number of Shares Owned, |
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Percentage of Shares |
Name and Address |
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Controlled or Directed |
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Outstanding |
Robert M. Friedland |
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Hong Kong |
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100,834,334 |
(1) |
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31.85 |
% |
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Directors and Officers as a group(2) |
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101,741,248 |
(3) |
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32.13 |
% |
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Common Shares are held directly (as to 19,810,801 shares) and
indirectly through Newstar Securities SRL (as to 30,701,000 shares), a company
beneficially owned and controlled by Mr. Friedland, and Goldamere Holdings SRL (as
to 50,322,533 shares), a company beneficially owned and controlled as to 91.91% by
Mr. Friedland. Common Shares held directly and indirectly by Mr. Friedland do not
include 2,000,000 unissued Common Shares issuable upon the exercise of incentive
stock options. |
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Common Shares held by the directors and senior officers as a
group do not include 8,095,000 unissued Common Shares issuable upon the exercise of
incentive stock options. |
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Includes 100,834,334 Common Shares held directly and indirectly
by Robert M. Friedland. |
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
No person who has been a director or officer of the Corporation at any time since the beginning of
its last completed financial year, any proposed nominee for director of the Corporation or any
associate or affiliate of the foregoing has any material interest, direct or indirect, in any
matter to be acted upon at the Meeting, except as disclosed in this Information Circular.
ELECTION OF DIRECTORS
Term of Office
The Corporations articles provide that the number of directors of the Corporation will be a
minimum of three and a maximum of 12. The term of office of each of the current directors will end
at the conclusion of the Meeting. Unless a directors office is earlier vacated in accordance with
the provisions of the YBCA, each director elected will hold office until the conclusion of the next
annual meeting of the Corporation or, if no director is then elected, until a successor is elected.
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Management Nominees
Managements nominees for election as directors are as follows:
Robert M. Friedland
Chairman, Chief Executive Officer and Director since 1994;
Member of Executive Committee since 2005.
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R. Edward Flood
Director since 1995; Deputy Chairman since 1999; formerly
President of the Corporation from 1995 to 1999.
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John Macken
President and Director since 2004;
Member of Executive Committee since 2005.
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Peter
G. Meredith
Director since 2005; Chief Financial Officer since 2004, formerly Chief Financial Officer from 1999 to 2001;
Member of Executive Committee since 2005.
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David Huberman
Lead Director and Chair of Compensation and Benefits Committee and Corporate Governance and Nominating Committee since 2003;
Member of Executive Committee since 2005.
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John Weatherall
Director since 1996, Chair of Audit Committee since 1997 and member of
Corporate Governance and Nominating Committee since 2003.
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Kjeld Thygesen
Director since 2001;
Member of Audit Committee since 2001, Compensation and Benefits Committee since
2002 and Corporate Governance and Nominating Committee since 2003.
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Hon. Robert Hanson
Director since 2001;
Member of Compensation and Benefits Committee since 2002 and Corporate Governance and Nominating Committee since 2003.
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Dr. Markus Faber
Director since 2002;
Member of Audit Committee since 2002 and Corporate Governance and Nominating Committee since 2004.
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Howard R. Balloch
Director since 2005.
The following table sets out the names of managements nominees for election as directors, their
ages, all major offices and positions with the Corporation and any of its significant affiliates
each now holds, each nominees principal occupation, business or employment, the period of time
during which each has been a director of the Corporation, the number of Common Shares of the
Corporation beneficially owned by each, directly or indirectly, or over which each exercised
control or direction, as at March 30, 2006, and the number of options to purchase Common Shares
of the Corporation held by each as at March 30, 2006.
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Shares Beneficially |
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Stock |
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Principal Occupation, Business or |
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Period as a Director |
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Owned, Controlled |
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Options |
Name and Position |
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Employment(1) |
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of the Corporation |
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or Directed(1)(2) |
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Held |
ROBERT M.
FRIEDLAND(6)
Hong Kong
Chairman,
Chief
Executive
Officer and
Director
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Chairman and Chief Executive Officer
of the Corporation (March 1994
present); Chairman and President,
Ivanhoe Capital Corporation, a
Singapore based venture capital
company principally involved in
establishing and financing
international mining and exploration
companies
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since March 1994
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100,834,334 |
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2,000,000 |
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R. EDWARD FLOOD
Idaho, United
States Deputy
Chairman and
Director
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Deputy Chairman of the Corporation
(May 1999 present); Senior Mining
Analyst, Haywood Securities Inc. (May
1999 November 2001), President of
the Corporation (1995 1999)
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since March 1994
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218,585 |
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685,000 |
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JOHN MACKEN(6)
Co. Louth,
Ireland
President and
Director
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President of the Corporation (January
2004 present); Consultant (2000
January, 2004); Senior Vice President
of Freeport McMoran Copper & Gold
(1996 2000)
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since January 2004
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NIL
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4,000,000 |
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PETER G. MEREDITH(6)
B.C., Canada
Chief
Financial
Officer and
Director
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Chief Financial Officer of the
Corporation (June 1999 November
2001; May 2004 present); Chief
Financial Officer, Ivanhoe Capital
Corporation (1996 present); Senior
Partner, Deloitte & Touche, chartered
accountants (1966 1996)
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since March 2005
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87,452 |
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750,000 |
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DAVID HUBERMAN(4)(5)(6)
B.C.,Canada
Lead Director
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President, Coda Consulting Corp.
(1993 present); Senior Partner,
Freeman & Company, barristers & solicitors |
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Shares Beneficially |
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Stock |
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Principal Occupation, Business or |
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Period as a Director |
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Owned, Controlled |
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Options |
Name and Position |
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Employment(1) |
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of the Corporation |
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or Directed(1)(2) |
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Held |
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since September 2003
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20,000 |
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300,000 |
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JOHN WEATHERALL(3)(4)
Ontario,
Canada
Director
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President, Scarthingmoor Assets
Management Inc. (1996 present)
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since June 1996
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74,500 |
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100,000 |
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KJELD THYGESEN(3)(4)(5)
England
Director
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Managing Director of Lion Resource
Management (1989 present)
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since February 2001
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150,000 |
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50,000 |
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HON. ROBERT HANSON(4)(5)
England
Director
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Chairman of Hanson Capital Limited
(1998 present); Chairman of Hanson
Transport Group (1990 present)
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since February 2001
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85,000 |
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50,000 |
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DR. MARKUS FABER(3)(4)
Hong Kong
Director
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Managing Director, Marc Faber Ltd.
(investment advisory firm and fund
manager) (1990 present)
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since February 2002
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20,000 |
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130,000 |
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HOWARD R. BALLOCH
China
Director
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President, The Balloch Group (July
2001 present); President, Canada
China Business Council (July 2001
present); Canadian Ambassador to
China, Mongolia and Democratic
Republic of Korea (April 1996 July
2001)
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since March 2005
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20,000 |
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90,000 |
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The information as to principal occupation, business or employment and
shares beneficially owned, controlled or directed by a nominee is not within the knowledge
of the management of the Corporation and has been furnished by the nominee. |
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(2) |
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Does not include unissued common shares issuable upon the exercise of
incentive stock options. See Voting Shares. |
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(3) |
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Member of the Audit Committee.
(4) Member of the Corporate Governance and Nominating Committee.
(5) Member of the Compensation and Benefits Committee.
(6) Member of Executive Committee. |
Directors Minimum Shareholding Requirements
All independent Directors are required to beneficially own and hold a minimum of 20,000 Common
Shares for as long as they are a director of the Corporation. These Common Shares may be held
either directly in the name of the Director or indirectly in the name of a company controlled by
the Director. All current independent Director nominees have met the minimum share purchase
requirement. Mr. Howard Balloch, a non-management Director, also holds 20,000 Common Shares.
Any new directors will have one year from their date of election or appointment to meet the
requirement.
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Additional
information with respect to stock under options held by
managements nominees for directors is as follows:
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Securities Under |
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Options Vested/ |
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Name |
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Unvested |
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Vested |
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Unvested |
ROBERT FRIEDLAND
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500,000/1,500,000
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500,000 granted March 27, 2006 at
Cdn.$9.73, expire March 27, 2013.
|
|
1,500,000 granted March 27, 2006 at Cdn.$9.73,
expire March 27, 2013; 400,000 to vest on the
earlier of December 31, 2006 or achievement of
each of four defined development criteria for Oyu
Tolgoi currently planned for 2006, 300,000 to
vest on the earlier of December 31, 2007 or
achievement of each of four additional defined
development criteria for Oyu Tolgoi currently
planned for 2007, 300,000 to vest on the earlier
of December 31, 2008 or achievement of one of two
additional defined development criteria currently
planned for Oyu Tolgoi for 2008 and the remaining
500,000 to vest on the earlier of December 31,
2009 and achievement of each of two additional
defined development criteria planned for Oyu
Tolgoi for 2009. |
|
|
|
|
|
|
|
R. EDWARD FLOOD
|
|
385,000/NIL
|
|
385,000 granted September 24, 2001, at
Cdn.$1.60, expire September 24, 2006.
|
|
N/A |
|
|
|
|
|
|
|
|
|
75,000/225,000
|
|
75,000 granted March 27, 2006 at
Cdn.$9.73, expire March 27, 2013.
|
|
225,000 granted March 27, 2006 at Cdn.$9.73,
expire March 27, 2013; 60,000 to vest on the
earlier of December 31, 2006 or achievement of
each of four defined development criteria for Oyu
Tolgoi currently planned for 2006, 45,000 to vest
on the earlier of December 31, 2007 or
achievement of each of four additional defined
development criteria for Oyu Tolgoi currently
planned for 2007, 45,000 to vest on the earlier
of December 31, 2008 or achievement of one of two
additional defined development criteria currently
planned for Oyu Tolgoi for 2008 and the remaining
75,000 to vest on the earlier of December 31,
2009 and achievement of each of two additional
defined development criteria planned for Oyu
Tolgoi for 2009. |
|
|
|
|
|
|
|
JOHN MACKEN
|
|
750,000/250,000
|
|
750,000 granted November 1, 2003 at
Cdn.$12.70, expire November 1, 2013.
|
|
250,000 granted November 1, 2003 at Cdn.$12.70,
expire November 1, 2013. 250,000 to vest on
November 1, 2006. |
|
|
|
700,000/300,000
|
|
700,000 granted March 30, 2004 at
Cdn.$7.78, expire March 30, 2014.
|
|
300,000 granted March 30, 2004 at Cdn.$7.78,
expire March 30, 2014; |
- 13 -
|
|
|
|
|
|
|
|
|
Securities Under |
|
|
|
|
|
|
Options Vested/ |
|
|
|
|
Name |
|
Unvested |
|
Vested |
|
Unvested |
|
|
|
|
|
|
to vest on March 10, 2007
or upon commencement of commercial production at
Oyu Tolgoi. |
|
|
|
|
|
|
|
|
|
500,000/1,500,000
|
|
500,000 granted March 27, 2006 at
Cdn.$9.73, expire March 27, 2013.
|
|
1,500,000 granted March 27, 2006 at Cdn.$9.73,
expire March 27, 2013; 400,000 to vest on the
earlier of December 31, 2006 or achievement of
each of four defined development criteria for Oyu
Tolgoi currently planned for 2006, 300,000 to
vest on the earlier of December 31, 2007 or
achievement of each of four additional defined
development criteria for Oyu Tolgoi currently
planned for 2007, 300,000 to vest on the earlier
of December 31, 2008 or achievement of one of two
additional defined development criteria currently
planned for Oyu Tolgoi for 2008 and the remaining
500,000 to vest on the earlier of December 31,
2009 and achievement of each of two additional
defined development criteria planned for Oyu
Tolgoi for 2009. |
|
|
|
|
|
|
|
PETER G. MEREDITH
|
|
30,000/20,000
|
|
30,000 granted February 4, 2004, at
Cdn.$7.69, expire February 4, 2009.
|
|
20,000 granted February 4, 2004, at Cdn.$7.69,
expire February 4, 2009. 10,000 to vest on
February 4, 2007; 10,000 to vest on February 4,
2008. |
|
|
|
|
|
|
|
|
|
80,000/120,000
|
|
80,000 granted on May 14, 2004, at
Cdn.$8.20, expire on May 14, 2009.
|
|
120,000 granted on May 14, 2004, at Cdn.$8.20,
expire on May 14, 2009. 40,000 to vest on May
14, 2006; 40,000 to vest on May 14, 2007; 40,000
to vest on May 14, 2008. |
|
|
|
|
|
|
|
|
|
|
|
100,000 granted March 27, 2006 at
Cdn.$9.73, expire March 27, 2013.
|
|
300,000 granted March 27, 2006 at Cdn.$9.73,
expire March 27, 2013; 80,000 to vest on the
earlier of December 31, 2006 or achievement of
each of four defined development criteria for Oyu
Tolgoi currently planned for 2006, 60,000 to vest
on the earlier of December 31, 2007 or
achievement of each of four additional defined
development criteria for Oyu Tolgoi currently
planned for 2007, 60,000 to vest on the earlier
of December 31, 2008 or achievement of one of two
additional defined development criteria currently
planned for Oyu Tolgoi for 2008 and the remaining
100,000 to vest on the earlier of December 31,
2009 and achievement of each of two additional
defined development criteria planned for Oyu
Tolgoi for 2009. |
- 14 -
|
|
|
|
|
|
|
|
|
Securities Under |
|
|
|
|
|
|
Options Vested/ |
|
|
|
|
Name |
|
Unvested |
|
Vested |
|
Unvested |
DAVID HUBERMAN
|
|
150,000/100,000
|
|
150,000 granted September 16, 2003, at
Cdn.$6.75, expire September 16, 2008.
|
|
100,000 granted September 16, 2003, at Cdn.$6.75,
expire September 16, 2008. 50,000 to vest on
September 16, 2006; 50,000 to vest on September
16, 2007. |
|
|
|
|
|
|
|
|
|
25,000/NIL
|
|
25,000 granted September 3, 2004, at
Cdn.$7.00, expire September 3, 2009.
|
|
N/A |
|
|
|
|
|
|
|
|
|
NIL/25,000
|
|
N/A
|
|
25,000 granted May 10, 2005, at Cdn.$9.37, expire
May 10, 2010. Vests May 10, 2006. |
|
|
|
|
|
|
|
JOHN WEATHERALL
|
|
30,000/20,000
|
|
30,000 granted June 12, 2003, at
Cdn.$3.25, expire June 12, 2008.
|
|
20,000 granted June 12, 2003, at Cdn.$3.25,
expire June 12, 2008. 10,000 to vest on June 12,
2006; 10,000 to vest on June 12, 2007. |
|
|
|
|
|
|
|
|
|
25,000/NIL
|
|
25,000 granted September 3, 2004, at
Cdn.$7.00, expire September 3, 2009.
|
|
N/A |
|
|
|
|
|
|
|
|
|
NIL/25,000
|
|
N/A
|
|
25,000 granted May 10, 2005, at Cdn.$9.37, expire
May 10, 2010. Vests May 10, 2006. |
|
|
|
|
|
|
|
KJELD THYGESEN
|
|
25,000/NIL
|
|
25,000 granted September 3, 2004, at
Cdn.$7.00, expire September 3, 2009.
|
|
N/A |
|
|
|
|
|
|
|
|
|
NIL/25,000
|
|
N/A
|
|
25,000 granted May 10, 2005, at Cdn.$9.37, expire
May 10, 2010. Vests May 10, 2006. |
|
|
|
|
|
|
|
HON. ROBERT HANSON
|
|
25,000/NIL
|
|
25,000 granted September 3, 2004, at
Cdn.$7.00, expire September 3, 2009.
|
|
N/A |
|
|
|
|
|
|
|
|
|
NIL/25,000
|
|
N/A
|
|
25,000 granted May 10, 2005, at Cdn.$9.37, expire
May 10, 2010. Vests May 10, 2006. |
|
|
|
|
|
|
|
DR. MARKUS FABER
|
|
80,000/NIL
|
|
80,000 granted February 5, 2002, at
Cdn.$3.05, expire February 5, 2007.
|
|
N/A |
|
|
|
|
|
|
|
|
|
25,000/NIL
|
|
25,000 granted September 3, 2004, at
Cdn.$7.00, expire September 3, 2009.
|
|
N/A |
|
|
|
|
|
|
|
|
|
NIL/25,000
|
|
N/A
|
|
25,000 granted May 10, 2005, at Cdn.$9.37, expire
May 10, 2010. Vests May 10, 2006. |
- 15 -
|
|
|
|
|
|
|
|
|
Securities Under |
|
|
|
|
|
|
Options Vested/ |
|
|
|
|
Name |
|
Unvested |
|
Vested |
|
Unvested |
HOWARD BALLOCH
|
|
60,000/20,000
|
|
60,000 granted September 6, 2002, at
Cdn.$3.25, expires September 6, 2007.
|
|
20,000 granted September 6, 2002, at Cdn.$3.25,
expires September 6, 2007. Vests on September 6,
2006. |
|
|
|
|
|
|
|
|
|
25,000/NIL
|
|
25,000 granted March 11, 2005, at
Cdn.$10.51, expire March 11, 2010.
|
|
N/A |
|
|
|
|
|
|
|
|
|
NIL/25,000
|
|
N/A
|
|
25,000 granted May 10, 2005, at Cdn.$9.37, expire
May 10, 2010. Vests May 10, 2006. |
Managements nominees for director also serve as directors of the following public
companies:
|
|
|
ROBERT M. FRIEDLAND
|
|
Ivanhoe Energy Inc. (TSX; NASDAQ) |
|
|
|
R. EDWARD FLOOD
|
|
Ivanhoe Energy Inc. (TSX; NASDAQ);
Jinshan Gold Mines Inc. (TSX-V);
Asia Gold Corp. (TSX-V);
American Gold Capital Corp. (TSX-V). |
|
|
|
PETER G. MEREDITH
|
|
Entrée Gold Inc. (TSX-V; AMEX);
Jinshan Gold Mines Inc. (TSX-V);
Olympus Pacific Minerals Inc. (TSX-V);
Asia Gold Corp. (TSX-V);
Great Canadian Gaming Corporation (TSX) |
|
|
|
JOHN WEATHERALL
|
|
Stratic Energy Corporation (TSX) |
|
|
|
KJELD THYGESEN
|
|
Resources Investment Trust PLC (LSE);
Superior Mining Corporation (TSX-V) |
|
|
|
HOWARD R. BALLOCH
|
|
Ivanhoe Energy Inc. (TSX; NASDAQ);
Methanex Corporation (TSX; NASDAQ);
Zi Corporation (TSX; NASDAQ);
Tiens Biotech Group (USA) Ltd. (OTCBB);
Gobi Gold Inc. (TSX-V) |
Independence of the Board
The following table sets forth the independent or non-independent status of the Directors of
the Corporation pursuant to the corporate governance guidelines of the
- 16 -
Canadian Securities Administrators, as more fully discussed under Corporate Governance Board
Composition below.
|
|
|
Independent Directors |
|
Non-Independent Directors |
David Huberman(1)
|
|
Robert M. Friedland(2) |
John Weatherall
|
|
R. Edward Flood(3) |
Markus Faber
|
|
John Macken(4) |
Robert Hanson
|
|
Peter Meredith(5) |
Kjeld Thygesen
|
|
Howard Balloch(6) |
|
(1) Mr. Huberman is Lead Director of the Corporation. |
(2) Mr. Friedland is Chairman and Chief Executive Officer of the Corporation. |
(3) Mr. Flood is Deputy Chairman and a management director of the Corporation. |
(4) Mr. Macken is President of the Corporation. |
(5) Mr. Meredith is Chief Financial Officer of the Corporation. |
(6) Mr. Balloch does not presently qualify as an independent director under
the applicable per se standards of the CSA Corporate Governance Guidelines, the NYSE
Corporate Governance Rules and the NASDAQ Corporate Governance Rules, by virtue of a
previous consulting relationship with the Corporation. However, Mr. Balloch is not a
member of management and the Board considers him to be sufficiently independent of
management to permit his exercise of independent judgment in carrying out his
responsibilities. See Corporate Governance Board
Composition. |
Board Committees
The committees of the Board of Directors of the Corporation consist of an Audit Committee, a
Compensation and Benefits Committee, and a Corporate Governance and Nominating Committee. In
addition, the Board has appointed an Executive Committee. The members of the Audit Committee are
John Weatherall (Chair), Kjeld Thygesen, and Markus Faber. The members of the Compensation and
Benefits Committee are David Huberman (Chair), Kjeld Thygesen and Robert Hanson. The members of the
Corporate Governance and Nominating Committee are David Huberman (Chair), John Weatherall, Kjeld
Thygesen, Robert Hanson and Markus Faber. The members of the Executive Committee are Robert
Friedland, John Macken, Peter Meredith and David Huberman.
Summary of Board and Committee Meetings Held
The following table summarizes Board and Committee meetings held during the year ended December 31,
2005:
|
|
|
|
|
Board of Directors
|
|
|
5 |
|
Audit Committee
|
|
|
4 |
|
Compensation and Benefits Committee
|
|
|
4 |
|
Corporate Governance and Nominating Committee
|
|
|
4 |
|
Executive Committee
|
|
|
1 |
|
During 2005, two meetings of the Board, two meetings of the Audit Committee, one meeting of the
Compensation and Benefits Committee and one meeting of the Corporate Governance and Nominating
Committee were held by teleconference. In addition, there were 18 resolutions in writing of the
Board, and no resolutions in writing were passed by the Audit Committee in 2005. Resolutions in
writing must be executed by all of the directors entitled to vote on a matter.
- 17 -
Attendance of Board and Committee Members
The following table summarizes the attendance of Board and Committee members during the year ended
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
Corporate |
|
Governance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation & |
|
Compensation |
|
Governance & |
|
& |
|
|
|
|
|
|
|
|
|
|
|
|
Audit |
|
% of Audit |
|
Benefits |
|
& Benefits |
|
Nominating |
|
Nominating |
|
|
|
% of |
|
|
Board |
|
% of Board |
|
Committee |
|
Committee |
|
Committee |
|
Committee |
|
Committee |
|
Committee |
|
Executive |
|
Executive |
|
|
Meetings |
|
Meetings |
|
Meetings |
|
Meetings |
|
Meetings |
|
Meetings |
|
Meetings |
|
Meetings |
|
Meetings |
|
Meetings |
Name |
|
Attended |
|
Attended |
|
Attended |
|
Attended |
|
Attended |
|
Attended |
|
Attended |
|
Attended |
|
Attended(4) |
|
Attended |
Robert M. Friedland
|
|
4 of 5
|
|
|
80 |
% |
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
1 of 1
|
|
|
100 |
% |
R. Edward Flood(1)
|
|
5 of 5
|
|
|
100 |
% |
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
John Macken
|
|
4 of 5
|
|
|
80 |
% |
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
1 of 1
|
|
|
100 |
% |
Peter Meredith(2)
|
|
4 of 4
|
|
|
100 |
% |
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
1 of 1
|
|
|
100 |
% |
David Huberman
|
|
5 of 5
|
|
|
100 |
% |
|
n/a
|
|
|
n/a |
|
|
4 of 4
|
|
|
100 |
% |
|
4 of 4
|
|
|
100 |
% |
|
1 of 1
|
|
|
100 |
% |
John Weatherall
|
|
5 of 5
|
|
|
100 |
% |
|
4 of 4
|
|
|
100 |
% |
|
n/a
|
|
|
n/a |
|
|
4 of 4
|
|
|
100 |
% |
|
n/a
|
|
|
n/a |
|
Kjeld Thygesen
|
|
5 of 5
|
|
|
100 |
% |
|
4 of 4
|
|
|
100 |
% |
|
3 of 4
|
|
|
75 |
% |
|
3 of 4
|
|
|
75 |
% |
|
n/a
|
|
|
n/a |
|
Robert Hanson
|
|
5 of 5
|
|
|
100 |
% |
|
n/a
|
|
|
n/a |
|
|
4 of 4
|
|
|
100 |
% |
|
4 of 4
|
|
|
100 |
% |
|
n/a
|
|
|
n/a |
|
Markus Faber
|
|
4 of 5
|
|
|
80 |
% |
|
4 of 4
|
|
|
100 |
% |
|
n/a
|
|
|
n/a |
|
|
3 of 4
|
|
|
75 |
% |
|
n/a
|
|
|
n/a |
|
Howard Balloch(2)
|
|
4 of 4
|
|
|
100 |
% |
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
n/a
|
|
|
n/a |
|
|
|
|
|
|
(1) Mr. Flood is not a member of any Committee of the Board. |
|
|
|
(2) Messrs. Meredith and Balloch joined the Board of Directors on March 11, 2005. |
|
|
|
(3) The Executive Committee was formed on March 11, 2005. |
- 18 -
APPOINTMENT OF AUDITORS
Deloitte & Touche LLP, Chartered Accountants, will be nominated at the Meeting for re-appointment
as auditors of the Corporation at a remuneration to be fixed by the Board of Directors. Deloitte
& Touche LLP have been the Corporations auditors since January 1995.
Fees billed by Deloitte & Touche LLP and its affiliates during fiscal 2005 and fiscal 2004 were
approximately Canadian $1,220,000 and Canadian $1,336,000, respectively. The aggregate fees
billed by the auditors in fiscal 2005 and fiscal 2004 are detailed below.
|
|
|
|
|
|
|
|
|
(Canadian $ in 000s) |
|
2005 |
|
|
2004 |
|
Audit Fees (a) |
|
$ |
824 |
|
|
$ |
957 |
|
Audit Related Fees (b) |
|
|
196 |
|
|
|
10 |
|
Tax Fees (c) |
|
|
200 |
|
|
|
369 |
|
All Other Fees |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,220 |
|
|
$ |
1,336 |
|
|
|
|
(a) |
|
Fees for audit services billed or expected to be billed relating to fiscal 2005 and 2004
consisted of: |
|
|
|
audit of the Corporations annual statutory financial statements |
|
|
|
|
audit of the financial statements of one of the Corporations subsidiaries |
|
|
|
|
reviews of the Corporations quarterly financial statements |
|
|
|
|
comfort letters, consents, and other services related to SEC and Canadian
securities regulatory authorities matters |
(b) |
|
Fees for audit-related services provided during fiscal 2005 and 2004 consisted of financial
accounting and reporting consultations. |
|
(c) |
|
Fees for tax services provided during fiscal 2005 and 2004 consisted of tax compliance, and
tax planning and advice. |
Pre-Approval Policies and Procedures
All services to be performed by the Corporations independent auditor must be approved in advance
by the Audit Committee or a designated member of the Audit Committee (Designated Member). The
Designated Member is a member of the Audit Committee who has been given the authority to grant
pre-approvals of permitted audit and non-audit services.
The Audit Committee has considered whether the provision of services other than audit services is
compatible with maintaining the auditors independence and has adopted a policy governing the
provision of these services. This policy requires the pre-approval by the Audit Committee or the
Designated Member of all audit and non-audit services provided by the external auditor, other
than any de minimus non-audit services allowed by applicable law or regulation. The decisions of
the Designated Member to pre-approve a permitted service needs to be reported to the Audit
Committee at its regularly scheduled meetings.
- 19 -
Pre-approval from the Audit Committee or Designated Member can be sought for planned engagements
based on budgeted or committed fees. No further approval is required to pay pre-approved fees.
Additional pre-approval is required for any increase in scope or in final fees.
PARTICULARS OF MATTERS TO BE ACTED UPON
Amended and Restated Equity Incentive Plan
Purpose
The Corporation is seeking authorization from its shareholders at the Meeting to amend and restate
the Corporations existing Employees and Directors Equity Incentive Plan (the Incentive Plan)
to increase the maximum number of Common Shares of the Corporation which may be allocated for
issuance from 29,000,000 to 32,000,000 Common Shares. The Toronto Stock Exchange has approved the
Amended Plan, subject to approval by the shareholders at the Meeting.
Set forth below is a summary of certain aspects of the Incentive Plan relating to the proposed
increase in the number of Common Shares issuable under the Incentive Plan. A more detailed
description of the Incentive Plan is set forth in the section entitled Equity Compensation Plan
Information in this Management Proxy Circular and a copy of the Incentive Plan illustrating the
proposed amendments is attached as Schedule B.
Amendment Procedure
The Board has the right to amend, modify or terminate the Incentive Plan, in whole or in part, at
any time if and when deemed advisable in the absolute discretion of the Board of Directors.
However, any amendment to the Incentive Plan which would materially increase the benefits under the
Incentive Plan, materially modify the requirements as to eligibility for participation in the
Incentive Plan or materially increase the number of Common Shares that may be issued or reserved
for issuance under the Incentive Plan will be effective only upon the approval of the shareholders
of the Corporation, and, if required, the approval of any regulatory body having jurisdiction over
the securities of the Corporation and the approval of any stock exchange on which the Common Shares
are then listed for trading.
Share Issuance Limits
The aggregate maximum number of Common Shares which the Corporation may, from time to time, issue
or reserve for issuance under the Incentive Plan is 29,000,000 Common Shares. The aggregate number
of Common Shares which the Corporation may at any time reserve for issuance under the Incentive
Plan to any one person may not exceed five per cent (5%), and to Insiders under the Incentive Plan
may not exceed ten per cent (10%), of the issued and outstanding Common Shares at such time. The
aggregate number of Common Shares that may be issued within any one-year period to Insiders under
the Incentive Plan shall not exceed ten per cent (10%), and to any one Insider and his or her
Associates under the Incentive Plan may not exceed five per cent (5%), of the issued and
outstanding Common Shares at such time.
Securities Issued and Unissued under the Incentive Plan
As of the date of this Management Information Circular, there are 316,624,073 Common Shares of the
Corporation issued and outstanding. Since the date of inception of the Incentive Plan in June of
1996 and amendment in May and August of 2005, the
- 20 -
29,000,000 Common Shares authorized for issuance under the Incentive Plan have been issued or
reserved for issuance as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Issued |
|
|
|
|
|
|
and |
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
Common |
|
|
Number of Common Shares |
|
Shares |
Common Shares
previously issued
upon exercise of
options under Option
Plan |
|
|
12,755,552 |
|
|
|
4.02 |
% |
|
|
|
|
|
|
|
|
|
Common Shares
reserved for future
issuance pursuant to
unexercised options
under Option Plan |
|
|
13,336,900 |
|
|
|
4.21 |
% |
|
|
|
|
|
|
|
|
|
Common Shares
previously issued
pursuant to Purchase
Plan |
|
|
572,361 |
|
|
|
0.18 |
% |
|
|
|
|
|
|
|
|
|
Common Shares
previously issued
pursuant to Bonus
Plan |
|
|
701,463 |
|
|
|
0.22 |
% |
|
|
|
|
|
|
|
|
|
Unissued Common
Shares available for
future awards under
Bonus Plan |
|
|
1,299,137 |
|
|
|
0.47 |
% |
|
|
|
|
|
|
|
|
|
Unissued Common
Shares available for
future option grants
under Option Plan and
purchases under
Purchase Plan |
|
|
335,187 |
|
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
Maximum number of
Common Shares
available for
issuance |
|
|
29,000,000 |
|
|
|
9.16 |
% |
Proposed Amendment
Maximum Number of Shares
The Incentive Plan provides that the aggregate number of Common Shares that may be issued or
reserved for issuance may not exceed 29,000,000 Common Shares.
The Corporation believes that incentive stock options are a valuable mechanism for incentivizing
the Corporations existing employees, attracting new employees and aligning their interests with
those of the Corporations shareholders. To provide the Corporation with the continued flexibility
of granting incentive stock options under the Option Plan, the Corporation is seeking approval from
the shareholders at the Meeting to increase the number of Common Shares of the Corporation issuable
under the Incentive Plan to a maximum of 32,000,000 Common Shares, which would represent 10.11% of
the Common Shares currently issued and outstanding.
BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:
1. |
|
an amendment to the Corporations Employees and Directors Equity Incentive Plan (the
Incentive Plan) to increase, by 3,000,000 Common Shares, the maximum number of Common Shares
of the Corporation issuable under the Incentive Plan from 29,000,000 Common Shares to
32,000,000 Common Shares is hereby authorized, approved and adopted; and |
|
2. |
|
the directors of Ivanhoe be and they are hereby authorized and empowered to implement the
foregoing amendments to the Incentive Plan. |
- 21 -
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS
Other than as disclosed below or elsewhere in this Management Proxy Circular, no insider,
director nominee or associate or affiliate of any such insider or director nominee, has any
material interest, direct or indirect, in any material transaction since the commencement of the
Corporations last financial year or in any proposed transaction, which, in either case, has
materially affected or would materially affect the Corporation.
At the end of 2004 and 2003, subsidiaries of the Corporation holding the Savage River iron ore
project owed approximately U.S.$5.1 million to Mr. Robert M. Friedland, Chairman and Chief
Executive Officer of the Corporation, which indebtedness originated as a result of the December
2000 acquisition by the Corporation of the Savage River project. Following the sale of the Savage
River operations in February 2005, repayment of this balance is contingent upon the Corporation
receiving proceeds in excess of approximately U.S.$111 million from the sale of the Savage River
operations.
The Corporation is a party to cost sharing agreements with other companies in which Robert M.
Friedland has a material direct or indirect beneficial interest. Through these agreements, the
Corporation shares, on a cost-recovery basis, office space, furnishings, equipment and
communications facilities in Vancouver, Singapore, Beijing and London, and an aircraft. The
Corporation also shares the costs of employing administrative and non-executive management
personnel in these offices. During the year ended December 31, 2005, the Corporations share of
these costs was US$10,486,000. The companies with which the Corporation is a party to the cost
sharing agreements, and Mr. Friedlands ownership interest in each of them, are as follows:
|
|
|
|
|
|
|
R. Friedland |
Corporation Name |
|
Ownership Interest |
Ivanhoe Energy Inc. |
|
|
21.11 |
% |
Ivanhoe Capital Corporation |
|
|
100 |
% |
Ivanhoe Nickel & Platinum Ltd. |
|
|
50.06 |
% |
Jinshan Gold Mines Inc. |
|
|
(1 |
) |
Asia Gold Corp. |
|
|
(1 |
) |
|
|
|
(1) |
|
Mr. Friedland owned 31.92% of the Common Shares of the Corporation, which owns
52.91% of the common shares of Jinshan Gold Mines Inc. and 47% of the common shares of Asia
Gold Corp. as at December 31, 2005. |
The shared and other expenditures for the last two years were as follows:
|
|
|
|
|
|
|
|
|
|
|
U.S.$(000) |
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
|
Exploration |
|
|
1,122 |
|
|
|
2,198 |
|
Legal |
|
|
823 |
|
|
|
468 |
|
Office and administrative |
|
|
2,216 |
|
|
|
2,057 |
|
Salaries and benefits |
|
|
2,904 |
|
|
|
2,239 |
|
Travel (including aircraft rental) |
|
|
3,421 |
|
|
|
3,001 |
|
|
|
|
|
10,486 |
|
|
|
9,963 |
|
|
- 22 -
EXECUTIVE COMPENSATION
In accordance with the requirements of applicable securities legislation in Canada, the following
executive compensation disclosure is provided as at December 31, 2005, in respect of the Chief
Executive Officer, Chief Financial Officer and each of the Corporations three executive officers
whose annual compensation exceeded Cdn.$150,000 in the year ended December 31, 2005
(collectively, the Named Executive Officers). During the year ended December 31, 2005, the
aggregate compensation paid to all officers of the Corporation who received more than Cdn.$40,000
in aggregate compensation during such period was U.S.$2,068,000 (Cdn.$2,505,000).
Summary Compensation Table
The following table sets forth a summary of all compensation paid during the years ending
December 31, 2003, 2004 and 2005 to each of the Named Executive Officers (NEO).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Compensation |
|
Awards |
|
Payouts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under |
|
Shares or |
|
|
|
|
|
|
NEO Name and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Annual |
|
Options/ |
|
Units Subject |
|
|
|
|
|
All Other |
Principal |
|
|
|
|
|
Salary |
|
Bonus |
|
Compensation(1) |
|
SARs |
|
to Resale |
|
LTIP |
|
Compensation |
Position |
|
Year |
|
(U.S.$) |
|
(U.S.$) |
|
(U.S.$) |
|
Granted |
|
Restrictions |
|
Payouts |
|
(U.S.$) |
Robert Friedland |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(CEO) |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
549 |
(2) |
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
877 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter
Meredith(4) |
|
|
2005 |
|
|
|
216,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,315 |
(3) |
(CFO) |
|
|
2004 |
|
|
|
243,053 |
|
|
|
|
|
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
10,602 |
(3) |
|
|
|
2003 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Macken |
|
|
2005 |
|
|
|
457,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,200 |
(2) |
(President) |
|
|
2004 |
|
|
|
370,022 |
|
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
8,200 |
(2) |
|
|
|
2003 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward Flood |
|
|
2005 |
|
|
|
226,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,690 |
(2) |
(Deputy Chairman) |
|
|
2004 |
|
|
|
179,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,690 |
(2) |
|
|
|
2003 |
|
|
|
120,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,210 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doug Kirwin |
|
|
2005 |
|
|
|
185,770 |
|
|
|
|
|
|
|
36,000 |
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,837 |
(3) |
(VP Exploration) |
|
|
2004 |
|
|
|
180,136 |
|
|
|
|
|
|
|
36,000 |
(5) |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
7,765 |
(3) |
|
|
|
2003 |
|
|
|
177,443 |
|
|
|
46,429 |
|
|
|
36,000 |
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,176 |
(3) |
|
|
|
(1) |
|
Perquisites and benefits do not exceed the lesser of Cdn.$50,000 and 10% of the total of
the annual salary and bonus for any of the Named Executive Officers except where numbers are
disclosed in this column. |
|
(2) |
|
Includes life insurance premiums. |
|
(3) |
|
Includes life insurance premiums and share purchase plan. |
|
(4) |
|
Mr. Meredith became the Corporations Chief Financial Officer on May 20, 2004. |
|
(5) |
|
Represents housing allowance. |
- 23 -
Long Term Incentive Plan
The Corporation does not presently have a long-term incentive plan for its executive officers.
Options/SAR Grants During The Most Recently Completed Financial Year
There were no options or SAR grants made to the Named Executive Officers during the most recently
completed financial year.
Aggregated Option Exercises
Other than as described below, no options or stock appreciation rights were exercised during the
year ended December 31, 2005 by the Named Executive Officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised Options at |
|
Value of Unexercised in the |
|
|
Securities |
|
Aggregate |
|
December 31, 2005 |
|
Money Options at |
|
|
Acquired on |
|
Value |
|
(Exercisable/ |
|
December 31, 2005 |
|
|
Exercise |
|
Realized |
|
Unexercisable) |
|
(Exercisable/Unexercisable) |
Name |
|
(#) |
|
(Cdn.$) |
|
(#) |
|
(Cdn.$) |
Robert Friedland |
|
|
1,500,000 |
|
|
$ |
10,875,000 |
|
|
NIL |
|
NIL |
Peter Meredith |
|
|
60,000 |
|
|
$ |
434,825 |
|
|
|
20,000/30,000 |
|
|
$ |
13,200/$19,800 |
|
|
|
|
|
|
|
|
|
|
|
|
80,000/120,000 |
|
|
$ |
12,000/$18,000 |
|
John Macken |
|
NIL |
|
NIL |
|
|
1,150,000/850,000 |
|
|
$ |
223,00/$342,000 |
|
Edward Flood |
|
|
156,111 |
(1) |
|
|
1,167,366 |
(2) |
|
535,000/NIL |
|
$ |
3,611,250/NIL |
|
Douglas Kirwin |
|
|
26,500 |
|
|
$ |
241,680 |
|
|
|
20,000/30,000 |
|
|
$ |
13,200/$19,800 |
|
|
|
|
(1) |
|
Includes 41,111 common shares issued through exercise of a stock appreciation right
(SAR) on June 9, 2005 in respect of options for 50,000 shares. |
|
(2) |
|
Includes the closing market value on June 8, 2005 for 41,111 common shares
issued through exercise of a SAR in respect of options for 50,000 shares. |
Option and SAR Repricings
No options or stock appreciation rights were re-priced during the year ended December 31, 2005.
Defined Benefit and Pension Plans
The Corporation does not presently provide any defined benefit or pension plan to its directors,
executive officers or employees.
Employment Contracts
The Corporation has an employment contract with John Macken respecting his employment as
President of the Corporation. The term of the agreement commenced on January 1, 2004 and provides
for an initial base salary, a housing benefit and the same benefit entitlements available to the
Corporations other executive officers. The Corporation may terminate Mr. Mackens employment
for cause, or, on payment of 12 months base salary, without cause. In the event of a change of
control of the Corporation and if the contract is terminated by the Corporation within twelve
months thereafter, Mr. Macken would be entitled to receive payment of 12 months base salary
and a vesting of all unexercised stock options which will thereafter remain exercisable for six
months. Under the terms of the contract, Mr. Macken was granted an initial
- 24 -
incentive stock
option effective January 1, 2004 to acquire 1,000,000 common shares which vest over three years
and expire on November 1, 2013. Mr. Macken was granted a further option on March 30, 2004 to
acquire an additional 1,000,000 common shares, which options vest as to 20% in March, 2004 and,
as to the balance, 20% in March, 2005, 30% in March 2006 and 30% in March 2007, subject in each
case to earlier vesting upon specified corporate goals identified by the Board of Directors being
met. Mr. Macken was also granted a further option on March 27, 2006 which options expire on March
27, 2013 and which vest as to 25% on grant, as to 20% on December 31, 2006, as to 15% on December
31, 2007, as to 15% on December 31, 2008, and as to the balance on December 31, 2009, subject to
earlier vesting upon specific corporate goals being met by the Corporation. The Corporation also
has had employment contracts with Douglas Kirwin respecting his employment with the Corporation
since 1995. His current contract for services as the Corporations Executive Vice President,
Exploration was originally entered into in November 1998 and was renewed in May 2003. Under the
contract, the Corporation may terminate Mr. Kirwins employment for death, disability or cause,
or, on payment of one months salary multiplied by the number of whole years Mr. Kirwin has been
employed by the Corporation, without cause. In the event of a change of control of the
Corporation which has not been approved by the then existing Board, Mr. Kirwin is entitled to
terminate his employment within three months of the date of such change of control and to receive
a payment equal to three times his annual salary. The Corporation does not have employment
contracts with any other of its Named Executive Officers.
Composition of the Compensation and Benefits Committee
During the year ended December 31, 2005, the Compensation and Benefits Committee was comprised of
Messrs. David Huberman (Chair), Kjeld Thygesen, Robert Hanson and John Bruk.
Since the beginning of the most recently completed financial year, which ended on December 31,
2005, none of Messrs. Huberman, Thygesen, Hanson or Bruk was indebted to the Corporation or any
of its subsidiaries or had any material interest in any transaction or proposed transaction which
has materially affected or would materially affect the Corporation or any of its subsidiaries.
None of the Corporations executive officers serve as a member of the Compensation and Benefits
Committee or Board of Directors of any entity that has an executive officer serving as a member
of the Compensation and Benefits Committee or Board of Directors of the Corporation.
Report on Executive Compensation
The Corporations executive compensation program is administered by the Compensation and Benefits
Committee. The members of the Compensation and Benefits Committee are all independent directors.
Following review and approval by the Committee, decisions relating to executive compensation are
reported to, and approved by, the full Board of Directors. The Compensation and Benefits Committee
has directed the preparation of this report and has approved its contents and its submission to
shareholders.
The basic philosophy underlying the Corporations executive compensation program is that the
interests of the Corporations executive officers should be aligned as closely as possible with the
interests of the Corporation and its shareholders as a whole. We believe that the Corporations
approach to executive compensation should broadly reflect both the stage of development of the
Corporations business and its entrepreneurial culture. At the same time, we recognize that,
because competition in the
mining industry for highly skilled employees is intense, the levels of compensation we
- 25 -
offer must
be comparable to those offered by our competitors in order to attract, retain and motivate
executive personnel of the highest calibre.
Compensation for the Corporations senior executive officers has been traditionally determined with
regard to the following considerations:
|
(i) |
|
the desirability of providing a strong incentive to management to work as a
team to achieve the Corporations corporate long term and short term business
development goals; |
|
|
(ii) |
|
the principle that the economic interests of management and those of the
Corporations shareholders should be aligned as closely as reasonably possible; |
|
|
(iii) |
|
the competitive environment that exists in the mining industry for the
recruitment and retention of qualified personnel and the resulting need to offer
levels of executive compensation that are comparable to those offered by our
competitors; and |
|
|
(iv) |
|
the present stage of development of the Corporations business and the
corresponding lack of meaningful quantitative factors, other than changes in share
price, by which to measure corporate performance in relation to executive
compensation. |
The compensation that the Corporations executive officers receive generally consists of cash,
equity and equity incentives. Typically, base salary comprises the entire cash component of each
executive officers compensation. The Corporation does not maintain a pension plan or other long
term compensation plan for its executive officers and, generally, does not pay cash bonuses.
Compensation over and above base salary usually takes the form of incentive stock options but can
also include bonus awards of fully paid Common Shares of the Corporation.
Although the relative emphasis on the various compensation components has tended to be variable
year over year, the cash component of each executives overall compensation tends to remain
relatively consistent. We believe that the cash compensation we pay to our executive officers is
competitive and, although the Compensation and Benefits Committee reviews levels of cash
compensation at least annually, we do not generally make recommendations to the Board of Directors
to adjust cash compensation unless we become aware that the level at which our executive officers
are compensated in cash may no longer be competitive.
We have tended to place a relatively higher emphasis on equity compensation generally and on
incentive stock options in particular. This is consistent with our objective of preserving cash and
also reflects our belief that incentive stock options offer an effective mechanism for
incentivizing management and aligning the interests of our executive officers with those of our
shareholders. In the earlier stages of the Corporations growth the absence of the kind of
objective, quantitative economic measurement criteria by which the corporate performance of major
mining companies with significant production and earnings are measured, has made it difficult to
meaningfully correlate levels of equity compensation to corporate performance except with reference
to changes in the market price of the Corporations Common Shares. Since we do not grant incentive
stock options at a discount to the prevailing market price of the Corporations Common Shares, the
incentive stock options we grant to our executive officers accrete value only if, and to the extent
that, the market price of the Corporations Common Shares increases, thereby linking equity-based
executive compensation to shareholder returns.
Where appropriate, the Corporation increasingly strives to include performance-based
- 26 -
criteria as a
key component of stock option grants and during 2005 a number of stock option grants to key
employees included vesting schedules that were based on the achievement of key milestones for the
Corporations development on which such key employee had the potential to positively impact.
The Compensation and Benefits Committee regularly assesses the individual performance of the
Corporations executive officers and makes recommendations to the Board of Directors. Based on
these recommendations, the Board of Directors makes decisions concerning the nature and scope of
the equity-based compensation to be paid to the Corporations executive officers. The criteria upon
which these recommendations are based has, in the earlier stages of the Corporations development,
tended to be subjective and has reflected our views as to the nature and value of the contributions
made by our executive officers to the achievement of our corporate plans and objectives. As part of
our periodic review of executive compensation, we may recommend, from time to time, that the Board
of Directors make discretionary bonus awards of Common Shares to the Corporations employees,
including the Corporations executive officers. Such awards are intended to recognize extraordinary
contributions to the achievement of corporate objectives or the fulfillment of defined business
development goals and milestones tied to pre-determined equity incentives.
During 2005, the Corporation granted incentive stock options to employees, officers and directors
exercisable to purchase a total of 1,125,000 Common Shares, representing less than 0.36 per cent of
the total number of Common Shares currently issued and outstanding. No incentive stock options were
granted to the Named Executive Officers in 2005. Details of the grants made to the Named Executive
Officers are provided under the heading Options/SAR Grants During The Most Recently Completed
Financial Year above. During 2005, the Corporation did not make any discretionary bonus awards of
Common Shares.
The Corporations Chief Executive Officer, Robert M. Friedland, who is also the Corporations
largest shareholder, does not currently receive a salary or any other cash compensation for acting
as such. Mr. Friedland is, however, eligible, on the same basis as the Corporations other
executive officers, to receive a salary and equity compensation and equity incentives from time to
time at the discretion of the Board of Directors based on recommendations by the Compensation and
Benefits Committee. Mr. Friedland did not receive any incentive stock option grants or
discretionary bonus awards of Common Shares during 2005. Insofar as Mr. Friedland did not receive
any cash or equity compensation during 2005 in his capacity as the Corporations Chief Executive
Officer, no comparison to the compensation received by the chief executive officers of the
Corporations peer companies is possible or relevant. During 2005, the Corporations President,
John Macken, received a salary of US$457,400. Mr. Macken did not receive any additional incentive
stock option grants or discretionary bonus awards of cash or Common Shares during 2005.
During 2005 we conducted a review of our compensation policies and practices and we engaged outside
consultants to develop a justifiable compensation strategy for the Corporations key employees,
including the Corporations executive and senior management, that supports business objectives and
rewards experience and impact on organizational success. The Corporation recognizes that its
success is increasingly dependent on the attraction, motivation, and retention of a top-flight
executive and engineering team, and, as the Corporation grows, there is likely a need for more
structure in its approach to compensation.
The Compensation and Benefits Committee is continuing its review and analyzing the findings of
outside consultants with a view to implementing certain changes to its
compensation programs for executives, management and key employees during 2006.
- 27 -
At this stage,
these changes are expected to include some or all of the following: (i) salaries for executives,
management and other key employees would be benchmarked at appropriate levels in the compensation
marketplace of other similar sized mining companies, and, where appropriate, larger operating
mining companies; (ii) additional cash and/or stock-based awards would be provided to the
Corporations executives, management and certain key employees for the achievement of
pre-determined approved objectives, with a view to having the aggregate of annual salary and
bonuses benchmarked against appropriate levels in the compensation marketplace; (iii) longer term
equity incentive stock options with appropriate retention, vesting and performance provisions would
be granted increasingly with reference to specific performance criteria, such as vesting schedules
based on the achievement of key milestones in the Corporations development, and/or with reference
to the competitive marketplace for executives, management and key employees, including when
determining the appropriate multiples of annual salary to use in determining the size of any
initial or ongoing option grants; and (iv) where appropriate, establishing targeted stock ownership
levels for our executives and other key personnel.
On March 27, 2006 the Corporation granted incentive stock options to management and employees of
the Corporation to purchase a total of 6,685,000 Common Shares. Included in these grants were
incentive stock options expiring on March 27, 2013 granted to John Macken in respect of 2,000,000
Common Shares, Robert M. Friedland in respect of 2,000,000 Common Shares, Peter Meredith in respect
of 400,000 Common Shares and Edward Flood in respect of 300,000 Common Shares. The stock options
issued to Messrs. Macken, Friedland, Meredith and Flood each vest as to 25% on grant, 20% on
December 31, 2006, 15% on December 31, 2007, 15% on December 31, 2008 and the balance on December
31, 2009, subject to earlier vesting upon specific corporate goals being met by the Corporation.
Submitted on behalf of the Compensation and Benefits Committee:
David Huberman (Chair)
Kjeld Thygesen
Robert Hanson
- 28 -
Performance Graph
The following graph and table compares the cumulative shareholder return on a Cdn.$100 investment
in common shares of the Corporation to a similar investment in companies comprising the S&P/TSX
Composite Index, including dividend reinvestment, for the period from December 31, 2000 to
December 31, 2005.
COMPENSATION OF DIRECTORS
Each independent director (from and after January 1, 2006, each non-management director) receives
Cdn.$15,000 per annum. Mr. David Huberman receives an additional payment of Cdn.$60,000 per annum
for acting as the Lead Director of the Board of Directors. Mr. John Weatherall receives an
additional payment of Cdn.$25,000 for acting as the Chairman of the Audit Committee. Commencing in
2006, each Chair of the Compensation and Benefits Committee and the Corporate Governance and
Nominating Committee will receive an additional payment of Cdn.$15,000 per annum for acting as
such. Each non-management director receives a fee of Cdn.$1,200 for each Board of Directors meeting
and each Committee meeting attended in person and, from and after November 8, 2005, US$600 for each
Director and Committee conference call in which they participate. Each non-management director also
receives an annual grant of incentive stock options exercisable to purchase up to 25,000 common
shares of the Corporation, such options having a five year term, and fully vesting on the first
anniversary of the date of the grant. Each executive director and non-management director is also
entitled to be reimbursed for actual expenses reasonably incurred in the performance of his duties
as a director.
The following table reflects compensation earned by directors in respect of fiscal 2005 under the
compensation arrangements described above.
- 29 -
Directors Compensation for Fiscal 2005
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BOARD AND |
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NON- |
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AUDIT |
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BOARD AND |
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COMMITTEE |
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INDEPENDENT |
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MANAGEMENT |
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LEAD |
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COMMITTEE |
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COMMITTEE |
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ATTENDANCE |
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DIRECTOR |
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DIRECTORS |
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DIRECTOR |
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CHAIRMAN |
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ATTENDANCE |
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(conference |
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TOTAL CASH FEES |
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STOCK |
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RETAINER |
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FEES |
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RETAINER |
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RETAINER |
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(in person) |
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call) |
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PAID |
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OPTIONS |
NAME |
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(Cdn.$) |
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(Cdn.$) |
|
(Cdn.$) |
|
(Cdn.$) |
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(Cdn.$) |
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(US$) |
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(Cdn.$) |
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(US$) |
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GRANTED |
Robert M. Friedland(1) |
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R. Edward Flood(1) |
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John Macken(1) |
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Peter G. Meredith(1) |
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David Huberman |
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15,000 |
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60,000 |
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7,200 |
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600 |
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85,800 |
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600 |
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25,000 |
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John Weatherall |
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15,000 |
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25,000 |
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9,600 |
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49,600 |
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25,000 |
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Kjeld Thygesen |
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15,000 |
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13,200 |
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600 |
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28,200 |
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600 |
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25,000 |
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Robert Hanson |
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15,000 |
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10,800 |
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600 |
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25,800 |
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600 |
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25,000 |
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Markus Faber |
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15,000 |
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8,400 |
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23,400 |
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25,000 |
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John Bruk(3) |
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15,000 |
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12,000 |
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600 |
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27,000 |
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600 |
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25,000 |
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Howard R. Balloch(2) |
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11,250 |
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2,400 |
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13,650 |
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25,000 |
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TOTAL |
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90,000 |
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11,250 |
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60,000 |
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25,000 |
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63,600 |
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2,400 |
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253,450 |
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2,400 |
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175,000 |
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(1) |
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Messrs. Friedland, Flood, Macken and Meredith are members of management and as such do not
receive compensation as directors of the Corporation. |
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(2) |
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Mr. Balloch joined the Board of Directors on March 11, 2005. In recognition of Mr. Ballochs
contributions as a non-management director during fiscal 2005, the Board, on the
recommendation of the Compensation and Benefits Committee, approved the payment to Mr. Balloch
of a directors fee and stock options equivalent to the annual retainer and stock options paid
to the Corporations independent directors. From and after January 1, 2006, such fee will be
payable annually to all non-management directors. |
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(3) |
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Mr. Bruk joined the Audit Committee on May 10, 2005. He retired from the Board on March 10,
2006. |
- 30 -
EQUITY COMPENSATION PLAN INFORMATION
The following information respecting the Incentive Plan is presented as at December 31, 2005:
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Number of |
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Weighted-average |
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Number of Securities |
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Securities to be |
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exercise price of |
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remaining available for |
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issued upon |
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outstanding |
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future issuance under |
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exercise of |
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options, warrants |
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equity compensation plans |
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outstanding options, |
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and rights |
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(excluding securities |
Plan Category |
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warrants and rights |
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(Cdn.$) |
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reflecting in column (a)) |
Equity compensation
plans approved by
securityholders |
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7,416,700 |
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$ |
7.27 |
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8,303,936 |
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Equity compensation
plans not approved
by shareholders |
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Nil |
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Nil |
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Nil |
Total |
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7,416,700 |
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$ |
7.27 |
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8,303,936 |
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On the date of this Management Proxy Circular, there are 13,336,900 Common Shares issuable upon
the exercise of outstanding options, representing approximately 4.21% of the Corporations issued
and outstanding share capital.
Employees and Directors Equity Incentive Plan
The Incentive Plan, as amended, has three components: an Option Plan, which provides for the grant
to eligible participants of incentive stock options exercisable to purchase common shares of the
Corporation (Common Shares), a Bonus Plan, which provides for awards of fully paid Common Shares
to eligible participants as and when determined to be warranted on the basis of past performance
and a Purchase Plan, under which eligible participants have the opportunity to purchase Common
Shares through payroll deductions which are supplemented by Corporation contributions.
Participation in the Incentive Plan is limited to directors, officers, employees and service
providers of the Corporation and its affiliates (participants).
The Incentive Plan is administered by the Compensation and Benefits Committee although all
incentive stock options and other awards are subject to the approval of the Corporations Board.
Option Plan
The Option Plan authorizes the Board to grant options to purchase Common Shares. The number of
Common Shares, the exercise price per Common Share, the vesting period and any other terms and
conditions of options granted pursuant to the Option Plan, from time to time are determined by the
Board at the time of the grant, subject to the defined parameters of the Option Plan.
The exercise price of any option granted under the Plan cannot be less than the weighted average
price of the Common Shares on the Toronto Stock Exchange for the five days on which Common Shares
were traded immediately preceding the date of grant. Options are exercisable for a period of five
years from date of grant unless
- 31 -
otherwise determined by the Board on the recommendation of the Compensation and Benefits Committee.
Options may be earlier terminated in the event of death or termination of employment or
appointment. Unless otherwise determined by the Board on the recommendation of the Compensation and
Benefits Committee, stock options will vest at a rate of 20% per year, commencing on the date of
grant. The right to exercise an option may be accelerated in the event a takeover bid in respect of
the common shares is made.
Share appreciation rights may also be granted, at the discretion of the Board, to an optionee in
conjunction with, or at any time following the grant of, an option. Share appreciation rights under
the Plan effectively allow an optionee to exercise an option on a cashless basis by electing to
relinquish the right to exercise the option and receive, in lieu thereof, a number of fully paid
Common Shares. The number of Common Shares issuable on the exercise of share appreciation rights is
equal to the quotient obtained by dividing the difference between the aggregate fair market value
and the aggregate option price of all Common Shares subject to the option by the fair market value
of one Common Share.
The Board may, in its discretion but subject to applicable law, authorize the Corporation to make
loans to employees, other than directors or executive officers, to assist them in exercising
options. The terms of any such loans include security, in favour of the Corporation, in the Common
Shares issued upon exercise of the options, which security may be granted on a non-recourse basis.
No such loans are currently outstanding.
Bonus Plan
The Bonus Plan permits the Board to authorize the issuance, from time to time, of Common Shares to
employees and directors of the Corporation and its affiliates. The criteria for determining if and
when such awards should be made and the quantum of such awards is within the discretion of the
Board. The Bonus Plan provides for the issuance of a maximum of 2,000,000 Common Shares in respect
of bonus awards. Common Shares allocated to the Bonus Plan may be reallocated for issuance under
the Option Plan or Purchase Plan and are then no longer available for issuance under the Bonus
Plan.
Purchase Plan
Participants in the Purchase Plan are full-time employees of the Corporation who have completed at
least one year (or less, at the discretion of the Board) of continuous service and who elect to
participate.
Eligible employees are entitled to contribute up to seven per cent (7%) of their annual basic
salary to the Share Purchase Plan in semi-monthly instalments. The Corporation makes a
contribution of up to one hundred per cent (100%) of the employees contribution on a quarterly
basis.
Each participant receives, at the end of each calendar quarter during which he or she participates
in the Purchase Plan, a number of Common Shares equal to the quotient obtained by dividing the
aggregate amount of all contributions to the Purchase Plan by the participant, and by the
Corporation on the participants behalf, during the preceding quarter by the weighted average
trading price of the Common Shares on the Toronto Stock Exchange during the quarter. If the
participants employment with the Corporation is terminated for any reason, any portion of the
participants contribution then held in trust for a participant pending a quarterly purchase of
Common Shares is returned to him or her or to his or her estate.
- 32 -
General
The aggregate maximum number of Common Shares which the Corporation may, from time to time, issue
or reserve for issuance under the Plan is 29,000,000 Common Shares. The aggregate number of Common
Shares which the Corporation may at any time reserve for issuance under the Plan to any one person
may not exceed five per cent (5%), and to insiders under the Plan may not exceed ten per cent
(10%), of the issued and outstanding Common Shares at such time. The aggregate number of Common
Shares that may be issued within any one-year period to insiders under the Plan shall not exceed
ten per cent (10%), and to any one insider and his or her associates under the Plan may not exceed
five per cent (5%), of the issued and outstanding Common Shares at such time.
CORPORATE GOVERNANCE
The Board of Directors considers good corporate governance practices as an important factor in the
continued and long term success of the Corporation by helping to maximize shareholder value over
time.
Until June 30, 2005, the rules and policies of the TSX required corporations listed on the TSX to
disclose their corporate governance practices with reference to a series of guidelines adopted by
the TSX for effective corporate governance (the TSX Guidelines).
Following the enactment in the United States of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley
Act), the TSX initiated a review of its proposed standards in light of new U.S. legislation and
published for public comment proposed amendments to the TSX Guidelines. However, in September 2003
the TSX announced that it would be relinquishing responsibility for setting corporate governance
standards to Canadian securities regulators.
In January 2004, the Canadian Securities Administrators (the CSA) announced new rules governing
(among other things) the independence, competence and responsibility of audit committees, which
rules are substantially similar to those adopted in the United States. These rules are set out in
Multilateral Instrument 52-110 (the CSA Audit Committee Rules) and came into force on March 30,
2004. In April 2005, the CSA announced amendments to the CSA Audit Committee Rules designed to
ensure the consistency of the definition of independence with that of the New York Stock
Exchanges listing standards. These amendments took effect as of June 30, 2005.
The CSA Audit Committee Rules (with which the Corporation is in compliance) require:
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a minimum three-member audit committee comprised solely of independent directors; |
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an audit committee charter that specifies certain specific audit committee
responsibilities and authority, including, among other things: |
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the pre-approval of all audit services and permissible non-audit
services; and |
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the sole authority to appoint, determine funding for and oversee
the outside auditors. |
The CSA also announced, in April 2005, the adoption of Multilateral Policy 58-201 and Multilateral
Instrument 58-101 (collectively, the CSA Corporate Governance Disclosure
- 33 -
Requirements), which took effect as of June 30, 2005. The CSA Corporate Governance
Disclosure Requirements replaced the TSX Guidelines and apply to the Corporations disclosure of
its corporate governance practices for the year ended December 31, 2005. These requirements are
substantially consistent with the revised corporate governance listing standards of the New York
Stock Exchange. The CSA Corporate Governance Disclosure Requirements require the Corporation to
make certain prescribed disclosures respecting its particular corporate governance practices and
recommend a series of non-prescriptive corporate governance guidelines (the CSA Corporate
Governance Guidelines) that Canadian public companies are encouraged to consider in developing
their own corporate governance practices.
During 2003 and 2004, the Board of Directors implemented several changes in its corporate
governance procedures to comply with the TSX Guidelines, the proposed amendments to those
guidelines published by the TSX in 2002 and U.S. corporate governance standards. As part of those
changes the Board:
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i. |
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approved and adopted a new mandate for the Board; |
|
|
ii. |
|
appointed an independent director as lead director, with specific
responsibility for maintaining the independence of the Board and ensuring the
Board carries out its responsibilities contemplated by applicable statutory and
regulatory requirements and stock exchange listing standards; |
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|
iii. |
|
appointed a Corporate Governance and Nominating Committee consisting
solely of independent directors; |
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iv. |
|
changed the membership of the Compensation and Benefits Committee to
consist solely of independent directors instead of a majority of independent
directors; |
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v. |
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approved charters for each of the Corporations Board committees,
being the Audit Committee, the Compensation and Benefits Committee and the
Corporate Governance and Nominating Committee, formalizing the mandates of those
committees; |
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vi. |
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established a management Disclosure Committee for the Corporation,
with the mandate to oversee the Corporations disclosure practices; |
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vii. |
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formalized the Corporations Corporate Disclosure, Confidentiality
and Securities Trading Policy; and |
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viii. |
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adopted a formal Code of Business Conduct and Ethics for the
Corporation that governs the behaviour of directors, officers and employees. |
The Corporation is engaged in an ongoing review of its corporate governance practices against the
CSA Corporate Governance Guidelines. The Board intends to consider additional changes to its
corporate governance practices during the remainder of 2006 with a view to furthering its adherence
to the CSA Corporate Governance Guidelines.
The Corporations Common Shares are listed on the New York Stock Exchange (NYSE) and quoted on
the NASDAQ Stock Market (NASDAQ) and the Corporation is subject to applicable provisions of U.S. securities laws and regulations relating to corporate
governance, which have been the subject of sweeping changes in recent years. Both as part of the
Sarbanes-Oxley Act and independently, the SEC has
- 34 -
enacted a number of new regulations relating to
corporate governance standards for U.S. listed companies. In addition, the NYSE and NASDAQ have
implemented numerous rule changes (the NYSE Corporate Governance Rules and the NASDAQ
Corporate Governance Rules, respectively) that revise the corporate governance standards for
NYSE and NASDAQ-listed companies.
THE CSA Audit Committee Rules, the CSA Corporate Governance Guidelines, the NYSE Corporate
Governance Rules, and the NASDAQ Corporate Governance Rules address, among other things, the
composition and independence of Boards of directors and Board committees. The CSA Corporate
Governance Guidelines are recommendations only and reflect a best practice standard to which
Canadian public companies are encouraged to adhere. For example, the CSA Corporate Governance
Guidelines recommend that a Board should be comprised of a majority of independent directors. On
the other hand, the NYSE Corporate Governance Rules and the NASDAQ Corporate Governance Rules are
prescriptive and require that the Board of a NYSE or NASDAQ-listed company be comprised of a
majority of independent directors.
Each of the Sarbanes-Oxley Act, the NYSE Corporate Governance Rules, the NASDAQ Corporate
Governance Rules and the CSA Corporate Governance Guidelines define independence in a slightly
different way. Although a finding of independence remains a matter of judgment and perception
based on a particular directors circumstances, the Sarbanes-Oxley Act, the NYSE Corporate
Governance Rules, the NASDAQ Corporate Governance Rules and the CSA Corporate Governance
Guidelines prescribe certain per se bars to a finding of independence. In addition, there is a
heightened independence requirement for members of audit committees under the Sarbanes-Oxley Act,
the NYSE Corporate Governance Rules, the NASDAQ Corporate Governance Rules and the CSA Audit
Committee Rules. Unlike the CSA Corporate Governance Guidelines, compliance with the requirements
of the CSA Audit Committee Rules relating to the composition of audit committees and the
heightened standard of independence for audit committee members is mandatory.
Subject to certain exceptions, including the requirement pertaining to the composition and
independence of audit committees, foreign private issuers, like the Corporation, are exempt from
any requirement of the NASDAQ Corporate Governance Rules and the NYSE Corporate Governance Rules
which is contrary to a law, rule or regulation of any public authority exercising jurisdiction
over such issuer or contrary to generally accepted business practices in the issuers country of
domicile. The Corporation believes that it is in full compliance with all of the applicable
requirements of the CSA Audit Committee Rules and all requirements of the Sarbanes-Oxley Act, the
NASDAQ Corporate Governance Rules and the NYSE Corporate Governance Rules applicable to foreign
private issuers for which no exemption is available. The Corporation also believes that most, but
not all, of its corporate governance practices are consistent with the CSA Corporate Governance
Guidelines. The Corporation intends to continue its efforts to improve its corporate governance
practices in order to make them wholly consistent with the CSA Corporate Governance Guidelines.
Board Composition
The CSA Corporate Governance Guidelines recommend that a majority of the directors of a
corporation be independent directors. Under the CSA Corporate Governance
Guidelines, the applicable provisions of the NYSE Corporate Governance Rules and the NASDAQ
Corporate Governance Rules, an independent director is a director who has no direct or indirect
material relationship with the Corporation, even including as a partner, shareholder or officer
of an organization that has a relationship with the Corporation. A material relationship is
one that would, or in the view of the Board of
- 35 -
Directors could, be reasonably expected to
interfere with the exercise of a Directors independent judgment.
A total of ten persons have been nominated for election as directors at the Meeting. The Board
has determined that if all such nominees are elected, the Board will consist of five independent
directors (as defined in the CSA Corporate Governance Guidelines, the NYSE Corporate Governance
Rules and the NASDAQ Corporate Governance Rules) in David Huberman, John Weatherall, Markus
Faber, Robert Hanson and Kjeld Thygesen and five non- independent directors in Robert
Friedland, Edward Flood, John Macken, Peter Meredith and Howard Balloch. Each of Messrs.
Friedland, Flood, Macken and Meredith are non-independent directors in their capacities as
senior officers of the Corporation and/or one or more of its subsidiaries and members of
management. By virtue of an agreement for consulting services between the Corporation and a
company beneficially owned by Mr. Balloch and his spouse, pursuant to which the Corporation paid
compensation in excess of Cdn.$75,000 in 2004, Mr. Balloch does not qualify as an independent
director under the applicable per se standards of the CSA Corporate Governance Guidelines, the
NYSE Corporate Governance Rules and the NASDAQ Corporate Governance Rules. Payments pursuant to
such agreement terminated in October 2004. Mr. Balloch is not a member of management and the
Board considers him to be sufficiently independent of management to permit his exercise of
independent judgment in carrying out his responsibilities.
The Chairman and Chief Executive Officer of the Corporation holds approximately 31.85% of the
Corporations voting securities as of the date of this Management Proxy Circular. The Board has
determined that the Corporation currently has five of ten directors in David Huberman, John
Weatherall, Markus Faber, Robert Hanson and Kjeld Thygesen who are independent as defined in
the CSA Corporate Governance Guidelines, the NYSE Corporate Governance Rules and the NASDAQ
Corporate Governance Rules) of both the Corporation and its Chairman and Chief Executive Officer.
For the reasons set forth above, the Board believes that it includes a majority of directors
(inclusive of Mr. Balloch) who do not have an interest in or relationships with either the
Corporation or its principal shareholder and which fairly reflects the investment in the
Corporation by shareholders other than the principal shareholder.
The directors of the Corporation are satisfied with the size and composition of the Board and
believe that the current Board composition results in a balanced representation on the Board of
Directors among management, non-management directors, and the Corporations major shareholder.
While the Board functions effectively given the Corporations stage of development and the size and
complexity of its business, the Board, through its Corporate Governance and Nominating Committee,
will continue to seek qualified candidates to augment its experience and expertise and to enhance
the Corporations ability to effectively develop its business interests.
Mandate of the Board
Under the YBCA, the directors of the Corporation are required to manage the Corporations business
and affairs, and in doing so to act honestly and in good faith with
a view to the best interests of the Corporation. In addition, each director must exercise the
care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances.
The Board of Directors is responsible for supervising the conduct of the Corporations affairs and
the management of its business. The Boards mandate includes setting long term goals and
objectives for the Corporation, formulating the plans and strategies necessary to achieve those
objectives and supervising senior management in their
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implementation. Although the Board delegates
the responsibility for managing the day to day affairs of the Corporation to senior management
personnel, the Board retains a supervisory role in respect of, and ultimate responsibility for, all
matters relating to the Corporation and its business.
The Boards mandate requires that the Board be satisfied that the Corporations senior management
will manage the affairs of the Corporation in the best interest of the shareholders, in accordance
with the Corporations principles, and that the arrangements made for the management of the
Corporations business and affairs are consistent with their duties described above. The Board is
responsible for protecting shareholder interests and ensuring that the incentives of the
shareholders and of management are aligned. The obligation of the Board must be performed
continuously, and not merely from time to time, and in times of crisis or emergency the Board may
have to assume a more direct role in managing the affairs of the Corporation.
In discharging this responsibility, the Boards mandate provides that the Board oversees and
monitors significant corporate plans and strategic initiatives. The Boards strategic planning
process includes annual budget reviews and approvals, and discussions with management relating to
strategic and budgetary issues. At least one Board meeting per year is to be devoted to a
comprehensive review of strategic corporate plans proposed by management.
As part of its ongoing review of business operations, at each Board meeting the Board reviews the
principal risks inherent in the Corporations business, including financial risks, through periodic
reports from management of such risks, and assesses the systems established to manage those risks.
Directly and through the Audit Committee, the Board also assesses the integrity of internal control
over financial reporting and management information systems.
In addition to those matters that must, by law, be approved by the Board, the Board is required
under its mandate to approve annual operating and capital budgets, any material dispositions,
acquisitions and investments outside of the ordinary course of business or not provided for in
the approved budgets, long-term strategy, organizational development plans and the appointment of
senior executive officers. Management is authorized to act, without Board approval, on all
ordinary course matters relating to the Corporations business.
The mandate provides that the Board also expects management to provide the directors, on a timely
basis, with information concerning the business and affairs of the Corporation, including financial
and operating information and information concerning industry developments as they occur, all with
a view to enabling the Board to discharge its stewardship obligations effectively. The Board
expects management to efficiently implement its strategic plans for the Corporation, to keep the
Board fully apprised of its progress in doing so and to be fully accountable to the Board in
respect to all matters for which it has been assigned responsibility.
The Board has instructed management to maintain procedures to monitor and promptly address
shareholder concerns and has directed and will continue to direct management to apprise the Board
of any major concerns expressed by shareholders.
Each Committee of the Board is empowered to engage external advisors as it sees fit. Any
individual director is entitled to engage an outside advisor at the expense of the Corporation
provided such director has obtained the approval of the Corporate Governance and Nominating
Committee to do so.
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In April 2003, the Board adopted a strategic planning process which involves, among other things,
the following:
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at least one meeting per year will be devoted substantially to review of strategic plans that
are proposed by management; |
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meetings of the Board, at least quarterly, to discuss strategic planning issues, with and
without members of management; |
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the Board reviews and assists management in forming short and long term objectives of the
Corporation on an ongoing basis; |
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the Board also maintains oversight of managements strategic planning initiatives through
annual and quarterly budget reviews and approvals. The strategic planning process adopted by
the Board takes into account, among other things, the opportunities and risks of the business. |
In order to ensure that the principal business risks borne by the Corporation are identified and
appropriately managed, the Board receives periodic reports from management of the Corporations
assessment and management of such risks. In conjunction with its review of operations which takes
place at each Board meeting, the Board considers risk issues and approves corporate policies
addressing the management of the risk of the Corporations business.
The Board takes ultimate responsibility for the appointment and monitoring of the Corporations
senior management. The Board approves the appointment of senior management and reviews their
performance on an ongoing basis.
The Corporation has a disclosure policy addressing, among other things, how the Corporation
interacts with analysts and the public, and contains measures for the Corporation to avoid
selective disclosure. The Corporation has a Disclosure Committee responsible for overseeing the
Corporations disclosure practices. This committee consists of the Chief Executive Officer, the
Chief Financial Officer, the Corporate Secretary and senior Corporate Communications and Investor
Relations Department personnel, and receives advice from the Corporations outside legal counsel.
The Disclosure Committee assesses materiality and determines when developments justify public
disclosure. The committee will review the disclosure policy annually and as otherwise needed to
ensure compliance with regulatory requirements. The Board reviews and approves the Corporations
material disclosure documents, including its annual report, annual information form and management
proxy circular. The Corporations annual and quarterly financial statements, Managements
Discussion and Analysis and other financial disclosure is reviewed by the Audit Committee and
recommended to the Board prior to its release.
Meetings of the Board
The Board holds regular annual and quarterly meetings. Between the quarterly meetings, the Board
meets as required, generally by means of telephone conferencing facilities. As part of the annual
and quarterly meetings, the independent directors also have the opportunity to meet separate from
management. Between each regularly scheduled Board meeting, a meeting of non-management Directors,
chaired by the Lead Director, is held by teleconference to update the Directors on corporate
developments since the last Board meeting. Management also communicates informally with members of
the Board on a regular basis, and solicits the advice of the Board members on matters falling
within their special knowledge or experience.
- 38 -
Board Committees
The Corporation has an Audit Committee, Compensation and Benefits Committee and a Corporate
Governance and Nominating Committee. In addition, the Board has appointed an Executive Committee.
Audit Committee
The mandate of the Audit Committee is to oversee the Corporations financial reporting obligations,
systems and disclosure, including monitoring the integrity of the Corporations financial
statements, monitoring the independence and performance of the Corporations external auditors and
acting as a liaison between the Board and the Corporations auditors. The activities of the Audit
Committee typically include reviewing interim financial statements and annual financial statements,
management discussion and analysis and earnings press releases before they are publicly disclosed,
ensuring that internal controls over accounting and financial systems are maintained and that
accurate financial information is disseminated to shareholders. Other responsibilities include
reviewing the results of internal and external audits and any change in accounting procedures or
policies, and evaluating the performance of the Corporations auditors. The Audit Committee
communicates directly with the Corporations external auditors in order to discuss audit and
related matters whenever appropriate.
The Audit Committee currently consists of Messrs. Weatherall (Chair), Thygesen and Faber. The CSA
Audit Committee Rules provide for audit committees to consist solely of independent directors. All
of Messrs. Weatherall, Thygesen and Faber are independent directors for the purposes of the CSA
Audit Committee Rules, the NYSE Corporate Governance Rules and the NASDAQ Corporate Governance
Rules, having regard to the heightened independence requirements applicable to audit committees.
The Board has determined that all members of the Audit Committee are financially literate since
each member has the ability to read and understand a set of financial statements that present a
breadth and level of complexity of accounting issues that are generally comparable to the breadth
and complexity of the issues that can reasonably be expected to be raised by the Corporations
financial statements.
Mr. Weatherall has been determined by the Board of Directors to be an Audit Committee financial
expert. The Company believes that Mr. Weatherall, a Chartered Financial Analyst, with over 40
years experience as an investment analyst, who also has experience as a portfolio manager, is
qualified to be an Audit Committee financial expert.
The Corporation has adopted an Audit Committee charter which codifies the mandate of the Audit
Committee to, and specifically defines its relationship with, and expectations of, the external
auditors, including the establishment of the independence of the external auditor and the approval
of any non-audit mandates of the external auditor; the engagement, evaluation, remuneration and
termination of the external auditor; its relationship with, and expectations of, the internal
auditor function and its oversight of internal control; and the disclosure of financial and related
information. The Board will review and reassess the adequacy of the Audit Committee charter on an
annual basis.
The Audit Committee has regular access to the Chief Financial Officer of the Corporation. The
external auditors regularly attend all meetings of the Audit Committee. At each meeting of the
Audit Committee, a portion of the meeting is set aside to discuss matters with the external
auditors without management being present. In addition, the Audit Committee has the authority to
call a meeting with the external auditors without management being present, at the Committees
discretion.
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Compensation and Benefits Committee
The role of the Compensation and Benefits Committee is primarily to review the adequacy and form of
compensation of senior management and the directors with such compensation realistically reflecting
the responsibilities and risks of such positions, to administer the Corporations Employees and
Directors Equity Incentive Plan, to determine the recipients of, and the nature and size of share
compensation awards granted from time to time, to determine the remuneration of executive officers
and to determine any bonuses to be awarded.
The Compensation and Benefits Committee currently consists of Messrs. Huberman (Chair), Thygesen
and Hanson. Each member of the committee qualifies as an independent director for the purposes
of the CSA Corporate Governance Guidelines, the NYSE Corporate Governance Rules and the NASDAQ
Corporate Governance Rules.
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee is responsible for making recommendations to the
Board with respect to developments in the area of corporate governance and the practices of the
Board. The Corporate Governance and Nominating Committee has expressly assumed responsibility for
developing the Corporations approach to governance issues. The Committee is also responsible for
reporting to the Board with respect to appropriate candidates for nominations to the Board, for
overseeing the execution of an assessment process appropriate for the Board and its committees and
for evaluating the performance and effectiveness of the Board and its committees.
The Corporate Governance and Nominating Committee of the Board currently consists of Messrs.
Huberman, Weatherall, Hanson, Thygesen and Faber, of which Mr. Huberman is Chair of the Committee,
in addition to being the Corporations lead director. Each member of the Committee qualifies as an
independent director for the purposes of the CSA Corporate Governance Guidelines, the NYSE
Corporate Governance Rules and the NASDAQ Corporate Governance Rules.
Executive Committee
The Executive Committee was appointed by the Board on March 11, 2005 to meet when necessary between
meetings of the full Board, with authority to approve expenditures of up to U.S.$10,000,000.
The Executive Committee currently consists of Messrs. Friedland, Meredith, Macken and Huberman.
Code of Business Conduct and Ethics
The Corporation has adopted a Code of Business Conduct and Ethics applicable to all employees,
consultants, officers and directors regardless of their position in the organization, at all times
and everywhere the Corporation does business. The Code of Business Conduct and Ethics provides that
the Corporations employees, consultants, officers and directors will uphold its commitment to a
culture of honesty, integrity and accountability and the Corporation requires the highest standards
of professional and ethical conduct from its employees, consultants, officers and directors. A copy
of the Corporations Code of Business Conduct and Ethics has been filed on SEDAR and is available
on the Corporations website (www.ivanhoemines.com). A copy may also be
- 40 -
obtained, without charge, by request to the Corporate Secretary, 654 999 Canada Place, Vancouver,
British Columbia, Canada V6C 3E1, telephone to (604) 688-5755.
CSA Corporate Governance Guidelines
The Corporations statement of corporate governance practices with reference to each of the CSA
Corporate Governance Guidelines is set out in Schedule A to this Management Proxy Circular.
OTHER BUSINESS
Management of the Corporation is not aware of any matter to come before the Meeting other than
the matters referred to in the Notice of the Meeting.
DIRECTORS APPROVAL
The contents of this Management Proxy Circular and its distribution to shareholders have been
approved by the Board of Directors of the Corporation.
ADDITIONAL INFORMATION
Copies of the Corporations Annual Information Form, annual financial statements, a Management
Discussion and Analysis for its most recently completed financial year filed pursuant to applicable
Canadian provincial securities laws are available free of charge on or through the Corporations
website at www.ivanhoemines.com or through the System for Electronic Document Analysis and
Retrieval (SEDAR) at www.sedar.com. Finally, securityholders may contact the Corporation directly
to receive copies of, such filings, without charge, upon written or oral request to Beverly A.
Bartlett, Corporate Secretary, Suite 654-999 Canada Place, Vancouver, British Columbia, V6C 3E1, or
by telephone at (604) 688-5755.
DATED at Vancouver, British Columbia, as of the 30 th day of March, 2006.
BY ORDER OF THE BOARD
BEVERLY A. BARTLETT
CORPORATE SECRETARY
- 41 -
SCHEDULE A
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
Effective June 30, 2005, the Canadian Securities Administrators adopted National Instrument
58-101 (NI 58-101) and the associated National Policy 58-201 (NP 58-201) which require the
Corporation to disclose its corporate governance practices. These new rules replace the former
corporate governance guidelines of the TSX.
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CORPORATE GOVERNANCE DISCLOSURE REQUIREMENT(1) |
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COMMENTS |
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Board of Directors
(a) Disclose the identity of directors who are independent. |
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The Board of Directors has reviewed the
independence of each Director on the basis of
the definitions in section 1.4 of MI 52-110,
as amended, and the applicable previsions of
the NYSE Corporate Governance Rules and the
NASDAQ Corporate Governance Rules. A
Director is independent if he or she has no
direct or indirect material relationship with
the Corporation, including as a partner,
shareholder or officer of an organization
that has a relationship with the Corporation.
A material relationship is one that would,
or in the view of the Board of Directors
could, be reasonably expected to interfere
with the exercise of a Directors independent
judgment. The Board has determined, after
reviewing the roles and relationships of each
of the Directors, that one-half (5 out of 10)
of the nominees proposed by management for
election to the Board are independent from
the Corporation. The following nominees have
been affirmatively determined to be
independent by the Board: |
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David Huberman |
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John Weatherall |
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Markus Faber |
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Robert Hanson |
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Kjeld Thygesen |
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This determination was made on the basis that: |
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(a)
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they (and their immediate family members)
are not and have not been within the last
three years an employee or executive officer
of the Corporation; |
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(b)
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they (and their spouse, minor child or
step child) are not and have not been within
the last three years a partner or employee of
the Corporations external auditors firm; |
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(c)
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they (and their immediate family members)
are not and have not been within the last
three years an executive officer of an entity
of which the Corporations executives served
on that entitys compensation committee; |
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(d)
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they (and their immediate family members)
did not receive more than U.S.$60,000 in
direct compensation from the Corporation
(exclusive of any remuneration received for
acting as a Board or Committee member) during
any 12 month period during the last three
years; |
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(e)
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they and their immediate family members
are not a current executive officer of a
company that has |
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Reference is made to the items in Form 58-101F. |
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CORPORATE GOVERNANCE DISCLOSURE REQUIREMENT(1) |
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COMMENTS |
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made payments to, or
received payments from, the Corporation for
property or services in an amount which, in
any of the last three fiscal years, exceeds
the greater of U.S.$1 million or 2% of such
other companys consolidated gross revenues; |
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(f)
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they are not a partner in, or a
continuing shareholder or executive officer
of any for-profit business organization to
which the Corporation made, or from which the
Corporation received payments (other than
those arising solely from investments in the
Corporations securities) that exceed 5% of
the Corporations or business organizations
consolidated gross revenues for that year, or
U.S.$200,000, whichever is more, in any of
the past three years. |
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Disclose the identity of directors who are not
independent, and describe the basis for that
determination. |
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The Board of Directors and Corporate
Governance and Nominating Committee have
determined, after reviewing the roles and
relationships of each of the Directors, that
the following 5 out of 10 nominees proposed
by management for election to the Board are
not independent from the Corporation as
defined in the CSA Corporate Governance
Guidelines, the NYSE Corporate Governance
Rules and the NASDAQ Corporate Governance
Rules: |
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Robert M. Friedland: Chairman and CEO |
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R. Edward Flood: Deputy Chairman |
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Peter G. Meredith: CFO |
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John Macken: President |
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Howard Balloch |
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Messrs. Friedland, Flood, Meredith and
Macken, as senior officers of the Corporation
and/or one or more of its subsidiaries and
members of management, are considered to be
non-independent directors. |
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By virtue of an agreement for consulting
services between the Corporation and a
company beneficially owned by Mr. Balloch and
his spouse, pursuant to which the Corporation
paid compensation in excess of Cdn.$75,000 in
2004, Mr. Balloch does not qualify as an
independent director under the applicable
per se standards of the CSA Corporate
Governance Guidelines, the NYSE Corporate
Governance Rules and the NASDAQ Corporate
Governance Rules. Payments pursuant to such
agreement terminated in October 2004. Mr.
Balloch is not a member of management,
however, and the Board considers him to be
sufficiently independent of management to
permit his exercise of independent judgment
in carrying out his responsibilities. |
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CORPORATE GOVERNANCE DISCLOSURE REQUIREMENT(1) |
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COMMENTS |
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Disclose whether or not a majority of the directors are
independent. If a majority of directors are not
independent, describe what the Board of Directors (the
Board) does to facilitate its exercise of independent
judgment in carrying out its responsibilities. |
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One-half or five of the 10 nominees proposed
by Management for election to the Board are
independent directors as defined in the CSA
Corporate Governance Guidelines, the NYSE
Corporate Governance Rules and the NASDAQ
Corporate Governance Rules. In addition,
although Mr. Balloch does not qualify as an
independent director for the reasons set
forth in Item 1(b) above, he is not a member
of management and the Board considers him to
be sufficiently independent of management to
permit his exercise of independent judgment
in carrying out his responsibilities. |
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The directors of the Corporation have
reviewed the size of the Board and believe
that the current Board size and composition
results in a balanced representation on the
Board of Directors among management,
non-management directors and the
Corporations major shareholder. While the
Board functions effectively, given the
Corporations stage of development and the
size and complexity of its business, the
Board, through its Corporate Governance and
Nominating Committee, will continue to seek
additional qualified candidates to augment
its experience and expertise and to enhance
the Corporations ability to effectively
develop its business interests. In so doing,
the Corporate Governance and Nominating
Committee will seek candidates that meet all
Canadian, U.S. and other standards of
independence applicable to the Corporation.
The Corporate Governance and Nominating
Committee will continue to examine the size
and composition of the Board and recommend
adjustments from time to time to ensure that
the Board continues to be of a size that
facilitates effective decision-making. There
are currently 10 Directors on the Board. The
maximum number permitted under the
Corporations articles of incorporation is
12. This will facilitate adding an additional
qualified candidate to the Board as the
opportunity to do so arises. |
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If a director is presently a director of any other
issuer that is a reporting issuer (or the equivalent) in a
jurisdiction or a foreign jurisdiction, identify both the
director and the other issuer. |
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directorships with other public entities
for each of the nominees are set out in the
table under Election of Directors. |
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Disclose whether or not the independent directors hold
regularly scheduled meetings at which members of management
are not in attendance. If the independent directors hold
such meetings, disclose the number of meetings held since
the beginning of the issuers most recently completed
financial year. If the independent directors do not hold
such meetings, describe what the Board does to facilitate
open and candid discussion among its independent directors. |
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The Board sets aside a portion of each
regularly scheduled meeting to discuss any
issues without management Directors being
present. In addition, all committees meet
without management being present unless the
committee specifically requests.
The Corporate Governance and Nominating
Committee, in particular, provides a forum
without management being present to receive
any expression of concern from a director,
including a concern regarding the
independence of the Board from management.
There were five such Board meetings and four
such meetings of each committee held in 2005.
In addition, between each regularly scheduled
Board meeting, a meeting of non-management
Directors, chaired by the Lead Director, is
held by teleconference to update the
Directors on developments since the last
Board meeting. |
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CORPORATE GOVERNANCE DISCLOSER REQUIREMENT1 |
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COMMENTS |
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Board meeting. |
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(f)
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Disclose whether or not the chair of the Board is
an independent director. If the Board has a chair or lead
director who is an independent director, disclose the
identity of the independent chair or lead director, and
describe his or her role and responsibilities. If the
Board has neither a chair that is independent nor a lead
director that is independent, describe what the Board does
to provide leadership for its independent directors.
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Mr. Friedland, the
Corporations Chief
Executive Officer,
currently serves as
Chairman of the
Board of Directors.
The Board of
Directors is of the
view that
appropriate
structures and
procedures are in
place to allow the
Board to function
independently of
management while
continuing to
provide the
Corporation with
the benefit of
having a Chairman
of the Board with
extensive
experience and
knowledge of the
Corporations
business.
The Board has
created the
position of lead
director, with
specific
responsibility for
maintaining the
independence of the
Board and ensuring
that the Board
carries out its
responsibilities.
Mr. Huberman, who
also serves as
chair of the
Corporate
Governance and
Nominating
Committee, serves
as the
Corporations lead
director. |
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(g)
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Disclose the attendance record of each director for all
Board meetings held since the beginning of the issuers
most recently completed financial year.
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The Board held five
meetings in the
2005 financial year
and the Nominating
and Corporate
Governance, the
Compensation and
Benefits Committee
and the Audit
Committee each met
four times during
the year. A record
of attendance by
Director(s) at
meetings of the
Board and its
Committees as well
as the number of
Board and Board
Committee meetings
held during the
financial year
ended December 31,
2005, is set out
under the heading
Attendance of
Board and Committee
Members in this
Circular. |
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Board Mandate -
Disclose the text of the Boards written mandate. If the
Board does not have a written mandate, describe how the
Board delineates its role and responsibilities. |
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The Board of
Directors has
assumed
responsibility for
the stewardship of
the Corporation and
has adopted a
formal mandate as
described in this
Circular under the
heading Corporate
Governance
Mandate of the
Board, setting out
its stewardship
responsibilities.
The mandate of the
Board is available
on the
Corporations
website
(www.ivanhoemines.co
m). A copy may also
be obtained upon
request to the
Corporate Secretary
of the Corporation,
Suite 654, 999
Canada Place,
Vancouver, British
Columbia V6C 3E1,
telephone (604)
688-5755. |
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3. |
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Position Descriptions - |
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(a)
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Disclose whether or not the Board has developed written
position descriptions for the chair and the chair of each
Board committee. If the Board has not developed written
position descriptions for the chair and/or the chair of
each Board committee, briefly describe how the Board
delineates the role and responsibilities of each such
position.
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The Board of
Directors has not
yet developed
written position
descriptions for
the Chair, the
chair of each Board
committee, or the
CEO. The Corporate
Governance and
Nominating
Committee is
responsible for and
is continuing to
develop
recommendations for
structures and
procedures to clearly define the
role and
responsibilities of
the Chair, the
chair of each Board
committee and the
CEO. |
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(b)
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Disclose whether or not the Board and CEO have
developed a written position description for the CEO. If
the Board and CEO have not developed such a position
description, briefly describe how the Board delineates the
role and responsibilities of the CEO. |
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CORPORATE GOVERNANCE DISCLOSURE REQUIREMENT(1) |
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COMMENTS |
4. |
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Orientation and Continuing Education |
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The Corporation takes steps to ensure that prospective directors fully
understand the role of the Board and its committees and the contribution
individual directors are expected to make, including in particular the
commitment of time and energy that the Corporation expects of its directors. New
directors are provided with a comprehensive information package, including
pertinent corporate documents and a directors manual containing information on
the duties, responsibilities and liabilities of directors. New directors are
also briefed by management as to the status of the Corporations business.
Directors are provided with the opportunity to make site visits to the
Corporations properties. |
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(a) |
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Briefly describe what measures the Board takes to
orient new members regarding: |
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(i)
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the role of the Board, its committees and its
directors, and
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(ii)
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the nature and operation of the issuers
business
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(b) |
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Briefly describe what measures, if any, the Board takes to provide
continuing education for its directors. If the Board does not provide continuing
education, describe how the Board ensures that its directors maintain the skill
and knowledge necessary to meet their obligations as directors. |
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Management and outside advisors provide information and education sessions to
the Board and its committees on a continuing basis as necessary to keep the
directors up-to-date with the Corporation, its business and the environment in
which it operates as well as with developments in the responsibilities of
directors.
Presentations are made to the Board from time to time to educate and keep them
informed of changes within the Corporation and of regulatory and industry
requirements and standards.
In addition, Directors are encouraged to take courses relevant to the
Corporation and its business, particularly with respect to corporate governance
and the mining industry. Directors are also encouraged to make site visits to
the Corporations properties.
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5. |
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Ethical Business Conduct |
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The Corporation has adopted a Code of Business Conduct and Ethics applicable to
all employees, consultants, officers and directors regardless of their position
in the organization, at all times and everywhere the Corporation does business.
The Code of Business Conduct and Ethics provides that the Corporations
employees, consultants, officers and directors will uphold its commitment to a
culture of honesty, integrity and accountability and the Corporation requires
the highest standards of professional and ethical conduct from its employees,
consultants, officers and directors. The Corporations Code of Business Conduct
and Ethics has been filed on SEDAR and is available on the Corporations website
(www.ivanhoemines.com). A copy may also be obtained, without charge, by request
to the Corporate Secretary, 654 999 Canada Place, Vancouver, British Columbia,
Canada V6C 3E1, telephone to (604) 688-5755.
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(a) |
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Disclose whether or not the Board has adopted a written code for its
directors, officers and employees. If the Board has adopted a written code: |
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(i)
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disclose how a person or company may obtain a copy of the code;
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(ii)
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describe how the Board monitors compliance with its code, or if the Board
does not monitor compliance, explain whether and how the Board satisfies itself
regarding compliance with its code; and disclose how a person or company may
obtain a copy of the code;
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(iii)
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provide a cross-reference to any material change report filed since the
beginning of the issuers most recently completed financial year that pertains
to any conduct of a director or executive officer that constitutes a departure
from the code.
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The Corporate Governance and Nominating Committee monitors compliance with the
Code of Business Conduct and Ethics and also ensures that management encourages
and promotes a culture of ethical business conduct.
The Board has not granted any waiver of the Code of Business Conduct and Ethics
in favor of a Director or executive officer. Accordingly, no material change
report has been required or filed. |
- 46 -
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CORPORATE GOVERNANCE DISCLOSURE REQUIREMENT(1) |
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COMMENTS |
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(b) |
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Describe any steps the Board takes to ensure directors
exercise independent judgment in considering transactions
and agreements in respect of which a director or executive
officer has a material interest. |
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The Corporate Governance and Nominating Committee monitors the disclosure of
conflicts of interest by Directors and ensures that no Director will vote nor
participate in a discussion on a matter in respect of which such Director has a
material interest. |
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(c) |
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Describe any other steps the Board takes to encourage and promote a culture of
ethical business conduct. |
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The Corporation has published a Statement of Values and Responsibilities. It has
also developed various corporate policies including Corporate Disclosure,
Confidentiality and Securities Trading policies, and a Whistleblower Policy,
administered by an independent third party. |
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6. |
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Nomination of Directors
(a)
Describe the process by which the Board identifies new candidates for Board
nomination. |
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The Board has a Corporate Governance and Nominating Committee consisting of
Messrs. Huberman, Hanson, Weatherall, Thygesen and Faber all of whom are
independent directors under the CSA Corporate Governance Guidelines, the NYSE
Corporate Governance Rules and the NASDAQ Corporate Governance Rules. Mr.
Huberman has been appointed as Chairman of the committee, in addition to being
the Corporations lead director. The full Board determines, in light of the
opportunities and risks facing the Corporation, what competencies, skills and
personal qualities it should seek in new Board members in order to add value to
the Corporation. Based on this framework, the Corporate Governance and
Nominating Committee has responsibility for approaching and proposing to the
full Board new nominees to the Board, and for assessing directors on an ongoing
basis.
The Corporation does not have a shareholder with the ability to exercise a
majority of the votes for the election of the Board of Directors. However, the
Chairman and the Chief Executive Officer of the Corporation holds approximately
31.85% of the Corporations voting securities as at the date of this Circular.
The Corporation has a majority of directors who do not have an interest in or
relationship with either the Corporation or its principal shareholder and, which
fairly reflects the investment in the Corporation by shareholders other than the
principal shareholder.
The full Board determines, in light of the opportunities and risks facing the
Corporation and the recommendations of the Corporate Governance and Nominating
Committee, what competencies, skills and personal qualities it should seek in
new Board members in order to add value to the Corporation. Based on this
framework, the Corporate Governance and Nominating Committee has responsibility
for identifying, interviewing and assessing nominees to the Board and proposing
to the full Board new nominees, and for assessing directors on an ongoing basis.
The Board seeks to achieve a greater representation of independent directors and
has determined to continue to seek, through its Corporate Governance and
Nominating Committee, additional qualified candidates to augment its experience
and expertise and to enhance the Corporations ability to effectively develop
its business interests. In so doing, the Corporate Governance and Nominating
Committee will seek candidates that meet all Canadian, U.S. and other standards
of independence applicable to the Corporation.
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- 47 -
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CORPORATE
GOVERNANCE DISCLOSURE
REQUIREMENT(1) |
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COMMENTS |
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Corporation.
The charter of the Corporate Governance and Nominating Committee is
available on the Companys website (www.ivanhoemines.com). A copy may also
be obtained upon request to the Corporate Secretary, 654 999 Canada
Place, Vancouver, British Columbia, V6C 3E1, telephone (604) 688-5755. |
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7. |
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Compensation
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The Compensation and Benefits Committee has responsibility for recommending compensation for the Companys officers to the Board. CEO
compensation is approved by the Compensation and Benefits Committee.
Report on Executive Compensation. |
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(a)
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Describe the process by which the Board determines the compensation for the
issuers directors and officers.
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The Compensation and Benefits Committee reviews and makes recommendations
to the Board regarding the adequacy and form of the compensation for
non-management Directors to ensure that such compensation realistically
reflects the responsibilities and risks involved in being an effective
director, without compromising a Directors independence. Directors who
are executives of the Company receive no additional remuneration for their
services as Directors. |
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Independent directors, as defined in the CSA Corporate Governance
Guidelines, the NYSE Corporate Governance Rules and the NASDAQ Corporate
Governance Rules (and, from and after January 1, 2006, all non-management
directors), receive Cdn.$15,000 per annum for acting as such. Mr. David
Huberman receives an additional Cdn.$60,000 per annum for acting as the
Lead Director of the Board of Directors. Mr. John Weatherall, as Chair of
the Audit Committee, receives an additional Cdn.$25,000 per annum, for
acting in such capacity. Commencing in 2006 each Chair of the Compensation
and Benefits Committee and the Corporate Governance Committee will receive
an additional payment of Cdn.$15,000 per annum for acting as such.
Independent directors also receive Cdn.$1,200 per in-person Board or
Committee meeting attended and US$600 per Board or Committee conference
call in which they participate. |
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In addition to their cash compensation, non-executive directors also
receive a grant of 25,000 stock options per annum, such options having a
five year term and fully vesting on the first anniversary of the date of
the grant. |
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(b)
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Disclose whether or not the Board has a compensation committee composed
entirely of independent directors. If the Board does not have a compensation
committee composed entirely of independent directors, describe what steps the
Board takes to ensure an objective process for determining such compensation.
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The Compensation and Benefits Committee comprises three Directors, all of
whom have been affirmatively determined by the Board to be independent
directors as defined by the CSA Corporate Governance Guidelines, the NYSE
Corporate Governance Rules and the NASDAQ Corporate Governance Rules. |
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(c)
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If the Board has a compensation committee, describe the responsibilities,
powers and operation of the compensation committee.
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The duties and responsibilities of the Compensation and Benefits Committee
include the development of a compensation philosophy and policy;
evaluating the performance of the Corporations senior executive officers,
reviewing their compensation, and monitoring equity incentive arrangements. |
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The role of the Compensation and Benefits Committee is primarily to review
the adequacy and form of compensation of senior management and the directors |
- 48 -
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CORPORATE
GOVERNANCE DISCLOSURE
REQUIREMENT(1) |
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COMMENTS |
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with such compensation realistically reflecting the
responsibilities and risks of such positions, to administer the
Corporations Equity Incentive Plan, to determine the recipients of, and
the nature and size of share compensation awards granted from time to time
and to determine the remuneration of executive officers and to determine
any bonuses to be awarded. |
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The members of the Compensation and Benefits Committee are Messrs.
Huberman (Chair), Thygesen and Hanson. Each member of the committee is an
independent director for the purposes of the CSA Corporate Governance
Guidelines, the NYSE Corporate Governance Rules and the NASDAQ Corporate
Governance Rules. |
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The charter of the Compensation and Benefits Committee is available on the
Companys website (www.ivanhoemines.com). A copy may also be obtained upon
request to the Corporate Secretary, Suite 654, 999 Canada Place,
Vancouver, British Columbia V6C 3E1, telephone (604) 688-5755. |
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(d)
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If a compensation consultant or advisor has, at any time since the beginning
of the issuers most recently completed financial year, been retained to
assist in determining compensation for any of the issuers directors and
officers, disclose the identity of the consultant or advisor and briefly
summarize the mandate for which they have been retained. If the consultant or
advisor has been retained to perform any other work for the issuer, state
that fact and briefly describe the nature of the work.
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Towers Perrin were retained in 2004 by the Compensation Committee to
prepare a director compensation report to assist the Committee in the
determination of independent director compensation. They were mandated to
provide the review based on compensation levels provided to similarly
sized Canadian mining companies. Towers Perrins fee for its 2004 report
was Cdn$19,821.
Gurr Lane & Associates were retained in 2005 by the Compensation Committee
to prepare reports to assist the Committee in developing a compensation
strategy for the position of President and for the other executive and
senior management positions. They were mandated to develop a justifiable
compensation strategy which benchmarks such positions in terms of the
competitive marketplace of similar-sized international mining companies
and, where appropriate, larger operating mining companies. The proposals
were intended to address salary, bonus and stock options. Gurr Lane &
Associates fee for the reports was Cdn$39,697. |
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8. |
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Other Board Committees If the Board has standing committees other than the audit,
compensation and nominating committees, identify the committees and describe their
function. |
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In addition to the Audit Committee, the Compensation and Benefits
Committee and the Corporate Governance and Nominating Committee, effective
March 11, 2005, the Board has also approved establishment of an Executive
Committee consisting of the Chief Executive Officer, Chief Financial
Officer, President and one independent director (currently the Lead
Director) to meet between formal meetings of the Board as necessary, with
authority to approve expenditures of up to U.S.$10,000,000. |
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9. |
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Assessments Disclose whether or not the Board, its committees and individual
directors are regularly assessed with respect to their effectiveness and
contribution. If assessments are regularly conducted, describe the process used for
the assessments. If assessments are not regularly conducted, describe how the Board
satisfies itself that the Board, its committees, and its individual directors are
performing effectively. |
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The Corporate Governance and Nominating Committee has the responsibility
for developing and recommending to the Board, and overseeing the execution
of, a process for assessing the effectiveness of the Board as a whole, the
committees of the Board and the contribution of individual directors, on a
regular basis. The Corporate Governance and Nominating Committee has
developed and is continuing to refine an assessment process for the Board
and each of its committees. In addition, the Committee is refining a |
- 49 -
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CORPORATE
GOVERNANCE DISCLOSURE
REQUIREMENT(1) |
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COMMENTS |
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process to assess the contribution of individual directors. |
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The Corporate Governance and Nominating Committee reviews and approves a
performance evaluation questionnaire that is forwarded annually to the
members of the Board of Directors. This questionnaire covers a wide range
of issues and allows for comments and suggestions. In 2004, all Directors
assessed the performance of the Board as a whole, its Committees, the
Chair of each Committee, and the Lead Director. In 2005, each Director
assessed his own performance. In 2006, a process of peer review will be
initiated for all Directors. The Lead Director compiles responses to the
questionnaire and contacts each Director to discuss the evaluations. The
Lead Director then reports the results to the Board of Directors. This
evaluation process takes place on an annual basis prior to recommendation
of nominees to the Board of Directors. |
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The most recent annual evaluation showed that the Board, its Committees,
the Committee Chairs, the Lead Director and individual Directors were
effectively fulfilling their responsibilities. |
- 50 -
SCHEDULE B
IVANHOE MINES LTD.
EMPLOYEES AND DIRECTORS EQUITY INCENTIVE PLAN
AMENDED AND RESTATED MAY 12, 2006
PART 1 INTRODUCTION
The purpose of the Plan is to secure for the Company and its shareholders the benefits of incentive
inherent in share ownership by the directors and employees of the Company and its affiliates who,
in the judgment of the Board, will be largely responsible for its future growth and success. It is
generally recognized that share plans of the nature provided for herein aid in retaining and
encouraging employees and directors of exceptional ability because of the opportunity offered them
to acquire a proprietary interest in the Company.
(a) Affiliate has the meaning set forth in Section 1(2) of the Ontario Securities Act, as
amended.
(b) Associate has the meaning assigned to it in the Ontario Securities Act, as amended.
(c) Board means the board of directors of the Company.
(d) Company means Ivanhoe Mines Ltd., a company continued under the laws of the Yukon Territory.
(e) Committee has the meaning attributed thereto in Section 6.1;
(f) Eligible Directors means the directors of the Company or any Affiliate thereof who are, as
such, eligible for participation in the Plan.
(g) Eligible Employees means employees (including employees who are officers and directors) of
the Company or any Affiliate thereof, whether or not they have a written employment contract with
Company, determined by the Board, upon recommendation of the Committee, as employees eligible for
participation in the Plan. Eligible Employees shall include Service Providers eligible for
participation in the Plan as determined by the Board.
(h) Fair Market Value means, with respect to a Share subject to Option, the weighted average
price of the Shares on The Toronto Stock Exchange for the five days on which Shares were traded
immediately preceding the date in respect of which Fair Market Value is to be determined or, if
the Shares are not, as at that date listed on The Toronto Stock Exchange, on such other exchange
or exchanges on which the Shares are listed on that date. If the Shares are not listed and
posted for trading on an exchange on such day, the Fair Market Value shall be such price per
Share as the Board, acting in good faith, may determine.
(i) Insider has the meaning assigned to it in the Ontario Securities Act, as amended.
- 51 -
(j) Option means an option granted under the terms of the Share Option Plan.
(k) Option Period means the period during which an Option is outstanding.
(l) Optionee means an Eligible Employee or Eligible Director to whom an Option has been granted
under the terms of the Share Option Plan.
(m) Participant means, in respect of any Plan, an Eligible Employee or Eligible Director who
participates in such Plan.
(n) Plan means, collectively the Share Option Plan, the Share Bonus Plan and the Share Purchase
Plan and Plan means any such plan as the context requires.
(o) Service Provider means any person or company engaged by the Company or an Affiliate to
provide services for an initial, renewable or extended period of 12 months or more.
(p) Share Bonus Plan means the plan established and operated pursuant to Part 3 and Part 5
hereof.
(q) Share Option Plan means the plan established and operated pursuant to Part 2 and Part 5
hereof.
(r) Share Purchase Plan means the plan established and operated pursuant to Part 4 and Part 5
hereof.
(s) Shares means the common shares of the Company.
PART 2 SHARE OPTION PLAN
Options shall be granted only to Eligible Employees and Eligible Directors.
2.2 |
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Administration of Share Option Plan. |
The Share Option Plan shall be administered by the Committee.
The exercise price per Share of any Option shall be not less than one hundred per cent (100%) of
the Fair Market Value on the date of grant.
The Board, on the recommendation of the Committee, may at any time authorize the granting of
Options to such Eligible Employees and Eligible Directors as it may select for the number of Shares
that it shall designate, subject to the provisions of the Share Option Plan. When the grant is
authorized, the Board, on the recommendation of the Committee, shall specify the date of grant.
Each Option granted to an Eligible Employee or to an Eligible Director shall be evidenced by a
stock option agreement with terms and conditions consistent with the Share Option Plan and as
approved by the Board on the recommendation of the Committee (which terms and conditions
- 52 -
need not be the same in each case and may be changed from time to time, subject to the
approval of any material changes by The Toronto Stock Exchange or such other exchange or exchanges
on which the Shares are then traded).
2.5 Terms of Options
The Option Period shall be five years from the date such Option is granted or such greater or
lesser duration as the Board, on the recommendation of the Committee, may determine at the date
of grant, and may thereafter be reduced with respect to any such Option as provided in Section 2.8
hereof covering termination of employment or death of the Optionee.
Unless otherwise determined from time to time by the Board, on the recommendation of the Committee,
Options may be exercised (in each case to the nearest full Share) during the Option Period as
follows:
(a) at any time during the first year of the Option Period, the Optionee may
purchase up to 20% of the total number of Shares reserved for issuance pursuant to
his or her Option; and
(b) at any time during each additional year of the Option Period the Optionee may
purchase an additional 20% of the total number of Shares reserved for issuance
pursuant to his or her Option plus any Shares not purchased in accordance with the
preceding subsection (a) until, in the fifth year of the Option Period, 100% of
the Option will be exercisable.
Except as set forth in Section 2.8, no Option may be exercised unless the Optionee is at the time
of such exercise:
(a) in the case of an Eligible Employee, in the employ of the Company or an
Affiliate and shall have been continuously so employed since the grant of his
Option, but absence on leave, having the approval of the Company or such Affiliate,
shall not be considered an interruption of employment for any purpose of the Share
Option Plan; or
(b) in the case of an Eligible Director, a director of the Company or an Affiliate
and shall have been such a director continuously since the grant of his Option.
Subject to Section 2.6, the exercise of any Option will be contingent upon the Optionee having
entered into an Option agreement with the Company on such terms and conditions as have been
approved by the Board, on the recommendation of the Committee, and which incorporates by reference
the terms of the Plan. The exercise of any Option will also be contingent upon receipt by the
Company of cash payment of the full purchase price of the Shares being purchased. No Optionee or
his legal representatives or legatees will be, or will be deemed to be, a holder of any Shares
subject to an Option, unless and until certificates for such Shares are issued to him or them under
the terms of the Share Option Plan.
- 53 -
2.6 Share Appreciation Right
A Participant may, if at any time determined by the Board, on the recommendation of the Committee,
have the right (the Right), when entitled to exercise an Option, to terminate such Option in
whole or in part (the Terminated Option) by notice in writing to the Company and, in lieu of
receiving the Shares (the Option Shares) to which the Terminated Option relates, to receive the
number of Shares, disregarding fractions, which is equal to the quotient obtained by:
(a) subtracting the Option exercise price per Share from the Fair Market Value per
Share on the day immediately prior to the exercise of the Right and multiplying
the remainder by the number of Option Shares; and
(b) dividing the product obtained under subsection 2.6(a) by the Fair Market Value
per Share on the day immediately prior to the exercise of the Right.
If a Right is granted in connection with an Option, it is exercisable only to the extent and on the
same conditions that the related Option is exercisable.
2.7 Lapsed Options
If Options are surrendered, terminated or expire without being exercised in whole or in part, new
Options may be granted covering the Shares not purchased under such lapsed Options, subject in the
case of the cancellation of an Option in connection with the grant of a new Option to the same
person on different terms, to the consent of The Toronto Stock Exchange.
2.8 Effect of Termination of Employment or Death
If an Optionee:
(a) dies while employed by or while a director of the Company or its Affiliate, any Option held
by him at the date of death shall become exercisable in whole or in part, but only by the person
or persons to whom the Optionees rights under the Option shall pass by the Optionees will or
applicable laws of descent and distribution. Unless otherwise determined by the Board, on the
recommendation of the Committee, all such Options shall be exercisable only to the extent that
the Optionee was entitled to exercise the Option at the date of his death and only for 12 months
after the date of death or prior to the expiration of the Option Period in respect thereof,
whichever is sooner; or
(b) ceases to be employed by or act as a director of the Company or its Affiliate for cause, no
Option held by such Optionee will, unless otherwise determined by the Board, on the
recommendation of the Committee, be exercisable following the date on which such Optionee ceases
to be so employed or ceases to be a director, as the case may be. If an Optionee ceases to be
employed by or act as a director of the Company or its Affiliate for any reason other than cause
then, unless otherwise determined by the Board, on the recommendation of the Committee, any
Option held by such Optionee at the effective date thereof shall become exercisable for a period
of up to 12 months thereafter or prior to the expiration of the Option Period in respect thereof,
whichever is sooner.
2.9 Effect of Takeover Bid
If a bona fide offer (the Offer) for Shares is made to the Optionee or to shareholders generally
or to a class of shareholders which includes the Optionee, which Offer, if accepted in whole or in
- 54 -
part, would result in the offeror exercising control over the Company within the meaning of
subsection 1(3) of the Ontario Securities Act (as amended from time to time), then the Company
shall, immediately upon receipt of notice of the Offer, notify each Optionee currently holding an
Option of the Offer, with full particulars thereof, whereupon, notwithstanding Section 2.5 hereof,
such Option may be exercised in whole or in part by the Optionee so as to permit the Optionee to
tender the Shares received upon such exercise (the Optioned Shares) pursuant to the Offer.
2.10 Effect of Amalgamation or Merger
If the Company amalgamates or merges with or into another corporation, any Shares receivable on the
exercise of an Option shall be converted into the securities, property or cash which the
Participant would have received upon such amalgamation or merger if the Participant had exercised
his Option immediately prior to the record date applicable to such amalgamation or merger, and the
option price shall be adjusted appropriately by the Board and such adjustment shall be binding for
all purposes of the Share Option Plan.
2.11 Adjustment in Shares Subject to the Plan
If there is any change in the Shares through the declaration of stock dividends of Shares or
consolidations, subdivisions or reclassification of Shares, or otherwise, the number of Shares
available under the Share Option Plan, the Shares subject to any Option, and the option price
thereof shall be adjusted appropriately by the Board and such adjustment shall be effective and
binding for all purposes of the Share Option Plan.
2.12 Loans to Employees
Subject to applicable law, the Board may at any time authorize the Company to loan money to an
Eligible Employee (which for purposes of this Section 2.12 excludes any director or executive
officer (or equivalent thereof) of the Company), on such terms and conditions as the Board may
reasonably determine, to assist such Eligible Employee to exercise an Option held by him or her.
Such terms and conditions shall include, in any event, interest at prevailing market rates, a term
not in excess of one year, and security in favour of the Company represented by that number of
Shares issued pursuant to the exercise of an Option in respect of which such loan was made or
equivalent security which equals the loaned amount divided by the Fair Market Value of the Shares
on the date of exercise of the Option, which security may be granted on a non-recourse basis.
PART 3 SHARE BONUS PLAN
3.1 Participants
The Board, on the recommendation of the Committee, shall have the right, subject to Section 3.2, to
issue or reserve for issuance, for no cash consideration, to any Eligible Employee or any Eligible
Director any number of Shares as a discretionary bonus subject to such provisos and restrictions as
the Board may determine.
3.2 Number of Shares
The aggregate maximum number of shares that may be issued pursuant to Section 3.1 will be limited
to 2,000,000 Shares. Shares reserved for issuance and issued under the Share Bonus Plan shall be
subject to the limitations set out in Section 5.1.
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The Board, on the recommendation of the Committee, in its absolute discretion, shall have the right
to reallocate any of the Shares reserved for issuance under the Share Bonus Plan for future
issuance under the Share Option Plan or the Share Purchase Plan and, in the event that any Shares
specifically reserved under the Share Bonus Plan are reallocated to the Share Option Plan or the
Share Purchase Plan, as the case may be, the aggregate maximum number of Shares reserved under the
Share Bonus Plan will be reduced to that extent. In no event will the number of Shares allocated
for issuance under the Share Bonus Plan exceed 2,000,000 Shares.
3.3 Necessary Approvals
The obligation of the Company to issue and deliver any Shares pursuant to an award made under the
Share Bonus Plan will be subject to all necessary approvals of any exchange or securities
regulatory authority having jurisdiction over the Shares.
PART 4 SHARE PURCHASE PLAN
4.1 Participants
Participants in the Share Purchase Plan will be Eligible Employees who have been continuously
employed by the Company or any of its Affiliates on a full-time basis for at least 12 consecutive
months and who have been designated by the Board, on the recommendation of the Committee, as
participants in the Share Purchase Plan (Share Purchase Plan Participants). The Board, on the
recommendation of the Committee, shall have the right, in its absolute discretion, to waive such
12-month period or to refuse any Eligible Employee or group of Eligible Employees the right of
participation or continued participation in the Share Purchase Plan.
4.2 Election to Participate in the Share Purchase Plan and Participants Contribution
Any Share Purchase Plan Participant may elect to contribute money (the Participants
Contribution) to the Share Purchase Plan in any calendar year if the Share Purchase Plan
Participant delivers to the Company a written direction in form and substance satisfactory to the
Company authorizing the Company to deduct from the Share Purchase Plan Participants salary, in
equal instalments, the Participants Contribution. Such direction will remain effective until
revoked in writing by the Share Purchase Plan Participant or until the Board terminates or suspends
the Share Purchase Plan, whichever is earlier.
The Share Purchase Plan Participants Contribution as determined by the Board, on the
recommendation of the Committee, shall not exceed 10% of the Share Purchase Plan Participants
basic annual salary from the Company and its Affiliates at the time of delivery of the direction,
before deductions, exclusive of any overtime pay, bonuses or allowances of any kind whatsoever (the
Basic Annual Salary). In the case of a Share Purchase Plan Participant for whom the Board, on
the recommendation of the Committee, has waived the 12-month employment requirement, the Share
Purchase Plan Participants Contribution shall not exceed 10% of his Basic Annual Salary from the
Company and its Affiliates at the time of delivery of the direction, prorated over the remainder of
the calendar year, before deductions and exclusive of any overtime pay, bonuses or allowances of
any kind whatsoever.
4.3 Companys Contribution
Immediately prior to the date any Shares are issued to a Share Purchase Plan Participant in
accordance with Section 4.4, the Company will credit the Share Purchase Plan Participant with,
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and thereafter hold in trust for the Share Purchase Plan Participant, an amount determined by the
Board (the Companys Contribution) not to exceed the Participants Contribution then held in
trust by the Company.
4.4 Issue of Shares
On March 31, June 30, September 30 and December 31 in each calendar year the Company will issue to
each Share Purchase Plan Participant fully paid and non-assessable Shares, disregarding fractions,
which is equal to the aggregate amount of the Participants Contribution and the Companys
Contribution divided by the Issue Price. For the purposes of this Section 4.4, Issue Price means
the weighted average price of the Shares on The Toronto Stock Exchange, or such exchange or
exchanges on which the Shares may be traded at such time for the 90-day period immediately
preceding the date of issuance. If the Shares are not traded on an exchange on the date of
issuance, the Issue Price shall be such price per Share as the Board, acting in good faith, may
determine.
The Company shall hold any unused balance of the Participants Contribution for a Share Purchase
Plan Participant until used in accordance with the Share Purchase Plan.
4.5 Delivery of Shares
As soon as reasonably practicable following each issuance of Shares to a Share Purchase Plan
Participant pursuant to Section 4.4, the Company will cause to be delivered to the Share Purchase
Plan Participant a certificate in respect of such Shares provided that, if required by applicable
law or the rules and policies of The Toronto Stock Exchange or such other exchange or exchanges on
which the Shares are traded, a restrictive legend shall be inscribed on the certificate, which
legend shall state that the Shares shall not be transferable for such period as may be prescribed
by law or by any regulatory authority or stock exchange on which the Shares are listed.
4.6 Effect of Termination of Employment or Death
If a Participant dies or otherwise ceases to be employed by the Company or any of its Affiliates
for any reason or receives notice from the Company of the termination of his or her employment, the
Share Purchase Plan Participants participation in the Share Purchase Plan will be deemed to be
terminated and any portion of the Participants Contribution then held in trust shall be paid to
the Share Purchase Plan Participant or his estate or successor as the case may be.
4.7 Effect of Amalgamation or Merger
If the Company amalgamates or merges with or into another corporation, each Share Purchase Plan
Participant to whom Shares are to be issued will receive, on the date on which any Shares would
otherwise have been delivered to the Share Purchase Plan Participant in accordance with Section
4.5, the securities, property or cash to which the Share Purchase Plan Participant would have been
entitled on such amalgamation, consolidation or merger had the Shares been issued immediately prior
to the record date of such amalgamation or merger.
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PART 5 GENERAL
5.1 Number of Shares
The aggregate number of Shares that may be reserved for issuance under the Plan shall not exceed
32,000,000 Shares inclusive of those Shares reserved under the Share Bonus Plan pursuant to Section
3.2. In addition, the aggregate number of Shares:
(a) that may be reserved for issuance to Insiders under the Plan shall not exceed 10% of the
Companys outstanding issue from time to time;
(b) that may be issued to Insiders under the Plan within any one-year period shall not exceed 10%
of the Companys outstanding issue from time to time; and
(c) that may be issued to any one Insider and his or her Associates under the Plan within any
one-year period shall not exceed 5% of the Companys outstanding issue from time to time.
In no event will the number of Shares at any time reserved for issuance to any Participant exceed
5% of the Companys outstanding issue from time to time.
For the purposes of this Section 5.1, outstanding issue means the total number of Shares, on a
non-diluted basis, that are issued and outstanding as of the date that any Shares are issued or
reserved for issuance pursuant to an award under the Plan to an Insider or such Insiders
Associates, excluding any Shares issued under the Plan during the immediately preceding 12 month
period.
5.2 Transferability
Any benefits, rights and options accruing to any Participant in accordance with the terms and
conditions of the Plan shall not be transferable unless specifically provided herein. During the
lifetime of a Participant all benefits, rights and options may only be exercised by the
Participant. Options are non-transferable except by will or by the laws of descent and
distribution.
5.3 Employment
Nothing contained in any Plan shall confer upon any Participant any right with respect to
employment or continuance of employment with the Company or any, Affiliate, or interfere in any way
with the right of the Company or any Affiliate to terminate the Participants employment at any
time. Participation in any Plan by a Participant is voluntary.
5.4 Record Keeping
The Company shall maintain a register in which shall be recorded:
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the name and address of each Participant; |
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the Plan or Plans in which the Participant participates; |
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any Participants Contributions; |
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the number of unissued Shares reserved for issuance pursuant to an Option or
pursuant to an award made under the Share Bonus Plan in favour of a Participant; and |
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such other information as the Board may determine. |
5.5 Necessary Approvals
The Plan shall be effective only upon formal adoption by the Board following the approval of the
shareholders of the Company in accordance with the rules and policies of The Toronto Stock
Exchange.
The obligation of the Company to sell and deliver Shares in accordance with the Plan is subject to
the approval of any governmental authority having jurisdiction in respect of the Shares or any
exchanges on which the Shares are then listed which may be required in connection with the
authorization, issuance or sale of such Shares by the Company. If any Shares cannot be issued to
any Participant for any reason including, without limitation, the failure to obtain such approval,
the obligation of the Company to issue such Share shall terminate and any Participants
Contribution or option price paid to the Company shall be returned to the Participant.
5.6 Income Taxes
The Company may withhold from any remuneration or consideration whatsoever payable to such
Participant hereunder, any amounts required by any taxing authority to be withheld for taxes of any
kind as a consequence of such participation in the Plan.
5.7 Amendments to Plan
The Board may amend, modify or terminate the Plan at any time if and when it is advisable in the
absolute discretion of the Board, subject to the approval of any material changes by The Toronto
Stock Exchange or such other exchange or exchanges on which the Shares are traded. However, any
amendment of such Plan which would:
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materially increase the number of Shares issuable under the Plan; or |
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materially modify the requirements as to eligibility for participation in the
Plan; |
shall be effective only upon the approval of the shareholders of the Company and, if required, the
approval of any regulatory body having jurisdiction over the Shares and any stock exchanges on
which the Shares are then listed for trading. Except as expressly otherwise provided herein,
however, no change in an award already granted under the Plan shall be made without the written
consent of the recipient of such award.
5.8 No Representation or Warranty
The Company makes no representation or warranty as to the future market value of any Shares issued
in accordance with the provisions of the Plan.
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5.9 Compliance with Applicable Law, etc
If any provision of the Plan or any agreement entered into pursuant to the Plan contravenes any law
or any order, policy, by-law or regulation of any regulatory body or stock exchange having
authority over the Company or the Plan then such provision shall be deemed to be amended to the
extent required to bring such provision into compliance therewith.
PART 6 ADMINISTRATION OF THE PLAN
6.1 Administration by the Committee
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Unless otherwise determined by the Board, the Plan shall be administered by the
Compensation and Benefits Committee (the Committee) appointed by the Board and
constituted in accordance with such Committees charter. The members of the Committee
serve at the pleasure of the Board and vacancies occurring in the Committee shall be
filled by the Board. |
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The Committee shall have the power, where consistent with the general purpose
and intent of the Plan and subject to the specific provisions of the Plan, to: |
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adopt and amend rules and regulations relating to the
administration of the Plan and make all other determinations necessary or
desirable for the administration of the Plan. The interpretation and
construction of the provisions of the Plan and related agreements by the
Committee shall be final and conclusive. The Committee may correct any defect
or supply any omission or reconcile any inconsistency in the Plan or in any
related agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency; and |
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otherwise exercise the powers delegated to the Committee by the
Board and under the Plan as set forth herein. |
6.2 Board Role
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The Board, on the recommendation of the Committee, shall determine and
designate from time to time the individuals to whom awards shall be made, the
amounts of the awards and the other terms and conditions of the awards. |
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The Board may delegate any of its responsibilities or powers under the Plan to
the Committee, provided that the grant of all Shares, Options or other awards under the
Plan shall be subject to the approval of the Board. No Option shall be
exercisable in whole or in part unless and until such approval is obtained. |
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In the event the Committee is unable or unwilling to act in respect of a matter
involving the Plan, the Board shall fulfill the role of the Committee provided for
herein. |
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IVANHOE MINES LTD.
654 - 999 Canada Place, Vancouver, British Columbia V6C 3E1
Tel: (604) 688 5755 Fax: (604) 682 2060
P R O X Y
This proxy is solicited by the management of IVANHOE MINES LTD. (the Corporation) for the
Annual General Meeting of its shareholders (the Meeting) to be held on May 12, 2006.
The undersigned hereby appoints, R. Edward Flood, Deputy Chairman and Director, or failing him,
Beverly A. Bartlett, Corporate Secretary of the Corporation, or instead of either of the foregoing,
(insert name) , as nominee of the undersigned, with full power of substitution, to attend and vote
on behalf of the undersigned at the Meeting to be held in the Ceperly/Walker room of the Terminal
City Club, 837 West Hastings Street, Vancouver, British Columbia, on May 12, 2006 at 9:00 AM, local
time, and at any adjournments thereof, and directs the nominee to vote or abstain from voting the
shares of the undersigned in the manner indicated below:
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ELECTION OF DIRECTORS |
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The nominees proposed by management of the Corporation are: |
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ROBERT M. FRIEDLAND
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FOR ¨
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WITHHOLD ¨ |
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R. EDWARD FLOOD
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FOR ¨
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WITHHOLD ¨ |
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KJELD THYGESEN
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FOR ¨
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WITHHOLD ¨ |
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ROBERT HANSON
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FOR ¨
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WITHHOLD ¨ |
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JOHN WEATHERALL
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FOR ¨
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WITHHOLD ¨ |
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MARKUS FABER
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FOR ¨
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WITHHOLD ¨ |
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JOHN MACKEN
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FOR ¨
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WITHHOLD ¨ |
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DAVID HUBERMAN
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FOR ¨
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WITHHOLD ¨ |
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HOWARD BALLOCH
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FOR ¨
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WITHHOLD ¨ |
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PETER MEREDITH
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FOR ¨
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WITHHOLD ¨ |
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APPOINTMENT OF AUDITORS |
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To appoint Deloitte
& Touche, LLP, Chartered Accountants, as auditors of the Corporation at a
remuneration to be fixed by the board of directors. |
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FOR ¨ WITHHOLD ¨ |
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An amendment to the Corporations Employees and Directors Equity Incentive Plan (the
Plan) to increase, by 3,000,000 common shares, the maximum number of common shares of the
Corporation issuable under the Plan from 29,000,000 common shares to 32,000,000 common shares
is hereby authorized, approved and adopted. |
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FOR ¨ AGAINST ¨ |
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Upon any permitted amendment to or variation of any matter identified in the Notice of Annual
General Meeting. |
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Upon any other matter that properly comes before the Meeting . |
THE UNDERSIGNED HEREBY REVOKES ANY PRIOR PROXY OR PROXIES.
DATED: , 2006.
Signature of Shareholder
(Please print name here)
Note: If not dated, this proxy is deemed to be dated on the day sent by the Corporation.
Affix label here
Name of Shareholder
Address of Shareholder
(Please advise the Corporation of any change of address)
NOTES:
A proxy will not be valid unless the completed, signed and dated form of proxy is faxed to
1-866-781-3111 or delivered to the office of 200 Queens Quay East, Unit 6, Toronto, Ontario, M5A
4K9 not less than 48 hours (excluding Saturdays and holidays) before the time at which the Meeting
is to be held, or any adjournment thereof.
Any one of the joint holders of a share may sign a form of proxy in respect of the share but, if
more than one of them is present at the Meeting or represented by proxyholder, that one of them
whose name appears first in the register of members in respect of the share, or that ones
proxyholder, will alone be entitled to vote in respect thereof. Where the form of proxy is signed
by a corporation, either its corporate seal must be affixed or the form should be signed by the
corporation under the hand of an officer or attorney duly authorized in writing.
A shareholder has the right to appoint a person, who need not be a shareholder, other than either
of the nominees designated in this form of proxy to attend and act for the shareholder and on the
shareholders behalf at the Meeting, and may do so by inserting the name of that other person in
the blank space provided for that purpose in this form of proxy or by completing another suitable
form of proxy.
The shares represented by the proxy will be voted or withheld from voting in accordance with the
instructions of the shareholder on any ballot, and where a choice with respect to a matter to be
acted on is specified the shares will be voted on a ballot in accordance with that specification.
This proxy confers discretionary authority with respect to matters, other than the election of
directors and appointment of
auditors, identified or referred to in the accompanying Notice of Annual General Meeting for which
no instruction is given, and with
respect to other matters that may properly come before the Meeting.
In respect of a matter so identified or referred to for which no instruction is given, the nominees
named in this proxy will vote shares represented thereby for the approval of such matter.
SUPPLEMENTAL RETURN CARD
May 12, 2006
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TO: |
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REGISTERED AND NON-REGISTERED SHAREHOLDERS OF IVANHOE MINES LTD. (the Corporation) |
National Instrument 54-101/Shareholder Communication provides shareholders with the opportunity to
elect annually to have their name added to an issuers SUPPLEMENTAL MAILING LIST in order to
receive interim financial statements of the Corporation. If you are interested in receiving such
statements, please complete, sign and return this document to CIBC Mellon Trust Company, The
Oceanic Plaza, 1600 1066 West Hastings Street, PO Box 1900, Vancouver, British Columbia, V6C 3K9.
AS THE SUPPLEMENTAL LIST IS UPDATED EACH YEAR, A RETURN CARD WILL BE REQUIRED FROM YOU ANNUALLY IN
ORDER FOR YOUR NAME TO REMAIN ON THE LIST.
I CERTIFY THAT I AM A: REGISTERED/NON-REGISTERED
(Please Circle)
SHAREHOLDER OF
IVANHOE MINES LTD.
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Name of Shareholder: |
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Please Print |
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Address: |
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Postal Code: |
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Signature: |
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Date: |
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E-Mail Address: |
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SHAREHOLDER CONSENT TO DELIVERY OF ELECTRONIC MATERIALS
Ivanhoe Mines Ltd. (the Company) is introducing a voluntary option for the delivery of
Company documents to its shareholders (Shareholders) by electronic means rather than traditional
mailing of paper copies. This option allows the Company to provide its shareholders a convenient
method of receiving materials meant to increase timeliness for Shareholders, provide benefits to
our environment and reduce costs.
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I consent to the electronic delivery of the documents listed below that the Company elects
to deliver to me electronically, all in accordance with the terms hereof. The consent granted
herein will last until revoked by the Shareholder. |
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The following documents that are filed with securities regulators and mailed to other
Shareholders will at the same time be delivered electronically to me (collectively referred
to as the Documents or each of them as a Document): |
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annual reports including financial statements; |
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quarterly reports, including financial statements; |
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notices of meetings of shareholders, management information circulars and forms of
proxy; and |
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such other disclosure documents that the Company makes available by electronic means. |
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The Documents will be delivered to you by the Company by making them available for your
viewing, downloading and/or saving on the Internet website www.ivanhoemines.com (the
Website). |
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A Shareholder must then go to Investor Information and Financial Reports and locate the
document of interest for viewing. |
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The Company will advise you by e-mail when the documents are available on the Website. |
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The viewing, downloading and/or saving of a Document requires me to use: |
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a computer with a 486/33 processor
(or MacIntosh LC III) or higher with at
least 16 megabytes of RAM (Random Access Memory) and Windows 3.1; |
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access to an Internet service provider; |
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the program Netscape Navigator 3.0 (or higher) or Microsoft Internet Explorer 3.0 (or
higher); |
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the program Adobe Acrobat Reader 3.0 (or higher) to read the material; and |
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an electronic mail account to receive notification. |
For Shareholders without Adobe Acrobat Reader, a link will be provided to allow the downloading
of this program. Accordingly, I acknowledge that I understand the above technical requirements
and that I possess the technical ability and resources to receive electronic delivery in the
manner outlined in this Consent to Electronic Delivery of Documents.
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I acknowledge that I may receive at no cost a paper copy of any Document to be delivered if
the Company cannot make electronic delivery available or if I contact the Companys transfer
agent, CIBC Mellon by telephone at (800) 387-0825, regular mail at
Ivanhoe Mines Ltd. c/o CIBC Mellon Trust Company, PO Box 1900, Vancouver, BC
V6C 3K9 or via electronic mail at inquiries@cibcmellon.com. I further acknowledge
that my request of a paper copy of any Document does not constitute revocation of this Consent
to Electronic Delivery of Documents. |
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The Documents will be posted on the Website for delivery for a period of time corresponding
to the notice period stipulated
under applicable legislation and the Documents will remain posted on the Website thereafter
for a period of time which is appropriate and relevant, given the nature of the document. |
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I understand that my consent may be revoked or changed at any time by notifying the Companys
transfer agent of such revocation or changed by telephone, regular mail or e-mail as specified
in paragraph 4 above. |
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I understand that the Company maintains in confidence the personal information I provide as a
Shareholder and uses it only for the purpose of Shareholder communication. |
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I understand that I am not required to consent to the electronic delivery of Documents. I
have read and understand this Consent to Electronic Delivery of Documents and I consent to the
electronic delivery of Documents on the foregoing terms. |
I have
read and understand this Consent for Electronic Delivery of Documents and consent to the
electronic delivery of the Documents on the terms outlined above.
Please complete the below sections then mail or fax the form to CIBC Mellon Trust Company at the
address below.
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Print Shareholder(s) Name |
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(as it appears on your cheques, certificates, statements or correspondence) |
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E-mail Address |
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Mailing Address |
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Address 1 |
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Address 2 |
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Shareholder Signature(s) |
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Print and mail this form to:
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or
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Print and fax this form to: |
CIBC Mellon Trust Company
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1- 604-688-4301 |
PO Box 1900 |
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Vancouver, BC V6C 3K9 |
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CIBC Mellon Trust Company
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1-416-643-5660 |
PO Box 7010
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1-416-643-5661 |
Adelaide Street Postal Station |
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Toronto, ON M5C 2W9 |
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www.ivanhoemines.com
IVANHOE MINES LTD.
FINANCIAL STATEMENTS
December 31, 2005
and 2004
IVANHOE MINES LTD.
2005 HIGHLIGHTS
Highlights
Results of Operations - In 2005, the Company recorded a net loss of $89.8 million (or $0.29
per share), compared to a net loss of $94.5 million (or $0.34 per share) in 2004. The $4.7 million
decrease in net loss between the years is mainly due to a $35.9 million increase in income and gain
on sale from discontinued operations less an increase of approximately $29.0 million in exploration
expense.
Oyu Tolgoi Project -
Integrated Development Plan - On September 29, 2005, the Company announced the release of an
independent Integrated Development Plan (IDP) for the Oyu Tolgoi Project in Mongolia. The IDP
proposes the development of a combined open pit/underground block cave operation resulting in a
total mine life exceeding 40 years.
Two phases are being proposed to produce a copper/gold concentrate. The first phase is expected to
have a throughput rate of 70,000 tonnes-per-day. In year three of phase one, a decision is
envisaged to proceed to a second phase expansion when underground ore becomes available and allows
throughput to rise to 140,000 tonnes-per-day. Total production from the project is expected to
make the Oyu Tolgoi Project one of the worlds next major copper and gold mines with average
production of more than one billion pounds of copper and 330,000 ounces of gold for at least 35
years. Peak annual production is estimated at more than 1.6 billion pounds of copper and 900,000
ounces of gold.
Based on current estimates, the starting date for commercial production from the Oyu Tolgoi Project
is anticipated in mid-2008. Phase one is expected to reach a full production capacity of 70,000
tonnes per day at the beginning of 2009. Full production capacity of 140,000 tonnes per day is
expected seven years later.
Accessing the deep potential of the Hugo North deposit is currently viewed by the Companys
management as being critical to the financial success of the development of the Oyu Tolgoi Project.
Therefore, the construction of the headframe, hoisting plant, associated infrastructure and
pre-sinking excavation for Shaft #1, a 6.7 metre-diameter exploration shaft, was undertaken in 2005
and completed at the beginning of Q106.
Mine planning update Recent drilling and mine planning initiatives suggest that alternative
approaches to the mine schedule may yield higher returns and/or lower the risk associated with the
IDP mine plan. Applying a sub-level cave mining method to a high grade zone located in the
shallowest part of the southern end of the Hugo North deposit, the Companys ongoing studies are
analyzing the possibility of starting underground mining earlier than previously contemplated.
Under the scenario being analyzed, future production from this shallow zone would reach an
estimated 15,000 tonnes per day in the third year of the project life and would extend for a
minimum period of five years until the large deep block cave begins on the Hugo North deposit.
Additional studies planned for 2006 will focus on increasing the open pit life, ultimate
underground production and milling throughput tonnages beyond the 140,000 tonnes per day reported
in the IDP. Management anticipates that production from an estimated 29 year mining life in the
open pit coupled with block caving operations at Hugo North and
- 1 -
IVANHOE MINES LTD.
2005 HIGHLIGHTS
Hugo South could ultimately increase mill throughput into the 200,000 to 250,000 tonnes per day
range.
Reserve and resource estimates - On January 30, 2006, the Company announced reserve estimates for
the open-pit southern part of the Oyu Tolgoi Project. The reserves, prepared by independent
engineering consultants, GRD Minproc Limited, (Minproc) were determined using the following metal
prices: $400 per ounce for gold and $1.00 per pound for copper.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tonnes |
|
|
|
|
|
|
of Ore |
|
Copper |
|
Gold |
Class |
|
(Million) |
|
(%) |
|
(g/t) (a) |
|
Proven |
|
|
127 |
|
|
|
0.58 |
|
|
|
0.93 |
|
|
Probable |
|
|
803 |
|
|
|
0.48 |
|
|
|
0.27 |
|
|
Total |
|
|
930 |
|
|
|
0.50 |
|
|
|
0.36 |
|
|
On February 1, 2006, the Company released an updated resource estimate, which incorporated drilling
results from the Ivanhoe-Entrée property up to January 13, 2006. The new estimate, based on eight
months of drilling results, added the following resources to the northern-most portions of the Hugo
North Deposit:
Additional Inferred Resources at Hugo North and Shivee Tolgoi properties February, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tonnes |
|
Copper |
|
Gold |
Class |
|
(Million) |
|
(%) |
|
(g/t) |
|
Additional inferred resources |
|
|
|
|
|
|
|
|
|
|
|
|
|
Using 0.6% copper equivalent cut-off grade(1) |
|
|
281 |
|
|
|
1.49 |
% |
|
|
0.51 |
|
|
Using 2.0% copper equivalent cut-off grade(1) |
|
|
87 |
|
|
|
2.62 |
% |
|
|
1.19 |
|
|
|
|
|
(1) |
|
Copper equivalent has been calculated using assumed metal prices ($0.80/pound
for copper and $350/ounces gold); % Copper equivalent.= % Cu + Au (gpt) x (11.25/17.64). |
Stability Agreement - In March 2006, a delegation of Ivanhoe Mines senior management met with
leaders and senior officials of the Government of Mongolia and presented a series of well-received
investment-related initiatives aimed at facilitating the completion of the Special Stability
Agreement. These meetings coincided with a recent series of encouraging statements from Mongolias
political leadership reaffirming a commitment to the early conclusion of a stability agreement with
Ivanhoe Mines and to maintaining a positive environment for foreign investment.
The Mongolian Government also announced that its cabinet had instructed the Minister of Finance and
the Minister of Industry and Trade to form a new working group to conclude the negotiations with
Ivanhoe Mines on the Special Stability Agreement and to negotiate a parallel agreement to give
effect to the new investment-related initiatives proposed by Ivanhoe Mines.
Based on these recent developments, Ivanhoe Mines senior management is optimistic that the Special
Stability Agreement can be concluded successfully within a timeframe that will not unduly delay the
development of the Oyu Tolgoi Project.
- 2 -
IVANHOE MINES LTD.
2005 HIGHLIGHTS
Other Projects
S&K Mine The S&K Mine was shut down at the beginning of March 2006 and it is expected to resume
operations shortly when additional fuel, required to operate mining equipment and chemicals,
required in the heap leaching extraction process, become available. The Company is working to
resolve several potentially significant issues with its joint venture partner in the project.
|
|
|
The first issue concerns plans for the future expansion of the mine. The expected
decrease in mined copper grades at the Sabetaung pit coupled with the Companys potential
inability to import into Myanmar additional required mining equipment in a timely manner,
may limit production in 2006 to as low as 16,000 tonnes of copper cathode, down from
approximately 34,500 tonnes in 2005. |
|
|
|
|
The second issue involves a difference of interpretation between the Company and
certain Myanmar tax authorities concerning the imposition of commercial tax on all copper
cathode exports. The imposition of this commercial tax would be equivalent to an
additional 8% net smelter return charge on the project sales, retroactive to January 1,
2003. The Company is seeking a written legal opinion from the Attorney General of Myanmar
on the applicability of this tax and the Company has received certain assurances that the
ruling may be favorable. |
|
|
|
|
The Company is also concerned about timely approvals for the expansion of the
Letpadaung deposit. To date, the expansion of the deposit has been neither approved nor
denied by the Government of Myanmar. |
The Company intends to engage in discussions with its joint venture partner and with the relevant
Myanmar government authorities with a view to satisfactorily resolving these issues.
Sale of an interest in the S&K Mine In 2005, the Company signed a memorandum of understanding
(MOU) with an established large Korean corporation 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 a
completion of a due diligence and various approvals, including approval from Myanmar governmental
authorities.
Sale of Savage River In February 2005, the Company sold the Savage River operations for
guaranteed cash payments of $21.5 million plus, over the next five years, a series of contingent,
annual payments based on future pellet prices. To date, the Company has received the $21.5 million
guaranteed cash payments and the confirmation that the first contingent annual payment, due on
March 31, 2006, will be approximately $28.0 million.
Jinshan - On December 2, 2005, various interests held jointly by Ivanhoe Mines and Jinshan were
restructured in a transaction in which Jinshan issued approximately 48.6 million common shares to
Ivanhoe Mines and in exchange received from Ivanhoe Mines a cash payment of approximately $3.4
million and acquired Ivanhoe Mines entire share of mineral interests and mineral-option rights in
Jinshans various projects, including the
217 Project. Following completion of this transaction and the closing on December 9, 2005 of a
Cdn$15.0 million ($12.8 million) private placement by Jinshan, Ivanhoe Mines percentage ownership
in Jinshan increased from 38.5% to approximately 53%.
- 3 -
IVANHOE MINES LTD.
2005 HIGHLIGHTS
Mongolia Coal - The Company has announced its plans to separate its coal assets from the Companys
core copper and gold assets with a view to creating a separate self-financing coal company. In
Q106, the Company also announced the results of an updated resource estimate for the Nariin
Sukhait Coal Project located in southern Mongolia. The estimate was prepared by Norwest
Corporation (Norwest), an independent consulting firm, and included results from drilling up to
the end of October 2005. Total coal resources contained in two separate fields, the South-East
field and the West field, was 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) and an additional Inferred resource of approximately 33.8 million tonnes.
Financings On March 29, 2006, Ivanhoe Mines announced that it had entered into a financing that
consists of 16 million common shares at a price of $8.77 per common share (Cdn$10.28), representing
an aggregate amount of $140.3 (Cdn$164.5 million). Ivanhoe Mines has granted the underwriters an
option, exercisable at the issue price for a period of 30 days following the closing of this
offering, to purchase up to an additional 15% of the issue size, representing 2,400,000 common
shares. Closing is expected on or about April 25, 2006.
On June 1, 2005, the Company closed an equity financing involving the issuance of 19.75 million
common shares for gross proceeds of $125.9 million (Cdn$158.0 million).
In 2005, in two separate transactions, the Company increased its holding in Entrée Gold Inc.
(Entrée) to a cumulative 10.4 million common shares (15.0%).
- 4 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
INTRODUCTION
This discussion and analysis of the financial position and results of operations (MD&A) of
Ivanhoe Mines Ltd. should be read in conjunction 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 United States of America generally accepted
accounting principles (U.S. GAAP). Differences between Canadian and U.S. GAAP that would have
materially affected the Companys reported financial results are set out in Note 23. In this MD&A,
unless the context otherwise dictates, 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 March 31, 2006.
Additional information about the Company, including its Annual Information Form, is available at
www.sedar.com.
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 a stability agreement in respect
of the Oyu Tolgoi Project , the likelihood and potential impact of proposed 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
- 5 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
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.
- 6 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
CORPORATE STRATEGY & OUTLOOK
Ivanhoe Mines is an international mining company currently focused on exploring and developing
a major discovery of copper and gold at its Oyu Tolgoi project in southern Mongolia (the Oyu
Tolgoi Project).
Development of the Oyu Tolgoi Project - Since its inception in 1994, mineral exploration has been
the Companys main focus of interest. In 2005, the Company devoted most of its management and
financial resources to furthering the exploration and development of the Oyu Tolgoi Project, while
at the same time continuing to explore for minerals in other parts of Mongolia, Eastern Asia and
Australia. The Company is also assessing the extent, value and development potential of the
strategically located coal resources recently discovered on Ivanhoe Mines exploration concessions
in southern Mongolia.
Stability Agreement During 2005, discussions continued with the government of Mongolia regarding
the finalization and approval of the Special Stability Agreement for Ivanhoe Mines Oyu Tolgoi
Project. Intensive negotiations were undertaken by the Company in late 2003 and early 2004 with a
working group designated by the Government of Mongolia which culminated in a comprehensive draft
Special Stability Agreement. The draft Special Stability Agreement has been under review by the
Government of Mongolia since that time.
Finalization of the Special Stability Agreement has taken much longer than expected to complete.
Progress has been hampered by three changes in government since the most recent election in the
summer of 2005. These successive changes in government have necessarily involved changes to the
government personnel involved in the Special Stability Agreement negotiations, resulting in further
delays.
In March 2006, a delegation of Ivanhoe Mines senior management met with leaders and senior
officials of the Government of Mongolia and presented a series of well-received investment-related
initiatives aimed at facilitating the completion of the Special Stability Agreement. These meetings
coincided with a recent series of encouraging statements from Mongolias political leadership
reaffirming a commitment to the early conclusion of a stability agreement with Ivanhoe Mines and to
maintaining a positive environment for foreign investment.
The Mongolian Government also announced that its cabinet had instructed the Minister of Finance and
the Minister of Industry and Trade to form a new working group to conclude the negotiations with
Ivanhoe Mines on the Special Stability Agreement and to negotiate a parallel agreement to give
effect to the new investment-related initiatives proposed by Ivanhoe Mines. This parallel agreement
is expected to address, among other things, such matters as the employment, skills-training and
minimum wages of Mongolians on the Oyu Tolgoi Project, the provision of interim power supply and
the production of long-term electrical power generation in the South Gobi region and possible
development of downstream smelting and refining facilities in Mongolia. This
- 7 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
new working group will also be responsible for working with Ivanhoe Mines to facilitate
opportunities for a broad spectrum of Mongolian citizens to invest in Ivanhoe Mines and thus own an
interest in the Oyu Tolgoi Project.
Based on these recent developments, Ivanhoe Mines senior management is optimistic that the Special
Stability Agreement can be concluded successfully within a timeframe that will not unduly delay the
development of the Oyu Tolgoi Project. However, Ivanhoe Mines cannot predict how long it will take
for the new working group to be formed or for its members to familiarize themselves with those
aspects of the Special Stability Agreement that remain to be finalized. Proposed changes to
Mongolian tax and minerals legislation may also affect how quickly the discussions in respect of
the Special Stability Agreement can be finalized. Accordingly, there can be no assurance that a
stability agreement containing all of the terms sought by Ivanhoe Mines can be obtained in the
foreseeable future, or at all.
Various public statements were made in Q405 and Q106 by members of the Mongolian Government and
Parliament with regard to proposed changes to tax and minerals legislation and the potential
resulting impact on the ownership of mineral rights and licenses in Mongolia. Certain of those
announcements created some confusion among the media, international capital markets and members of
the mining industry concerning the potential ramifications of the proposed legislative changes.
The more recent proposed changes identified to date, if enacted, would be expected to have a less
significant negative impact than initially considered on the economics and development of current
as well as future mining projects in Mongolia. At present Ivanhoe Mines believes that it is too
early to speculate on what laws, if any, the Government of Mongolia and Parliament may eventually
seek to amend or modify. Ivanhoe Mines welcomes the most recent public assurances by the
Government that a positive environment for foreign investment will be maintained in Mongolia and
that international mining companies will continue to play an important role in the development of
the countrys natural resources and its free-market economy. The Company will continue to work
closely with the Government in the formulation of its development plans for the Oyu Tolgoi Project,
which is expected to bring enormous economic benefits to the people of Mongolia and the Companys
shareholders.
Financing alternatives The Company continues to assess strategic alternatives for the
development and financing of the Oyu Tolgoi Project. The Companys current plan is to aggressively
advance the development of the project while continuing to discuss financing options with various
parties.
In 2005, the Company continued its discussions with a number of major international mining industry
participants capable of financing the project, with a view to selecting suitable strategic partners
to develop the Oyu Tolgoi Project and associated infrastructure. The Company believes that
significant advantages could be realized from the participation of strategic partners and continues
to assess opportunities, as they arise, to extend to one or more such partners a participating
interest in the project. The Company is not soliciting bids from potential partners and has not
set a deadline or target date for concluding any such agreement. Accordingly, there can be no
assurance that any
- 8 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
ongoing or future discussions will result in an agreement with a strategic partner or that the
Company will pursue development of the Oyu Tolgoi Project with a strategic partner at all.
In February 2006, the Company announced its intention to separate its coal assets from its core
copper and gold assets with a view to creating a separate, self-financing coal company. The
Company is investigating possibilities to obtain outside financing to develop these coal assets.
Asset rationalization - 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. In 2005,
the Company signed a memorandum of understanding (MOU) with an established large Korean
corporation 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 a completion of a due diligence 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.
Liquidity and future funding requirements - The bulk of the Companys expenditures are of a
discretionary nature and as such can be deferred based on the status of the Companys cash
resources. Ivanhoe Mines cash resources are considered sufficient to maintain the Companys
minimum level of activities for the next twelve months. On March 29, 2006, Ivanhoe Mines announced
that it had entered into a financing that consists of 16 million common shares at a price of $8.77
per common share (Cdn$10.28), representing approximately $133.2 million (Cdn$156.1 million) in net
proceeds. Ivanhoe Mines has granted the underwriters an option, exercisable at the issue price for
a period of 30 days following the closing of this offering, to purchase up to an additional 15% of
the issue size, representing 2,400,000 common shares for a potential $20.1 million (Cdn$23.6
million) in additional net proceeds to the Company. The net proceeds of the offering are intended
to be used to further the development of various Mongolian projects, including the Oyu Tolgoi
Project.
Following completion of an open-pit reserve estimate in respect of the Southern Oyu deposits on
February 1, 2006, the Company expects to be in a position to seek project financing to implement
its initial open-pit development plans at the Oyu Tolgoi Project. As well, the Company is pursuing
a number of initiatives that, if consummated, would raise capital. However, there can be no
assurance that the Company will be able to obtain project financing or otherwise raise capital
before its existing cash resources are expended. See Cash Resources and Liquidity.
- 9 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
Since its inception, the Company has relied on capital markets (and in particular equity markets)
to fund its exploration and other activities. If the Companys existing cash resources are
insufficient to fund all of the Companys planned activities, or if the Company is unable to obtain
project financing before its existing cash resources are expended, the Company will have to rely
upon equity markets or other sources of capital (from potential joint venture partners or through
other arrangements) the availability of which cannot be assured to continue funding the
development of the Oyu Tolgoi Project. Capital markets are subject to significant volatilities and
uncertainties.
There can be no assurance that Ivanhoe Mines undeveloped or partially developed projects can be
fully developed, in whole or in part, since factors beyond the Companys control may adversely
affect its access to funding or its ability to recruit third-party participants.
- 10 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
SELECTED FINANCIAL INFORMATION
($ in millions of U.S. dollars, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
Exploration expenses |
|
|
127.2 |
|
|
|
98.2 |
|
|
|
68.0 |
|
General and administrative costs |
|
|
23.8 |
|
|
|
22.2 |
|
|
|
16.4 |
|
Share of income from Joint venture |
|
|
23.0 |
|
|
|
21.4 |
|
|
|
1.1 |
|
Foreign exchange gain |
|
|
7.8 |
|
|
|
4.6 |
|
|
|
12.6 |
|
Net (loss) from continuing operations |
|
|
(125.7 |
) |
|
|
(99.0 |
) |
|
|
(78.6 |
) |
Net income (loss) from discontinued operations |
|
|
35.9 |
|
|
|
4.5 |
|
|
|
(9.1 |
) |
Net (loss) |
|
|
(89.8 |
) |
|
|
(94.5 |
) |
|
|
(87.7 |
) |
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
($ |
0.41 |
) |
|
($ |
0.35 |
) |
|
($ |
0.32 |
) |
Discontinued operations |
|
$ |
0.12 |
|
|
$ |
0.01 |
|
|
($ |
0.04 |
) |
Total assets |
|
|
396.8 |
|
|
|
376.3 |
|
|
|
371.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration Division |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
29.8 |
|
|
|
6.0 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint venture operations |
|
|
|
|
|
|
|
|
|
|
|
|
Copper cathode - 50% share |
|
|
|
|
|
|
|
|
|
|
|
|
Units sold tonnes |
|
|
17,485 |
|
|
|
15,730 |
|
|
|
13,808 |
|
Units produced tonnes |
|
|
17,239 |
|
|
|
15,878 |
|
|
|
13,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sale price |
|
|
|
|
|
|
|
|
|
|
|
|
Copper cathode US$/pound |
|
$ |
1.83 |
|
|
$ |
1.33 |
|
|
$ |
0.79 |
|
- 11 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
SELECTED QUARTERLY DATA
($ in millions of U.S. dollars, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
|
QUARTER ENDED |
|
Ended |
|
|
Mar-31 |
|
Jun-30 |
|
Sep-30 |
|
Dec-31 |
|
Dec.31 |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration expenses |
|
|
(24.4 |
) |
|
|
(33.8 |
) |
|
|
(28.9 |
) |
|
|
(40.1 |
) |
|
|
(127.2 |
) |
General and administrative |
|
|
(4.8 |
) |
|
|
(5.9 |
) |
|
|
(7.3 |
) |
|
|
(5.8 |
) |
|
|
(23.8 |
) |
Share of income from joint venture |
|
|
7.7 |
|
|
|
7.8 |
|
|
|
8.0 |
|
|
|
(0.5 |
) |
|
|
23.0 |
|
Gain (loss) on foreign exchange |
|
|
(0.6 |
) |
|
|
1.7 |
|
|
|
7.1 |
|
|
|
(0.4 |
) |
|
|
7.8 |
|
Net (loss) from continuing operations |
|
|
(24.2 |
) |
|
|
(31.1 |
) |
|
|
(20.6 |
) |
|
|
(49.8 |
) |
|
|
(125.7 |
) |
Net income (loss) from discontinued
operations |
|
|
15.7 |
|
|
|
5.9 |
|
|
|
6.4 |
|
|
|
7.9 |
|
|
|
35.9 |
|
Net (loss) |
|
|
(8.5 |
) |
|
|
(25.2 |
) |
|
|
(14.3 |
) |
|
|
(41.8 |
) |
|
|
(89.8 |
) |
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
($ |
0.08 |
) |
|
($ |
0.10 |
) |
|
($ |
0.07 |
) |
|
($ |
0.16 |
) |
|
($ |
0.41 |
) |
Discontinued operations |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.12 |
|
Total |
|
($ |
0.03 |
) |
|
($ |
0.08 |
) |
|
($ |
0.05 |
) |
|
($ |
0.13 |
) |
|
($ |
0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration expenses |
|
|
(20.7 |
) |
|
|
(24.8 |
) |
|
|
(28.5 |
) |
|
|
(24.2 |
) |
|
|
(98.2 |
) |
General and administrative |
|
|
(5.2 |
) |
|
|
(4.8 |
) |
|
|
(6.0 |
) |
|
|
(6.2 |
) |
|
|
(22.2 |
) |
Share of income from joint venture |
|
|
4.2 |
|
|
|
6.1 |
|
|
|
4.6 |
|
|
|
6.5 |
|
|
|
21.4 |
|
Gain (loss) on foreign exchange |
|
|
(1.7 |
) |
|
|
(1.4 |
) |
|
|
4.2 |
|
|
|
3.5 |
|
|
|
4.6 |
|
Net (loss) from continuing operations |
|
|
(23.8 |
) |
|
|
(23.1 |
) |
|
|
(25.5 |
) |
|
|
(26.6 |
) |
|
|
(99.0 |
) |
Net income (loss) from discontinued
operations |
|
|
(7.9 |
) |
|
|
2.2 |
|
|
|
0.7 |
|
|
|
9.5 |
|
|
|
4.5 |
|
Net (loss) |
|
|
(31.6 |
) |
|
|
(21.0 |
) |
|
|
(24.8 |
) |
|
|
(17.1 |
) |
|
|
(94.5 |
) |
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
($ |
0.09 |
) |
|
($ |
0.09 |
) |
|
($ |
0.09 |
) |
|
($ |
0.08 |
) |
|
($ |
0.35 |
) |
Discontinued operations |
|
($ |
0.03 |
) |
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.03 |
|
|
$ |
0.01 |
|
Total |
|
($ |
0.12 |
) |
|
($ |
0.08 |
) |
|
($ |
0.09 |
) |
|
($ |
0.05 |
) |
|
($ |
0.34 |
) |
- 12 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
QUARTERLY ANALYSIS Q405 vs. Q404
|
Ø |
|
Exploration. Total exploration and development expenditures capitalized in Q405
totalled $10.2 million, compared to $2.5 million in Q404. The $8.1 million increase in
capitalized expenditures is mainly due to the capitalization of the Oyu Tolgoi Projects
surface and collar infrastructure for the exploration shaft. |
|
|
|
|
In Q405, Ivanhoe Mines expensed $40.1 million in exploration and development activities,
compared to $24.2 million in Q404. The majority of the $40.1 million was spent on Ivanhoe
Mines Mongolian properties ($37.6 million compared to $18.3 million). Approximately $29.8
million (79%) of the $37.6 million was spent on the Oyu Tolgoi project and various coal
exploration activities in the south Gobi region of Mongolia. The remaining 21% was spent
on various exploration activities, including the Bronze Fox District, the Kharmagtai
project, regional reconnaissance, licence holding fees and general in-country
administrative charges. |
|
|
Ø |
|
Administrative costs. Administrative costs in Q405 were slightly lower, but consistent
with expenditures in Q404. |
|
|
Ø |
|
Income from joint venture interest. At the end of 2005, the Company adopted U.S. GAAP
as the basis for the consolidation of its financial statements. |
|
|
|
|
Under U.S. GAAP, the equity method is used to account for interests in joint venture
operations. Under the equity method, account details of the S&K Mines assets, liabilities
and operating results are now included in notes to the financial statements and the
Companys share of the net assets and liabilities of the S&K Mine are consolidated on the
Companys balance sheet as a net equity investment in joint venture. The Companys share
of the S&K Mines operating results are consolidated on its Consolidated Statement of
Operations as share of income from joint venture. |
|
|
|
|
In Q405, Ivanhoe Mines share of operating profit from the S&K Mine increased by 51% over
the same period in 2004. This increase was due to a 65% increase in copper prices less a
17% decrease in cathode production and a 34% increase in operating costs. The increase in
operating costs is mainly attributed to increases in the unit costs of power and chemicals.
In Q405, net loss from the S&K Mine totalled $0.5 million compared to a profit of $6.5
million in Q404. |
|
|
Ø |
|
Investment in joint venture. In Q105 the Company announced its intention to expand, in
a series of incremental steps, the S&K Mines production capacity to a target of 200,000
tonnes per annum. Various mining equipment was ordered at that time to increase the
annual copper cathode capacity to 50,000 tonnes per annum by mid-2006 as part of the
expansion program. |
- 13 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
Several factors that arose in Q405 and Q106 may potentially have a negative impact on the
operations of the mine for 2006 and future years.
|
§ |
|
Economic sanctions imposed against Myanmar by the United States have started to
seriously impact the mines ability to function in a normal way. In Q405, both the
mines insurance broker and the off-shore banking institution terminated their
relationship with the mine on account of these sanctions. Although the mine had in
excess of $40 million in off-shore bank accounts at December 31, 2005, the operations
of the mine were shut-down in March 2006. The mine is expected to resume operations
shortly when additional fuel, required to operate mining equipment and chemicals,
required for the leaching and electrowinning process, become available. The
management of the S&K Mine has established a new banking relationship with an
off-shore institution. |
|
|
§ |
|
The mine has not yet been able to obtain from the Myanmar authorities the necessary
import permits for its previously ordered mining equipment. The equipment is
currently off-shore, awaiting approval for delivery. The Company does not know if and
when import permits will be granted for the importation of the necessary mining
equipment. The Company has received recent oral assurances from its joint venture
partner that the necessary documentation is nearing finalization. The increase in
mining capacity is crucial to allow waste stripping for the Sabetaung deposit and
ultimately for the future development of the Kysingtaung and Letpadaung deposits.
Without a substantial increase in mining capacity, these two deposits cannot be
economically developed. The drop in copper grades at the Sabetaung pit, combined with
the mines potential inability to obtain the necessary importing permits resulted in
significant decreases in copper cathode production in Q405. Significant decreases in
copper production are now forecasted for 2006 and subsequent years. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper cathode |
|
|
|
|
|
|
production |
|
|
|
|
|
|
(tonnes) |
|
Q105 |
|
|
|
|
|
|
9,603 |
|
|
Q205 |
|
|
|
|
|
|
9,118 |
|
|
Q305 |
|
|
|
|
|
|
8,497 |
|
|
Q405 |
|
|
|
|
|
|
7,260 |
|
|
Total production - 2005 |
|
|
|
|
|
|
34,478 |
|
|
|
|
|
|
|
|
|
|
|
Actual Jan06 |
|
|
|
|
|
|
2,134 |
|
|
Estimated |
|
|
|
|
|
|
|
|
|
Feb to March06 |
|
|
|
|
|
|
3,718 |
|
|
Apr to Dec06 |
|
|
|
|
|
|
10,428 |
|
|
Total forecasted production - 2006 |
|
|
|
|
|
|
16,280 |
|
|
- 14 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
§ |
|
In the Q305, the Company reported its disagreement with certain Myanmar tax
authorities on a commercial tax issue involving the purported imposition of an eight
percent commercial tax on all export sales. The Companys management believes that
tax provisions in the S&K Mine joint venture agreement clearly exempt the mines
copper exports from all forms of tax of a commercial nature. The imposition of such a
commercial tax, equivalent to an additional 8% royalty, would have a significant
negative impact on future cash flows and any future development plans for the S&K
Mine. The Commercial tax is being claimed retroactively to January 1, 2003, on all
copper export sales. If the Myanmar governments position on this issue prevails, the
joint ventures estimated commercial tax liability at December 2005 would total
approximately $22 million ($11.0 million net to the Company). The Company is seeking
a written legal opinion from the Attorney General of Myanmar on the applicability of
this tax and the Company has received certain assurances that the ruling may be
favorable. |
|
|
§ |
|
The Company is also concerned about the timely approvals for the expansion of the
Letpadaung deposit. To date, the expansion of the deposit has been neither approved
nor denied by the Government of Myanmar. |
In accordance with its accounting policies, as described in note 2 of its audited
consolidated financial statements, the Company reviews the carrying value of its assets
whenever events or changes in circumstances indicate that the carrying value of an asset
might have been impaired. The Company intends to engage in discussions with its joint
venture partner and with the relevant Myanmar government authorities with a view to
satisfactorily resolving these issues. If these issues cannot be satisfactorily resolved
in a timely manner, the Company may, as part of a future review of the carrying value of
its assets, be required to reflect a significant impairment of, and reduce on its financial
statements, the carrying value of its investment in the S&K Mine.
Ø |
|
Net income (loss) from discontinued operations. The Company announced the sale of the
Savage River mine operations in February 2005. The 2005 and 2004 operating results from
the mine have been reclassified as net income from discontinued operations. |
|
|
|
Income from the Savage River mine operations totalled $7.9 million in Q405, compared to
$9.5 million in Q404. Income from the Savage River mine in Q405 represents the accrual
of the pellet premium earned during the quarter on the estimated sale of 600,000 tonnes of
iron ore pellets from the Savage River mine. The high earnings in Q404 were mainly due to
a large portion of pellet
sales being settled at the spot market rates, which were much higher than the negotiated
normal annual rates. |
|
|
|
The net gain from discontinued operations reported for the quarter under U.S. GAAP exceeded
by $0.4 million the gain reported under Canadian GAAP. At the |
- 15 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
time of sale of the Savage
River mine, the mine assets reported under Canadian GAAP exceeded the mine assets value
reported under U.S. GAAP. As a result, under Canadian GAAP, smaller profits are reported
for the remaining ten months of 2005 as proceeds recorded from the sale of the mine are
first recorded to off-set the remaining asset values prior to any revenue being recorded. |
Ø |
|
Foreign exchange gain. In Q405, the Company maintained most of its cash resources in
Canadian dollars (Cdn$). The foreign exchange gain during the quarter was mainly
attributable to the strengthening of the Canadian dollar against the U.S. dollar. |
- 16 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
REVIEW OF OPERATIONS
A) EXPLORATION
Total exploration and development expenditures capitalized in 2005 totalled $29.8 million,
compared to $6.0 million in 2004. The $23.8 million increase in capitalized expenditures is mainly
due to the capitalization of the Oyu Tolgoi Projects surface and collar infrastructure for the
exploration shaft. Future expenditures related to the deepening of the exploration shaft and
related underground workings will be expensed.
In 2005, Ivanhoe Mines expensed $127.2 million in exploration and development activities, compared
to $98.2 million in 2004. The majority of the $127.2 million was spent on Ivanhoe Mines Mongolian
properties ($116.5 million compared to $85.3 million in 2004). Approximately $102.8 million (88%)
of the $116.5 million was spent on the Oyu Tolgoi Project and various coal exploration activities
in the south Gobi region of Mongolia. The remaining 12% was spent on various exploration
activities, including the Bronze Fox District, the Kharmagtai project, the Yellow Hills project,
regional reconnaissance, licence holding fees and general, in-country administrative charges.
At December 31, 2005, Ivanhoe Mines held four mining licences at the Oyu Tolgoi Project totalling
approximately 24,000 hectares. Ivanhoe Mines also held directly, and indirectly with Asia Gold
Corp. (Asia Gold), a company 47%-owned by the Company, interests in Mongolian exploration
licences covering approximately 13.6 million hectares.
a) Oyu Tolgoi Project, Mongolia
i) Oyu Tolgoi Exploration.
Drilling program In 2005, the bulk of Ivanhoe Mines drilling efforts were focused on
testing the Hugo Far Norths mineralized northern extension on both sides of the
Ivanhoe-Entrée Joint-Venture property boundary, as well as various satellite deposits
throughout the Oyu Tolgoi property.
In Q405, the Company announced drilling results from two holes, EGD081B and EGD082A, which
confirmed the extension of the Hugo Far North mineralized zone for up to 625 metres onto
the Ivanhoe-Entrée Joint-Venture property, bringing the total length of the Hugo Far
Norths high-grade deposit to over 2.5 kilometres . At the beginning of February 2006,
four deep-hole-capacity rigs were continuing with infill drilling to upgrade the newly
delineated inferred resources to indicated resources in order to permit the preparation of
a detailed underground mine planning report on the joint-venture property.
Reserve estimate On January 30, 2006, the Company announced reserve estimates for the
open-pit southern part of the Oyu Tolgoi Project. The reserves, prepared by independent
engineering consultants, GRD Minproc Limited, (Minproc) were valued using $400 per ounce
for gold and $1.00 per pound for copper. At December 31, 2005 metal prices were $517 per
ounces for gold and $2.08 per pound for copper.
- 17 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
Mineral Reserves* - Southern Oyu Open pits, Oyu Tolgoi January, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovered |
|
Recovered |
|
|
Tonnes |
|
|
|
|
|
|
|
|
|
|
|
|
|
CuEq |
|
Copper |
|
Gold |
|
|
of Ore |
|
NSR |
|
Copper |
|
Gold |
|
Grade |
|
(Millions |
|
(Millions |
Class |
|
(Million) |
|
($/Tonne) |
|
(%) |
|
(gpt) |
|
(%) |
|
pounds) |
|
ounces) |
|
Proven |
|
|
127 |
|
|
|
15.91 |
|
|
|
0.58 |
|
|
|
0.93 |
|
|
|
1.18 |
|
|
|
1.5 |
|
|
|
2.8 |
|
|
Probable |
|
|
803 |
|
|
|
7.96 |
|
|
|
0.48 |
|
|
|
0.27 |
|
|
|
0.66 |
|
|
|
7.4 |
|
|
|
4.8 |
|
|
Total |
|
|
930 |
|
|
|
9.05 |
|
|
|
0.50 |
|
|
|
0.36 |
|
|
|
0.73 |
|
|
|
8.9 |
|
|
|
7.6 |
|
|
|
|
|
* |
|
Reserves estimated using metal prices of $400/oz and $1.00/pound copper and
block value of NSR cut-off grades of $3.54/tonne for Southwest Oyu and $3.39/tonne for
Central Oyu. |
The Minproc study draws on the work included in the Oyu Tolgois IDP released at the end of
Q305 and only considers mineral resources in the Measured and Indicated categories.
Comparison of the reserves estimated by Minproc study to the total tonnes in the resource
model indicates that at the reserve cut-off grade, 100% of Measured resource tonnages have
been converted to Proven Mineral reserves. The average conversion ratios from resource
model to the Minproc reserve estimates are as follows; tonnages 55%, recovered copper metal
64% and recovered gold 70%.
Resource estimate On February 1, 2006, the Company released an updated resource estimate,
which incorporated drilling results from the Ivanhoe-Entrée property up to January 13,
2006.
At February 1, 2006, total mineral resources for the Oyu Tolgoi Project were as follows:
- 18 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CuEq(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CuEq(1) |
|
cut-off |
|
|
Tonnes |
|
Copper |
|
Gold |
|
Grade |
|
grade |
Deposit and Class |
|
(Million) |
|
(%) |
|
(gpt) |
|
(%) |
|
(%) |
|
Southern Oyu deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured |
|
|
101.6 |
|
|
|
0.64 |
% |
|
|
1.10 |
|
|
|
1.34 |
% |
|
|
0.60 |
% |
Indicated |
|
|
465.6 |
|
|
|
0.62 |
% |
|
|
0.43 |
|
|
|
0.89 |
% |
|
|
0.60 |
% |
|
Measured + Indicated |
|
|
567.2 |
|
|
|
0.62 |
% |
|
|
0.55 |
|
|
|
0.97 |
% |
|
|
0.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inferred (2) |
|
|
88.5 |
|
|
|
0.47 |
% |
|
|
0.41 |
|
|
|
0.73 |
% |
|
|
0.60 |
% |
|
Hugo Dummett deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicated |
|
|
581.3 |
|
|
|
1.91 |
% |
|
|
0.41 |
|
|
|
2.17 |
% |
|
|
0.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inferred |
|
|
1,162.0 |
|
|
|
1.08 |
% |
|
|
0.23 |
|
|
|
1.24 |
% |
|
|
0.60 |
% |
Total Oyu Tolgoi Project |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured |
|
|
101.6 |
|
|
|
0.64 |
% |
|
|
1.10 |
|
|
|
1.34 |
% |
|
|
0.60 |
% |
|
Indicated |
|
|
1,046.9 |
|
|
|
1.34 |
% |
|
|
0.42 |
|
|
|
1.60 |
% |
|
|
0.60 |
% |
|
Measured + Indicated |
|
|
1,148.5 |
|
|
|
1.27 |
% |
|
|
0.48 |
|
|
|
1.58 |
% |
|
|
0.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inferred (2) |
|
|
1,250.5 |
|
|
|
1.04 |
% |
|
|
0.24 |
|
|
|
1.20 |
% |
|
|
0.60 |
% |
|
|
|
|
(1) |
|
CuEq has been calculated using assumed metal prices ($0.80/pound
for copper and $350/ounces gold); %CuEq.= % Cu + Au (gpt) x (11.25/17.64). |
|
(2) |
|
Resources classified as Inferred are separate and in addition to resources
classified as Measured or Indicated. |
In addition, mineral resources from the Ivanhoe/Entrée Shivee Tolgoi property were as
follows at January 13, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CuEq(1) |
|
|
Tonnes |
|
Copper |
|
Gold |
|
CuEq(1) |
|
cut-off |
Deposit and Class |
|
(Million) |
|
(%) |
|
(gpt) |
|
Grade (%) |
|
grade (%) |
|
Ivanhoe/Entrée Shivee Tolgoi property |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inferred |
|
|
190.2 |
|
|
|
1.57 |
% |
|
|
0.53 |
|
|
|
1.91 |
% |
|
|
0.60 |
% |
|
|
|
|
(1) |
|
CuEq has been calculated using assumed metal prices ($0.80/pound
for copper and $350/ounces gold); %CuEq.= % Cu + Au (gpt) x (11.25/17.64). |
ii) Oyu Tolgoi Integrated Development Plan
Forty-year mine life On September 29, 2005, the Company released its independent IDP for
the Oyu Tolgoi Project. The IDP was prepared by a joint venture between AMEC Americas
Limited, of Vancouver, Canada, and Ausenco Limited, of Perth, Australia, with input from 12
other leading international engineering and environmental consultants. A copy of the IDPs
executive summary is available from the Companys website at www.ivanhoe-mines.com.
- 19 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
The IDP outlines the framework for the responsible development of the mine, allowing the
Company to integrate economic progress with environmental care and social responsibility.
The mine development proposed by the IDP will be completed over a 15-year period, resulting
in an ultimate mine life expectancy of 40 years. |
|
|
|
The IDP combined reports for two major aspects of development of the Oyu Tolgoi Project.
First was a feasibility-level evaluation of an initial, large open-pit mine developed on
the near-surface Southern Oyu deposits. Second were pre-feasibility and scoping-level
evaluations of the associated infrastructure, such as power supply, and of a world-class,
underground block-cave mining operation at the Hugo Dummett deposits. Because the
information used to prepare the IDP includes different levels of study, in accordance with
CIM Standards on Mineral Resources and Reserves referred to in National Instrument 43-101,
the overall
IDP report was released as a Preliminary Assessment Report. |
|
|
|
Phase One- 70,000 tpd scenario Phase one, expected to start in mid-2008, involves
open-pit mining of the Southwest Oyu deposits. At the beginning of 2009, a concentrator is
projected to produce a gold-rich copper concentrate at a throughput rate of 70,000 tonnes
per day (tpd). After three years, following the completion of the underground block-cave
development of the Hugo North deposit, mining production from underground will begin.
Because the underground mineralization is of much higher economic value than the open-pit
mineralization, the concentrator will give priority to the underground material. After
year five, open-pit production will be curtailed and material from the Hugo North deposit
will represent the predominant source of mill feed to the concentrator. |
|
|
|
Phase Two- 140,000 tpd scenario Phase two involves the development of a block-cave
underground operation at Hugo South combined with the deepening of the open pit at
Southwest Oyu, and is expected to result in a doubling of the daily throughput for the
entire Oyu Tolgoi Project to 140,000 tpd. The decision to proceed with phase two is
expected to be made in year three and the doubling of throughput capacity, that would
result from proceeding with phase two, is expected to be reached by year seven.
Underground production from the Hugo South deposit is expected to commence in year 12, at
which time the combined underground production from the Hugo Dummett deposits is expected
to reach 140,000 tpd. |
|
|
|
Given the significant potential to expand the known resources at the Oyu Tolgoi Project,
management believes that the ultimate rate of production could far exceed the projections
presented in the IDP. Management anticipates that production from an estimated 29 year
mining life in the open pit coupled with block caving operations at Hugo North and Hugo
South could ultimately increase mill throughput into the 200,000 to 250,000 tonnes per day
range. |
- 20 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
Valuation from IDP- Using a base copper price of $1 per pound and a base gold price of $400
per ounce, and based on interpretation of existing tax, mining and other relevant Mongolian
laws and the terms of the draft Special Stability Agreement currently being negotiated with
the Mongolian government, the Oyu Tolgoi Projects estimated net present value (NPV),
using an 8% discount rate and assuming the implementation of the phase-two scenario, is
estimated at $3.44 billion before tax and $2.71 billion after tax. At a 10% discount
rate, the NPV is $2.40 billion before tax and $1.85 billion after tax. |
|
|
|
The IDP estimated the average recoveries over the life-of-mine at 90.4% for copper and
78.1% for gold. Assuming implementation of the phase-two scenario, the IDP also estimates
that, over the life of the project, total cash costs, after gold credits, will average
$0.40 per pound of copper. |
|
|
|
The open-pit resources used in the IDP are all in the Measured and Indicated
categories. The underground resources used in the IDP include some Inferred resources that
have not yet been sufficiently drilled to have economic considerations applied to them to
enable them to be categorized as reserves. Mineral resources that are not reserves do not
have demonstrated economic viability. Until there is additional underground drilling and
geotechnical rock characterization to upgrade the Inferred resources to Measured and
Indicated resources, the economic analysis contained in the IDP is a preliminary assessment
and there can be no certainty that the predicted results of the IDP will be realized. |
|
|
|
Mine Planning Update . The IDP was based on mineral resources as of March 2005; more
recent drilling and mine planning initiatives suggest alternative approaches to the mine
schedule that may yield higher returns and/or a lowering of risk associated with the IDP
mine plan. Studies commenced in January 2006 to update the IDP mine plan and are expected
to be completed in the latter half of 2006. The Company is considering an opportunity to
mine, earlier than previously anticipated, a high grade zone at the shallowest part of the
southern end of Hugo North deposit using a Sub-Level Cave mining method. This mining would
be carried out in parallel with the deeper development work for the block cave mine.
Access to the ore zone would be by a 1.3 kilometre drift development from Shaft #1 at an
elevation as much as 300 metres shallower than envisaged by the IDP for the
Characterization drift. This Characterization is required to prove that block caving is
a suitable method to mine the Hugo North deposit. This drifting may allow the feasibility
study for the block caving of Hugo North to be completed as much as one year earlier than
previously anticipated. |
|
|
|
Mining from this zone is targeted at a rate in excess of 15,000 tpd during the third year
of the project life and while it is envisaged to continue for a period of more than five
years until the large deep block cave begins producing, its life may be extended. This
targeted mining zone is closest to Shaft #1 and the infrastructure required for the
long-term mining at the deeper block caving operations and should not require a duplication
of infrastructure. This early mining will provide |
- 21 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
a proving ground to train mining crews.
It will also permit Ivanhoe Mines to gather geotechnical data, undertake orebody
characterization and evaluate different drawpoint designs and layouts. This knowledge and
experience, when applied to the block cave mine, will reduce the mining/technical risks
from those associated with a caving operation without the early mining scenario. This early
mining option may offer an opportunity to increase the ore column height for the block
caving operation allowing the full height to be mined in a single lift and at higher
production tonnages. A single lift would dispense with the requirement for a second
extraction level and associated infrastructure and would result in a reduction in capital
expenditures anticipated to be incurred over the life of the mine. |
|
|
|
Additional studies will focus on mining beyond Phase 3 of the open pit and at higher mill
throughput tonnages than those indicated in the IDP. Production from
an estimated 29 year mining life in the open pit coupled with block caving operations at
Hugo North and Hugo South could ultimately increase mill throughput into the 200,000 to
250,000 tpd range. |
|
|
|
Exploration shaft Early access to the deep potential of the Hugo North deposit is
important to the financial success of the Oyu Tolgoi Projects development. In furtherance
of this objective, the construction of the headframe, hoisting plant, associated
infrastructure and pre-sinking excavation for Shaft #1, a 6.7-metre-diameter exploration
shaft, was undertaken in 2005. All surface installations for the shaft were completed by
the end of January 2006 including pre-sinking to a depth of 35 metres. As of March 10,
2006, after initial teething problems, sinking has reached a depth of approximately 100
metres. The sinking of the Shaft #1 to an originally 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 sinking of Shaft #1 is being performed by the Redpath Group of North Bay, Ontario,
Canada, one of the worlds leading shaft-sinking firms. When completed, Shaft #1 will
provide access to the Hugo Dummett deposits and enable the completion of detailed
feasibility studies, further resource-delineation drilling and rock-characterization work. |
|
|
|
To maximize project value from the high-grade Hugo North deposit, the Company plans to
commence construction of a ten-metre-diameter production/service shaft (Shaft #2) as soon
as possible. Engineering and geotechnical studies for the construction of Shaft #2 were
initiated in 2005, and are ongoing. Geotechnical drilling to identify suitable ground to
locate the proposed Shaft Pillar continues and is expected to be completed in Q306.
Construction of the surface works are not expected to commence until the site investigation
is completed. Sinking of the shaft is scheduled to commence in early 2007. |
- 22 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
Planning associated with the open pit phase of the project, covering the Southwest open pit
development and the construction of the concentrator and related infrastructures, is well
advanced. Major elements or issues yet to be finalized include interim and long-term
power, potential rail access and the completion of environmental assessments. |
|
|
|
During Q405, the consulting engineering firm, Fluor Canada Ltd. (Fluor) carried out a
strategic planning review of the IDP report, including a strategic assessment of the
concentrator facilities development. Following the completion of Fluors review, expected
in April 2006, Ivanhoe Mines and Fluor intend to negotiate a definitive agreement providing
for the management of the offshore design, procurement and onshore construction for the Oyu
Tolgoi Project. |
b) |
|
Other Mongolian copper/gold exploration projects. |
|
|
During 2005, Ivanhoe Mines continued its exploration efforts on other Mongolian prospects,
including the Kharmagtai project and the Bronze Fox district. Diamond drilling at the
Kharmagtai project tested several previously untested porphyry prospects. |
|
|
|
At the end of September 2005, the Company announced the commencement of the Falcon airborne
gravity gradiometer survey by BHP Billiton (BHPB) on an area covering approximately
35,640 square kilometres (the BHPB Joint Venture Area) of Ivanhoe Mines non-core
exploration licences in southern Mongolia. The survey is part of a joint-venture agreement
with BHPB that allows BHPB the right to earn up to a 50% interest in the BHPB Joint Venture
Area. The survey is expected to be completed in early 2006. |
|
|
|
The BHPB Joint Venture Area, which represents approximately 40% of Ivanhoe Mines land
holdings in this region, excludes all coal mineralization, as well as Ivanhoe Mines
advanced exploration and development-stage projects (the Oyu Tolgoi Project, the
Kharmagtai, Yellow Hills and Bronze Fox prospects). |
|
|
|
On July 5, 2005, Asia Gold announced a similar agreement with BHPB. The agreement,
covering approximately 3,600 square kilometres of Asia Golds mineral licences in southern
Mongolia, grants BHPB the right to earn a 50% interest by spending $2 million prior to
December 31, 2007. The expenditures include an initial commitment to conduct a Falcon
airborne gravity gradiometer survey before December 31, 2006. Following the initial
earn-in, BHPB has a second option to earn an additional 20% interest (for a total interest
of 70%) by funding a feasibility study on one exploration target up to a maximum value of
$45 million. BHPB also agreed to purchase an equity interest in Asia Gold by acquiring
approximately 1.15 million units valued at $1 million, each unit consisting of one common
share and a two-year warrant to purchase one half common share of Asia Gold at Cdn$1.395
per share.
|
- 23 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
In Q405 and in early 2006, Asia Gold announced the results of several projects all located
in Southern Mongolia. In 2005, Asia Gold completed exploration activities on several
projects including the Naran Bulag project and the Tsakhir licences located north of the
Konghor project. |
|
c) |
|
Mongolian coal projects. |
|
|
|
Nariin Sukhait Coal Project The Nariin Sukhait Coal Project, covering an area of 3,240
square kilometres, is located 40 kilometres north of the Mongolia-China border and the
shipping terminus for a newly constructed 450-kilometre Chinese rail line. A railway line
to the Nariin Sukhait Coal Project from the Mongolia-China border is being evaluated.
Engineering mine plans and a detailed Environmental Impact Assessment are being completed
in preparation for the application for a mining licence. |
|
|
|
On February 14, 2006, the Company announced the results of an updated resource estimate for
the Nariin Sukhait Coal Project. The estimate was prepared by Norwest Corporation
(Norwest), an independent consulting firm and included results from drilling up to the
end of October 2005. Total coal resources contained in two separate fields, the South-East
field and the West field, is 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) and an additional Inferred resource of approximately 33.8 million tonnes. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Place Resources |
ASTM |
|
|
|
(Tonnes Million) |
Category |
|
Fields |
|
Measured |
|
Indicated |
|
Inferred |
|
High Volatile |
|
South-East Field |
|
|
38.8 |
|
|
|
13.8 |
|
|
|
12.4 |
|
|
|
|
|
|
Bituminous |
|
West Field |
|
|
40.7 |
|
|
|
30.7 |
|
|
|
21.4 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
124.0 |
|
|
|
|
|
|
|
33.8 |
|
|
|
|
The results, which were delineated by a total of 212 drill holes, are considered to be
of immediate interest as surface open-pit deposits that are amenable to near-term
production. Ten coal seams have been identified with an estimated combined total thickness
for the coal-bearing sequence of approximately 1,370 metres and a coal thickness ranging
from 68 metres to 250 metres. To date, exploration efforts have been focused on
identifying resources in seams above, and including, the No. 5 Seam the thickest seam
within the coal bearing sequence. |
|
|
|
Extensive laboratory testing has been performed to determine the quality of the coal at
Nariin Sukhait. Proximate and thermal testing has been completed on samples obtained from
35 core holes and 45 reverse circulation drill holes, |
- 24 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
washability tests were completed for
samples from 26 drill holes and metallurgical tests were completed for samples from 21
drill holes. Following American Society for Testing and Materials standards (ASTM),
quality testing in both fields ranks the Nariin Sukhait coals as high-volatile bituminous,
containing volatiles ranging from 32% to 35% on a dry basis. Also, tests on some of the
No. 5 Seam in the West Field categorized the coal as high-rank, low-ash, low-sulphur coal
suitable for producing a high-volatile metallurgical blend. |
|
|
|
Ivanhoe Mines plans to complete a mining study on the Nariin Sukhait Coal Project some time
early in Q206. A potential annual throughput of 4 million tonnes of coal is currently
being evaluated by Ivanhoe Mines and its independent
consultants. Annual production is anticipated to yield thermal coal for power generation
and coal products used by the steel industry including coal used in the pulverized coal
injection process and metallurgical (coking) blends. Discussions with potential Chinese
customers interested in coal supply from Nariin Sukhait are ongoing. |
|
|
|
Tsagaan Tolgoi Coal Project The Project, discovered by Ivanhoe Mines, is located
approximately 100 kilometres from the Oyu Tolgoi Project. Significant coal thicknesses
were encountered along a strike length of six kilometres as a result of deep trenching
efforts and a drilling program which included a total of 46 drill holes. However, due to
the wide spacing of the drill holes, an estimate of coal resources cannot be made at this
time. Further drilling will be completed in 2006 with the objective of delineating
sufficient thermal coal resources to support the preparation of an initial study on the
development a major, long-life, coal-fired generating capacity to supply electricity to the
Oyu Tolgoi Project and the residents of the sparsely populated southern part of Mongolia. |
|
d) |
|
Other |
i) China: Jinshan Gold Mines Inc (Jinshan).
On September 26, 2005, Jinshan announced the results of an independently prepared
pre-feasibility study on the 217 Project in Inner Mongolia. The study concluded that, for
an initial 7.5 years, a gold-leaching open-pit operation would be capable of producing
approximately 120,000 ounces of gold per year at a cash cost of approximately $232 an
ounce. The total life-of-mine strip ratio was estimated at 0.96 tonne of waste per tonne
of ore.
A final feasibility study is underway and expected to be completed in mid-2006, at which
time Jinshan will assess available debt-financing options. Initial capital costs are
estimated at $31.8 million and additional sustaining capital totalling $21.9 million will
be required to provide additional leach-pad capacity and the addition, in the third year of
operations, of a crushing circuit to allow the processing of sulphide material. The
additional sustaining capital is expected to be funded from the projects operating cash
flows.
- 25 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
In December, 2005, a transaction to restructure various mineral resource interests held
jointly by Ivanhoe Mines and Jinshan was completed following approval by the minority
shareholders of Jinshan. As part of the transaction, Jinshan issued approximately 48.6
million common shares to Ivanhoe Mines and, in exchange, received from Ivanhoe Mines a cash
payment of approximately $3.4 million and acquired Ivanhoe Mines entire share of mineral
interests and mineral-option rights in Jinshans various projects, including the 217
Project. Following completion of this transaction and the closing on December 9, 2005 of a
Cdn$15.0 million ($12.8 million) private placement by Jinshan, Ivanhoe Mines percentage
ownership in Jinshan increased from 38.5% to approximately 53%. The placement consisted of
the issuance by Jinshan of 30 million units at
Cdn$0.50 per unit. Each unit consisted of one common share of Jinshan and one half of a
common share warrant. Each whole warrant is exercisable, over a period of 18 months, to
purchase one common share at a price of Cdn$0.70 per share.
On January 19, 2006, Jinshan announced results of its 217 Project drilling campaign which
consisted in 20 diamond drill holes totalling 4,630 metres. Jinshans current plans are to
incorporate these drill hole results in a updated resource estimate early in Q206 and to
complete the final feasibility study on 217 Project as soon as possible thereafter.
ii) Australia: Cloncurry
The Cloncurry Project, covering an area of more than 1,450 kilometres, was acquired in
September 2003. Since its acquisition, Ivanhoe Mines has been conducting a comprehensive
exploration program on the property, with the objective of identifying bulk-tonnage
copper-gold mining opportunities.
Swan Prospect In March05, Ivanhoe Mines announced the discovery of an Iron Oxide
Copper-Gold-Uranium (IOCG) mineralized system at the Swan Prospect. The Swan Prospect
has a 300-metre-wide by 400-metre-long magnetic anomaly signature.
Placer farm-in In June05, Ivanhoe Mines entered into a new farm-in and exploration
agreement with Placer Pacific (Osborne) Pty. Limited, a wholly-owned subsidiary of Placer
Dome Inc. to explore deposits of gold and copper on 114.5 square kilometres of the southern
end of Ivanhoe Mines Cloncurry project, representing approximately 8% of the Cloncurrys
total licence area.
Amethyst Castle copper, gold and uranium Project - In December05, Ivanhoe Mines announced
plans to conduct in 2006 geophysical surveys followed by diamond drilling at the Amethyst
Castle copper, gold and uranium target which is also considered to be an IOCG system. The
geophysical program will consist of gravity, magnetics, Resistivity and Induced
Polarization testing over an area of 1,000 metres by 1,000 metres. Geochemical anomalies,
detected by previously conducted surveys over this area, will strengthen the geological
interpretation and allow a drill program to be finalized and commenced. Two large
copper-gold-
- 26 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
uranium bearing breccias with a footprint in excess of 600 metres long and 400
metres wide, have been identified and found to be coincident with similarly large soil and
copper-gold anomalies, suggesting the breccias could host a major iron-copper-gold-uranium
near surface discovery.
iii) Bulgaria:
In November 2005, Ivanhoe Mines transferred to Asia Gold its right to earn up to an 80%
interest in various gold mineral prospects located in Bulgaria in exchange for a cash
payment of $300,000 and a 5% net profit royalty.
iv) Kazakhstan: Bakyrchik Project.
No material from the tailings pond was processed in the second half of 2005. Construction
during the second half of 2005 continued at a much reduced pace and representatives from
the Company met with various Kazakhstan government authorities to discuss the current
status and future prospects of the Bakyrchik Project. Ivanhoe Mines reached a satisfactory
agreement with the Kazakhstan government authorities in Q106, extending the Project
exploration licences to 2010. The Company also expects to receive a similar extension for
its investment commitment for the Project which should allow the Company to continue
discussions with third parties aimed at advancing the Project.
Summary of exploration expenditures by project:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Total exploration
expenditures-($000) |
|
|
127,165 |
|
|
|
98,174 |
|
|
|
67,989 |
|
Percentage allocation |
|
|
|
|
|
|
|
|
|
|
|
|
Mongolia |
|
|
92 |
% |
|
|
86 |
% |
|
|
87 |
% |
China |
|
|
4 |
% |
|
|
4 |
% |
|
|
5 |
% |
Myanmar |
|
|
1 |
% |
|
|
2 |
% |
|
|
4 |
% |
Bulgaria |
|
|
2 |
% |
|
|
1 |
% |
|
|
0 |
% |
Australia |
|
|
1 |
% |
|
|
5 |
% |
|
|
0 |
% |
Korea |
|
|
0 |
% |
|
|
0 |
% |
|
|
3 |
% |
Other |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
- 27 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
B) INVESTMENT IN JOINT VENTURE
MONYWA COPPER PROJECT (S&K MINE), MYANMAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
Total Operation |
|
Companys 50% net share |
|
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
2005 |
|
2004 |
|
(decrease) |
|
2005 |
|
2004 |
|
(decrease) |
|
|
|
|
|
Total tonnes moved (1) |
|
Tonnes (000s) |
|
|
13,527 |
|
|
|
10,675 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Tonnes of ore to heap |
|
Tonnes (000s) |
|
|
9,544 |
|
|
|
7,151 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Ore grade |
|
CuCN % |
|
|
0.48 |
% |
|
|
0.65 |
% |
|
|
(26 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Strip ratio |
|
Waste/Ore |
|
|
0.43 |
|
|
|
0.45 |
|
|
|
(4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Cathode production |
|
Tonnes |
|
|
34,478 |
|
|
|
31,756 |
|
|
|
9 |
% |
|
|
17,239 |
|
|
|
15,878 |
|
|
|
9 |
% |
Tonnage sold |
|
Tonnes |
|
|
34,969 |
|
|
|
31,460 |
|
|
|
11 |
% |
|
|
17,485 |
|
|
|
15,730 |
|
|
|
11 |
% |
Average sale price received |
|
$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.83 |
|
|
$ |
1.33 |
|
|
|
38 |
% |
Sales |
|
$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,801 |
|
|
|
44,091 |
|
|
|
49 |
% |
Cost of operations |
|
$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,768 |
|
|
|
12,137 |
|
|
|
46 |
% |
Operating profit |
|
$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,376 |
|
|
|
26,777 |
|
|
|
58 |
% |
Cost of operations |
|
US$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.46 |
|
|
$ |
0.35 |
|
|
|
32 |
% |
|
|
|
(1) |
|
Includes ore and waste material |
Copper prices on the London Metal Exchange averaged $1.67 per pound in 2005, compared to $1.30 per
pound in 2004. Cathode production in 2005 totalled 34,478 tonnes, representing an increase of 9%
over 2004. However delays in importing the trucking fleet negatively impacted the operating
results, resulting in actual tonnages moved in the second half of 2005 being 39% below budget.
When compared to 2004, however, total material moved in 2005 increased by 27% (Q405 +6%), while
the average copper grade mined decreased by 26% (Q405 -37%).
Unit cost of operations increased by 32% in 2005 compared to 2004. While total cathode production
increased by 9% in the year, increases in chemical costs (+84%) and power costs (+19%) accounted
for the bulk of the remaining 21% increase in unit costs. At the end of Q405, the S&K Mine had
$45.7 million in cash and the bank loan was completely repaid.
Investment in joint venture. In Q105 the Company announced its intention to expand, in a series
of incremental steps, the mines production capacity to a target of 200,000 tonnes per annum.
Various mining equipment was ordered at that time to increase the annual copper cathode capacity to
50,000 tonnes per annum by mid-2006 as part of the expansion program.
Several factors that arose in Q405 and Q106 may potentially have a negative impact on the
operations of the mine for 2006 and future years.
|
Ø |
|
Economic sanctions against Myanmar imposed by the United States have started to
seriously impact the mines ability to function in a normal way. In Q405, both the
mines insurance broker and the off-shore banking institution terminated their
relationship with the mine on account of these sanctions. Although the mine had |
- 28 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
|
in excess
of $40 million in off-shore bank accounts at December 31, 2005, the operations of the mine
were shut-down in Q106. The mine is expected to resume operations shortly when
additional fuel, required to operate mining equipment and chemicals, required for the
leaching and electrowinning process, become available. The management of the S&K Mine has
established a new banking relationship with an off-shore institution. |
|
|
Ø |
|
The mine has yet not been able to obtain from the Myanmar authorities the necessary
import permits for its previously ordered mining equipment. The equipment is currently
off-shore, awaiting approval for delivery. The Company does not know if or when import
permits will ever be granted for the importation of the necessary mining equipment. The
Company has received recent oral assurances from its joint venture partner that the
necessary documentation is nearing finalization. The increase in mining capacity is
crucial to allow waste stripping for the Sabetaung deposit and ultimately for the future
development of the Kysingtaung and Letpadaung deposits. Without a substantial increase in
mining capacity, these two deposits cannot be economically developed. The drop in copper
grades at the Sabetaung pit, combined with the mines potential inability to obtain the
necessary importing permits resulted in significant decreases in copper cathode production
in Q405. Significant decreases in copper production are now forecasted for 2006 and
subsequent years. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper cathode |
|
|
|
|
|
|
production |
|
|
|
|
|
|
(tonnes) |
|
Q105 |
|
|
|
|
|
|
9,603 |
|
|
Q205 |
|
|
|
|
|
|
9,118 |
|
|
Q305 |
|
|
|
|
|
|
8,497 |
|
|
Q405 |
|
|
|
|
|
|
7,260 |
|
|
Total 2005 |
|
|
|
|
|
|
34,478 |
|
|
|
|
|
|
|
|
|
|
|
Actual Jan06 |
|
|
|
|
|
|
2,134 |
|
|
Estimated |
|
|
|
|
|
|
|
|
|
Feb to March06 |
|
|
|
|
|
|
3,718 |
|
|
Apr to Dec06 |
|
|
|
|
|
|
10,428 |
|
|
Total 2006 |
|
|
|
|
|
|
16,280 |
|
|
|
Ø |
|
In the Q305, the Company reported its disagreement with certain Myanmar tax
authorities on a commercial tax issue involving the purported imposition of an eight
percent commercial tax on all export sales. The Companys management
believes that tax provisions in the S&K Mine joint venture agreement clearly exempt the
mines copper exports from all forms of tax of a commercial nature. The imposition of such
a commercial tax, equivalent to an additional 8% royalty, would have a significant negative
impact on future cash flows and any future development plans for the S&K Mine. The
commercial tax is being claimed
|
- 29 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
|
|
retroactively to January 1, 2003, on all copper export
sales. If the Myanmar governments position on this issue prevails, the joint ventures
estimated commercial tax liability at December 2005 would total approximately $22 million
($11 million net to the Company). The Company is seeking a written legal opinion from the
Attorney General of Myanmar on the applicability of this tax and the Company has received
certain assurances that the ruling may be favorable. |
|
Ø |
|
The Company is also concerned about the timely approvals for the expansion of the
Letpadaung deposit. To date, the expansion of the deposit has been neither approved nor
denied by the Government of Myanmar. |
|
|
|
|
In accordance with its accounting policies, as described in note 2 of its audited
consolidated financial statements, the Company reviews the carrying value of its assets
whenever events or changes in circumstances indicate that the carrying value of an asset
might have been impaired. The Company intends to engage in discussions with its joint
venture partner and with the relevant Myanmar government authorities with a view to
satisfactorily resolving these issues. If these issues cannot be satisfactorily resolved
in a timely manner, the Company may, as part of a future review of the carrying value of
its assets, be required to reflect a significant impairment of, and reduce on its financial
statements, the carrying value of its investment in the S&K Mine. |
C) DISCONTINUED OPERATIONS
Savage River Mine, Tasmania
On February 28, 2005, the Company completed the sale of its total investment in, and loans to, the
Savage River operations for two initial payments totalling $21.5 million, plus a series of
contingent, annual payments based on the annual iron ore pellet prices and annual tonnages sold.
The initial payments were received by the end of January 31, 2006 and the future payments will be
made over five years, commencing March 31, 2006. A 71.5% increase in the iron ore price benchmark
for the 2005 year was announced at the end of February 2005. The Company has received confirmation
that it will receive on March 31, 2006 approximately $28 million as its first annual payment,
bringing the cumulative sale consideration for the project to approximately $49.5 million. In
addition, if the 2005 pellet price benchmark and the Savage River pellet production are
maintained over the following five years, the Company should receive additional payments totalling
approximately $87.7 million.
D) ADMINISTRATIVE AND OTHER
General and administrative. The $1.6 million increase in general and administrative
expenditures in 2005 primarily was due to an $1.2 million increase in stock-based
- 30 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
compensation
charges and an increase of approximately $0.8 million in office administrative expenses.
Foreign exchange gains. In 2005 and 2004, the Company maintained most of its cash resources in
Canadian dollars. The majority of the foreign exchange gain in 2005 was attributable to the
strengthening of the Canadian dollar against the U.S. dollar.
Share of loss on significantly influenced investee. The $2.7 million share of loss on significant
influenced investee represents the Companys share of Jinshans net loss for the year as, for
accounting purposes, control of Jinshan was acquired effective December 31, 2005.
Share Capital - At March 30, 2006, the Company had a total of 316.6 million common shares and the
following purchase warrants outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share purchase |
|
|
|
|
|
|
|
Total number of |
warrants outstanding |
|
Maturity date |
|
Exercise price |
|
shares to be issued |
|
5.76 million (1)(2) |
|
February 15, 2007 |
|
$8.68 per share |
|
0.576 million |
|
|
|
|
(1) |
|
Each 10 warrants entitle the holder to acquire one common share. |
|
(2) |
|
In 2006, the expiry date was extended from February, 2006 to February, 2007. |
At March 30, 2006, the Company had a total of approximately 13.3 million incentive stock options
outstanding, with a weighted average exercise price per share of Cdn$8.69. Each option is
exercisable to purchase a common share of the Company at prices ranging from Cdn$1.60 to Cdn$ 12.70
per share.
- 31 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
CASH RESOURCES AND LIQUIDITY
At December 31, 2005, consolidated working capital was $127.6 million, including cash of
$101.7 million, compared with working capital of $133.6 million and cash of $112.5 million at the
end of 2004.
Operating activities. The $135.7 million of cash used in operating activities from continuing
operations in 2005 primarily was the result of $127.2 million in exploration expenditures.
Investing activities from continued operations. In 2005, a net of $9.7 million of cash was spent
on investing activities, mainly consisting in $32.2 million in equipment acquisitions for Mongolia
and the Bakyrchik projects, $6.3 million in the acquisition of shares of Entrée less $15.0 million
in proceeds received from the sale of the Savage River operation, $4.5 million in proceeds from the
sale of long term investments and a $12.0 million net investment proceeds resulting from the
Companys consolidation of Jinshan assets at December 31, 2005 which included a $15.4 million cash
balance.
Financing activities. Financing activities of $124.7 million in 2005 mainly consisted of a private
placement in June 2005 in which the Company issued 19.75 million shares for net proceeds of $119.8
million.
The bulk of the Companys expenditures are of a discretionary nature and as such can be deferred
based on the status of the Companys cash resources. Ivanhoe Mines cash resources are considered
sufficient to maintain the Companys minimum level of activities for the next twelve months. On
March 29, 2006, Ivanhoe Mines announced that it had entered into a financing that consists of 16
million common shares at a price of $8.77 per common share (Cdn$10.28), representing approximately
$133.2 million (Cdn$156.1 million) in net proceeds. Ivanhoe Mines has granted the underwriters an
option, exercisable at the issue price for a period of 30 days following the closing of this
offering, to purchase up to an additional 15% of the issue size, representing 2,400,000 common
shares for a potential $20.1 million (Cdn$23.6 million) in additional net proceeds to the
Company. The net proceeds of the offering are intended to be used to further the development of
various Mongolian projects, including the Oyu Tolgoi Project.
Following the release on February 1, 2006 of the Minprocs open-pit reserve estimate in respect of
the Southern Oyu deposits, the Company expects to be in a position to seek project financing to
implement its initial open-pit development plans at the Southern Oyu deposits. As well, the
Company is pursuing a number of initiatives that, if consummated, would raise capital.
However, there can be no assurance that the Company will be able to obtain project financing or
otherwise raise capital before its existing cash resources are exhausted. Failure to generate
sufficient funding from one or more currently anticipated sources may require Ivanhoe Mines to
delay, postpone or curtail certain of its planned activities for 2006 and thereafter.
- 32 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
Proceeds received from the sale of the Savage River mine will be used to supplement the funding of
the Companys ongoing activities at Oyu Tolgoi, although there can be no assurance that these
funds, if and when received, will be sufficient to meet all of the Companys funding requirements.
The Company expects to fund additional planned expenditures for 2006 and beyond from external
sources, which may include debt or equity financing, proceeds from the sale of existing non-core
assets, third-party participation in one or more of the Companys projects, or a combination
thereof. There can be no assurance that the Company will be successful in generating sufficient
funds from any of these sources. Failure to generate sufficient funding from one or more of these
sources may require Ivanhoe Mines to delay, postpone or curtail certain of its planned activities.
Over the long term, the Company will need to obtain additional funding for, or third-party
participation in, its undeveloped or partially developed projects (including the Oyu Tolgoi
Project, the Companys other Mongolian exploration projects, its Chinese and Australian exploration
projects and the Bakyrchik project) to bring them into full production.
- 33 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
OFF BALANCE SHEET ARRANGEMENTS and CONTRACTUAL OBLIGATIONS
At the end of December 2005, 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.
CONTRACTUAL OBLIGATIONS
US$(000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due in years ending December 31, |
|
|
2006 |
|
2007 |
|
2005 |
|
2009 |
|
2010 |
|
2011+ |
|
Total |
|
|
|
Operating leases (1) |
|
|
2,146 |
|
|
|
1,115 |
|
|
|
881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,142 |
|
Purchase obligations (1) |
|
|
14,199 |
|
|
|
1,291 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,492 |
|
Other long-term obligations (2) |
|
|
|
|
|
|
7,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,356 |
|
|
|
26,003 |
|
|
|
|
|
|
|
16,345 |
|
|
|
10,053 |
|
|
|
883 |
|
|
|
|
|
|
|
|
|
|
|
18,356 |
|
|
|
45,637 |
|
|
|
|
|
|
|
(1) |
|
These amounts mainly represent various long-term contracts that include
commitments for future operating payments under contracts for drilling, engineering,
equipment purchases, rentals and other arrangements. |
|
(2) |
|
Other long-term obligations mainly consist of asset retirement obligations. |
- 34 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States 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 expenses. Some of these estimates require judgments about matters that are inherently
uncertain.
A detailed summary of all of the Companys significant accounting policies and the estimates
derived therefrom is included in Note 2 to the annual Consolidated Financial Statements for the
year ended December 31, 2005. While all of the significant accounting policies are important to
the Companys consolidated financial statements, the following accounting policies and the
estimates derived therefrom, have been identified as being critical:
Ø |
|
Carrying Values of Property, Plant and Equipment; |
Ø |
|
Depletion and Depreciation of Property, Plant and Equipment; |
Ø |
|
Accounting for Stripping Costs |
Ø |
|
Asset Retirement Obligations; |
Carrying values of Property, Plant and Equipment
The Company undertakes a review, at least annually, to evaluate the carrying values of operating
mines and other mineral property interests. Preparation of a life-of-mines cash flow for each
remaining year is based on managements estimates of remaining mine reserves and grade, future
production and sale volumes, unit sales prices, future operating and capital costs and reclamation
costs to the end of mine life. For each mining project, the carrying value is compared to the
estimated future discounted cash flows and any excess is written down against operations.
The estimates used by management are subject to various risks and uncertainties. It is reasonably
possible that changes in estimates could occur which may affect the expected recoverability of the
Companys investments in mining projects and other mineral property interests.
Depletion and Depreciation of Property, Plant and Equipment
Property, plant and equipment comprises one of the largest component of Ivanhoe Mines assets and,
as such, the amortization of these assets has a significant effect on the Companys financial
statements.
On the commencement of commercial production, depletion of each mining property is provided on the
unit-of-production basis using estimated proven and probable reserves as the depletion basis. The
mining plant and equipment and other capital assets are
- 35 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
depreciated, following the commencement of commercial production, over their expected economic
lives using either the unit-of-production method or the straight-line method.
Capital projects in progress are not depreciated until the capital asset has been put into
operation.
The proven and probable reserves are determined based on a professional evaluation using accepted
international standards for the assessment of mineral reserves. The assessment involves the study
of geological, geophysical and economic data and the reliance on a number of assumptions. The
estimates of the reserves may change, based on additional knowledge gained subsequent to the
initial assessment. This may include additional data available from continuing exploration,
results from the reconciliation of actual mining production data against the original reserve
estimates, or the impact of economic factors such as changes in the price of commodities or the
cost of components of production. A change in the original estimate of reserves would result in a
change in the rate of depletion and depreciation of the related mining assets, or could result in
impairment, resulting in a write-down of the assets.
Accounting for Stripping Costs
On March 30, 2005, the Financial Accounting Standards Board (FASB) ratified the consensus of the
Emerging Issues Task Force (EITF) Issue 04-6 that stripping costs incurred during the production
phase of a mine are variable production costs that should be included in the costs of the inventory
produced during the period that the stripping costs are incurred. Commencing in the first quarter
of 2005, Ivanhoe Mines changed its accounting policy with respect to stripping costs to be
consistent with the consensus reached by the EITF. This change has been applied retrospectively by
restating prior period financial statements. In 2004 and prior years, Ivanhoe Mines deferred or
accrued stripping costs incurred during production, as appropriate, and charged these costs to
operations on the basis of the estimated average stripping ratio for each mine area. The effect of
this change was to increase the deficit at January 1, 2004 by $7.6 million and to increase the net
loss for the year ended December 31, 2004 by $7.9 million ($0.03 per share) and to decrease assets
of discontinued operations and investment in joint venture at December 31, 2004 by $14.0 million
and $1.5 million, respectively. The impact on the year ended December 31, 2005 was to decrease the
net loss for the year by $186,000 ($0.00 per share) and to increase assets of discontinued
operations and decrease investment in joint venture at December 31, 2005 by $887,000 and $701,000,
respectively.
Asset Retirement Obligations
The Company has obligations for site restoration and decommissioning related to its mining
properties. The Company, using mine closure plans or other similar studies that outline the
requirements planned to be carried out, estimates the future obligations for mine closure
activities. Because the obligations are dependent on the laws and regulations of the countries in
which the mines operate, the requirements could change
- 36 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
resulting from amendments in those laws and regulations relating to environmental protection and
other legislation affecting resource companies.
Ivanhoe Mines recognizes liabilities for statutory, contractual or legal obligations associated
with the retirement of mining property, plant and equipment when those obligations result from the
acquisition, construction, development or normal operation of the assets. Initially, a liability
for an asset retirement obligation is recognized at its fair value in the period in which it is
incurred. Upon initial recognition of the liability, the corresponding asset retirement cost is
added to the carrying amount of the related asset and the cost is amortized as an expense over the
economic life of the asset using either the unit-of-production method or the straight-line method,
as appropriate. Following the initial recognition of the asset retirement obligation, the carrying
amount of the liability is increased for the passage of time and adjusted for changes to the amount
or timing of the underlying cash flows needed to settle the obligation.
Because the estimate of obligations is based on future expectations in the determination of closure
provisions, management makes a number of assumptions and judgments. The closure provisions are
more uncertain the further into the future the mine closure activities are to be carried out.
Actual costs incurred in future periods in relation to the remediation of Companys existing assets
could differ materially from the $20.5 million undiscounted future value of Ivanhoe Mines
estimated asset retirement obligations at December 31, 2005.
Income Taxes
The Company must make significant estimates in respect of the provision for income taxes and the
composition of its deferred income tax assets and deferred income tax liabilities. Ivanhoe Mines
operations are, in part, subject to foreign tax laws where interpretations, regulations and
legislation are complex and continually changing. As a result, there are usually some tax matters
in question which may, on resolution in the future, result in adjustments to the amount of deferred
income tax assets and deferred income tax liabilities, and those adjustments may be material to the
Ivanhoe Mines financial position and results of operations.
Deferred income tax assets and liabilities are computed based on differences between the carrying
amounts of assets and liabilities on the balance sheet and their corresponding tax values, using
the enacted or substantially enacted, as applicable, income tax rates at each balance sheet date.
Deferred income tax assets also result from unused loss carry-forwards and other deductions. The
valuation of deferred income tax assets is reviewed quarterly and adjusted, if necessary, by use of
a valuation allowance to reflect the estimated realizable amount.
The determination of the ability of the Company to utilize tax loss carry-forwards to offset
deferred income taxes payable requires management to exercise judgment and make assumptions about
the future performance of the Company. Management is required to assess whether the Company is
more likely than not to be able to benefit from these tax losses. Changes in economic
conditions, metal prices and other factors
- 37 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
could result in revisions to the estimates of the benefits to be realized or the timing of
utilizing the losses.
Recent Accounting Pronouncements
Recently issued United States accounting pronouncements have been outlined below. Ivanhoe Mines
believes the new standards issued by the U.S. FASB will not have a material impact on the Company.
In March 2005, the Emerging Issues Committee issued EITF 04-3, Mining Assets Impairment and
Business Combinations, which states that an entity should include Value Beyond Proven and Probable
Reserves and Resources (VBPP) in the value allocated to mining assets in a purchase price
allocation to the extent that a market participant would include VBPP in determining the fair value
of the asset. EITF 04-3 also states that an entity should include the effects of anticipated
fluctuations in the future market price of minerals in determining the fair value of mining assets
in a purchase price allocation in a manner that is consistent with the expectations of marketplace
participants. In addition, EITF 04-3 states that an entity should include the cash flows
associated with VBPP as well as the effects of anticipated fluctuations in the market price of
minerals in estimates of future cash flows (both undiscounted and discounted) used for determining
whether a mining asset is impaired. The Companys current accounting policy complies with EITF
04-3.
In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1 The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP addresses
the determination as to when an investment is considered impaired, whether that impairment is other
than temporary, and the measurement of an impairment loss. This FSP also includes accounting
considerations subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. The guidance in this FSP FAS 115-1 and FAS 124-1 is applicable to reporting periods
beginning after December 15, 2005. Management does not expect the adoption of this FSP to have a
material effect on the Companys consolidated financial position and results of operations.
In December 2004, the FASB issued SFAS No. 123 (R) Share-Based Payment, which replaces SFAS No.
123 Accounting for Stock-Based Compensation. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 Share-Based Payment, which provides
interpretive guidance related to SFAS No. 123 (R). SFAS No. 123 (R) requires compensation costs
related to share-based payment transactions to be recognized in the financial statements. With
limited exceptions, the amount of compensation cost is measured based on the grant-date fair value
of the equity or liability instruments issued. SFAS No. 123 (R) requires liability awards to be
re-measured each reporting period and compensation costs to be recognized over the period that an
employee provides service in exchange for the award. Management plans to adopt
- 38 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
this statement on the modified prospective basis beginning January 1, 2006, and does not expect
adoption of this statement to have a material effect on the Companys consolidated financial
position and results of operations.
In October 2005, the FASB issued FASB Staff Position FAS 123 (R)-2, Practical Accommodation to the
Application of Grant Date as Defined in FAS 123 (R). FSP 123 (R)-2 provides guidance on the
application of grant date as defined in SFAS No. 123 (R). In accordance with this standard a grant
date of an award exists if (i) the award is a unilateral grant and (ii) the key terms and
conditions of the award are expected to be communicated to an individual recipient within a
relatively short time period from the date of approval. The Company will adopt this standard when
it adopts SFAS No. 123 (R), and does not anticipate that the implementation of this statement will
have a significant impact on its results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an amendment of
APB Opinion 29. This Statement amends Opinion 29 to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. The Statement is effective for fiscal periods beginning after June 15, 2005.
Management does not expect the adoption of this Statement to have a material effect on the
Companys consolidated financial position and results of operations.
In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections, a replacement
of APB Opinion 20 and FASB Statement 3. This Statement changes the requirements for the accounting
for and reporting of a change in accounting principle and applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition provisions. The
Statement is effective for accounting changes made in fiscal years beginning after December 15,
2005. Management does not expect the adoption of this Statement to have a material effect on the
Companys consolidated financial position and results of operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements No. 133 and 140. This Statement resolves issues
addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets. This Statement:
|
n |
|
Permits fair value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation; |
|
|
n |
|
Clarifies which interest-only strips and principal-only strips are not subject to the
requirements of Statement 133; |
- 39 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
|
n |
|
Establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation; |
|
|
n |
|
Clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives; and |
|
|
n |
|
Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. |
This Statement is effective for all financial instruments acquired or issued after the beginning of
fiscal years that begin after September 15, 2006. The Company is currently evaluating the
implications of this Statement.
In November 2005, the FASB concluded that in their proposed Accounting for Uncertain Tax Positions
an Interpretation of FASB Statement No. 109, a benefit recognition model with a two-step approach
would be used, with a more-likely-than-not recognition criterion and a best estimate measure
attribute. The first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more-likely-than-not, based solely on the technical
merits, that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the appropriate amount of the benefit
to recognize, which will be measured using the best estimate of the amount that will be sustained.
The tax position should be derecognized when it is no longer more-likely-than-not of being
sustained. In January 2006, the FASB concluded that the final Interpretation will be effective as
of the beginning of the first annual period beginning after December 31, 2006. The Company is
currently evaluating the implications of this Interpretation.
- 40 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
RISKS AND UNCERTAINTIES
Material risks and uncertainties affecting Ivanhoe Mines, their potential impact, and the
Companys principal risk management strategies, are as follows.
There can be no assurance that Ivanhoe Mines will be capable of raising the additional funding that
it needs to carry out its development and exploration objectives.
The further development and exploration of the Oyu Tolgoi Project and the various other mineral
properties in which it holds interests depends upon Ivanhoe Mines ability to obtain financing
through capital markets, sales of non-core assets or other means. There is no assurance that
Ivanhoe Mines will be successful in obtaining financing as and when needed. Depressed markets for
precious and base metals may make it difficult or impossible for Ivanhoe Mines to obtain debt
financing or equity financing on favourable terms or at all. Ivanhoe Mines operates in a region of
the world that is prone to economic and political upheaval and certain mineral properties held by
Ivanhoe Mines are located in politically and economically unstable countries, which may make it
more difficult for Ivanhoe Mines to obtain debt financing from project lenders. Ivanhoe Mines must
arrange significant project financing for development of the Oyu Tolgoi Project. Failure to obtain
additional financing on a timely basis may cause Ivanhoe Mines to postpone its development plans,
forfeit rights in some or all of its properties or joint ventures or reduce or terminate some or
all of its operations.
Ivanhoe Mines may be unsuccessful in obtaining the taxation and fiscal concessions and legal and
investor protection assurances it is seeking from the Government of Mongolia in its negotiations
for a stability agreement in respect of the Oyu Tolgoi Project.
Certain concessions and accommodations that Ivanhoe Mines 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 are inconsistent with, or not recognized by, the prevailing
laws of Mongolia and the government 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 Ivanhoe
Mines. Until the Special Stability Agreement is finalized and approved, it is not possible to
predict to what extent Ivanhoe Mines will be successful in obtaining those concessions and
accommodations regarded by management as key to the economic viability of the Oyu Tolgoi Project
nor the degree to which Ivanhoe Mines success or failure in obtaining such concessions and
accommodations will affect Ivanhoe Mines ability to finance the development of the project. It is
likely that the outcome of this matter will have a material impact upon Ivanhoe Mines prospects
for successfully developing the Oyu Tolgoi Project.
Future amendments to Mongolian laws could adversely affect Ivanhoe Mines mining rights in the Oyu
Tolgoi Project or make it more difficult or expensive to develop the project and carry out mining.
- 41 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
Mongolias Minerals Law was drafted with the assistance of Western legal experts and is regarded as
one of the most progressive, internally consistent and effective pieces of mining legislation among
all of the developing countries of Asia. However, future amendments to the Minerals Law or new
legislation covering ostensibly unrelated matters could affect the existing tenure regime under the
Minerals Law and potentially harm Ivanhoe Mines ability to carry on business in Mongolia.
Revisions to Mongolias Minerals Law have been proposed and remain subject to debate in the
Mongolian Parliament, which will not re-convene until April 2006. Until that debate has been
completed and a legislative consensus has been reached as to the nature and scope of the changes,
if any, to be made to the Minerals Law, the impact, if any, on the Oyu Tolgoi Project cannot be
measured. The Mongolian government has, in the past, expressed its strong desire to foster, and has
to date protected the development of, an enabling environment for foreign investment. However,
there are political constituencies within Mongolia that have espoused ideas, including the concept
of state participation in strategic mineral deposits, that would not be regarded by the
international mining industry as conducive to foreign investment if they were to become law or
official government policy. Ivanhoe Mines has no reason to believe that the government of Mongolia
intends to sponsor or that Parliament intends to enact amendments to the Minerals Law or other
legislation that would be materially adverse to the interests of international investors in
Mongolias mining sector including those of Ivanhoe Mines. Nevertheless, the Oyu Tolgoi Project
has a high profile among the citizens of Mongolia and, as a burgeoning democracy, Mongolia has
recently demonstrated a degree of political volatility. Accordingly, until these issues are
addressed and clarified, there can be no assurance that the present government or a future
government will refrain from enacting legislation or adopting government policies that are adverse
to Ivanhoe Mines interests or that impair Ivanhoe Mines ability to develop and operate the Oyu
Tolgoi Project on the basis presently contemplated.
Ivanhoe Mines ability to carry on business in Mongolia is subject to country risk.
Ivanhoe Mines holds its interest in the Oyu Tolgoi Project and in its Mongolian exploration
properties through mining licenses and exploration licenses that enable it to conduct operations or
development and exploration activities. Notwithstanding these arrangements, Ivanhoe Mines ability
to conduct operations or exploration and development activities is subject to changes in
legislation or government regulations or shifts in political attitudes beyond Ivanhoe Mines
control.
Government policy may change to discourage foreign investment, renationalization of mining
industries may occur or other government limitations, restrictions or requirements not currently
foreseen may be implemented. There can be no assurance that Ivanhoe Mines assets will not be
subject to nationalization, requisition or confiscation, whether legitimate or not, by any
authority or body.
There is no assurance that provisions under Mongolian law for compensation and reimbursement of
losses to investors under such circumstances would be effective to restore the value of Ivanhoe
Mines original investment. Similarly, Ivanhoe Mines
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IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
operations may be affected in varying degrees by government regulations with respect to
restrictions on production, price controls, export controls, income taxes, environmental
legislation, mine safety and annual fees to maintain mineral licenses in good standing. There can
be no assurance that Mongolian laws protecting foreign investments will not be amended or abolished
or that existing laws will be enforced or interpreted to provide adequate protection against any or
all of the risks described above.
Ivanhoe Mines business in Mongolia may be harmed if the country fails to complete its transition
from state socialism and a planned economy to political democracy and a free market economy.
Since 1990, Mongolia has been in transition from state socialism and a planned economy to a
political democracy and a free market economy. Much progress has been made in this transition but
much remains to be done, particularly with respect to the rule of law. Many laws have been
enacted, but in many instances they are neither understood nor enforced. For decades Mongolians
have looked to politicians and bureaucrats as the sources of the law. This has changed in
theory, but often not in practice. With respect to most day-to-day activities in Mongolia
government civil servants interpret, and often effectively make, the law. This situation is
gradually changing but at a relatively slow pace. Laws may be applied in an inconsistent,
arbitrary and unfair manner and legal remedies may be uncertain, delayed or unavailable.
Ivanhoe Mines may be unable to enforce its legal rights in certain circumstances.
In the event of a dispute arising at or in respect of, Ivanhoe Mines foreign operations, including
the Oyu Tolgoi Project, Ivanhoe Mines may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the jurisdiction of courts in
Canada or other jurisdictions. Ivanhoe Mines may also be hindered or prevented from enforcing its
rights with respect to a governmental entity or instrumentality because of the doctrine of
sovereign immunity.
The mineral resources identified on the Oyu Tolgoi Project do not have demonstrated economic
viability and the feasibility of mining has not been established.
A substantial portion of the mineral resources identified to date on the Oyu Tolgoi Project are not
mineral reserves and have not yet demonstrated economic viability. There can be no assurance that
additional mineral reserves will be identified on the property. The feasibility of underground
mining from the Oyu Tolgoi Project has not been, and may never be, established. Upgrading the
mineral resources in the Hugo Dummett deposits to mineral reserves and establishing the feasibility
of the underground development phase of the Oyu Tolgoi Project requires substantial underground
development work including the digging of shafts and drifts, all of which involves significant
expenditures of time and financial resources.
There is a degree of uncertainty attributable to the calculation of reserves, resources and
corresponding grades being mined or dedicated to future production. Until reserves or resources
are actually mined and processed, the quantity of reserves or resources and
- 43 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
grades must be considered as estimates only. In addition, the quantity of reserves or resources
may vary depending on prevailing metals market. Any material change in the quantity of its
reserves, resources, grades or stripping ratio may affect the economic viability of a particular
property. In addition, there can be no assurance that metal recoveries in small-scale laboratory
tests will be duplicated in larger scale tests under on-site conditions or during production.
Lack of infrastructure in proximity to the Oyu Tolgoi Project could adversely affect mining
feasibility.
The Oyu Tolgoi Project is located in an extremely remote area which currently lacks basic
infrastructure, including sources of electric power, water, housing, food and transport, necessary
to develop and operate a major mining project. While Ivanhoe Mines has established the limited
infrastructure necessary to conduct its current exploration and development activities,
substantially greater sources of power, water, physical plant and transport infrastructure in the
area will need to be established before Ivanhoe Mines can conduct mining operations. Lack of
availability of the means and inputs necessary to establish such infrastructure may adversely
affect mining feasibility. Establishing such infrastructure will, in any event, require significant
financing, identification of adequate sources of raw materials and supplies and necessary approvals
from national and regional governments, none of which can be assured.
Ivanhoe Mines may experience difficulties with its joint venture partners.
Ivanhoe Mines is currently earning an interest in a property held by Entrée which is adjacent to
the Hugo Dummett deposits. Upon earning an interest, Ivanhoe Mines will form a joint venture with
Entrée and may in the future enter into additional joint ventures in respect of other properties
with third parties. Ivanhoe Mines is subject to the risks normally associated with the conduct of
joint ventures, which include disagreements as to how to develop, operate and finance a project and
possible litigation between the joint venture partners regarding joint venture matters. These
matters may have an adverse effect on Ivanhoe Mines ability to realize the full economic benefit
of its interest in the property that is the subject of the joint venture, which could affect its
results of operations and financial condition.
Changes in, or more aggressive enforcement of, laws and regulations could adversely impact Ivanhoe
Mines business.
Mining operations and exploration activities are subject to extensive laws and regulations. These
relate to production, development, exploration, exports, imports, taxes and royalties, labour
standards, occupational health, waste disposal, protection and remediation of the environment, mine
decommissioning and reclamation, mine safety, toxic substances, transportation safety and emergency
response and other matters.
Compliance with these laws and regulations increases the costs of exploring, drilling, developing,
constructing, operating and closing mines and other facilities. It is possible that the costs,
delays and other effects associated with these laws and regulations may
- 44 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
impact Ivanhoe Mines decision as to whether to continue to operate existing mines and other
facilities or whether to proceed with exploration or development of properties. Since legal
requirements change frequently, are subject to interpretation and may be enforced to varying
degrees in practice, Ivanhoe Mines is unable to predict the ultimate cost of compliance with these
requirements or their effect on operations. Furthermore, changes in governments, regulations and
policies and practices could have an adverse impact on Ivanhoe Mines future cash flows, earnings,
results of operations and financial condition.
Ivanhoe Mines is subject to substantial environmental and other regulatory requirements and such
regulations are becoming more stringent. Non-compliance with such regulations, either through
current or future operations or a pre-existing condition could materially adversely affect Ivanhoe
Mines.
All phases of Ivanhoe Mines operations are subject to environmental regulations in the various
jurisdictions in which it operates. For example, the Oyu Tolgoi Project is subject to a
requirement to develop an environmental impact assessment, as well as other environmental
protection obligations. Environmental legislation is evolving in a manner which will likely
require stricter standards and enforcement, increased fines and penalties for non-compliance, more
stringent environmental assessments of proposed projects and a heightened degree of responsibility
for companies and their officers, directors and employees. There is no assurance that future
changes in environmental regulation, if any, will not adversely affect Ivanhoe Mines operations.
Environmental hazards may exist on the properties in which Ivanhoe Mines holds interests which are
presently unknown to Ivanhoe Mines and which have been caused by previous or existing third party
owners or operators of the properties.
Government approvals and permits are sometimes required in connection with Ivanhoe Mines
operations. To the extent such approvals are required and not obtained, Ivanhoe Mines may be
delayed or prohibited from proceeding with planned exploration or development of its mineral
properties.
Failure to comply with applicable laws, regulations and permitting requirements may result in
enforcement actions thereunder, including orders issued by regulatory or judicial authorities
causing operations to cease or be curtailed, and may include corrective measures requiring capital
expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining
operations may be required to compensate those suffering loss or damage by reason of the mining
activities and may have civil or criminal fines or penalties imposed for violations of applicable
laws or regulations.
Amendments to current laws, regulations and permits governing operations and activities of mining
companies, or more stringent implementation thereof, could have a material adverse impact on
Ivanhoe Mines and cause increases in capital expenditures or production costs or reductions in
levels of production at producing properties or require abandonment or delays in development of new
mining properties.
- 45 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
Previous mining operations may have caused environmental damage at Ivanhoe Mines mining sites, and
if Ivanhoe Mines cannot prove that such damage was caused by such prior operators, its indemnities
and exemptions from liability may not be effective.
Ivanhoe Mines has received exemptions from liability from relevant governmental authorities for
environmental damage caused by previous mining operations at the Monywa copper project in Myanmar
and the Bakyrchik gold project in Kazakhstan. There is a risk, however, that, if an environmental
accident occurred at those sites, it may be difficult or impossible to assess the extent to which
environmental damage was caused by Ivanhoe Mines activities or the activities of previous
operators. In that event, the liability exemptions could be ineffective and possibly worthless.
Mining projects are sensitive to the volatility of metal prices.
The value of, and Ivanhoe Mines ability to finance, the Oyu Tolgoi Project is largely dependent on
the world market prices of copper and gold, which are subject to volatile movements over time and
are affected by numerous factors beyond Ivanhoe Mines control. These factors include international
economic and political trends, expectations of inflation, global and regional demand, currency
exchange fluctuations, interest rates and global or regional consumption patterns, speculative
activities, increased production due to improved mining and production methods and economic events,
including the performance of Asias economies.
If prevailing metal prices fall and remain below variable production costs of Ivanhoe Mines
current and planned mining operations for a sustained period, losses may be sustained and, under
certain circumstances, there may be a curtailment or suspension of some or all of Ivanhoe Mines
mining and exploration activities. Ivanhoe Mines would also have to assess the economic impact of
any sustained lower metal prices on recoverability and, therefore, the cut-off grade and level of
Ivanhoe Mines reserves and resources. These factors could have an adverse impact on Ivanhoe Mines
future cash flows, earnings, results of operations, stated reserves and financial condition.
Illegal mining is prevalent in Mongolia and Myanmar.
Illegal mining is widespread in Mongolia, Myanmar and other developing countries. Illegal miners
may trespass on Ivanhoe Mines properties and engage in very dangerous practices, including
entering old exploration shafts and adits in Myanmar without sufficient safety equipment and
precautions. Although Ivanhoe Mines employs security personnel to protect its active mining and
development project sites, it is unable to continuously monitor the full extent of its exploration
properties. In December 2005, three illegal miners were accidentally killed while trespassing and
engaging in illegal mining activities on the Letpadaung property in Myanmar. The presence of
illegal miners could also lead to project delays and disputes regarding the development or
operation of commercial deposits. The illegal activities of these miners could cause environmental
damage or other damage to Ivanhoe Mines properties or personal injury or death, for which Ivanhoe
Mines could potentially be held responsible, all of which
- 46 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
could have an adverse impact on Ivanhoe Mines results of operations and financial condition.
There can be no assurance that the interest held by Ivanhoe Mines in its exploration, development
and mining properties is free from defects or that material contractual arrangements between
Ivanhoe Mines and entities owned or controlled by foreign governments will not be unilaterally
altered or revoked.
Ivanhoe Mines has investigated its rights to explore and exploit its various properties and, to the
best of its knowledge, those rights are in good standing but no assurance can be given that such
rights will not be revoked, or significantly altered, to the detriment of Ivanhoe Mines. There can
also be no assurance that Ivanhoe Mines rights will not be challenged or impugned by third
parties. Ivanhoe Mines has also applied for rights to explore, develop and mine various
properties, but there is no certainty that such rights, or any additional rights applied for, will
be granted on terms satisfactory to Ivanhoe Mines or at all.
Economic sanctions imposed by the United States, the European Union and Canada against Myanmar may
adversely affect the Monywa Copper Project.
In May 1997, the United States government imposed economic sanctions on Myanmar, banning new
investments in Myanmar by any United States investor. Additional U.S. sanctions were imposed in
2003. The European Union and the Canadian government have also imposed selective economic
sanctions on Myanmar. These sanctions were imposed based on the belief that the current government
of Myanmar has repressed opposition to the government. While the sanctions in their current form
do not affect the Companys investments in Myanmar, there can be no assurances that the sanctions
will not be broadened or that other countries will not adopt similar sanctions in the future. The
existence of United States sanctions may restrict the ability of United States companies to
participate in the Monywa Copper Project. It is not possible to assess whether additional
legislation will be enacted by the United States, the European Union, Canada or elsewhere or, if
enacted, such legislation will ultimately affect the Company or investment in the Company.
The proceeds from the sale of the Savage River Project are dependent on iron ore prices and the
remaining supply of ore at the Savage River Project.
The remaining portion of the proceeds payable to Ivanhoe Mines from the sale of the Savage River
Project is deferred, and the amount of such payments is dependent on prevailing prices for iron ore
(as represented by the Nibrasco/JSM pellet price) in the year that the compensation is paid and the
total tonnage of iron ore pellets sold from the Savage River Project in that year. While there
have been recent increases in the price of iron ore, the current price is at the high end of recent
historical trends. Such prices are very volatile and in the past prices have suffered significant
declines. There is a risk that prices will fall in subsequent years, meaning that corresponding
payments to Ivanhoe Mines will be lower than the annual payment expected to be received on March
31, 2006. In addition, while current reserve and resource estimates indicate that the mine will be
- 47 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
capable of producing sufficient ore to meet the 1,800,000 tpy threshold for the next five years,
there is no assurance that these estimates will actually bear themselves out. If insufficient ore
is actually present to produce the maximum threshold amount of ore, then the corresponding payments
to Ivanhoe Mines will be lower.
Competition for new mining properties by larger, more established companies may prevent Ivanhoe
Mines from acquiring interests in additional properties or mining operations.
Significant and increasing competition exists for mineral acquisition opportunities throughout the
world. As a result of this competition, some of which is with large, better established mining
companies with substantial capabilities and greater financial and technical resources, Ivanhoe
Mines may be unable to acquire rights to exploit additional attractive mining properties on terms
it considers acceptable. Accordingly, there can be no assurance that Ivanhoe Mines will acquire
any interest in additional operations that would yield reserves or result in commercial mining
operations.
Ivanhoe Mines has a limited operating history, and there is no assurance that it will be capable of
consistently producing positive cash flows.
The Company has paid no dividends on its common shares since incorporation and does not anticipate
doing so in the foreseeable future. Ivanhoe Mines does not anticipate receiving any cash flow
distribution from its Monywa Copper Project in 2006 and all of its other exploration and
development projects will require further funding. Ivanhoe Mines has a limited operating history
and there can be no assurance of its ability to operate its projects profitably. While Ivanhoe
Mines may in the future generate additional working capital through the operation, development,
sale or possible syndication of its properties, there is no assurance that Ivanhoe Mines will be
capable of producing positive cash flow on a consistent basis or that any such funds will be
available for exploration and development programs.
A substantial portion of Ivanhoe Mines operations involve exploration and development and there is
no guarantee that any such activity will result in commercial production of mineral deposits.
Development of Ivanhoe Mines mineral properties is contingent upon obtaining satisfactory
exploration results. Mineral exploration and development involves substantial expenses and a high
degree of risk, which even a combination of experience, knowledge and careful evaluation may not be
able to adequately mitigate. There is no assurance that additional commercial quantities of ore
will be discovered on any of Ivanhoe Mines exploration properties. There is also no assurance
that, even if commercial quantities of ore are discovered, a mineral property will be brought into
commercial production. The discovery of mineral deposits is dependent upon a number of factors,
not the least of which is the technical skill of the exploration personnel involved. The
commercial viability of a mineral deposit, once discovered, is also dependent upon a number of
factors, some of which are the particular attributes of the deposit, such as size, grade and
proximity to infrastructure, metal prices and government
- 48 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
regulations, including regulations relating to royalties, allowable production, importing and
exporting of minerals, and environmental protection. In addition, assuming discovery of a
commercial orebody, depending on the type of mining operation involved, several years can elapse
from the initial phase of drilling until commercial operations are commenced. Most of the above
factors are beyond the control of Ivanhoe Mines.
The Company does not maintain insurance over certain of its business operations.
Exploration, development and production operations on mineral properties involve numerous risks,
including unexpected or unusual geological operating conditions, rock bursts or slides, fires,
floods, earthquakes or other environmental occurrences, and political and social instability. It
is not always possible to obtain insurance against all such risks and the Company may decide not to
insure against certain risks as a result of high premiums or other reasons. Should such
liabilities arise, they could reduce or eliminate any further profitability and result in
increasing costs and a decline in the value of the securities of the Company. The Company does not
maintain insurance against political or environmental risks. Also, because of the recent major
increases in insurance premiums and the inability to obtain full coverage, the Monywa Copper
Project is self-insuring on a portion of the mine assets.
Mining operations are subject to numerous hazards that could have a material adverse effect on the
financial position of Ivanhoe Mines.
The business of mining is subject to a variety of risks such as groundfall, explosions and other
accidents, flooding, environmental hazards, the discharge of toxic chemicals and other risks. Such
occurrences, against which Ivanhoe Mines cannot, or may elect not to, insure, may result in
destruction of mines and other production facilities, damage to life and property, environmental
damage, delayed production, increased production costs and possible legal liability for any and all
damages. Such liabilities may have a material adverse effect on Ivanhoe Mines financial position.
Ivanhoe Mines is exposed to risks of changing political stability and government regulation in the
countries in which it operates.
Ivanhoe Mines holds mineral interests in countries which may be affected in varying degrees by
political stability, government regulations relating to the mining industry and foreign investment
therein, and the policies of other nations in respect of these countries. Any changes in
regulations or shifts in political conditions are beyond the control of Ivanhoe Mines and may
adversely affect its business. Ivanhoe Mines operations may be affected in varying degrees by
government regulations, including those with respect to restrictions on production, price controls,
export controls, income taxes, expropriation of property, employment, land use, water use,
environmental legislation and mine safety. Ivanhoe Mines operations may also be affected in
varying degrees by political and economic instability, economic or other sanctions imposed by other
nations, terrorism, military repression, crime, extreme fluctuations in currency exchange rates and
high inflation.
- 49 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
In certain areas where Ivanhoe Mines is active, the regulatory environment is in a state of
continuing change, and new laws, regulations and requirements may be retroactive in their effect
and implementation. The laws of many of the countries in which Ivanhoe Mines operates also contain
inconsistencies and contradictions. Many of them are structured to bestow on government
bureaucrats substantial administrative discretion in their application and enforcement with the
result that the laws are subject to changing and different interpretations. As such, even the
Companys best efforts to comply with the laws may not result in effective compliance in the
determination of government bureaucrats.
Ivanhoe Mines conducts certain of its operations through co-operative joint ventures with
government controlled entities. While this connection benefits Ivanhoe Mines in some respects,
there is a substantial inequality with respect to the influence of the parties with the applicable
government. Governments in these countries hold a substantial degree of subjective control over the
application and enforcement of laws and the conduct of business. This inequality would become
particularly detrimental if a business dispute arises between joint venture parties. Ivanhoe Mines
seeks to minimize this issue by including international arbitration clauses in relevant agreements
whenever possible and by maintaining positive relations with both its joint venture partners and
local governments, but there can be no guarantee that these measures will be sufficient to protect
Ivanhoe Mines interest in these countries.
Ivanhoe Mines prospects depend on its ability to attract and retain key personnel.
Recruiting and retaining qualified personnel is critical to Ivanhoe Mines success. The number of
persons skilled in the acquisition, exploration and development of mining properties is limited and
competition for such persons is intense. The Company believes that it has been successful in
recruiting excellent personnel to meet its corporate objectives but, as Ivanhoe Mines business
activity grows, it will require additional key financial, administrative, mining, marketing and
public relations personnel as well as additional staff on the operations side. Although the
Company believes that it will be successful in attracting and retaining qualified personnel, there
can be no assurance of such success.
Certain directors of Ivanhoe Mines are directors or officers of, or have significant shareholdings,
in other mineral resource companies and there is the potential that such directors will encounter
conflicts of interest with Ivanhoe Mines.
Certain of the directors of the Company are directors or officers of, or have significant
shareholdings in, other mineral resource companies and, to the extent that such other companies may
participate in ventures in which Ivanhoe Mines may participate, the directors of Ivanhoe Mines may
have a conflict of interest in negotiating and concluding terms respecting the extent of such
participation. Such other companies may also compete with Ivanhoe Mines for the acquisition of
mineral property rights. In the event that any such conflict of interest arises, a director who
has such a conflict will disclose the conflict to a meeting of the directors of the Company and
will abstain from voting for
- 50 -
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
or against the approval of such a participation or such terms. In appropriate cases, Ivanhoe Mines
will establish a special committee of independent directors to review a matter in which several
directors, or management, may have a conflict. From time to time, several companies may
participate in the acquisition, exploration and development of natural resource properties thereby
allowing their participation in larger programs, permitting involvement in a greater number of
programs and reducing financial exposure in respect of any one program. It may also occur that a
particular company will assign all or a portion of its interest in a particular program to another
of these companies due to the financial position of the company making the assignment. In
accordance with the laws of the Yukon, 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 Ivanhoe
Mines will participate in a particular program and the interest therein to be acquired by it, the
directors will primarily consider the potential benefits to Ivanhoe Mines, the degree of risk to
which Ivanhoe Mines may be exposed and its financial position at that time.
- 51 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
RELATED-PARTY TRANSACTIONS
At the end of 2005 and 2004, the Companys discontinued Savage River operations owed
approximately $5.1 million to Mr. Friedland. This debt originated as a result of the December 2000
acquisition, by the Company, of the Savage River operation. Following the sale of the Savage River
operations in February 2005, repayment of this balance is contingent upon the Company receiving
proceeds in excess of approximately $111 million from the sale of the Savage River operations.
The Company is a party to cost-sharing agreements with other companies in which Robert M.
Friedland, its Chairman and Chief Executive Officer, has a material, direct or indirect, beneficial
interest. Through these agreements, Ivanhoe Mines shares, on a cost-recovery basis, office space,
furnishings, equipment and communications facilities in Vancouver, Singapore, Beijing and London,
and an aircraft. Ivanhoe Mines also shares the costs of employing administrative and non-executive
management personnel in these offices.
Companies in which the Company is a party to the cost-sharing agreement and Mr. Friedlands
ownership interest in each of them, are as follows:
|
|
|
|
|
|
|
R. M. |
|
|
|
Friedlands |
|
|
|
Ownership |
|
Company Name |
|
Interest |
|
|
Ivanhoe Energy Inc. |
|
|
21.11 |
% |
|
Ivanhoe Capital Corporation |
|
|
100.00 |
% |
|
Ivanhoe Nickel & Platinum Ltd. |
|
|
50.06 |
% |
|
The Companys related-party transactions also include transactions with Asia Gold Corp., (a
47%-owned publicly listed company) and exploration expenditures incurred as part of several
joint-venture agreements with Jinshan Gold Mines Inc.(a 53%-owned, subsidiary).
The shared and other expenditures for the last two years were as follows:
|
|
|
|
|
|
|
|
|
|
|
$(000) |
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
Exploration |
|
|
1,122 |
|
|
|
2,198 |
|
|
Legal |
|
|
823 |
|
|
|
468 |
|
|
Office and administrative |
|
|
2,216 |
|
|
|
2,057 |
|
|
Salaries and benefits |
|
|
2,904 |
|
|
|
2,239 |
|
|
Travel (including aircraft rental) |
|
|
3,421 |
|
|
|
3,001 |
|
|
|
|
|
10,486 |
|
|
|
9,963 |
|
|
- 52 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
Accounts receivable and accounts payable of the Company at December 31, 2005, included $0.5
million and $1.1 million, respectively (December 31, 2004 $0.4 million and $3.3 million,
respectively), which were due from/to a company under common control or companies related by way of
directors in common.
QUALIFIED PERSONS
Disclosure of a scientific or technical nature in this MD&A in respect of each of the material
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 Company |
|
Oyu Tolgoi Project
|
|
Charles P.N. Forster
|
|
Employee |
|
Nariin Sukhait Project
|
|
Steven Kerr (Norwest Corporation)
|
|
Independent consultant |
|
OVERSIGHT ROLE OF THE AUDIT COMMITTEE
The Audit Committee reviews, with management and the external auditors, the Companys MD&A and
related consolidated financial statements and approves the release of such information to
shareholders. For each audit or quarterly review, the external auditors prepare a report for
members of the Audit Committee summarizing key areas, significant issues and material internal
control weaknesses encountered, if any.
- 53 -
IVANHOE
MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted)
MANAGEMENTS REPORT TO THE SHAREHOLDERS
The Consolidated Financial Statements and the managements discussion and analysis of
financial condition and results of operations (MD&A) are the responsibility of the management of
Ivanhoe Mines Ltd. These financial statements and the MD&A have been prepared in accordance with
accounting principles generally accepted in United States and regulatory requirements,
respectively, using managements best estimates and judgment of all information available up to
March 31, 2006.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities
for financial reporting and internal controls. The Audit Committee of the Board of Directors,
consisting solely of outside directors, meets regularly during the year with financial officers of
the Company and the external auditors to satisfy itself that management is properly discharging its
financial reporting responsibilities to the Directors who approve the consolidated financial
statements.
These financial statements have, in managements opinion, been properly prepared within reasonable
limits of materiality and within the framework of the accounting policies summarized in Note 2 to
the Consolidated Financial Statements.
The consolidated financial statements have been audited by Deloitte & Touche LLP, independent
registered chartered accountants, in accordance with Canadian generally accepted auditing
standards. They have full and unrestricted access to the Audit Committee.
|
|
|
|
|
By: |
/s/
R. M. Friedland
|
By: |
/s/ P. Meredith |
|
R. M. FRIEDLAND
|
|
P. MEREDITH |
|
Chairman
|
|
Chief Financial Officer |
March 31, 2006
Vancouver, BC Canada
- 54 -
|
|
|
|
|
Deloitte & Touche LLP
2800 1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver BC V7X 1P4
Canada
Tel: (604) 669-4466
Fax: (604) 685-0395
www.deloitte.ca |
Report of Independent Registered Chartered Accountants
To the Shareholders of
Ivanhoe Mines Ltd.
We have audited the consolidated balance sheets of Ivanhoe Mines Ltd. (the Company) as at
December 31, 2005 and 2004 and the consolidated statements of operations, shareholders equity and
cash flows for each of the years then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. These
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects,
the financial position of the Company as at December 31, 2005 and 2004 and the results of their
operations and their cash flows for each of the years then ended in conformity with accounting
principles generally accepted in the United States of America.
The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion.
Independent Registered Chartered Accountants
Vancouver, British Columbia
March 30, 2006
Comment by Independent Registered Chartered Accountants on Canada-United States of America
Reporting Difference
The standards of the Public Company Accounting Oversight Board (United States) require the
addition of an explanatory paragraph (following the opinion paragraph) when there are changes in
accounting principles that have a material effect on the comparability of the Companys financial
statements, such as the change described in Note 2 (i) to the consolidated financial statements.
Our report to the shareholders dated March 30, 2006 is expressed in accordance with Canadian
reporting standards which do not require a reference to such changes in accounting principles in
the report of the independent registered chartered accountants when the change is properly
accounted for and adequately disclosed in the financial statements.
Independent Registered Chartered Accountants
Vancouver, British Columbia
March 30, 2006
- 55 -
IVANHOE MINES LTD.
Consolidated Balance Sheets
(Stated in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
CURRENT |
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 5) |
|
$ |
101,681 |
|
|
$ |
112,478 |
|
Accounts receivable (Note 6) |
|
|
33,350 |
|
|
|
6,552 |
|
Inventories |
|
|
3,547 |
|
|
|
2,192 |
|
Prepaid expenses |
|
|
6,353 |
|
|
|
1,196 |
|
Other current assets (Note 7) |
|
|
3,286 |
|
|
|
3,000 |
|
Current assets of discontinued operations (Note 3) |
|
|
|
|
|
|
36,636 |
|
|
TOTAL CURRENT ASSETS |
|
|
148,217 |
|
|
|
162,054 |
|
|
|
|
|
|
|
|
|
|
INVESTMENT IN JOINT VENTURE (Note 4) |
|
|
139,874 |
|
|
|
126,911 |
|
LONG-TERM INVESTMENTS (Note 8) |
|
|
18,417 |
|
|
|
19,160 |
|
PROPERTY, PLANT AND EQUIPMENT (Note 9) |
|
|
85,706 |
|
|
|
54,434 |
|
DEFERRED INCOME TAXES (Note 13) |
|
|
171 |
|
|
|
318 |
|
OTHER ASSETS (Note 10) |
|
|
4,394 |
|
|
|
3,764 |
|
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS (Note 3) |
|
|
|
|
|
|
9,627 |
|
|
TOTAL ASSETS |
|
$ |
396,779 |
|
|
$ |
376,268 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities (Note 11) |
|
$ |
20,594 |
|
|
$ |
14,412 |
|
Current liabilities of discontinued operations (Note 3) |
|
|
|
|
|
|
14,082 |
|
|
TOTAL CURRENT LIABILITIES |
|
|
20,594 |
|
|
|
28,494 |
|
|
|
|
|
|
|
|
|
|
LOANS PAYABLE TO RELATED PARTIES (Note 12) |
|
|
5,088 |
|
|
|
5,088 |
|
DEFERRED INCOME TAXES (Note 13) |
|
|
315 |
|
|
|
476 |
|
ASSET RETIREMENT OBLIGATIONS (Note 14) |
|
|
6,231 |
|
|
|
5,267 |
|
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS (Note 3) |
|
|
|
|
|
|
26,380 |
|
|
TOTAL LIABILITIES |
|
|
32,228 |
|
|
|
65,705 |
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTERESTS (Note 15) |
|
|
8,928 |
|
|
|
3,713 |
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARE CAPITAL (Note 16) |
|
|
|
|
|
|
|
|
Authorized |
|
|
|
|
|
|
|
|
Unlimited number of preferred shares without par value |
|
|
|
|
|
|
|
|
Unlimited number of common shares without par value |
|
|
|
|
|
|
|
|
Issued and outstanding |
|
|
|
|
|
|
|
|
315,900,668 (2004 -292,870,998) common shares |
|
|
994,442 |
|
|
|
868,606 |
|
ADDITIONAL PAID-IN CAPITAL |
|
|
25,174 |
|
|
|
16,283 |
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 17) |
|
|
6,711 |
|
|
|
2,879 |
|
DEFICIT |
|
|
(670,704 |
) |
|
|
(580,918 |
) |
|
TOTAL SHAREHOLDERS EQUITY |
|
|
355,623 |
|
|
|
306,850 |
|
|
TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS EQUITY |
|
$ |
396,779 |
|
|
$ |
376,268 |
|
|
|
|
|
APPROVED BY THE BOARD: |
|
|
|
|
|
|
|
|
J. Weatherall, Director
|
|
K. Thygesen, Director |
The accompanying notes are an integral part of these consolidated financial statements
- 56 -
IVANHOE MINES LTD.
Consolidated Statements of Operations
(Stated in thousands of U.S. dollars, except for share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Exploration |
|
$ |
(127,165 |
) |
|
$ |
(98,174 |
) |
General and administrative |
|
|
(23,825 |
) |
|
|
(22,202 |
) |
Interest |
|
|
(354 |
) |
|
|
(309 |
) |
Depreciation |
|
|
(2,558 |
) |
|
|
(2,027 |
) |
Mining property care and maintenance costs (Note 9 (a)) |
|
|
(3,706 |
) |
|
|
(3,755 |
) |
Write-down of carrying values of property, plant and equipment |
|
|
(609 |
) |
|
|
(142 |
) |
|
OPERATING LOSS |
|
|
(158,217 |
) |
|
|
(126,609 |
) |
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
Share of income from joint venture (Note 4) |
|
|
23,036 |
|
|
|
21,416 |
|
Interest income |
|
|
3,421 |
|
|
|
3,126 |
|
Foreign exchange gains |
|
|
7,751 |
|
|
|
4,631 |
|
Share of loss of significantly influenced investees (Note 8 (a) and (b)) |
|
|
(2,651 |
) |
|
|
(2,315 |
) |
Gain on sale of long-term investments (Note 8 (c) and (e)) |
|
|
115 |
|
|
|
4,523 |
|
Write-down of carrying values of long-term investments (Note 8 (a) and (c)) |
|
|
(1,438 |
) |
|
|
(5,277 |
) |
|
LOSS BEFORE TAXES AND OTHER ITEMS |
|
|
(127,983 |
) |
|
|
(100,505 |
) |
Provision for income and capital taxes (Note 13) |
|
|
(433 |
) |
|
|
(588 |
) |
Minority interests (Note 15) |
|
|
2,714 |
|
|
|
2,103 |
|
|
NET LOSS FROM CONTINUING OPERATIONS |
|
|
(125,702 |
) |
|
|
(98,990 |
) |
NET INCOME AND GAIN ON SALE FROM DISCONTINUED OPERATIONS (Note 3) |
|
|
35,916 |
|
|
|
4,449 |
|
|
NET LOSS |
|
|
(89,786 |
) |
|
|
(94,541 |
) |
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE FROM |
|
|
|
|
|
|
|
|
CONTINUING OPERATIONS |
|
$ |
(0.41 |
) |
|
$ |
(0.35 |
) |
DISCONTINUED OPERATIONS |
|
|
0.12 |
|
|
|
0.01 |
|
|
|
|
$ |
(0.29 |
) |
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES |
|
|
|
|
|
|
|
|
OUTSTANDING (000s) |
|
|
305,160 |
|
|
|
281,640 |
|
|
The accompanying notes are an integral part of these consolidated financial statements
- 57 -
IVANHOE MINES LTD.
Consolidated Statements of Shareholders Equity
(Stated in thousands of U.S. dollars, except for share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Share Capital |
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Special |
|
|
Paid-In |
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Amount |
|
|
Warrants |
|
|
Capital |
|
|
Income |
|
|
Deficit |
|
|
Total |
|
Balances, December 31, 2003 |
|
|
265,440,052 |
|
|
$ |
714,359 |
|
|
$ |
49,975 |
|
|
$ |
10,658 |
|
|
$ |
1,587 |
|
|
$ |
(478,749 |
) |
|
$ |
297,830 |
|
Effect of accounting change (Note 2 (i)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,628 |
) |
|
|
(7,628 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94,541 |
) |
|
|
(94,541 |
) |
Other comprehensive income (Note 17): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,292 |
|
|
|
|
|
|
|
1,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private placements, net of issue costs of $5,765 |
|
|
20,000,000 |
|
|
|
100,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,593 |
|
Exercise of special warrants |
|
|
5,760,000 |
|
|
|
49,975 |
|
|
|
(49,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
1,502,554 |
|
|
|
2,233 |
|
|
|
|
|
|
|
(892 |
) |
|
|
|
|
|
|
|
|
|
|
1,341 |
|
Exercise of share purchase warrants |
|
|
25,000 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244 |
|
Share purchase plan |
|
|
17,019 |
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
Consulting fees |
|
|
126,373 |
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,100 |
|
Stock compensation charged to operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,517 |
|
|
|
|
|
|
|
|
|
|
|
6,517 |
|
|
Balances, December 31, 2004 |
|
|
292,870,998 |
|
|
$ |
868,606 |
|
|
$ |
|
|
|
$ |
16,283 |
|
|
$ |
2,879 |
|
|
$ |
(580,918 |
) |
|
$ |
306,850 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89,786 |
) |
|
|
(89,786 |
) |
Other comprehensive income (Note 17): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,832 |
|
|
|
|
|
|
|
3,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,954 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private placement, net of issue costs of $6,095 |
|
|
19,750,000 |
|
|
|
119,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,801 |
|
Exercise of stock options |
|
|
3,213,172 |
|
|
|
5,555 |
|
|
|
|
|
|
|
(1,835 |
) |
|
|
|
|
|
|
|
|
|
|
3,720 |
|
Property, plant and equipment purchased (Note 19 (b)) |
|
|
50,000 |
|
|
|
362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
362 |
|
Share purchase plan |
|
|
16,498 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
Dilution gain on issuance of shares by a subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,012 |
|
|
|
|
|
|
|
|
|
|
|
3,012 |
|
Stock compensation charged to operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,714 |
|
|
|
|
|
|
|
|
|
|
|
7,714 |
|
|
Balances, December 31, 2005 |
|
|
315,900,668 |
|
|
$ |
994,442 |
|
|
$ |
|
|
|
$ |
25,174 |
|
|
$ |
6,711 |
|
|
$ |
(670,704 |
) |
|
$ |
355,623 |
|
|
The accompanying notes are an integral part of these consolidated financial statements
- 58 -
IVANHOE MINES LTD.
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(125,702 |
) |
|
$ |
(98,990 |
) |
Items not involving use of cash |
|
|
|
|
|
|
|
|
Depreciation |
|
|
2,558 |
|
|
|
2,027 |
|
Stock based compensation |
|
|
7,714 |
|
|
|
6,517 |
|
Accretion expense |
|
|
354 |
|
|
|
286 |
|
Non-cash exploration expense recovery (Note 8 (a)) |
|
|
|
|
|
|
(3,248 |
) |
Unrealized foreign exchange gains |
|
|
(7,691 |
) |
|
|
(5,443 |
) |
Share of income from joint venture, net of cash distribution |
|
|
(13,036 |
) |
|
|
(21,416 |
) |
Share of loss of significantly influenced investees |
|
|
2,651 |
|
|
|
2,315 |
|
Gain on sale of long-term investments (Note 8 (c) and (e)) |
|
|
(115 |
) |
|
|
(4,523 |
) |
Write-down of carrying value of long-term investments (Note 8 (a) and (c)) |
|
|
1,438 |
|
|
|
5,277 |
|
Deferred income taxes |
|
|
(15 |
) |
|
|
246 |
|
Minority interests |
|
|
(2,714 |
) |
|
|
(2,103 |
) |
Write-down of carrying values of property, plant and equipment |
|
|
609 |
|
|
|
142 |
|
Loss on sale of property, plant and equipment |
|
|
|
|
|
|
197 |
|
Net change in non-cash operating working capital items (Note 19 (a)) |
|
|
(1,756 |
) |
|
|
(3,174 |
) |
|
Cash used in operating activities of continuing operations |
|
|
(135,705 |
) |
|
|
(121,890 |
) |
Cash provided by operating activities of discontinued operations |
|
|
2,592 |
|
|
|
3,150 |
|
|
Cash used in operating activities |
|
|
(133,113 |
) |
|
|
(118,740 |
) |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations |
|
|
15,000 |
|
|
|
|
|
Redemption of investments |
|
|
|
|
|
|
50,000 |
|
Purchase of long-term investments |
|
|
(6,310 |
) |
|
|
(3,846 |
) |
Purchase of subsidiary, net of cash acquired of $15,414 |
|
|
12,022 |
|
|
|
|
|
Proceeds from sale of long-term investments |
|
|
4,539 |
|
|
|
2,461 |
|
Proceeds from sale of property, plant and equipment |
|
|
|
|
|
|
2,720 |
|
Expenditures on property, plant and equipment |
|
|
(32,180 |
) |
|
|
(27,846 |
) |
Expenditures on other assets |
|
|
(794 |
) |
|
|
|
|
Other |
|
|
(2,007 |
) |
|
|
(6,226 |
) |
|
Cash (used in) provided by investing activities of continuing operations |
|
|
(9,730 |
) |
|
|
17,263 |
|
Cash used in investing activities of discontinued operations |
|
|
(502 |
) |
|
|
(4,657 |
) |
|
Cash (used in) provided by investing activities |
|
|
(10,232 |
) |
|
|
12,606 |
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Issue of share capital |
|
|
123,639 |
|
|
|
102,280 |
|
Minority interests investment in subsidiary |
|
|
1,104 |
|
|
|
|
|
|
Cash provided by financing activities of continuing operations |
|
|
124,743 |
|
|
|
102,280 |
|
Cash (used in) provided by financing activities of discontinued operations |
|
|
(37 |
) |
|
|
5,431 |
|
|
Cash provided by financing activities |
|
|
124,706 |
|
|
|
107,711 |
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
7,842 |
|
|
|
5,385 |
|
|
|
|
|
|
|
|
|
|
|
NET CASH (OUTFLOW) INFLOW |
|
|
(10,797 |
) |
|
|
6,962 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
112,478 |
|
|
|
105,516 |
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR |
|
$ |
101,681 |
|
|
$ |
112,478 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS IS COMPRISED OF: |
|
|
|
|
|
|
|
|
Cash on hand and demand deposits |
|
$ |
33,240 |
|
|
$ |
33,796 |
|
Short-term money market instruments |
|
|
68,441 |
|
|
|
78,682 |
|
|
|
|
$ |
101,681 |
|
|
$ |
112,478 |
|
|
SUPPLEMENTARY INFORMATION (Note 19 (b) and (c))
The accompanying notes are an integral part of these consolidated financial statements
- 59 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
1. |
|
NATURE OF OPERATIONS |
|
|
|
Ivanhoe Mines Ltd. (the Company), together with its subsidiaries and joint venture
(collectively referred to as Ivanhoe Mines), is an international mineral exploration and
development company holding interests in and conducting operations on mineral resource
properties principally located in Southeast and Central Asia and Australia. |
2. |
|
SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
These consolidated financial statements have been prepared in accordance with United States
of America generally accepted accounting principles (U.S. GAAP). In the case of the
Company, U.S. GAAP differs in certain respects from accounting principles generally accepted
in the Canada (Canadian GAAP) as explained in Note 23. The significant accounting policies
used in these consolidated financial statements are as follows: |
|
(a) |
|
Principles of consolidation |
|
|
|
|
These consolidated financial statements include the accounts of the Company and all of
its subsidiaries. The principal subsidiaries of the Company are Ivanhoe Mines Mongolia
Inc. (B.V.I.), Ivanhoe Mines China (B.V.I.), Ivanhoe Cloncurry Mines Pty Ltd
(Australia), and their respective subsidiaries, and Bakyrchik Mining Venture
(Kazakhstan) (70% owned) (BMV). |
|
|
|
|
Jinshan Gold Mines Inc. (B.C., Canada) (Jinshan) became a subsidiary of the Company
in December 2005 (53% owned). Prior to this the investment in Jinshan was accounted
for using the equity method. |
|
|
|
|
Ivanhoe Mines investment in Asia Gold Corp. (Asia Gold) (B.C., Canada) (47% owned)
remains consolidated at December 2005 due to Ivanhoe Mines having control over the
operating, financing and strategic decisions of Asia Gold. |
|
|
|
|
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. |
|
|
|
|
All intercompany transactions and balances have been eliminated, where appropriate. |
|
|
|
|
Variable Interest Entities (VIEs), which include, but are not limited to, special
purpose entities, trusts, partnerships, and other legal structures, as defined by
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised 2003)
(FIN 46R) Consolidation of Variable Interest Entities an Interpretation of ARB No.
51, are entities in which equity investors do not have the characteristics of a
controlling financial interest or there is not sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support.
VIEs are subject to consolidation by the primary beneficiary who will absorb the
majority of the entities expected losses and/or expected residual returns. |
- 60 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(b) |
|
Measurement uncertainties |
|
|
|
|
Generally accepted accounting principles require management to make assumptions and
estimates that affect the reported amounts and other disclosures in these consolidated
financial statements. Actual results may differ from those estimates. |
|
|
|
|
Significant estimates used in the preparation of these consolidated financial
statements include, among other things, the recoverability of accounts receivable and
investments, the proven and probable ore reserves, the estimated recoverable tonnes of
ore from each mine area, the estimated net realizable value of inventories, the
provision for income taxes and composition of deferred income tax assets and deferred
income tax liabilities, the expected economic lives of and the estimated future
operating results and net cash flows from property, plant and equipment, and the
anticipated costs and timing of asset retirement obligations. |
|
(c) |
|
Foreign currencies |
|
|
|
|
The Company considers the U.S. dollar to be its functional currency as it is the
currency of the primary economic environment in which the Company and its subsidiaries
operate. Accordingly, monetary assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the exchange rate in effect at the
balance sheet date and non-monetary assets and liabilities are translated at the
exchange rates in effect at the time of acquisition or issue. Revenues and expenses are
translated at rates approximating the exchange rates in effect at the time of the
transactions. All exchange gains and losses are included in operations. |
|
(d) |
|
Cash and cash equivalents |
|
|
|
|
Cash and cash equivalents include short-term money market instruments with terms to
maturity, at the date of acquisition, not exceeding 90 days. |
|
(e) |
|
Inventories |
|
|
|
|
Mine stores and supplies are valued at the lower of the weighted average cost, less
allowances for obsolescence, and replacement cost. |
- 61 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(f) |
|
Long-term investments |
|
|
|
|
Long-term investments in companies in which Ivanhoe Mines has voting interests of 20%
to 50%, or where Ivanhoe Mines has the ability to exercise significant influence, are
accounted for using the equity method. Under this method, Ivanhoe Mines share of the
investees earnings and losses is included in operations and its investments therein
are adjusted by a like amount. Dividends received are credited to the investment
accounts. |
|
|
|
|
The other long-term investments are classified as available-for-sale investments.
Unrealized gains and losses on these investments are recorded in accumulated other
comprehensive income as a separate component of shareholders equity, unless the
declines in market value are judged to be other than temporary, in which case the
losses are recognized in income in the period. Realized gains and losses from the sale
of these investments are included in income in the period. |
|
(g) |
|
Exploration and development |
|
|
|
|
All direct costs related to the acquisition of mineral property interests are
capitalized in the period incurred. |
|
|
|
|
Exploration costs are charged to operations in the period incurred until such time as
it has been determined that a property has economically recoverable reserves, in which
case subsequent exploration costs and the costs incurred to develop a property are
capitalized. Exploration costs include value-added taxes incurred in foreign
jurisdictions when recoverability of those taxes is uncertain. |
- 62 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(h) |
|
Property, plant and equipment |
|
|
|
|
Property, plant and equipment are carried at cost (including development and
preproduction costs, capitalized interest, other financing costs and all direct
administrative support costs incurred during the construction period, net of cost
recoveries and incidental revenues), less accumulated depletion and depreciation
including write-downs. Following the construction period, interest, other financing
costs and administrative costs are expensed as incurred. |
|
|
|
|
On the commencement of commercial production, depletion of each mining property is
provided on the unit-of-production basis, using estimated proven and probable reserves
as the depletion basis. |
|
|
|
|
Property, plant and equipment are depreciated, following the commencement of
commercial production, over their expected economic lives using either the
unit-of-production method or the straight-line method (over one to twenty years). |
|
|
|
|
Capital works in progress are not depreciated until the capital asset has been
put into operation. |
|
|
|
|
Ivanhoe Mines reviews the carrying values of its property, plant and equipment
whenever events or changes in circumstances indicate that their carrying values may
not be recoverable. An impairment is considered to exist if total estimated future
cash flows, or probability-weighted cash flows on an undiscounted basis, are less than
the carrying value of the assets. An impairment loss is measured and recorded based
on discounted estimated future cash flows associated with values beyond proven and
probable reserves and resources. In estimating future cash flows, assets are grouped
at the lowest level for which there is identifiable future cash flows that are largely
independent of cash flows from other asset groups. Generally, in estimating future
cash flows, all assets are grouped at a particular mine for which there is
identifiable cash flows. |
- 63 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(i) |
|
Stripping costs |
|
|
|
|
On March 30, 2005, the FASB ratified the consensus of the Emerging Issues Task Force
(EITF) Issue 04-6 that stripping costs incurred during the production phase of a mine
are variable production costs that should be included in the costs of the inventory
produced during the period that the stripping costs are incurred. Commencing in the
first quarter of 2005, Ivanhoe Mines changed its accounting policy with respect to
stripping costs to comply with the consensus reached by the EITF. This change has been
applied retrospectively by restating prior period financial statements. In 2004 and
prior years, Ivanhoe Mines deferred or accrued stripping costs incurred during
production, as appropriate, and charged these costs to operations on the basis of the
estimated average stripping ratio for each mine area. The effect of this change was to
increase the deficit at January 1, 2004 by $7,628,000, to increase the net loss for the
year ended December 31, 2004 by $7,889,000 ($0.03 per share) and to decrease assets of
discontinued operations and investment in joint venture at December 31, 2004 by
$13,973,000 and $1,544,000, respectively. The impact on the year ended December 31,
2005 was to decrease the net loss for the year by $186,000 ($0.00 per share) and to
increase assets of discontinued operations and decrease investment in joint venture at
December 31, 2005 by $887,000 and $701,000, respectively. |
|
(j) |
|
Asset retirement obligations |
|
|
|
|
Ivanhoe Mines recognizes liabilities for statutory, contractual or legal obligations
associated with the retirement of property, plant and equipment, when those obligations
result from the acquisition, construction, development or normal operation of the
assets. Initially, a liability for an asset retirement obligation is recognized at its
fair value in the period in which it is incurred. Upon initial recognition of the
liability, the corresponding asset retirement cost is added to the carrying amount of
that asset and the cost is amortized as an expense over the economic life of the
related asset. Following the initial recognition of the asset retirement obligation,
the carrying amount of the liability is increased for the passage of time and adjusted
for changes to the amount or timing of the underlying cash flows needed to settle the
obligation. |
|
(k) |
|
Revenue recognition |
|
|
|
|
Revenue at JVCo from the sale of metals is recognized, net of related royalties and
sales commissions, when: (i) persuasive evidence of an arrangement exists; (ii) the
risks and rewards of ownership pass to the purchaser including delivery of the product;
(iii) the selling price is fixed or determinable; and (iv) collectibility is
reasonably assured. Revenue from copper cathode includes provisional pricing
arrangements accounted for as embedded derivative instruments under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. |
- 64 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(l) |
|
Stock-based compensation |
|
|
|
|
The Company has an Employees and Directors Equity Incentive Plan which is disclosed
in Note 16. The Company records compensation expense using the fair value based method
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation.
Accordingly, the fair value of stock options at the date of grant is amortized to
operations, with an offsetting credit to additional paid-in capital, on a straight-line
basis over the vesting period. If and when the stock options are ultimately exercised,
the applicable amounts of additional paid-in capital are transferred to share capital. |
|
(m) |
|
Deferred income taxes |
|
|
|
|
The Company computes income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. SFAS 109 requires that the provision for deferred income taxes be based
on the liability method. Deferred taxes arise from the recognition of the tax
consequences of temporary differences by applying statutory tax rates applicable to
future years to differences between the financial statements carrying amounts and the
tax bases of certain assets and liabilities. The Company records a valuation allowance
against any portion of those deferred income tax assets that management believes will,
more likely than not, fail to be realized. |
|
(n) |
|
Loss per share |
|
|
|
|
The Company follows SFAS No. 128, Earnings Per Share, which requires the presentation
of basic and diluted earnings per share. The basic loss per share is computed by
dividing the net loss attributable to common stock by the weighted average number of
common shares and Special Warrants outstanding during the year. All stock options and
share purchase warrants outstanding at each period end have been excluded from the
weighted average share calculation. The effect of potentially dilutive stock options
and share purchase warrants was antidilutive in years ending December 31, 2005 and
2004. |
|
|
|
|
Details of potentially dilutive shares excluded from the loss per share calculation due
to antidilution: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Options |
|
|
7,416,700 |
|
|
|
9,890,942 |
|
Share purchase warrants |
|
|
576,000 |
|
|
|
7,701,000 |
|
|
Total potentially dilutive shares |
|
|
7,992,700 |
|
|
|
17,591,942 |
|
|
- 65 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(o) |
|
Comparative figures |
|
|
|
|
Certain of the comparative figures have been reclassified to conform with the
presentation as at and for the year ended December 31, 2005. In particular, the assets
and liabilities of ABM Mining Limited (ABM) (owner of the Savage River Project) as at
December 31, 2004, and its results of operations and cash flows for the year then ended
(Note 3), have been classified as discontinued operations. Accounting for stripping
costs has also been retrospectively adjusted (Note 2 (i)). |
|
(p) |
|
Recent accounting pronouncements |
|
|
|
|
Recently issued United States accounting pronouncements have been outlined below.
Ivanhoe Mines believes the new standards issued by the U.S. FASB will not have a
material impact on the Company. |
|
|
|
|
In March 2005, the Emerging Issues Committee issued EITF 04-3, Mining Assets
Impairment and Business Combinations, which states that an entity should include Value
Beyond Proven and Probable Reserves and Resources (VBPP) in the value allocated to
mining assets in a purchase price allocation to the extent that a market participant
would include VBPP in determining the fair value of the asset. EITF 04-3 also states
that an entity should include the effects of anticipated fluctuations in the future
market price of minerals in determining the fair value of mining assets in a purchase
price allocation in a manner that is consistent with the expectations of marketplace
participants. In addition, EITF 04-3 states that an entity should include the cash
flows associated with VBPP as well as the effects of anticipated fluctuations in the
market price of minerals in estimates of future cash flows (both undiscounted and
discounted) used for determining whether a mining asset is impaired. The Companys
current accounting policy complies with EITF 04-3. |
|
|
|
|
In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. This FSP addresses the determination as to when an investment is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. This FSP also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in this FSP FAS 115-1 and FAS 124-1 is
applicable to reporting periods beginning after December 15, 2005. Management does not
expect the adoption of this FSP to have a material effect on the Companys consolidated
financial position and results of operations. |
- 66 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(p) |
|
Recent accounting pronouncements (Continued) |
|
|
|
|
In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment, which replaces
SFAS No. 123, Accounting for Stock-Based Compensation. In March 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 107 Share-Based Payment,
which provides interpretive guidance related to SFAS No. 123 (R). SFAS No. 123 (R)
requires compensation costs related to share-based payment transactions to be recognized
in the financial statements. With limited exceptions, the amount of compensation cost is
measured based on the grant-date fair value of the equity or liability instruments
issued. SFAS No. 123 (R) requires liability awards to be re-measured each reporting
period and compensation costs to be recognized over the period that an employee provides
service in exchange for the award. Management plans to adopt this statement on the
modified prospective basis beginning January 1, 2006, and does not expect adoption of
this statement to have a material effect on the Companys consolidated financial position
and results of operations. |
|
|
|
|
In October 2005, the FASB issued FASB Staff Position SFAS No. 123 (R)-2, Practical
Accommodation to the Application of Grant Date as Defined in SFAS No. 123 (R). FSP 123
(R)-2 provides guidance on the application of grant date as defined in SFAS No. 123 (R).
In accordance with this standard a grant date of an award exists if (i) the award is a
unilateral grant and (ii) the key terms and conditions of the award are expected to be
communicated to an individual recipient within a relatively short time period from the
date of approval. The Company will adopt this standard when it adopts SFAS No. 123 (R),
and does not anticipate that the implementation of this statement will have a significant
impact on its results of operations. |
|
|
|
|
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion 20 and FASB Statement 3. This Statement changes the
requirements for the accounting for and reporting of a change in accounting principle and
applies to all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. The Statement is effective for
accounting changes made in fiscal years beginning after December 15, 2005. Management
does not expect the adoption of this Statement to have a material effect on the Companys
consolidated financial position and results of operations. |
- 67 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(p) |
|
Recent accounting pronouncements (Continued) |
|
|
|
|
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an
amendment of APB Opinion 29. This Statement amends Opinion 29 to eliminate the exception
for non-monetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The Statement is effective
for fiscal periods beginning after June 15, 2005. Management does not expect the adoption
of this Statement to have a material effect on the Companys consolidated financial
position and results of operations. |
|
|
|
|
In November 2005, the FASB concluded that in their proposed Accounting for Uncertain Tax
Positions an Interpretation of FASB Statement No. 109, a benefit recognition model
with a two-step approach would be used, with a more-likely-than-not recognition criterion
and a best estimate measure attribute. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is
more-likely-than-not, based solely on the technical merits, that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the appropriate amount of the benefit to recognize,
which will be measured using the best estimate of the amount that will be sustained. The
tax position should be derecognized when it is no longer more-likely-than-not of being
sustained. In January 2006, the FASB concluded that the final Interpretation will be
effective as of the beginning of the first annual period beginning after December 31,
2006. The Company is currently evaluating the implications of this Interpretation. |
|
|
|
|
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements No. 133 and 140. This Statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement
133 to Beneficial Interests in Securitized Financial Assets. This Statement: |
Permits fair value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation;
Clarifies which interest-only strips and principal-only strips are not subject to the
requirements of Statement 133;
Establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation;
Clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives; and
Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
- 68 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(p) |
|
Recent accounting pronouncements (Continued) |
|
|
|
|
This Statement is effective for all financial instruments acquired or issued after the
beginning of fiscal years that begin after September 15, 2006. The Company is currently
evaluating the implications of this Statement. |
3. |
|
DISCONTINUED OPERATIONS |
|
|
|
In November 2004, the Company adopted a plan to dispose of the Savage River Iron Ore Project
(the Project). This decision was part of the Companys plan to rationalize its non-core
assets as it focuses on the Oyu Tolgoi project in Mongolia. In February 2005, Ivanhoe Mines
sold the Project for two initial payments totalling $21.5 million, plus a series of
contingent, annual payments based on annual iron ore pellet tonnes sold and an escalating
price formula based on the prevailing annual Nibrasco/JSM pellet price. |
|
|
|
Ivanhoe Mines received the first initial payment of $15.0 million on February 28, 2005. The
second payment of $6.5 million plus an additional $0.2 million in interest was received on
January 31, 2006. |
|
|
|
The future payments will be received over five years commencing March 2006. These payments
will be calculated at an initial rate of $1.00 per tonne of iron ore pellets sold if the
annual benchmark pellet price exceeds $30 per tonne, and will escalate to a maximum of $16.50
per tonne of iron ore pellets sold if the annual price exceeds $80 per tonne. Based on the
tonnes of iron ore sold during the nine months ended December 31, 2005, and the escalating
price formula, an amount of $20.2 million has been accrued as receivable. |
|
|
|
At February 28, 2005, the net book value of the Project was $11.2 million. Therefore, the
total income recognized in 2005 reduced the net book value to $nil and resulted in the excess
of $30.5 million being included in operations during the year. |
|
|
|
At December 31, 2005, Ivanhoe Mines had a total of $26.9 million included in accounts
receivable related to the disposition of the Project. The amount was comprised of the second
initial payment and related interest of $6.7 million and the contingent income accrual of
$20.2 million. |
- 69 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
3. |
|
DISCONTINUED OPERATIONS (Continued) |
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
7,432 |
|
Accounts receivable |
|
|
|
|
|
|
3,985 |
|
Inventories |
|
|
|
|
|
|
21,295 |
|
Prepaid expenses |
|
|
|
|
|
|
882 |
|
Other current assets |
|
|
|
|
|
|
3,042 |
|
|
Current assets of discontinued operations |
|
|
|
|
|
|
36,636 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
5,889 |
|
Other assets |
|
|
|
|
|
|
3,738 |
|
|
Non-current assets of discontinued operations |
|
|
|
|
|
|
9,627 |
|
|
Total assets of discontinued operations |
|
$ |
|
|
|
$ |
46,263 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
|
|
|
$ |
13,870 |
|
Current portion of long-term debt |
|
|
|
|
|
|
212 |
|
|
Current liabilities of discontinued operations |
|
|
|
|
|
|
14,082 |
|
|
|
|
|
|
|
|
|
|
Long-term debt (non-recourse to the Company) |
|
|
|
|
|
|
13,025 |
|
Deferred income taxes |
|
|
|
|
|
|
2,078 |
|
Other liabilities |
|
|
|
|
|
|
11,277 |
|
|
Non-current liabilities of discontinued operations |
|
|
|
|
|
|
26,380 |
|
|
Total liabilities of discontinued operations |
|
$ |
|
|
|
$ |
40,462 |
|
|
- 70 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
3. |
|
DISCONTINUED OPERATIONS (Continued) |
|
|
|
The following table presents summarized financial information related to discontinued
operations: |
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005(1) |
|
|
2004 |
|
REVENUE |
|
$ |
18,031 |
|
|
$ |
83,898 |
|
COST OF OPERATIONS |
|
|
(11,965 |
) |
|
|
(78,778 |
) |
DEPRECIATION AND DEPLETION |
|
|
|
|
|
|
(1,395 |
) |
|
OPERATING PROFIT |
|
|
6,066 |
|
|
|
3,725 |
|
EXPENSES |
|
|
|
|
|
|
|
|
General and administrative |
|
|
(195 |
) |
|
|
(1,425 |
) |
Interest expense |
|
|
(203 |
) |
|
|
(1,021 |
) |
|
INCOME BEFORE THE FOLLOWING |
|
|
5,668 |
|
|
|
1,279 |
|
Interest income |
|
|
16 |
|
|
|
308 |
|
Foreign exchange (losses) gains |
|
|
(285 |
) |
|
|
3,745 |
|
|
INCOME BEFORE INCOME TAXES |
|
|
5,399 |
|
|
|
5,332 |
|
Recovery of (provision for) income and capital taxes |
|
|
7 |
|
|
|
(883 |
) |
|
NET INCOME |
|
|
5,406 |
|
|
|
4,449 |
|
Contingent income |
|
|
20,243 |
|
|
|
|
|
Gain on sale of ABM |
|
|
10,267 |
|
|
|
|
|
|
NET INCOME AND GAIN ON SALE
FROM DISCONTINUED OPERATIONS |
|
$ |
35,916 |
|
|
$ |
4,449 |
|
|
|
|
|
(1) |
|
Net income for the year ended December 31, 2005, includes only two months of results for the
Project as it was sold on February 28, 2005. |
- 71 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
4. |
|
INVESTMENT IN JOINT VENTURE |
|
|
|
Ivanhoe Mines has a 50% interest in JVCo, a joint venture formed to develop open-pit copper
mining operations at Monywa in the Union of Myanmar. JVCo completed construction of a
mining complex in 1998 to develop the Sabetaung and Kyisintaung (S&K) deposits within the
Monywa Copper Project. Commercial production from those deposits commenced during the first
quarter of 1999. |
|
|
|
In early 2005, the Company announced its intention to expand, in a series of incremental
steps, the mines production capacity to a target of 200,000 tonnes per annum. At that
time, mining equipment was ordered to increase the annual copper cathode capacity to 50,000
tonnes per annum by mid-2006 as part of the expansion program. |
|
|
|
In the fourth quarter of 2005 and the first quarter of 2006, several circumstances occurred
that may potentially have a negative impact on the operations of the mine for 2006 and
future years. |
|
|
|
Firstly, the economic sanctions imposed against Myanmar by the United States have started to
seriously impact the mines ability to function in a normal way. In the fourth quarter of
2005, both the mines insurance broker and the off-shore banking institution terminated
their relationship with the mine on account of these sanctions. Although the mine had in
excess of $40 million in off-shore bank accounts at December 31, 2005, the operations of the
mine were shut-down in March 2006. The mine is expected to resume operations shortly when
additional fuel, required to operate mining equipment, and chemicals required for the
leaching and electrowinning process, become available. The management of the S&K Mine has
established a new banking relationship with an off-shore institution. |
|
|
|
Secondly, the mine has not yet been able to obtain from the Myanmar authorities the
necessary import permits for its previously ordered mining equipment. The equipment is
currently off-shore, awaiting approval for delivery. The Company does not know if or when
import permits will be granted for the importation of this equipment. The Company has
received recent oral assurances from its joint venture partner that the necessary
documentation is nearing finalization. The increase in mining capacity is crucial to allow
waste stripping for the Sabetaung deposit and ultimately for the future development of the
Kysingtaung and Letpadaung deposits. Without a substantial increase in mining capacity,
these two deposits cannot be economically developed. The drop in copper grades at the
Sabetaung pit, combined with the mines potential inability to obtain the necessary
importing permits resulted in significant decreases in copper cathode production in the
fourth quarter of 2005. |
- 72 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
4. |
|
INVESTMENT IN JOINT VENTURE (CONTINUED) |
|
|
|
Thirdly, in the third quarter of 2005, the Company reported its difference of opinion with
certain Myanmar tax authorities on a commercial tax issue involving the imposition of an 8%
commercial tax on all export sales of JVCo. In the fourth quarter of 2005, Ivanhoe Mines was
unable to satisfactorily resolve this issue. The Companys management 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 nature. The imposition of such a commercial tax, equivalent to
an additional 8% royalty, would have a significant negative impact on future cash flows and
any future development plans for the S&K Mine. The commercial tax is being claimed
retroactively to January 1, 2003, on all export copper sales. If the Myanmar governments
position on this issue prevails, the joint ventures estimated commercial tax liability at
December 31, 2005 would total approximately $22.4 million (net $11.2 million to the Company).
The Company is seeking a written legal opinion from the Attorney General of Myanmar on the
applicability of this tax and the Company has received certain assurances that the ruling may
be favorable. |
|
|
|
The Company is also concerned about the timely approvals for the expansion of the Letpadaung
deposit. To date, the expansion of the deposit has been neither approved nor denied by the
Government of Myanmar. |
|
|
|
The Company reviews the carrying value of its assets whenever events or changes in
circumstances indicate that the carrying value of an asset might have been impaired. The
Company intends to engage in discussions with its joint venture partner and with the relevant
Myanmar government authorities with a view to satisfactorily resolving these issues. If
these issues cannot be satisfactorily resolved in a timely manner, the Company may, as part
of a future review of the carrying value of its assets, be required to reflect a significant
impairment of, and reduce on its financial statements, the carrying value of its investment
in the S&K Mine. |
|
|
|
The following table summarizes Ivanhoe Mines investment in JVCo: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Balance, at beginning of year |
|
$ |
126,911 |
|
|
$ |
105,425 |
|
Share of income from JVCo |
|
|
23,036 |
|
|
|
21,416 |
|
Cash distribution |
|
|
(10,000 |
) |
|
|
|
|
Other |
|
|
(73 |
) |
|
|
70 |
|
|
Balance, at end of year |
|
$ |
139,874 |
|
|
$ |
126,911 |
|
|
- 73 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
4. |
|
INVESTMENT IN JOINT VENTURE (CONTINUED) |
|
|
|
The following tables summarize Ivanhoe Mines 50% share of the financial position and results
of operations of JVCo for the years ending December 31, 2005 and 2004. |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Cash and cash equivalents |
|
$ |
22,843 |
|
|
$ |
10,099 |
|
Accounts receivable |
|
|
11,364 |
|
|
|
3,734 |
|
Inventories |
|
|
16,754 |
|
|
|
13,313 |
|
Prepaid expenses |
|
|
1,558 |
|
|
|
1,800 |
|
Other current assets |
|
|
|
|
|
|
117 |
|
Property, plant and equipment |
|
|
128,405 |
|
|
|
130,869 |
|
Deferred income tax assets |
|
|
432 |
|
|
|
464 |
|
Other assets |
|
|
1,585 |
|
|
|
1,569 |
|
Accounts payable and accrued liabilities |
|
|
(14,784 |
) |
|
|
(10,349 |
) |
Current portion of long-term debt |
|
|
|
|
|
|
(7,500 |
) |
Deferred income tax liabilities |
|
|
(11,321 |
) |
|
|
(11,429 |
) |
Other liabilities |
|
|
(16,962 |
) |
|
|
(5,776 |
) |
|
Share of Net Assets of JVCo |
|
$ |
139,874 |
|
|
$ |
126,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Revenue |
|
$ |
65,801 |
|
|
$ |
44,091 |
|
Cost of operations |
|
|
(17,768 |
) |
|
|
(12,137 |
) |
Depreciation and depletion |
|
|
(5,657 |
) |
|
|
(5,177 |
) |
|
Operating profit |
|
|
42,376 |
|
|
|
26,777 |
|
Other income / (expense) |
|
|
(19,340 |
) |
|
|
(5,361 |
) |
|
Share of Income of JVCo |
|
$ |
23,036 |
|
|
$ |
21,416 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows |
|
|
|
|
|
|
|
|
From operating activities |
|
$ |
24,805 |
|
|
$ |
25,207 |
|
For investing activities |
|
|
(4,561 |
) |
|
|
(9,086 |
) |
For financing activities |
|
|
(7,500 |
) |
|
|
(7,500 |
) |
|
|
|
$ |
12,744 |
|
|
$ |
8,621 |
|
|
- 74 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
5. |
|
CASH AND CASH EQUIVALENTS |
|
|
|
Cash and cash equivalents at December 31, 2005, included Asia Golds and Jinshans cash and
cash equivalent balances of $3.1 million and $15.4 million, respectively (2004 $8.2
million and $nil), which were not available for Ivanhoe Mines general corporate purposes. |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Contingent income (Note 3) |
|
$ |
20,243 |
|
|
$ |
|
|
Proceeds from sale of Project (Note 3) |
|
|
6,500 |
|
|
|
|
|
Refundable taxes |
|
|
4,423 |
|
|
|
4,576 |
|
Related parties (Note 18 (b)) |
|
|
451 |
|
|
|
414 |
|
Accrued interest |
|
|
340 |
|
|
|
134 |
|
Other |
|
|
1,393 |
|
|
|
1,428 |
|
|
|
|
$ |
33,350 |
|
|
$ |
6,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Loan receivable |
|
$ |
3,000 |
|
|
$ |
3,000 |
|
Restricted cash |
|
|
286 |
|
|
|
|
|
|
|
|
$ |
3,286 |
|
|
$ |
3,000 |
|
|
|
|
In December 2004, Ivanhoe Mines loaned Lepanto Consolidated Mining Company (Lepanto) $3.0
million, which bore interest at 3.0% per annum. In December 2005, Ivanhoe Mines and Lepanto
renegotiated the terms of the loan. The loan now matures in 2006 and bears interest at 6.0%
per annum. During 2005, Ivanhoe Mines received $0.1 million in interest income from
Lepanto. |
|
|
|
In March 2006, Ivanhoe Mines received a loan and interest repayment of $1.04 million from
Lepanto. |
- 75 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
December 31, 2004 |
|
|
Equity |
|
Cost/Equity |
|
Unrealized |
|
Fair/Equity |
|
Equity |
|
Cost/Equity |
|
Unrealized |
|
Fair/Equity |
|
|
Interest |
|
Basis |
|
Gain |
|
Value |
|
Interest |
|
Basis |
|
Gain |
|
Value |
Investment in companies subject
to significant influence: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinshan Gold Mines Inc.(a) |
|
|
N/a |
|
|
|
N/a |
|
|
|
N/a |
|
|
|
N/a |
|
|
|
38.5 |
% |
|
$ |
5,024 |
|
|
|
N/a |
|
|
$ |
5,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intec Ltd.(b) |
|
|
12.5 |
% |
|
$ |
1,446 |
|
|
$ |
1,331 |
|
|
$ |
2,777 |
|
|
|
12.8 |
% |
|
$ |
1,446 |
|
|
$ |
1,469 |
|
|
$ |
2,915 |
|
Olympus Pacific Minerals Inc.(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.6 |
% |
|
|
5,862 |
|
|
|
(293 |
) |
|
|
5,569 |
|
Entrée Gold Inc.(d) |
|
|
15.0 |
% |
|
|
10,157 |
|
|
|
5,380 |
|
|
|
15,537 |
|
|
|
9.0 |
% |
|
|
3,846 |
|
|
|
1,703 |
|
|
|
5,549 |
|
Other |
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
$ |
11,706 |
|
|
$ |
6,711 |
|
|
$ |
18,417 |
|
|
|
|
|
|
$ |
11,257 |
|
|
$ |
2,879 |
|
|
$ |
14,136 |
|
|
|
|
|
|
|
|
$ |
11,706 |
|
|
$ |
6,711 |
|
|
$ |
18,417 |
|
|
|
|
|
|
$ |
16,281 |
|
|
$ |
2,879 |
|
|
$ |
19,160 |
|
|
|
(a) |
|
In 2004, Ivanhoe Mines and Jinshan restructured their participating arrangements in
respect of certain joint ventures. In consideration for the transaction, Jinshan
issued to Ivanhoe Mines 2.5 million common shares with a fair value of $3,248,000.
This amount was included in operations as a recovery of prior exploration expenses. |
|
|
|
|
In November 2005, Ivanhoe Mines and Jinshan further restructured these participating
arrangements to simplify Jinshans corporate structure. Ivanhoe Mines transferred
to Jinshan its entire participating interest in the 217 Gold Project, its interests
in other joint venture arrangements between the parties, its existing contractual
rights to participate in Jinshan projects in China and cash proceeds of $3,392,000
in exchange for Jinshan issuing Ivanhoe Mines 48,552,948 of its common shares. As a
result of this transaction, in December 2005, Ivanhoe Mines ceased equity accounting
for its investment in Jinshan as it now holds approximately 53% of the issued and
outstanding common shares of Jinshan, thereby making Jinshan a controlled
subsidiary, requiring consolidation. |
|
|
|
|
During 2005 and up to the date that it acquired control, Ivanhoe Mines recorded a
$2,651,000 (2004 $1,974,000) equity loss on this investment. In 2004, Ivanhoe
Mines recorded an impairment provision of $5,277,000 based on an assessment of the
underlying book value of Jinshans net assets. |
|
(b) |
|
In the fourth quarter of 2004, Ivanhoe Mines interest in Intec Ltd. (Intec)
was decreased to 12.8% as a result of the issuance of additional shares by Intec. As a
result, Ivanhoe Mines ceased equity accounting for its investment in Intec. During
2004, Ivanhoe Mines recorded a $341,000 equity loss on this investment. |
- 76 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
8. |
|
LONG-TERM INVESTMENTS (Continued) |
|
(c) |
|
During 2004, the Company sold its 32.6% interest in New Vietnam Mining Corp.
(B.V.I.) (NVM) in exchange for shares of Olympus Pacific Minerals Inc. (Olympus),
representing a 10.7% equity interest, with a fair value of $3,275,000. The interest
in NVM had been fully written down in prior years, thereby resulting in a pre-tax gain
of $3,275,000 being recognized in operations. |
|
|
|
|
In March 2005, the share price of Olympus deteriorated, with the result that the
market value of Ivanhoe Mines investment in Olympus decreased significantly below
carrying value. Accordingly, the Company recorded an other-than-temporary impairment
of $1,438,000, reducing the carrying value of this investment to $4,424,000. |
|
|
|
|
In May 2005, Ivanhoe Mines sold its investment in Olympus, generating proceeds of
$4,539,000. This transaction resulted in a gain on sale of $115,000 being recognized
in operations. |
|
(d) |
|
During 2004, the Company purchased 4.6 million units of Entrée Gold Inc.
(Entrée) at a cost of $3,846,000 (Cdn$4,600,000). Each unit consisted of one Entrée
common share and one share purchase warrant exercisable until October 2006 to purchase
an additional Entrée common share at a price of Cdn$1.10. In 2005, the Company
exercised these share purchase warrants to acquire 4.6 million common shares of Entrée
at a cost of $4,111,000 (Cdn$5,060,000). |
|
|
|
|
Also during 2005, the Company acquired 1.2 million units in Entrée at a cost of
$2,199,000 (Cdn$2,718,000). Each unit consisted of one Entrée common share and two
share purchase warrants. These share purchase warrants are outstanding at December
31, 2005, and if not exercised will expire in July 2007. |
|
(e) |
|
During 2004, the Company sold its investment in Resource Investment Trust,
generating proceeds of $2,461,000. This transaction resulted in a pre-tax gain of
$1,248,000 being recognized in operations. |
- 77 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
9. |
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
Depletion and |
|
|
|
|
|
|
|
|
|
Depletion and |
|
|
|
|
|
|
|
|
Depreciation, |
|
|
|
|
|
|
|
|
|
Depreciation, |
|
|
|
|
|
|
|
|
Including |
|
Net Book |
|
|
|
|
|
Including |
|
Net Book |
|
|
Cost |
|
Write-downs |
|
Value |
|
Cost |
|
Write-downs |
|
Value |
Mining properties
Bakyrchik Mining Venture,
Kazakhstan (a) |
|
$ |
87,541 |
|
|
$ |
(87,541 |
) |
|
$ |
|
|
|
$ |
87,541 |
|
|
$ |
(87,541 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining plant and equipment
Bakyrchik Mining Venture,
Kazakhstan (a) |
|
$ |
3,107 |
|
|
$ |
(3,107 |
) |
|
$ |
|
|
|
$ |
3,107 |
|
|
$ |
(3,107 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other mineral property interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oyu Tolgoi, Mongolia (b) |
|
$ |
43,562 |
|
|
$ |
(6,244 |
) |
|
$ |
37,318 |
|
|
$ |
43,097 |
|
|
$ |
(6,185 |
) |
|
$ |
36,912 |
|
Cloncurry, Australia (c) |
|
|
6,293 |
|
|
|
(1,185 |
) |
|
|
5,108 |
|
|
|
6,293 |
|
|
|
(696 |
) |
|
|
5,597 |
|
Other exploration projects |
|
|
1,530 |
|
|
|
(115 |
) |
|
|
1,415 |
|
|
|
1,594 |
|
|
|
(308 |
) |
|
|
1,286 |
|
|
|
|
$ |
51,385 |
|
|
$ |
(7,544 |
) |
|
$ |
43,841 |
|
|
$ |
50,984 |
|
|
$ |
(7,189 |
) |
|
$ |
43,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other capital assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oyu Tolgoi, Mongolia (b) |
|
$ |
14,334 |
|
|
$ |
(3,326 |
) |
|
$ |
11,008 |
|
|
$ |
6,121 |
|
|
$ |
(1,701 |
) |
|
$ |
4,420 |
|
Cloncurry, Australia (c) |
|
|
1,833 |
|
|
|
(174 |
) |
|
|
1,659 |
|
|
|
2,399 |
|
|
|
(143 |
) |
|
|
2,256 |
|
Other exploration projects |
|
|
2,961 |
|
|
|
(1,122 |
) |
|
|
1,839 |
|
|
|
1,385 |
|
|
|
(936 |
) |
|
|
449 |
|
|
|
|
$ |
19,128 |
|
|
$ |
(4,622 |
) |
|
$ |
14,506 |
|
|
$ |
9,905 |
|
|
$ |
(2,780 |
) |
|
$ |
7,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital works in progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oyu Tolgoi, Mongolia (b) |
|
$ |
22,939 |
|
|
$ |
|
|
|
$ |
22,939 |
|
|
$ |
1,784 |
|
|
$ |
|
|
|
$ |
1,784 |
|
Bakyrchik Mining Venture,
Kazakhstan (a) |
|
|
4,420 |
|
|
|
|
|
|
|
4,420 |
|
|
|
1,730 |
|
|
|
|
|
|
|
1,730 |
|
|
|
|
$ |
27,359 |
|
|
$ |
|
|
|
$ |
27,359 |
|
|
$ |
3,514 |
|
|
$ |
|
|
|
$ |
3,514 |
|
|
|
|
$ |
188,520 |
|
|
$ |
(102,814 |
) |
|
$ |
85,706 |
|
|
$ |
155,051 |
|
|
$ |
(100,617 |
) |
|
$ |
54,434 |
|
|
|
(a) |
|
Ivanhoe Mines placed the Bakyrchik Mining Venture on a care and maintenance
basis in prior years. |
|
|
(b) |
|
Ivanhoe Mines has a 100% interest in the Oyu Tolgoi copper-gold project located
in Mongolia. In 2003, Ivanhoe Mines converted its four exploration licences on the
project into 60-year mining licences, which are renewable for an additional 40 years. |
|
|
|
|
Capital works in progress at December 31, 2005 consisted mainly of surface assets
being constructed for the exploration shaft at Oyu Tolgoi ($21.4 million). |
|
|
(c) |
|
Ivanhoe Mines owns certain copper-gold and uranium mining and exploration
leases in Queensland, Australia. |
- 78 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Advances to suppliers |
|
$ |
1,711 |
|
|
$ |
917 |
|
Environmental bond (Queensland, Australia) |
|
|
2,683 |
|
|
|
2,847 |
|
|
|
|
$ |
4,394 |
|
|
$ |
3,764 |
|
|
11. |
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Accounts payable |
|
$ |
11,902 |
|
|
$ |
10,970 |
|
Payroll and other employee related payables |
|
|
546 |
|
|
|
157 |
|
Accrued construction costs |
|
|
7,044 |
|
|
|
|
|
Amounts payable to related parties (Note 18 (b)) |
|
|
1,102 |
|
|
|
3,285 |
|
|
|
|
$ |
20,594 |
|
|
$ |
14,412 |
|
|
12. |
|
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 $111,055,000 from the sale of
the Savage River Project. At December 31, 2005, $15.0 million has been received from the
sale with a further $26.7 million accrued as receivable (Note 3 and 6). |
- 79 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
13. |
|
INCOME TAXES |
|
|
|
As referred to in Note 2(b), Ivanhoe Mines must make significant estimates in respect of its
provision for income taxes and the composition of its deferred income tax assets and
liabilities. Ivanhoe Mines operations are, in part, subject to foreign tax laws where
interpretations, regulations and legislation are complex and continually changing. As a
result, there are usually some tax matters in question that may, on resolution in the future,
result in adjustments to the amount of deferred income tax assets and liabilities, and those
adjustments may be material to Ivanhoe Mines financial position and results of operations. |
|
|
|
Ivanhoe Mines provision for income and capital taxes for continuing operations consists of
the following: |
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Deferred income taxes |
|
$ |
(15 |
) |
|
$ |
246 |
|
Capital taxes |
|
|
448 |
|
|
|
342 |
|
|
|
|
$ |
433 |
|
|
$ |
588 |
|
|
|
|
Deferred income tax assets and liabilities for continuing operations at December 31, 2005 and
2004 arise from the following: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Long-term investments |
|
$ |
279 |
|
|
$ |
2,441 |
|
Loss carry-forwards |
|
|
133,562 |
|
|
|
86,691 |
|
Other |
|
|
10,107 |
|
|
|
10,978 |
|
|
|
|
|
143,948 |
|
|
|
100,110 |
|
Valuation allowance |
|
|
(143,777 |
) |
|
|
(99,792 |
) |
|
Net deferred income tax assets |
|
|
171 |
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
Property, plant and equipment |
|
|
315 |
|
|
|
476 |
|
|
|
|
|
315 |
|
|
|
476 |
|
|
Deferred income tax liabilities, net |
|
$ |
144 |
|
|
$ |
158 |
|
|
- 80 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
13. |
|
INCOME TAXES (Continued) |
|
|
|
A reconciliation of the provision for income and capital taxes for continuing operations is
as follows: |
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Recovery of income taxes based on the combined
|
|
|
|
|
|
|
|
|
Canadian federal and provincial statutory tax
rates of 34.9% in 2005 and 35.6% in 2004
applied to the loss before taxes and other items |
|
$ |
44,666 |
|
|
$ |
35,780 |
|
(Deduct) add |
|
|
|
|
|
|
|
|
Lower foreign tax rates |
|
|
(7,109 |
) |
|
|
(734 |
) |
Tax benefit of losses not recognized |
|
|
(34,703 |
) |
|
|
(33,831 |
) |
Change in valuation allowance for deferred
income tax assets |
|
|
(147 |
) |
|
|
749 |
|
Capital taxes |
|
|
(448 |
) |
|
|
(342 |
) |
Other, including non-deductible expenses |
|
|
(2,692 |
) |
|
|
(2,210 |
) |
|
Provision for income and capital taxes |
|
$ |
(433 |
) |
|
$ |
(588 |
) |
|
|
|
At December 31, 2005, Ivanhoe Mines had deductible temporary differences aggregating
approximately $24,554,000 and the following unused tax losses from continuing operations, for
which no deferred income tax assets had been recognized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
U.S. Dollar |
|
Expiry |
|
|
|
|
|
|
Currency |
|
Equivalent (i) |
|
Dates |
Non-capital losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
Cdn. |
|
$ |
124,078 |
|
|
$ |
106,780 |
|
|
2006 to 2012 |
Australia |
|
|
A |
|
|
$ |
8,349 |
|
|
$ |
6,118 |
|
|
(a) |
Mongolia |
|
Mongolian Tugrik |
|
|
316,819,140 |
|
|
$ |
282,370 |
|
|
(b) |
Kazakhstan |
|
Kazakhstan Tenge |
|
|
11,354,394 |
|
|
$ |
84,958 |
|
|
2006 to 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
Cdn. |
|
$ |
90,210 |
|
|
$ |
77,633 |
|
|
(c) |
(i) Translated using the year-end exchange rate.
|
|
|
(a) |
|
These losses are carried forward indefinitely, subject to continuity of ownership
and business tests. |
|
(b) |
|
These losses are carried forward indefinitely until production from a mine
commences; thereafter, they can be amortized on a straight-line basis over a period of
five years. |
|
(c) |
|
These losses are carried forward indefinitely for utilization against any future
net realized capital gains. |
- 81 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
13. |
|
INCOME TAXES (Continued) |
|
|
|
Ivanhoe Mines also has deductible temporary differences and unused tax losses in certain
other foreign jurisdictions that are not disclosed above, as it is currently highly unlikely
that these items will be utilized. |
14. |
|
ASSET RETIREMENT OBLIGATIONS |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Balance, beginning of year |
|
$ |
5,267 |
|
|
$ |
4,709 |
|
Increase in obligations for: |
|
|
|
|
|
|
|
|
Amounts incurred |
|
|
610 |
|
|
|
660 |
|
Amounts extinguished on disposal of
mineral property interests |
|
|
|
|
|
|
(388 |
) |
Accretion expense |
|
|
354 |
|
|
|
286 |
|
|
Balance, end of year |
|
$ |
6,231 |
|
|
$ |
5,267 |
|
|
|
|
The total undiscounted amount of estimated cash flows required to settle the obligations is
$20,458,000 (2004- $12,179,000), which has been discounted using credit adjusted risk free
rates ranging from 5.6% to 8.4%. All reclamation obligations are not expected to be paid for
several years and will be funded from Ivanhoe Mines cash balances at the time of mine
closures. |
15. |
|
MINORITY INTERESTS |
|
|
|
At December 31, 2005 and 2004, there were minority interests in the BMV, Asia Gold and
Jinshan. Currently, losses applicable to the minority interest in the BMV are being
allocated to Ivanhoe Mines since those losses exceed the minority interest in the net assets
of the BMV. |
|
|
|
The minority interests are comprised of the following: |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Balance, beginning of year |
|
$ |
3,713 |
|
|
$ |
5,816 |
|
Minority interests share of loss of Asia Gold |
|
|
(2,714 |
) |
|
|
(2,103 |
) |
Increase in minority interest arising from
share issuances by Asia Gold |
|
|
582 |
|
|
|
|
|
Initial interest arising from acquisition of
Jinshan in December 2005 |
|
|
7,347 |
|
|
|
|
|
|
Balance, end of year |
|
$ |
8,928 |
|
|
$ |
3,713 |
|
|
- 82 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
|
(a) |
|
Equity Incentive Plan |
|
|
|
|
The Company has an Employees and Directors Equity Incentive Plan (the Equity
Incentive Plan), which includes three components: (i) a Share Option Plan; (ii) a Share
Bonus Plan; and (iii) a Share Purchase Plan. |
|
(i) |
|
The Share Option 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. The Share Option Plan also provides that these options may,
upon approval of the Board of Directors, be converted into stock appreciation
rights. |
|
|
(ii) |
|
The Share Bonus Plan permits the Board of Directors of the Company to
authorize the issuance, from time to time, of Common Shares of the Company to
employees of the Company and its affiliates. |
|
|
(iii) |
|
The Share Purchase Plan entitles each eligible employee of Ivanhoe
Mines to contribute up to seven percent of each employees annual basic salary in
semi-monthly instalments. At the end of each calendar quarter, each employee
participating in the Share Purchase Plan is issued Common Shares of the Company
equal to 1.5 times the aggregate amount contributed by the participant, based on
the weighted average trading price of the Common Shares during the preceding three
months. |
The Company is authorized to issue a maximum of 29,000,000 Common Shares pursuant to the
Equity Incentive Plan. At December 31, 2005, an aggregate of 8,305,936 Common Shares
were available for future grants of awards under the plan.
- 83 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
16. |
|
SHARE CAPITAL (Continued) |
|
(a) |
|
Equity Incentive Plan (Continued) |
|
|
|
|
A summary of stock option activity and information concerning outstanding and
exercisable options at December 31, 2005 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
Options |
|
|
Number of |
|
|
Weighted |
|
|
|
Available |
|
|
Common |
|
|
Average |
|
|
|
for Grant |
|
|
Shares |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
(Expressed in |
|
|
|
|
|
|
|
|
|
|
|
Canadian dollars) |
|
|
Balances, December 31, 2003 |
|
|
3,215,126 |
|
|
|
8,589,894 |
|
|
|
3.26 |
|
Options granted |
|
|
(3,089,000 |
) |
|
|
3,089,000 |
|
|
|
7.91 |
|
Options exercised |
|
|
|
|
|
|
(1,665,952 |
) |
|
|
1.58 |
|
Options cancelled |
|
|
122,000 |
|
|
|
(122,000 |
) |
|
|
2.93 |
|
Shares issued for consulting fees |
|
|
(126,373 |
) |
|
|
|
|
|
|
|
|
Shares issued under share
purchase plan |
|
|
(17,019 |
) |
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004 |
|
|
104,734 |
|
|
|
9,890,942 |
|
|
|
5.02 |
|
Increase in amount authorized |
|
|
9,000,000 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(1,125,000 |
) |
|
|
1,125,000 |
|
|
|
8.86 |
|
Options exercised |
|
|
|
|
|
|
(3,256,542 |
) |
|
|
1.48 |
|
Options cancelled |
|
|
342,700 |
|
|
|
(342,700 |
) |
|
|
2.41 |
|
Shares issued under share
purchase plan |
|
|
(16,498 |
) |
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005 |
|
|
8,305,936 |
|
|
|
7,416,700 |
|
|
$ |
7.27 |
|
|
At December 31, 2005, the U.S. dollar equivalent of the weighted average exercise price
was $6.26.
In the period subsequent to December 31, 2005, the Company granted 6,685,000 stock
options with an exercise price of Cdn$9.73. These options have lives of seven years and
vest over periods up to four years. Also, during this period, 744,800 options were
exercised for proceeds of $2.3 million.
- 84 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
16. |
|
SHARE CAPITAL (Continued) |
|
(b) |
|
Equity Incentive Plan (Continued) |
|
|
|
|
The following table summarizes information concerning outstanding and exercisable
options at December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
ddollars) |
|
|
|
|
|
|
|
|
|
dollars) |
|
|
|
|
|
|
dollars) |
|
$1.20 to $3.50 |
|
|
2,002,200 |
|
|
|
1.54 |
|
|
$ |
2.75 |
|
|
|
1,645,300 |
|
|
$ |
2.64 |
|
$3.51 to $6.75 |
|
|
293,500 |
|
|
|
2.67 |
|
|
|
6.75 |
|
|
|
181,500 |
|
|
|
6.75 |
|
$6.76 to $7.69 |
|
|
1,051,000 |
|
|
|
3.26 |
|
|
|
7.46 |
|
|
|
471,330 |
|
|
|
7.37 |
|
$7.70 to $8.20 |
|
|
1,430,000 |
|
|
|
6.78 |
|
|
|
7.91 |
|
|
|
572,000 |
|
|
|
7.91 |
|
$8.21 to $8.99 |
|
|
1,140,000 |
|
|
|
4.09 |
|
|
|
8.62 |
|
|
|
295,000 |
|
|
|
8.63 |
|
$9.00 to $10.51 |
|
|
500,000 |
|
|
|
4.26 |
|
|
|
9.56 |
|
|
|
75,000 |
|
|
|
9.67 |
|
$10.52 to $12.70 |
|
|
1,000,000 |
|
|
|
7.84 |
|
|
|
12.70 |
|
|
|
750,000 |
|
|
|
12.70 |
|
|
|
|
|
7,416,700 |
|
|
|
4.26 |
|
|
$ |
7.27 |
|
|
|
3,990,130 |
|
|
$ |
6.61 |
|
|
The weighted average grant-date fair value of stock options granted during 2005 and 2004
was Cdn$4.95 and Cdn$4.77, respectively. The fair value of these options was determined
using a Black-Scholes option pricing model, recognizing forfeitures as they occur, using
the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Risk-free interest rate |
|
|
3.76 |
% |
|
|
4.29 |
% |
Expected life |
|
5.0 years |
|
6.6 years |
Expected volatility |
|
|
61 |
% |
|
|
64 |
% |
Expected dividends |
|
$Nil |
|
$Nil |
|
(c) |
|
Share Purchase Warrants |
|
|
|
|
At December 31, 2005, 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. |
- 85 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
17. |
|
ACCUMULATED OTHER COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Balance, beginning of year |
|
$ |
2,879 |
|
|
$ |
1,587 |
|
Other comprehensive income for the year: |
|
|
|
|
|
|
|
|
Changes in fair value of long-term investments |
|
|
3,539 |
|
|
|
2,124 |
|
Reclassification for losses (gains) recorded in
earnings |
|
|
293 |
|
|
|
(1,025 |
) |
|
Other comprehensive income before tax: |
|
|
3,832 |
|
|
|
1,099 |
|
Income tax recovery related to other
comprehensive income |
|
|
|
|
|
|
193 |
|
|
Other comprehensive income, net of tax: |
|
|
3,832 |
|
|
|
1,292 |
|
|
Balance, end of year |
|
$ |
6,711 |
|
|
$ |
2,879 |
|
|
18 |
|
OTHER RELATED PARTY TRANSACTIONS |
|
(a) |
|
Ivanhoe Mines incurred the following expenses, primarily on
a cost recovery basis, with an officer of Ivanhoe Mines, a company subject to
significant influence by Ivanhoe Mines, or with companies related by way of
directors or shareholders in common: |
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Exploration |
|
$ |
1,122 |
|
|
$ |
2,198 |
|
Legal |
|
|
823 |
|
|
|
468 |
|
Office and administrative |
|
|
2,216 |
|
|
|
2,057 |
|
Salaries and benefits |
|
|
2,904 |
|
|
|
2,239 |
|
Travel (including aircraft rental) |
|
|
3,421 |
|
|
|
3,001 |
|
|
|
|
$ |
10,486 |
|
|
$ |
9,963 |
|
|
The above noted transactions were in the normal course of operations and were measured
at the exchange amount, which is the amount of consideration established and agreed to
by the related parties.
|
(b) |
|
Accounts receivable and accounts payable at December 31, 2005, included $451,000
and $1,102,000, respectively (December 31, 2004 $414,000 and $3,285,000,
respectively), which were due from/to a company under common control or companies
related by way of directors in common. |
- 86 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
19. |
|
CASH FLOW INFORMATION |
|
(a) |
|
Net change in non-cash operating working capital items |
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
2005 |
|
|
2004 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
522 |
|
|
$ |
(3,254 |
) |
Inventories |
|
|
(1,355 |
) |
|
|
(1,689 |
) |
Prepaid expenses |
|
|
(5,132 |
) |
|
|
(795 |
) |
Other current assets |
|
|
|
|
|
|
(1,010 |
) |
Increase in: |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
4,209 |
|
|
|
3,574 |
|
|
|
|
$ |
(1,756) |
|
|
$ |
(3,174) |
|
|
|
(b) |
|
Supplementary information regarding other non-cash transactions |
|
|
|
|
The non-cash investing and financing activities relating to continuing operations not
already disclosed in the Consolidated Statement of Shareholders Equity or the
Consolidated Statements of Cash Flows were as follows: |
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Investing activities: |
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment |
|
$ |
440 |
|
|
$ |
|
|
|
(c) |
|
Other supplementary information |
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
Income taxes paid |
|
$ |
448 |
|
|
$ |
342 |
|
|
- 87 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
20. |
|
SEGMENT DISCLOSURES |
|
|
|
Ivanhoe Mines has one operating segment; its exploration division with projects located
primarily in Mongolia. The iron ore division located in Australia was sold in February 2005
and has been reported as discontinued operations (Note 3). |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Exploration |
|
|
|
|
|
|
|
December 31, 2005 |
|
Division |
|
|
Corporate |
|
|
Consolidated |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Exploration |
|
$ |
(127,165 |
) |
|
$ |
|
|
|
|
(127,165 |
) |
General and administrative |
|
|
|
|
|
|
(23,825 |
) |
|
|
(23,825 |
) |
Interest |
|
|
(124 |
) |
|
|
(230 |
) |
|
|
(354 |
) |
Depreciation |
|
|
(2,516 |
) |
|
|
(42 |
) |
|
|
(2,558 |
) |
Mining property care and maintenance costs |
|
|
|
|
|
|
(3,706 |
) |
|
|
(3,706 |
) |
Write-down of carrying values of property, plant
and equipment |
|
|
(442 |
) |
|
|
(167 |
) |
|
|
(609 |
) |
|
Operating loss |
|
|
(130,247 |
) |
|
|
(27,970 |
) |
|
|
(158,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
Share of income from joint venture |
|
|
|
|
|
|
23,036 |
|
|
|
23,036 |
|
Interest income |
|
|
294 |
|
|
|
3,127 |
|
|
|
3,421 |
|
Foreign exchange losses (gains) |
|
|
(157 |
) |
|
|
7,908 |
|
|
|
7,751 |
|
Share of loss of significantly influenced investees |
|
|
|
|
|
|
(2,651 |
) |
|
|
(2,651 |
) |
Gain on sale of long-term investments |
|
|
|
|
|
|
115 |
|
|
|
115 |
|
Write-down of carrying value of long-term investments |
|
|
|
|
|
|
(1,438 |
) |
|
|
(1,438 |
) |
|
Loss before taxes and other items |
|
|
(130,110 |
) |
|
|
2,127 |
|
|
|
(127,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income and capital taxes |
|
|
(205 |
) |
|
|
(228 |
) |
|
|
(433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
2,714 |
|
|
|
|
|
|
|
2,714 |
|
|
Net loss from continuing operations |
|
$ |
(127,601 |
) |
|
$ |
1,899 |
|
|
$ |
(125,702 |
) |
|
Expenditures on property, plant and equipment |
|
$ |
29,754 |
|
|
$ |
2,866 |
|
|
$ |
32,620 |
|
|
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
124,919 |
|
|
$ |
271,860 |
|
|
$ |
396,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
124,919 |
|
|
$ |
271,860 |
|
|
$ |
396,779 |
|
|
- 88 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
20. |
|
SEGMENT DISCLOSURES (Continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Exploration |
|
|
|
|
|
|
|
December 31, 2004 |
|
Division |
|
|
Corporate |
|
|
Consolidated |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Exploration |
|
$ |
(98,174 |
) |
|
$ |
|
|
|
|
(98,174 |
) |
General and administrative |
|
|
|
|
|
|
(22,202 |
) |
|
|
(22,202 |
) |
Interest |
|
|
(134 |
) |
|
|
(175 |
) |
|
|
(309 |
) |
Depreciation |
|
|
(2,002 |
) |
|
|
(25 |
) |
|
|
(2,027 |
) |
Mining property care and maintenance costs |
|
|
|
|
|
|
(3,755 |
) |
|
|
(3,755 |
) |
Write-down of carrying values of property, plant
and equipment |
|
|
|
|
|
|
(142 |
) |
|
|
(142 |
) |
|
Operating loss |
|
|
(100,310 |
) |
|
|
(26,299 |
) |
|
|
(126,609 |
) |
|
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
Share of income from joint venture |
|
|
|
|
|
|
21,416 |
|
|
|
21,416 |
|
Interest income |
|
|
232 |
|
|
|
2,894 |
|
|
|
3,126 |
|
Foreign exchange gains |
|
|
48 |
|
|
|
4,583 |
|
|
|
4,631 |
|
Share of loss of significantly influenced investees |
|
|
|
|
|
|
(2,315 |
) |
|
|
(2,315 |
) |
Gain on sale of long-term investments |
|
|
|
|
|
|
4,523 |
|
|
|
4,523 |
|
Write-down of carrying value of long-term investments |
|
|
|
|
|
|
(5,277 |
) |
|
|
(5,277 |
) |
|
Loss before taxes and other items |
|
|
(100,030 |
) |
|
|
(475 |
) |
|
|
(100,505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income and capital taxes |
|
|
(184 |
) |
|
|
(404 |
) |
|
|
(588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests |
|
|
2,103 |
|
|
|
|
|
|
|
2,103 |
|
|
Net loss from continuing operations |
|
$ |
(98,111 |
) |
|
$ |
(879 |
) |
|
$ |
(98,990 |
) |
|
Expenditures on property, plant and equipment |
|
$ |
6,039 |
|
|
$ |
1,807 |
|
|
$ |
7,846 |
|
|
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
84,242 |
|
|
$ |
245,763 |
|
|
$ |
330,005 |
|
Discontinued operations |
|
|
|
|
|
|
46,263 |
|
|
|
46,263 |
|
|
|
|
$ |
84,242 |
|
|
$ |
292,026 |
|
|
$ |
376,268 |
|
|
- 89 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
20. |
|
SEGMENT DISCLOSURES (Continued) |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Property, plant and equipment at the end of the year: |
|
|
|
|
|
|
|
|
Mongolia |
|
$ |
71,666 |
|
|
$ |
43,308 |
|
Inner Mongolia, China |
|
|
2,459 |
|
|
|
1,293 |
|
Australia |
|
|
6,767 |
|
|
|
7,853 |
|
Kazakhstan |
|
|
4,419 |
|
|
|
1,730 |
|
Canada |
|
|
131 |
|
|
|
144 |
|
Other |
|
|
264 |
|
|
|
106 |
|
|
|
|
$ |
85,706 |
|
|
$ |
54,434 |
|
|
21. |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
Ivanhoe Mines has, in the normal course of its business, entered into various long-term
contracts, which include commitments for future operating payments under contracts for
drilling, engineering, equipment rentals and other arrangements as follows: |
|
|
|
|
|
2006 |
|
$ |
16,345 |
|
2007 |
|
|
2,406 |
|
2008 |
|
|
883 |
|
2009 onwards |
|
|
|
|
|
|
|
$ |
19,634 |
|
|
- 90 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
22. |
|
DISCLOSURES REGARDING FINANCIAL INSTRUMENTS |
|
(a) |
|
The estimated fair value of Ivanhoe Mines financial instruments was as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Cash |
|
$ |
101,681 |
|
|
$ |
101,681 |
|
|
$ |
112,478 |
|
|
$ |
112,478 |
|
Accounts receivable |
|
|
33,350 |
|
|
|
33,350 |
|
|
|
6,552 |
|
|
|
6,552 |
|
Other current assets |
|
|
3,286 |
|
|
|
3,286 |
|
|
|
3,000 |
|
|
|
3,000 |
|
Current
assets of discontinued operations (Note 3) |
|
|
|
|
|
|
|
|
|
|
36,636 |
|
|
|
36,636 |
|
Long-term investments |
|
|
18,417 |
|
|
|
18,417 |
|
|
|
19,160 |
|
|
|
24,404 |
|
|
Accounts payable and accrued liabilities |
|
|
20,594 |
|
|
|
20,594 |
|
|
|
14,412 |
|
|
|
14,412 |
|
Current
liabilities of discontinued operations (Note 3) |
|
|
|
|
|
|
|
|
|
|
14,082 |
|
|
|
14,082 |
|
Loans payable to related parties |
|
|
5,088 |
|
|
|
3,733 |
|
|
|
5,088 |
|
|
|
3,393 |
|
The fair value of Ivanhoe Mines long-term investments was determined by reference to
published market quotations, which may not be reflective of future values.
The fair value of Ivanhoe Mines remaining financial instruments was estimated to
approximate their carrying value, due primarily to the immediate or short-term
maturity of these financial instruments.
|
(b) |
|
Ivanhoe Mines is exposed to credit risk with respect to its accounts receivable.
The significant concentrations of credit risk are situated in Mongolia and Australia.
Ivanhoe Mines does not mitigate the balance of this risk in light of the credit
worthiness of its major debtors. |
- 91 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
As indicated in Note 2, 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
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Total assets in accordance with U.S. GAAP |
|
$ |
396,779 |
|
|
$ |
376,268 |
|
Reverse equity accounting for investment in joint venture (a) |
|
|
43,067 |
|
|
|
35,054 |
|
Increase in fair value of the Savage River Project assets
acquired (b) |
|
|
|
|
|
|
5,634 |
|
Adjustment arising from reversal of write-down of the
Savage River Project (c) |
|
|
|
|
|
|
14,058 |
|
Reversal of amortization of other mineral property interests (d) |
|
|
6,329 |
|
|
|
6,521 |
|
Adjustment to carrying value of long-term investments (e) |
|
|
(6,711 |
) |
|
|
(2,879 |
) |
|
Total assets in accordance with Canadian GAAP |
|
$ |
439,464 |
|
|
$ |
434,656 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities in accordance with U.S. GAAP |
|
$ |
32,228 |
|
|
$ |
65,705 |
|
Reverse equity accounting for investment in joint venture (a) |
|
|
43,067 |
|
|
|
35,054 |
|
Income tax effect of U.S. GAAP adjustments for: |
|
|
|
|
|
|
|
|
Amortization of other mineral property interests (d) |
|
|
882 |
|
|
|
882 |
|
|
Total liabilities in accordance with Canadian GAAP |
|
$ |
76,177 |
|
|
$ |
101,641 |
|
|
|
|
|
|
|
|
|
|
|
Total minority interests in accordance with U.S.
and Canadian GAAP |
|
$ |
8,928 |
|
|
$ |
3,713 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity in accordance with U.S. GAAP |
|
$ |
355,623 |
|
|
$ |
306,850 |
|
Increase in fair value of shares issued to acquire ABM (b) |
|
|
|
|
|
|
4,930 |
|
(Increase) decrease in the deficit for: |
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation (b) |
|
|
|
|
|
|
704 |
|
Adjustment arising from write-down of the Savage River
Project (c) |
|
|
|
|
|
|
14,058 |
|
Amortization of other mineral property interests (d) |
|
|
5,447 |
|
|
|
5,639 |
|
Other comprehensive income (f) |
|
|
(6,711 |
) |
|
|
(2,879 |
) |
|
Total shareholders equity in accordance with Canadian GAAP |
|
$ |
354,359 |
|
|
$ |
329,302 |
|
|
- 92 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)
Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Net (loss) from continuing operations in accordance with U.S. GAAP |
|
$ |
(125,702 |
) |
|
$ |
(98,990 |
) |
Dilution gain on issuance of shares by a subsidiary (i) |
|
|
3,012 |
|
|
|
|
|
|
Net (loss) from continuing operations in accordance with
Canadian GAAP |
|
$ |
(122,690 |
) |
|
$ |
(98,990 |
) |
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations in accordance
with U.S. GAAP |
|
$ |
35,916 |
|
|
$ |
4,449 |
|
Adjustment arising from write-down of the Savage River Project (c) |
|
|
|
|
|
|
(2,974 |
) |
Write-down of other mineral property interests (d) |
|
|
(192 |
) |
|
|
|
|
Gain on sale of Savage River Project (h) |
|
|
(19,692 |
) |
|
|
|
|
|
Net income from discontinued operations in accordance
with Canadian GAAP |
|
$ |
16,032 |
|
|
$ |
1,475 |
|
|
Net (loss) in accordance with Canadian GAAP |
|
$ |
(106,658 |
) |
|
$ |
(97,515 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding under
Canadian GAAP (in thousands) |
|
|
305,160 |
|
|
|
281,640 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share in accordance with
Canadian GAAP from: |
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.40 |
) |
|
$ |
(0.35 |
) |
Discontinued operations |
|
|
0.05 |
|
|
|
|
|
|
|
|
$ |
(0.35 |
) |
|
$ |
(0.35 |
) |
|
Under Canadian GAAP, the components of shareholders equity would be as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Share capital |
|
$ |
999,372 |
|
|
$ |
873,536 |
|
Additional paid-in capital |
|
|
17,952 |
|
|
|
12,073 |
|
Deficit |
|
|
(662,965 |
) |
|
|
(556,307 |
) |
|
|
|
$ |
354,359 |
|
|
$ |
329,302 |
|
|
- 93 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Cash used in operating activities in accordance with
U.S. GAAP |
|
$ |
(133,113 |
) |
|
$ |
(118,740 |
) |
Reverse equity accounting for investment in
joint venture (a) |
|
|
24,805 |
|
|
|
25,207 |
|
|
Cash used in operating activities in accordance with
Canadian GAAP |
|
|
(108,308 |
) |
|
|
(93,533 |
) |
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by investing activities in accordance
with U.S. GAAP |
|
|
(10,232 |
) |
|
|
12,606 |
|
Reverse equity accounting for investment in
joint venture (a) |
|
|
(4,561 |
) |
|
|
(9,086 |
) |
|
Cash (used in) provided by investing activities in
accordance with Canadian GAAP |
|
|
(14,793 |
) |
|
|
3,520 |
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities in
accordance with U.S. GAAP |
|
|
124,706 |
|
|
|
107,711 |
|
Reverse equity accounting for investment in
joint venture (a) |
|
|
(7,500 |
) |
|
|
(7,500 |
) |
|
Cash provided by financing activities in accordance
with Canadian GAAP |
|
|
117,206 |
|
|
|
100,211 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
7,842 |
|
|
|
5,385 |
|
|
Net cash inflow in accordance with Canadian GAAP |
|
|
1,947 |
|
|
|
15,583 |
|
Cash, beginning of year in accordance with Canadian GAAP |
|
|
122,577 |
|
|
|
106,994 |
|
|
Cash, end of year in accordance with Canadian GAAP |
|
$ |
124,524 |
|
|
$ |
122,577 |
|
|
- 94 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
23. 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 4) 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 the Ivanhoe Mines investment and its
share of equity of JVCo is eliminated. Ivanhoe Mines proportionate share of each
line item of JVCos assets, liabilities, revenue and expenses is included in the
corresponding line items of Ivanhoe Mines financial statements. All intercompany
balances and transactions would be eliminated. Note 4 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) |
|
Acquisition of ABM |
|
|
|
|
Under U.S. GAAP, the fair value of the shares issued in 2000 to effect the
acquisition of ABM were measured at the date the acquisition was announced and the
terms agreed to, whereas, under Canadian GAAP, the shares issued would have been
measured at the
transaction date. This difference would have resulted in the cost of the
acquisition under Canadian GAAP being $4,930,000 higher than under U.S. GAAP. |
|
|
|
|
Under U.S. GAAP, the Company included in the cost of the acquisition of ABM the
intrinsic value of the unvested options granted by the Company in 2000 as
consideration for the acquisition of all of the outstanding stock options of ABM.
Under U.S. GAAP, the deferred stock compensation was recognized as a compensation
cost over the remaining future vesting period of the options. Under Canadian GAAP,
the Company would have included in the cost of acquisition of ABM the $1,750,000
fair value of the stock options. This difference would have resulted in the cost of
the acquisition in 2000 under Canadian GAAP being $704,000 higher than under U.S.
GAAP. |
|
|
|
|
ABM was sold in February 2005 (Note 3). |
- 95 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
|
(c) |
|
Impairment of long-lived assets |
|
|
|
|
Under U.S. GAAP, impairment charges are recorded based on the discounted, estimated
future net cash flows, whereas, under Canadian GAAP, impairment charges on
long-lived assets in 2002 and prior years were recorded as the excess of their
carrying amount over their recoverable amount, which was determined based on the
undiscounted estimated future net cash flows. |
|
|
|
|
Under U.S. GAAP, the Savage River Project was fully written off as at December 31,
2002. However, under Canadian GAAP only an $18 million write-down would have been
taken. In 2003, additional amounts capitalized under U.S. GAAP were written off;
however, these would have been capitalized under Canadian GAAP. As a result, under
Canadian GAAP, these assets would need to be depreciated and depleted. In 2005,
additional depreciation recorded under Canadian GAAP was $nil (2004: $2,974,000). |
|
|
(d) |
|
Other mineral property interests |
|
|
|
|
Under U.S. GAAP, where the 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 needs to be reversed. |
- 96 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)
|
(e) |
|
Long-term investments |
|
|
|
|
Under U.S. GAAP, portfolio investments are classified as available-for-sale
securities, which are carried at market value. The resulting unrealized gains or
losses are included in the determination of comprehensive income, net of income
taxes where applicable. Under Canadian GAAP, these investments would be carried at
their original cost less provisions for impairment. |
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(f) |
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Other comprehensive income |
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|
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|
U.S. GAAP requires that a statement of comprehensive income be displayed with the
same prominence as other financial statements and that the aggregate amount of
comprehensive income, excluding the deficit, be disclosed separately in
shareholders equity. Comprehensive income, which incorporates the net loss,
includes all changes in shareholders equity during a period except those resulting
from investments by, and distributions to, owners. Under Canadian GAAP, companies
do not report comprehensive income or loss. |
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(g) |
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Income taxes |
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|
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|
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 years ended December 31, 2005 and 2004. |
|
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(h) |
|
Gain on Sale of ABM |
|
|
|
|
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 the carrying value was $30.9 million.
During 2005, total proceeds from the sale were $41.7 million, representing cash
instalments including interest of $21.5 million, plus escalating payments of $20.2
million. Therefore, under Canadian GAAP the gain on sale was $19.7 million less
than under U.S. GAAP. |
- 97 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
23. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
|
(i) |
|
Dilution gain on investment in subsidiary |
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|
|
Under U.S. GAAP the $3.0 million dilution gain on investment in a subsidiary was
accounted for as part of additional paid-in capital. Under Canadian GAAP, the
dilution gain would have been included in the net loss for 2005. |
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(j) |
|
Recently released Canadian accounting standards |
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|
In January 2005, the CICA issued Section 1530, Comprehensive Income, Section 3251,
Equity, Section 3855, Financial Instruments Recognition and Measurement, and
Section 3865, Hedges. The new standards increase harmonization with US GAAP and
will require the following measures: |
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Financial assets will be classified as held-to-maturity, held-for-trading or
available-for-sale. Held-to-maturity classification will be restricted to fixed
maturity instruments that the Company intends, and is able, to hold to maturity and
will be accounted for at amortized cost. Held-for-trading instruments will be
recorded at fair value, with realized and unrealized gains and losses reported in net
income. Available-for-sale financial assets will be recorded at fair value, with
unrealized gains and losses reported in a new category in shareholders equity, called
other comprehensive income. |
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|
Derivatives will be classified as held-for-trading unless designated as hedging
instruments. All derivatives, including embedded derivatives that must be separately
accounted for, will be recorded at fair value on the Condensed Consolidated Balance
Sheet. For derivatives that hedge the changes in fair value of an asset or liability,
changes in the derivatives fair value will be reported in net income and
substantially offset by changes in the fair value of the hedged asset or liability
attributable to the risk being hedged. For derivatives that hedge variability in cash
flows, the effective portion of the changes in the derivatives fair value will be
initially recognized in other comprehensive income and the ineffectiveness will be
recorded in net income. The amounts temporarily recorded in other comprehensive
income subsequently will be reclassified to net income in the periods net income is
affected by the variability in the cash flows of the hedged item. |
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The guidance will apply for interim and annual financial statements relating to fiscal
years beginning on or after October 1, 2006. Earlier adoption is permitted only as of
the beginning of a fiscal year. The Company will adopt these new standards on January
1, 2006. |
- 98 -
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
24. |
|
SUBSEQUENT EVENTS |
|
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|
On March 29, 2006, Ivanhoe Mines announced that it had entered into a financing that consists
of 16 million common shares at a price of $8.77 per common share (Cdn$10.28), representing an
aggregate amount of $140.3 million (Cdn$164.5 million). Ivanhoe Mines has granted the
underwriters an option, exercisable at the issue price for a period of 30 days following the
closing of this offering, to purchase up to an additional 15% of the issue size, representing
2,400,000 common shares. Closing is expected on or about April 25, 2006. |
- 99 -