Form 6-K
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: August 14, 2006
IVANHOE MINES LTD.
(Translation of Registrants Name into English)
Suite 654 999 CANADA PLACE, VANCOUVER, BRITISH COLUMBIA V6C 3E1
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file annual reports under cover of
Form 20-F or Form 40-F.)
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:
First quarter unaudited financial statements, notes and Managements Discussion and Analysis to
June 30, 2006.
CEO Certification
CFO Certification
Press release
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: August 14, 2006
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By:
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/s/ Beverly A. Bartlett |
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BEVERLY A. BARTLETT
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Vice President & Corporate Secretary |
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SECOND QUARTER REPORT
JUNE 30, 2006
(Prepared in accordance with United States of America
generally accepted accounting principles)
TABLE OF CONTENTS
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ITEM 1.
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Financial Statements |
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Unaudited Consolidated Balance Sheets at June 30, 2006 and December 31, 2005 |
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Unaudited Consolidated Statements of Operations for the Three and Six Month Periods
ended June 30, 2006 and 2005 |
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Unaudited Consolidated Statement of Shareholders Equity for the Six Month Period
ended June 30, 2006 |
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Unaudited Consolidated Statements of Cash Flows for the Three and Six Month Periods
ended June 30, 2006 and 2005 |
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Notes to the Unaudited Consolidated Financial Statements |
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ITEM 2.
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Managements Discussion and Analysis of Financial Condition and
Results of Operations |
IVANHOE MINES LTD.
Consolidated Balance Sheets
(Stated in thousands of U.S. dollars)
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June 30, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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ASSETS |
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CURRENT |
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Cash and cash equivalents (Note 3) |
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$ |
201,782 |
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$ |
101,681 |
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Accounts receivable |
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16,588 |
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33,350 |
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Inventories |
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6,105 |
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3,547 |
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Prepaid expenses |
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3,731 |
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6,353 |
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Other current assets |
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286 |
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3,286 |
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TOTAL CURRENT ASSETS |
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228,492 |
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148,217 |
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INVESTMENT IN JOINT VENTURE (Note 4) |
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141,840 |
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139,874 |
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LONG-TERM INVESTMENTS (Note 5) |
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17,094 |
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18,417 |
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PROPERTY, PLANT AND EQUIPMENT |
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102,090 |
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85,706 |
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DEFERRED INCOME TAXES |
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98 |
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171 |
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OTHER ASSETS |
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4,348 |
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4,394 |
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TOTAL ASSETS |
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$ |
493,962 |
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$ |
396,779 |
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LIABILITIES |
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CURRENT |
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Accounts payable and accrued liabilities |
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$ |
10,380 |
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$ |
20,594 |
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TOTAL CURRENT LIABILITIES |
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10,380 |
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20,594 |
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LOANS PAYABLE TO RELATED PARTIES (Note 6) |
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5,088 |
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5,088 |
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DEFERRED INCOME TAXES |
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304 |
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315 |
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ASSET RETIREMENT OBLIGATIONS |
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6,173 |
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6,231 |
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TOTAL LIABILITIES |
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21,945 |
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32,228 |
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MINORITY INTERESTS |
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6,525 |
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8,928 |
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SHAREHOLDERS EQUITY |
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SHARE CAPITAL (Note 7) |
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Authorized |
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Unlimited number of preferred shares without par value |
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Unlimited number of common shares without par value |
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Issued and outstanding |
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335,235,682 (2005 - 315,900,668) common shares |
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1,158,737 |
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994,442 |
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ADDITIONAL PAID-IN CAPITAL |
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37,512 |
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25,174 |
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ACCUMULATED OTHER COMPREHENSIVE INCOME |
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3,437 |
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6,711 |
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DEFICIT |
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(734,194 |
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(670,704 |
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TOTAL SHAREHOLDERS EQUITY |
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465,492 |
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355,623 |
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TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS
EQUITY |
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$ |
493,962 |
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$ |
396,779 |
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APPROVED BY THE BOARD:
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/s/
John Weatherall
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/s/ Kjeld Thygesen |
Director
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Director |
The accompanying notes are an integral part of these consolidated interim financial statements.
IVANHOE MINES LTD.
Consolidated Statements of Operations
(Stated in thousands of U.S. dollars, except for share and per share amounts)
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Three months ended June 30, |
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Six months ended June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(Unaudited) |
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OPERATING EXPENSES |
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Exploration |
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$ |
(39,886 |
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$ |
(33,829 |
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$ |
(66,851 |
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$ |
(58,235 |
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General and administrative |
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(9,786 |
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(5,927 |
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(20,818 |
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(10,712 |
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Accretion |
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(102 |
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(88 |
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(204 |
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(177 |
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Depreciation |
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(1,231 |
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(806 |
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(2,143 |
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(1,219 |
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Mining property care and maintenance costs |
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(980 |
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(899 |
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(1,700 |
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(1,751 |
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OPERATING LOSS |
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(51,985 |
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(41,549 |
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(91,716 |
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(72,094 |
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OTHER INCOME (EXPENSES) |
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Share of (loss) income from joint venture (Note 4) |
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(2,404 |
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7,839 |
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2,056 |
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15,512 |
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Interest income |
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1,935 |
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668 |
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2,690 |
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1,263 |
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Foreign exchange gains |
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4,669 |
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1,692 |
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4,519 |
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1,123 |
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Share of loss of significantly influenced investees |
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(382 |
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(621 |
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Gain on sale of other mineral property rights |
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2,724 |
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Gain on sale of long-term investments |
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115 |
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115 |
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Write-down of carrying value of long-term investment |
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(1,438 |
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LOSS BEFORE TAXES AND OTHER ITEMS |
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(47,785 |
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(31,617 |
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(79,727 |
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(56,140 |
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Provision for income taxes |
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(230 |
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(74 |
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(450 |
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(130 |
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Minority interests |
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2,284 |
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575 |
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3,344 |
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1,001 |
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NET LOSS FROM CONTINUING OPERATIONS |
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(45,731 |
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(31,116 |
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(76,833 |
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(55,269 |
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NET INCOME AND GAIN ON SALE FROM
DISCONTINUED OPERATIONS (Note 2) |
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5,412 |
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5,941 |
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13,343 |
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21,614 |
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NET LOSS |
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$ |
(40,319 |
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$ |
(25,175 |
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$ |
(63,490 |
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$ |
(33,655 |
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BASIC AND DILUTED (LOSS) EARNINGS PER SHARE FROM
CONTINUING OPERATIONS |
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$ |
(0.14 |
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$ |
(0.10 |
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$ |
(0.24 |
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$ |
(0.18 |
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DISCONTINUED OPERATIONS |
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0.02 |
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0.02 |
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0.04 |
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0.07 |
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$ |
(0 .12 |
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$ |
(0.08 |
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$ |
(0.20 |
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$ |
(0.11 |
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000s) |
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329,998 |
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298,467 |
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323,255 |
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295,905 |
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The accompanying notes are an integral part of these consolidated interim financial statements
IVANHOE MINES LTD.
Consolidated Statement of Shareholders Equity
(Stated in thousands of U.S. dollars, except for share amounts)
(Unaudited)
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Accumulated |
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Share Capital |
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Additional |
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Other |
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Number |
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Paid-In |
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Comprehensive |
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of Shares |
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Amount |
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Capital |
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Income |
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Deficit |
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Total |
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Balances, December 31, 2005 |
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315,900,668 |
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$ |
994,442 |
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$ |
25,174 |
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$ |
6,711 |
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$ |
(670,704 |
) |
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$ |
355,623 |
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Net loss |
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(63,490 |
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(63,490 |
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Other comprehensive loss (unrealized loss on
available-for-sale securities) (Note 5) |
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(3,274 |
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(3,274 |
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Comprehensive loss |
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(66,764 |
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Shares issued for: |
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Private placement, net of issue costs of $8,162 |
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18,400,000 |
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158,992 |
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158,992 |
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Exercise of stock options |
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925,393 |
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5,228 |
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(1,754 |
) |
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3,474 |
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Share purchase plan |
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9,621 |
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75 |
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75 |
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Dilution gain on issuance of shares by a subsidiary |
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485 |
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485 |
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Stock compensation charged to operations |
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13,607 |
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13,607 |
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Balances, June 30, 2006 |
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335,235,682 |
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$ |
1,158,737 |
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$ |
37,512 |
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$ |
3,437 |
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$ |
(734,194 |
) |
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$ |
465,492 |
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The accompanying notes are an integral part of these consolidated interim financial statements
IVANHOE MINES LTD.
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(Unaudited) |
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OPERATING ACTIVITIES |
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Net loss from continuing operations |
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$ |
(45,731 |
) |
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$ |
(31,116 |
) |
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$ |
(76,833 |
) |
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$ |
(55,269 |
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Items not involving use of cash |
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Depreciation |
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1,231 |
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|
806 |
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2,143 |
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|
1,219 |
|
Stock-based compensation |
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5,662 |
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2,173 |
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13,607 |
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|
3,689 |
|
Accretion expense |
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|
102 |
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|
88 |
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|
204 |
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|
177 |
|
Unrealized foreign exchange gains |
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(4,490 |
) |
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|
(1,772 |
) |
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|
(4,182 |
) |
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|
(1,259 |
) |
Share of loss (income) from joint venture, net of cash distribution |
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|
2,404 |
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|
2,161 |
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|
(2,056 |
) |
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|
(5,512 |
) |
Share of loss of significantly influenced investees |
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|
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|
382 |
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|
|
|
|
|
|
621 |
|
Gain on sale of long-term investments |
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|
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|
(115 |
) |
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|
|
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|
(115 |
) |
Write-down of carrying value of long-term investments |
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|
|
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|
|
|
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|
|
|
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|
1,438 |
|
Gain on sale of other mineral property rights |
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|
|
|
|
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|
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|
|
(2,724 |
) |
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|
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|
Deferred income taxes |
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(17 |
) |
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(5 |
) |
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|
62 |
|
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|
(9 |
) |
Minority interests |
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|
(2,284 |
) |
|
|
(575 |
) |
|
|
(3,344 |
) |
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|
(1,001 |
) |
Net change in non-cash operating working capital items (Note 8 (b)) |
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|
(5,548 |
) |
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|
4,494 |
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|
(11,719 |
) |
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|
(564 |
) |
|
Cash used in operating activities of continuing operations |
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|
(48,671 |
) |
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|
(23,479 |
) |
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|
(84,842 |
) |
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|
(56,585 |
) |
Cash provided by operating activities of discontinued operations |
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|
2,592 |
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Cash used in operating activities |
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(48,671 |
) |
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|
(23,479 |
) |
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(84,842 |
) |
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|
(53,993 |
) |
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INVESTING ACTIVITIES |
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Proceeds from sale of discontinued operations |
|
|
174 |
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|
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|
34,674 |
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|
15,000 |
|
Purchase of long-term investments |
|
|
(1,951 |
) |
|
|
(4,110 |
) |
|
|
(1,951 |
) |
|
|
(4,110 |
) |
Proceeds from sale of other mineral property rights |
|
|
|
|
|
|
|
|
|
|
2,724 |
|
|
|
|
|
Proceeds from sale of long-term investments |
|
|
|
|
|
|
4,539 |
|
|
|
|
|
|
|
4,539 |
|
Expenditures on property, plant and equipment |
|
|
(8,477 |
) |
|
|
(5,728 |
) |
|
|
(18,736 |
) |
|
|
(8,860 |
) |
(Expenditures on) proceeds from other assets |
|
|
(50 |
) |
|
|
(1,361 |
) |
|
|
77 |
|
|
|
(1,238 |
) |
Other |
|
|
620 |
|
|
|
(1 |
) |
|
|
90 |
|
|
|
(2,078 |
) |
|
Cash provided by investing activities of continuing operations |
|
|
(9,684 |
) |
|
|
(6,661 |
) |
|
|
16,878 |
|
|
|
3,253 |
|
Cash used in investing activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(502 |
) |
|
Cash provided by investing activities |
|
|
(9,684 |
) |
|
|
(6,661 |
) |
|
|
16,878 |
|
|
|
2,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of share capital |
|
|
160,127 |
|
|
|
120,346 |
|
|
|
162,541 |
|
|
|
121,281 |
|
Minority interests investment in subsidiaries |
|
|
1,425 |
|
|
|
|
|
|
|
1,425 |
|
|
|
|
|
|
Cash provided by financing activities of continuing operations |
|
|
161,552 |
|
|
|
120,346 |
|
|
|
163,966 |
|
|
|
121,281 |
|
Cash used in financing activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37 |
) |
|
Cash provided by financing activities |
|
|
161,552 |
|
|
|
120,346 |
|
|
|
163,966 |
|
|
|
121,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
4,342 |
|
|
|
1,801 |
|
|
|
4,099 |
|
|
|
1,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH INFLOW |
|
|
107,539 |
|
|
|
92,007 |
|
|
|
100,101 |
|
|
|
71,295 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
94,243 |
|
|
|
91,766 |
|
|
|
101,681 |
|
|
|
112,478 |
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
201,782 |
|
|
$ |
183,773 |
|
|
$ |
201,782 |
|
|
$ |
183,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS IS COMPRISED OF: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash on hand and demand deposits |
|
$ |
31,100 |
|
|
$ |
28,324 |
|
|
$ |
31,100 |
|
|
$ |
28,324 |
|
Short-term money market instruments |
|
|
170,682 |
|
|
|
155,449 |
|
|
|
170,682 |
|
|
|
155,449 |
|
|
|
|
$ |
201,782 |
|
|
$ |
183,773 |
|
|
$ |
201,782 |
|
|
$ |
183,773 |
|
|
Supplementary cash flow information (Note 8)
The accompanying notes are an integral part of these consolidated interim financial statements
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
1. |
|
SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
These unaudited interim consolidated financial statements have been prepared in
accordance with United States of America generally accepted accounting principles (U.S.
GAAP). The accounting policies followed in preparing these consolidated financial
statements are those used by the Company as set out in the audited financial statements for
the year ended December 31, 2005, except that on January 1, 2006, the Company adopted the
provisions of SFAS No. 123(R), Share-Based Payment, on a modified prospective basis. The
adoption of SFAS No. 123 (R) did not have an impact on the Companys consolidated financial
position and results of operations (Note 7). In the case of Ivanhoe Mines Ltd. (the
Company), U.S. GAAP differs in certain respects from accounting principles generally
accepted in Canada (Canadian GAAP) as explained in Note 9. |
|
|
|
Certain information and note disclosures normally included for annual consolidated financial
statements prepared in accordance with U.S. GAAP have been omitted. These interim
consolidated financial statements should be read together with the Companys audited
financial statements for the year ended December 31, 2005. |
|
|
|
In the opinion of management, all adjustments considered necessary (including
reclassifications and normal recurring adjustments) to present fairly the financial position,
results of operations and cash flows at June 30, 2006 and for all periods presented, have
been included in these financial statements. The interim results are not necessarily
indicative of results for the full year ending December 31, 2006, or future operating
periods. For further information, see the Companys annual consolidated financial
statements, including the accounting policies and notes thereto, included in the Annual
Information Form. |
|
|
|
For purposes of these consolidated financial statements, the Company and its subsidiaries and
joint venture are collectively referred to as Ivanhoe Mines. |
|
|
|
The Company operates in a single reportable segment, being exploration and development of
mineral properties. |
|
|
|
References to Cdn$ refer to Canadian currency and $ to United States currency. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
2. |
|
DISCONTINUED OPERATIONS |
|
|
|
In February 2005, Ivanhoe Mines disposed of the Savage River Iron Ore Project (the
Project). This decision was part of the plan to rationalize its non-core assets as it
focuses on the Oyu Tolgoi project in Mongolia. |
|
|
|
Ivanhoe Mines sold the Project for two initial payments totalling $21.5 million, plus a
series of five contingent, annual payments that commenced on March 31, 2006. The annual
payments are based on the annual iron ore pellet tonnes sold and an escalating price formula
based on the prevailing annual Nibrasco/JSM pellet price. |
|
|
|
In 2005, Ivanhoe Mines received the first initial payment of $15.0 million and the second
initial payment of $6.5 million was received on January 31, 2006. On March 31, 2006, Ivanhoe
Mines received its first contingent annual payment of $28.0 million with an additional $0.2
million adjustment received in April 2006. This $28.2 million payment, included $7.9 million
in contingent income which was recognized in the first quarter of 2006. |
|
|
|
To date, Ivanhoe Mines has received $49.7 million in proceeds from the sale of the Project. |
|
|
|
At June 30, 2006, Ivanhoe Mines has accrued $5.4 million as receivable in relation to the
second contingent annual payment due in March 2007. This amount is based upon the tonnes of
iron ore sold during the three month period ended June 30, 2006 and the escalating price
formula. |
|
|
|
The following table presents summarized financial information related to discontinued
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 (1) |
Revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18,031 |
|
Cost of operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,965 |
) |
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203 |
) |
|
OPERATING PROFIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,668 |
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Foreign exchange losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(285 |
) |
|
INCOME BEFORE TAXES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,399 |
|
Recovery of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
NET INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,406 |
|
Contingent income |
|
|
5,412 |
|
|
|
5,941 |
|
|
|
13,343 |
|
|
|
5,941 |
|
Gain on sale of Savage River Project |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,267 |
|
|
NET INCOME AND GAIN ON
SALE FROM DISCONTINUED
OPERATIONS |
|
|
5,412 |
|
|
|
5,941 |
|
|
|
13,343 |
|
|
|
21,614 |
|
|
|
|
|
(1) |
|
Net income for the six month period ended June 30, 2005, includes only two months
of results for the Project as it was sold on February 28, 2005. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
3. |
|
CASH AND CASH EQUIVALENTS |
|
|
|
Cash and cash equivalents at June 30, 2006 included Jinshans and Asia Golds cash and
cash equivalents balances of $6.4 million and $2.0 million, respectively (December 31, 2005:
$15.4 million and $3.1 million), which were not available for Ivanhoe Mines general corporate
purposes. |
|
4. |
|
INVESTMENT IN JOINT VENTURE |
|
|
|
Ivanhoe Mines investment in Myanmar Ivanhoe Copper Company Limited (JVCo) (Myanmar)
(50% owned), which is subject to joint control, is accounted for using the equity method. |
|
|
|
During and subsequent to the second quarter there have been developments regarding certain
circumstances that were reported in the Companys 2005 annual consolidated financial
statements. |
|
|
|
In Myanmar, all air and sea imports and exports require prior approval from the Myanmar Trade
Council. In July 2006, JVCo obtained from the Trade Council the necessary import permits for
its previously ordered mining equipment. The equipment arrived at the minesite at the
beginning of August 2006 and is being assembled. This equipment will enable the mine to
increase its mining and cathode production. |
|
|
|
During the second quarter, JVCo paid $8.1 million (net $4.0 million to Ivanhoe Mines) in
commercial tax on export sales, which was previously accrued, to the Myanmar tax authorities
for tax claimed retroactively for the period January 1, 2003 to March 31, 2004. At June 30,
2006, JVCos accounts payable balance included $22.4 million (net $11.2 million to Ivanhoe
Mines) in commercial tax for the period April 1, 2004 to June 30, 2006. JVCo believes that
the tax provisions in the S&K mine joint venture agreement clearly exempt the mines copper
exports from all tax of a commercial tax nature and therefore it has lodged an appeal with the
tax authorities regarding the application of this tax. |
|
|
|
Also, during the second quarter, JVCo increased its provision for income tax for the 2005 and
2006 tax years that cover the period from April 1, 2004 to June 30, 2006. JVCo had filed its
2003 and 2004 returns on the basis that it would receive a 50% exemption on the 30% corporate
tax rate; however, this did not occur. This ruling by the tax authorities is being appealed.
Notwithstanding the appeal, JVCo has increased its accrued income tax payable for the April 1,
2004 to June 30, 2006 period to reflect this potentially increased tax rate. At June 30,
2006, JVCo had accrued in accounts payable $39.7 million (net $19.8 million to Ivanhoe Mines)
in income tax. The net impact on JVCos results of operations was an additional $18.5 million
(net $9.3 million to Ivanhoe Mines) in income tax expense for the three months ended June 30,
2006. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
4. |
|
INVESTMENT IN JOINT VENTURE (Continued) |
|
|
|
The following tables summarize Ivanhoe Mines 50% share of the financial position of JVCo as
at June 30, 2006 and December 31, 2005 and its share of the results of operations and cash
flows for the three and six month periods ended June 30, 2006 and 2005. |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Cash and cash equivalents |
|
$ |
42,146 |
|
|
$ |
22,843 |
|
Accounts receivable |
|
|
3,073 |
|
|
|
11,364 |
|
Inventories |
|
|
16,004 |
|
|
|
16,754 |
|
Prepaid expenses |
|
|
1,855 |
|
|
|
1,558 |
|
Property, plant and equipment |
|
|
145,129 |
|
|
|
128,405 |
|
Deferred income tax assets |
|
|
673 |
|
|
|
432 |
|
Other assets |
|
|
1,570 |
|
|
|
1,585 |
|
Accounts payable and accrued liabilities |
|
|
(34,173 |
) |
|
|
(14,784 |
) |
Deferred income tax liabilities |
|
|
(28,757 |
) |
|
|
(11,321 |
) |
Other liabilities |
|
|
(5,680 |
) |
|
|
(16,962 |
) |
|
SHARE OF NET ASSETS OF JVCO |
|
$ |
141,840 |
|
|
$ |
139,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
14,047 |
|
|
$ |
15,614 |
|
|
$ |
25,083 |
|
|
$ |
30,758 |
|
Cost of operations |
|
|
(2,317 |
) |
|
|
(4,026 |
) |
|
|
(8,341 |
) |
|
|
(8,083 |
) |
Depreciation and depletion |
|
|
(1,115 |
) |
|
|
(1,325 |
) |
|
|
(2,358 |
) |
|
|
(2,956 |
) |
General and administrative |
|
|
(79 |
) |
|
|
(85 |
) |
|
|
(80 |
) |
|
|
(215 |
) |
Interest expense |
|
|
(76 |
) |
|
|
(126 |
) |
|
|
(151 |
) |
|
|
(288 |
) |
|
OPERATING PROFIT |
|
|
10,460 |
|
|
|
10,052 |
|
|
|
14,153 |
|
|
|
19,216 |
|
Interest income |
|
|
255 |
|
|
|
98 |
|
|
|
446 |
|
|
|
164 |
|
Foreign exchange gains (losses) |
|
|
16 |
|
|
|
(23 |
) |
|
|
(19 |
) |
|
|
(135 |
) |
|
INCOME BEFORE TAXES |
|
|
10,731 |
|
|
|
10,127 |
|
|
|
14,580 |
|
|
|
19,245 |
|
Provision for income taxes |
|
|
(13,135 |
) |
|
|
(2,288 |
) |
|
|
(12,524 |
) |
|
|
(3,733 |
) |
|
SHARE OF (LOSS)
INCOME OF JVCO |
|
$ |
(2,404 |
) |
|
$ |
7,839 |
|
|
$ |
2,056 |
|
|
$ |
15,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Cash flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From operating activities |
|
$ |
22,035 |
|
|
$ |
616 |
|
|
$ |
29,260 |
|
|
$ |
8,987 |
|
For investing activities |
|
|
(6,186 |
) |
|
|
(1,049 |
) |
|
|
(9,957 |
) |
|
|
(1,975 |
) |
For financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,750 |
) |
|
|
|
$ |
15,849 |
|
|
$ |
(433 |
) |
|
$ |
19,303 |
|
|
$ |
3,262 |
|
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
December 31, 2005 |
|
|
Equity |
|
Cost/Equity |
|
Unrealized |
|
Fair/Equity |
|
Equity |
|
Cost/Equity |
|
Unrealized |
|
Fair/Equity |
|
|
Interest |
|
Basis |
|
Gain |
|
Value |
|
Interest |
|
Basis |
|
Gain |
|
Value |
Investments available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intec Ltd. |
|
|
10.1 |
% |
|
$ |
1,446 |
|
|
$ |
3,577 |
|
|
$ |
5,023 |
|
|
|
12.5 |
% |
|
$ |
1,446 |
|
|
$ |
1,331 |
|
|
$ |
2,777 |
|
Entrée Gold Inc. |
|
|
14.8 |
% |
|
|
10,157 |
|
|
|
(341 |
) |
|
|
9,816 |
|
|
|
15.0 |
% |
|
|
10,157 |
|
|
|
5,380 |
|
|
|
15,537 |
|
Asia Now Resources Corp. |
|
|
2.0 |
% |
|
|
103 |
|
|
|
201 |
|
|
|
304 |
|
|
|
3.1 |
% |
|
|
103 |
|
|
|
|
|
|
|
103 |
|
Redox Diamonds
Ltd. (a) |
|
|
15.0 |
% |
|
|
1,451 |
|
|
|
|
|
|
|
1,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind Energy Group Inc. (b) |
|
|
12.4 |
% |
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,657 |
|
|
$ |
3,437 |
|
|
$ |
17,094 |
|
|
|
|
|
|
$ |
11,706 |
|
|
$ |
6,711 |
|
|
$ |
18,417 |
|
|
|
|
|
(a) |
|
During the three month period ended June 30, 2006, the Company purchased 8.3 million
units of Redox Diamonds Ltd. (Redox) at a cost of $1.5 million. Each unit consists of
one Redox common share and one Redox share option exercisable until April 2008 to
purchase an additional Redox common share at a price ranging from Cdn$0.30 to Cdn$0.35. |
|
(b) |
|
During the three month period ended June 30, 2006, the Company purchased 1.0
million common shares of Wind Energy Group Inc. at a cost of $0.5 million. |
6. |
|
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 June 30, 2006, proceeds received from the sale of the
Project totaled $49.7 million (Note 2). |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
|
(a) |
|
Equity Incentive Plan |
|
|
|
|
The Company has an Employees and Directors Equity Incentive Plan (the Equity
Incentive Plan). This plan authorizes the Board of Directors of the Company to grant
options, which vest over a period of years, to directors and employees of Ivanhoe Mines
to acquire Common Shares of the Company at a price based on the weighted average
trading price of the Common Shares for the five days preceding the date of the grant. |
|
|
|
|
On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based
Payment, on a modified prospective basis. Prior to January 1, 2006, the Company
recorded compensation costs using the fair value based method in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation. |
|
|
|
|
Under SFAS No. 123 (R), the value of each option award is estimated on the date of
grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing
model requires the input of subjective assumptions, including the expected term of the
option award and stock price volatility. The expected term of options granted is
derived from historical data on employee exercise and post-vesting employment
termination behavior. Expected volatility is based on the historical volatility of our
stock. These estimates involve inherent uncertainties and the application of management
judgment. In addition, we are required to estimate the expected forfeiture rate and
only recognize expense for those options expected to vest. As a result, if other
assumptions had been used, our recorded stock-based compensation expense could have
been materially different from that reported. |
|
|
|
|
During the three and six months ended June 30, 2006, 1,334,000 and 8,019,000 stock
options were granted, respectively (2005: 675,000 and 750,000). The weighted average
grant-date fair value of the stock options granted during the three and six months
ended June 30, 2006 was Cdn$3.30 and Cdn$4.42, respectively (2005: Cdn$5.02 and
Cdn$5.01). The fair value of these options was determined using the Black-Scholes
option pricing model, using the following weighted average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Risk-free interest rate |
|
|
4.20 |
% |
|
|
3.72 |
% |
|
|
4.12 |
% |
|
|
3.74 |
% |
Expected life |
|
2.8 years |
|
5.0 years |
|
3.3 years |
|
5.0 years |
Expected volatility |
|
|
52 |
% |
|
|
61 |
% |
|
|
50 |
% |
|
|
61 |
% |
Expected dividends |
|
$Nil |
|
$Nil |
|
$Nil |
|
$Nil |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
7. |
|
SHARE CAPITAL (Continued) |
|
(a) |
|
Equity Incentive Plan |
|
|
|
|
A summary of stock option activity and information concerning options available for
grant under the Companys Equity Incentive Plan, options outstanding, and exercisable
options at June 30, 2006 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
Options |
|
Number of |
|
Weighted |
|
|
Available |
|
Common |
|
Average |
|
|
for Grant |
|
Shares |
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
(Expressed in |
|
|
|
|
|
|
|
|
|
|
Canadian dollars) |
|
Balances, December 31, 2005 |
|
|
8,305,936 |
|
|
|
7,416,700 |
|
|
$ |
7.27 |
|
Increase in amount authorized |
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(8,019,000 |
) |
|
|
8,019,000 |
|
|
|
9.49 |
|
Options exercised |
|
|
|
|
|
|
(952,000 |
) |
|
|
4.44 |
|
Options cancelled |
|
|
51,000 |
|
|
|
(51,000 |
) |
|
|
6.25 |
|
Shares issued under share
purchase plan |
|
|
(9,621 |
) |
|
|
|
|
|
|
|
|
|
Balances, June 30, 2006 |
|
|
3,328,315 |
|
|
|
14,432,700 |
|
|
$ |
8.70 |
|
|
|
|
|
At June 30, 2006, the U.S. dollar equivalent of the weighted average exercise price was
$7.79. |
|
|
|
|
The following table summarizes information about stock options outstanding at June 30,
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
Weighted |
Range of |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
Exercise |
|
Number |
|
Remaining |
|
Exercise Price |
|
Number |
|
Exercise Price |
Prices |
|
Outstanding |
|
Life (in years) |
|
Per Share |
|
Exercisable |
|
Per Share |
(Expressed in |
|
|
|
|
|
|
|
|
|
(Expressed in |
|
|
|
|
|
(Expressed in |
Canadian |
|
|
|
|
|
|
|
|
|
Canadian |
|
|
|
|
|
Canadian |
dollars) |
|
|
|
|
|
|
|
|
|
dollars) |
|
|
|
|
|
dollars) |
$ |
1.60 |
to |
$ |
|
|
3.50 |
|
|
|
1,335,600 |
|
|
|
1.11 |
|
|
$ |
2.72 |
|
|
|
1,104,700 |
|
|
$ |
2.61 |
|
$ |
3.51 |
to |
$ |
|
|
6.75 |
|
|
|
293,500 |
|
|
|
2.17 |
|
|
|
6.75 |
|
|
|
181,500 |
|
|
|
6.75 |
|
$ |
6.76 |
to |
$ |
|
|
7.69 |
|
|
|
1,198,600 |
|
|
|
3.36 |
|
|
|
7.33 |
|
|
|
472,266 |
|
|
|
7.36 |
|
$ |
7.70 |
to |
$ |
|
|
8.20 |
|
|
|
2,050,000 |
|
|
|
5.94 |
|
|
|
7.90 |
|
|
|
1,018,000 |
|
|
|
7.87 |
|
$ |
8.21 |
to |
$ |
|
|
8.99 |
|
|
|
1,090,000 |
|
|
|
3.57 |
|
|
|
8.64 |
|
|
|
520,000 |
|
|
|
8.65 |
|
$ |
9.00 |
to |
$ |
|
|
10.51 |
|
|
|
7,160,000 |
|
|
|
6.54 |
|
|
|
9.72 |
|
|
|
1,783,500 |
|
|
|
9.71 |
|
$ |
10.52 |
to |
$ |
|
|
12.70 |
|
|
|
1,305,000 |
|
|
|
6.76 |
|
|
|
12.20 |
|
|
|
780,500 |
|
|
|
12.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14,432,700 |
|
|
|
5.39 |
|
|
$ |
8.70 |
|
|
|
5,860,466 |
|
|
$ |
8.06 |
|
|
|
|
|
As at June 30, 2006, there was $27.3 million of total unrecognized compensation cost
related to unvested stock options. This cost is expected to be recognized over a
weighted-average period of approximately 1.8 years. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
7. |
|
SHARE CAPITAL (Continued) |
|
(b) |
|
Share Purchase Warrants |
|
|
|
|
At June 30, 2006, the Company had 5,760,000 share purchase warrants outstanding that
were issued in 2004. These warrants entitle the holder to acquire one-tenth of a
common share of the Company at any time on or before February 15, 2007, at a price of
$8.68 per common share. |
8. |
|
SUPPLEMENTARY CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Income taxes paid |
|
$ |
242 |
|
|
$ |
60 |
|
|
$ |
387 |
|
|
$ |
94 |
|
|
(b) |
|
Net change in non-cash operating working capital items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
(2,861 |
) |
|
$ |
(1,383 |
) |
|
$ |
(4,569 |
) |
|
$ |
(526 |
) |
Inventories |
|
|
(3,824 |
) |
|
|
(405 |
) |
|
|
(2,558 |
) |
|
|
(53 |
) |
Prepaid expenses |
|
|
2,891 |
|
|
|
92 |
|
|
|
2,622 |
|
|
|
(406 |
) |
Other current assets |
|
|
2,000 |
|
|
|
23 |
|
|
|
3,000 |
|
|
|
|
|
(Decrease) increase in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
(3,754 |
) |
|
|
6,167 |
|
|
|
(10,214 |
) |
|
|
421 |
|
|
|
|
$ |
(5,548 |
) |
|
$ |
4,494 |
|
|
$ |
(11,719 |
) |
|
$ |
(564 |
) |
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES |
|
|
|
As indicated in Note 1, these consolidated financial statements have been prepared in
accordance with U.S. GAAP, which, in the case of the Company, conform in all material
respects with Canadian GAAP, except as set forth below. |
|
|
|
Consolidated Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Total assets in accordance with U.S. GAAP |
|
$ |
493,962 |
|
|
$ |
396,779 |
|
Reverse equity accounting for investment in joint venture (a) |
|
|
68,610 |
|
|
|
43,067 |
|
Reversal of amortization of other mineral property interests (b) |
|
|
6,329 |
|
|
|
6,329 |
|
Adjustment to carrying value of long-term investments (c) |
|
|
|
|
|
|
(6,711 |
) |
|
Total assets in accordance with Canadian GAAP |
|
$ |
568,901 |
|
|
$ |
439,464 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities in accordance with U.S. GAAP |
|
$ |
21,945 |
|
|
$ |
32,228 |
|
Reverse equity accounting for investment in joint venture (a) |
|
|
68,610 |
|
|
|
43,067 |
|
Income tax effect of U.S. GAAP adjustments for: |
|
|
|
|
|
|
|
|
Reversal of amortization of other mineral property interests (b) |
|
|
882 |
|
|
|
882 |
|
|
Total liabilities in accordance with Canadian GAAP |
|
$ |
91,437 |
|
|
$ |
76,177 |
|
|
|
|
|
|
|
|
|
|
|
Total minority interests in accordance with U.S.
and Canadian GAAP |
|
$ |
6,525 |
|
|
$ |
8,928 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity in accordance with U.S. GAAP |
|
$ |
465,492 |
|
|
$ |
355,623 |
|
Decrease in the deficit for: |
|
|
|
|
|
|
|
|
Reversal of amortization of other mineral property interests (b) |
|
|
5,447 |
|
|
|
5,447 |
|
Other comprehensive income (c) |
|
|
|
|
|
|
(6,711 |
) |
|
Total shareholders equity in accordance with Canadian GAAP |
|
$ |
470,939 |
|
|
$ |
354,359 |
|
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
|
|
|
Consolidated Statements of Operations
(in thousands, except for share and per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net (loss) from continuing operations in accordance with
U.S. GAAP |
|
$ |
(45,731 |
) |
|
$ |
(31,116 |
) |
|
$ |
(76,833 |
) |
|
$ |
(55,269 |
) |
Dilution gain on issuance of shares by a subsidiary (d) |
|
|
798 |
|
|
|
|
|
|
|
485 |
|
|
|
|
|
|
Net (loss) from continuing operations in accordance with
Canadian GAAP |
|
$ |
(44,933 |
) |
|
$ |
(31,116 |
) |
|
$ |
(76,348 |
) |
|
$ |
(55,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations in accordance
with U.S. GAAP |
|
$ |
5,412 |
|
|
$ |
5,941 |
|
|
$ |
13,343 |
|
|
$ |
21,614 |
|
Gain on sale of Savage River Project (e) |
|
|
|
|
|
|
(5,941 |
) |
|
|
|
|
|
|
(16,208 |
) |
|
Net income from discontinued operations in accordance
with Canadian GAAP |
|
$ |
5,412 |
|
|
$ |
|
|
|
$ |
13,343 |
|
|
$ |
5,406 |
|
|
Net (loss) in accordance with Canadian GAAP |
|
$ |
(39,521 |
) |
|
$ |
(31,116 |
) |
|
$ |
(63,005 |
) |
|
$ |
(49,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding under
Canadian GAAP (in thousands) |
|
|
329,998 |
|
|
|
298,467 |
|
|
|
323,255 |
|
|
|
295,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share in accordance
with Canadian GAAP from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.14 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.19 |
) |
Discontinued operations |
|
|
0.02 |
|
|
|
|
|
|
|
0.04 |
|
|
|
0.02 |
|
|
|
|
$ |
(0.12 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.17 |
) |
|
|
|
Under Canadian GAAP, the components of shareholders equity would be as follows: |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Share capital |
|
$ |
1,163,667 |
|
|
$ |
999,372 |
|
Additional paid-in capital |
|
|
29,805 |
|
|
|
17,952 |
|
Accumulated other comprehensive income (c) |
|
|
3,437 |
|
|
|
|
|
Deficit |
|
|
(725,970 |
) |
|
|
(662,965 |
) |
|
|
|
$ |
470,939 |
|
|
$ |
354,359 |
|
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
|
|
|
Consolidated Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Cash used in operating activities in accordance with
U.S. GAAP |
|
$ |
(48,671 |
) |
|
$ |
(23,479 |
) |
|
$ |
(84,842 |
) |
|
$ |
(53,993 |
) |
Reverse equity accounting for investment in
joint venture (a) |
|
|
22,035 |
|
|
|
616 |
|
|
|
29,260 |
|
|
|
8,987 |
|
|
Cash used in operating activities in accordance with
Canadian GAAP |
|
|
(26,636 |
) |
|
|
(22,863 |
) |
|
|
(55,582 |
) |
|
|
(45,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by investing activities in accordance
with U.S. GAAP |
|
|
(9,684 |
) |
|
|
(6,661 |
) |
|
|
16,878 |
|
|
|
2,751 |
|
Reverse equity accounting for investment in
joint venture (a) |
|
|
(6,186 |
) |
|
|
(1,049 |
) |
|
|
(9,957 |
) |
|
|
(1,975 |
) |
|
Cash (used in) provided by investing activities in
accordance with Canadian GAAP |
|
|
(15,870 |
) |
|
|
(7,710 |
) |
|
|
6,921 |
|
|
|
776 |
|
|
|
Cash provided by financing activities in
accordance with U.S. GAAP |
|
|
161,552 |
|
|
|
120,346 |
|
|
|
163,966 |
|
|
|
121,244 |
|
Reverse equity accounting for investment in
joint venture (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities in accordance
with Canadian GAAP |
|
|
161,552 |
|
|
|
120,346 |
|
|
|
163,966 |
|
|
|
117,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
4,342 |
|
|
|
1,801 |
|
|
|
4,099 |
|
|
|
1,293 |
|
|
Net cash inflow in accordance with Canadian GAAP |
|
|
123,388 |
|
|
|
91,574 |
|
|
|
119,404 |
|
|
|
74,557 |
|
Cash, beginning of period in accordance with Canadian GAAP |
|
|
120,540 |
|
|
|
105,560 |
|
|
|
124,524 |
|
|
|
122,577 |
|
|
Cash, end of period in accordance with Canadian GAAP |
|
$ |
243,928 |
|
|
$ |
197,134 |
|
|
$ |
243,928 |
|
|
$ |
197,134 |
|
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
|
(a) |
|
Investment in Joint Venture |
|
|
|
|
Under U.S. GAAP, Ivanhoe Mines has accounted for its joint venture interest in JVCo
(Note 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 and replaced with Ivanhoe Mines proportionate share of
each line item of JVCos assets, liabilities, revenue and expenses which is included in
the corresponding line items of Ivanhoe Mines financial statements. All intercompany
balances and transactions would be eliminated. Note 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) |
|
Other mineral property interests |
|
|
|
|
Under U.S. GAAP, where mineral property interests are, at the date of acquisition,
without economically recoverable reserves, these costs are generally considered to be
exploration costs that are expensed as incurred. Under Canadian GAAP, the costs of the
acquisition of mineral property interests are capitalized. |
|
|
|
|
In accordance with EITF 04-02, Whether Mining Rights are Tangible or Intangible Assets,
the Company classifies its mineral exploration licenses as tangible assets and there is
no difference between Canadian and U.S. GAAP. Prior to January 2004, the costs of
acquisition of Ivanhoe Mines mineral exploration licenses were classified as
intangible assets under U.S. GAAP and amortized over the term of the licenses. As a
result, for Canadian GAAP purposes, the $6,329,000, net of deferred income taxes of
$882,000, in amortization or write-offs of other mineral property interests under U.S.
GAAP has been reversed. |
|
|
(c) |
|
Financial Instruments |
|
|
|
|
On January 1, 2006, the Company adopted CICA Section 1530, Comprehensive Income,
Section 3855, Financial Instruments Recognition and Measurement, Section 3861,
Financial Instruments Disclosure and Presentation and Section 3865, Hedges. These
new standards increased harmonization between U.S. and Canadian GAAP. |
|
|
|
|
Under U.S. and Canadian GAAP, portfolio investments are classified as
available-for-sale securities, which are carried at market value (Note 5). The
resulting unrealized gains or losses are included in the determination of comprehensive
income, net of income taxes where applicable. Prior to adopting Sections 3855 and
1530, these investments were carried at their original cost less provisions for
impairment under Canadian GAAP. Upon adoption, the Company recorded a retroactive
balance representing the unrealized gains on available-for-sale securities of
$6,711,000 at January 1, 2006. Available-for-sale securities generated comprehensive
loss of $12,189,000 and $3,274,000 under both Canadian and U.S. GAAP for the three and
six month periods ended June 30, 2006. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
(Unaudited)
9. |
|
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (Continued) |
|
(d) |
|
Dilution gain on investment in subsidiary |
|
|
|
|
Under U.S. GAAP, dilution gain on investment in a subsidiary of $798,000 and $485,000
for the three and six month periods ended June 30, 2006 was accounted for as part of
additional paid-in capital. Under Canadian GAAP, the dilution gain was included in
the net loss for the three and six month periods ended June 30, 2006. |
|
|
(e) |
|
Gain on Sale of Savage River Project |
|
|
|
|
Under U.S. GAAP, the net book value of ABM when it was sold in February 2005 was
$11.2 million, whereas under Canadian GAAP the carrying value was $30.9 million. At
June 30, 2005, total proceeds from the sale were $27.4 million. Therefore, under
Canadian GAAP a balance of $3.5 million was included on the balance sheet as deferred
consideration receivable, whereas under U.S. GAAP a gain on sale of $16.2 million was
recognized. |
|
|
(f) |
|
Income taxes |
|
|
|
|
Under U.S. GAAP, deferred income taxes are calculated based on enacted tax rates
applicable to future years. Under Canadian GAAP, future income taxes are calculated
based on enacted or substantively enacted tax rates applicable to future
years. This difference in GAAP did not have any effect on the financial position or
results of operations of the Company for the three and six month periods ended June
30, 2006 and 2005. |
10. |
|
SUBSEQUENT EVENTS |
|
|
|
In July 2006, Ivanhoe Mines and Asia Gold Corp. (Asia Gold) signed a definitive
agreement whereby Asia Gold will acquire Ivanhoe Mines Coal Division by issuing 82,576,383
shares of Asia Gold to Ivanhoe Mines. This reorganization was approved by Asia Golds
shareholders on August 8, 2006. This transaction remains subject to final approval by the
TSX Venture Exchange and the fulfillment of certain conditions precedent, including the
completion of the transfer of certain mineral exploration licenses in Mongolia, applications
for which have been submitted to the relevant Mongolian governmental authorities and are
pending. The reorganization will result in Ivanhoe Mines owning approximately 90% of Asia
Golds issued and outstanding share capital. |
|
|
|
As part of the agreement, Ivanhoe Mines extended to Asia Gold an interim line of credit of
US$10 million (which can be increased to US$15 million by mutual agreement). At June 30,
2006, $2.0 million has been drawn down by Asia Gold from this facility. |
|
|
|
Ivanhoe Mines also agreed to fund, for the account of Asia Gold, the expenditures necessary
to continue the exploration and development of Ivanhoe Mines Coal Divisions projects
pending the completion of the reorganization. If the coal reorganization is completed, all of
these interim expenditures will be treated as advances and will be added to the outstanding
balance under the line of credit. If the coal reorganization is not completed, these
expenditures will remain solely for the account of IVN. |
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interim Report For the three and six months ended June 30, 2006
At August 11, 2006 the Company had 335.3 million common shares issued and outstanding and warrants and stock options outstanding for 15.1 million additional common shares.
Share
Information
Common shares of Ivanhoe Mines Ltd. are listed for trading under the symbol IVN on the New York Stock Exchange, NASDAQ and the Toronto Stock Exchange.
Transfer Agents and Registrars
CIBC Mellon Trust Company
320 Bay Street
Toronto, Ontario, Canada
M5H 4A6
Toll free in North America:
1-800-387-0825
Investor Information
All
financial reports, news releases and corporate information can be
accessed on our web site at www.ivanhoe-mines.com
Contact Information
Investors: Bill Trenaman
Media: Bob Williamson
Suite 654-999 Canada Place
Vancouver, BC, Canada V6C 3E1
E-mail: info@ivanhoemines.com
Tel: (604) 688-5755
INTRODUCTION
This management discussion and analysis of the financial position and results of operations
(MD&A) of Ivanhoe Mines Ltd. should be read in conjunction with the unaudited consolidated
financial statements of Ivanhoe Mines Ltd. and the notes thereto for the three and six months ended
June 30, 2006, and with the audited consolidated financial statements of Ivanhoe Mines Ltd. and the
notes thereto for the year ended
December 31, 2005. These financial statements have been prepared in accordance with 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 9. In this MD&A, unless the context dictates otherwise, a reference to the Company
refers to Ivanhoe Mines Ltd. and a reference to Ivanhoe Mines refers to Ivanhoe Mines Ltd.,
together with its subsidiaries and joint ventures. The effective date of this MD&A is August 11,
2006.
Additional information about the Company, including its Annual Information Form, is available at
www.sedar.com.
OVERVIEW
Ivanhoe Mines is an international mining company that is focused on exploring and developing
its major discoveries of copper and gold at its Oyu Tolgoi Project, and coal at the Nariin Sukhait
Project, in southern Mongolia.
At June 30, 2006, Ivanhoe Mines held four mining licenses for the Oyu Tolgoi Project totalling
approximately 24,000 hectares. Ivanhoe Mines also held directly, and indirectly with Asia Gold
Corp. a company 45%-owned by Ivanhoe Mines interests in Mongolian exploration licenses covering
approximately 10.3 million hectares.
Results of Operations
The Company recorded a net loss of $40.3 million (or $0.12 per share) for the second quarter of
2006, compared to a net loss of $25.2 million (or $0.08 per share) in Q205.
Page 1 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The increase in the
loss from 2005 to 2006 is primarily due to a $6.1 million increase in exploration expenses, a $3.5
million increase in stock compensation expense, a $10.2 million decrease in income from the Monywa
Copper joint venture, less a $3.0 million increase in foreign exchange gains, a $1.3 million
increase in interest income and a $1.7 million increase in operating loss allocated to minority
interests.
Financings
On April 25, 2006, Ivanhoe Mines completed a financing that consisted of 18.4 million common shares
at a price of $9.08 per common share (Cdn$10.28), representing gross proceeds of $167.2 million
(net proceeds of $159 million).
Oyu Tolgoi Project, Mongolia
New Mine-Plan Initiatives Designed to Raise Returns and Reduce Risk
Strategic planning and development activities for the Oyu Tolgoi Project have been directed at
improving the risk profile of the project and developing alternative strategies to guide the
development of the mine. These initiatives will allow for the optimum use of available cash-flow
once operations commence.
The Company has concluded that it will move from the original large, single SAG and dual ball-mill
configuration to a circuit comprised of two smaller SAG mills, each coupled with two ball mills.
Smaller SAG mills will significantly reduce the perceived
technical risk associated with the larger unit as mills of this size have a proven operational
track record. A further risk-mitigating factor is that the dual-circuit configuration would allow
Oyu Tolgoi to continue production at reduced rates in the event of mine or mill outages.
In another development, the Company is continuing to investigate the option for sub-level caving
mining on a high-grade portion of the upper Hugo North Deposit. Sub-level caving is a bulk,
underground mining method where the ore body is developed, drilled, blasted and removed from a
series of progressive levels from the top down. The waste rock overlying the ore body caves
upwards progressively as the ore is removed. This area of the deposit contains copper grades of
between 2.5% and 3%. This underground starter mine will provide an ideal environment to train
miners and better understand in-situ geotechnical conditions which will be applied to enhance the
layout and operations of the large-scale longer term block caving operation. Recent drilling and
mine planning initiatives have suggested that this alternative approach to the mine schedule may
yield higher returns and/or lower the risk associated with the initial Integrated Development Plan
(IDP) that was issued in September, 2005. Originally, production from this part of the Hugo North
deposit was planned as part of the block-cave production schedule later in the deposit life.
By using the new infrastructure of Shaft #1 presently under construction, the Company effectively
can advance the scheduled production from this high-grade portion of the Hugo North deposit and
provide a minimum of seven million tonnes per annum of high-grade feed to the mill extending for
at least five years, until the large, deep block-cave begins on the Hugo North Deposit. A
sub-level cave development could provide
Page 2 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
significant cash flows to assist in the funding of the
block-cave underground development and also significantly reduce risk by providing additional
technical information and reducing the production reliance on the long-term, capital-intensive,
underground block-cave development.
Additional studies planned for later this year will focus on increasing the open-pit life, ultimate
underground production and milling throughput tonnages beyond the 140,000 tonnes per day as
reported in the IDP. Management believes that production from the open pit, with an estimated
29-year mine life coupled with block-caving operations at the Hugo North and Hugo South deposits
ultimately could increase mill throughput to a range of 200,000 to 250,000 tonnes per day.
Shaft No. 1 Reaches Depth of 400 Metres
Construction activities on the Oyu Tolgoi Project have centered on the continued, successful
sinking of Shaft #1, a 6.7-metre-diameter exploration and production shaft. It remains on plan,
presently averaging 3.1 metres per day, and has reached a depth of approximately 400 metres below
surface. This important item of infrastructure will allow the Company to access the underground
copper and gold at the Hugo North Deposit as it advances the development of the Oyu Tolgoi Project.
In conjunction with Shaft #1, preliminary activities have been undertaken in preparation for
commencement of construction in 2007. The Company is focusing on roadworks, site
clearing, excavation of the concentrator site and planning for construction accommodation to remain
in position to meet the scheduled mine start up in mid 2009, subject to the receipt of all
necessary project approvals before January 2007. Engineering and procurement efforts undertaken
during the second quarter were directed at working toward a definitive capital estimate.
The definitive capital estimate, being prepared by Fluor Engineering, will encompass the initial
concentrator and infrastructure construction at Oyu Tolgoi. Bids are being gathered for most major
equipment. The Company has had a procurement presence in China since 2005. The relationships
developed during this period are considered a major factor in being able to realize the potential
cost and schedule benefits that can be obtained from doing business in China.
Investment Contract with Mongolian Government
The finalization of an Investment Contract with the Mongolian Government will be a very important
milestone towards the development of Oyu Tolgoi.
An Investment Contract, previously referred to as a Stability Agreement, is intended to be a
comprehensive agreement that will create a stable tax and royalty environment, cover arrangements
for essential infrastructure, including roads, the supply of interim and long-term electrical
power, and confirm the Companys commitments to maximize opportunities to educate, train and employ
Mongolians.
Early in July 2006, the Mongolian Parliament fulfilled its commitment to finalize changes to the
countrys Minerals Law and Tax Law. This was an important stage in the
Page 3 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
development of Oyu Tolgoi,
since the Government had declared that approval of the revised laws was a precondition to the
negotiation of an Investment Contract.
The Company provided input on the development of the new laws through meetings between its Senior
Executives and representatives of the Government, Members of Parliament and civil groups in
Mongolia. The second quarter was marked by a consistent effort from the Company to engage these
groups and its own national employees in an effort to build a broad understanding within Mongolia
of the benefits of the Oyu Tolgoi Project. The Company firmly believes that helping to ensure that
the Government and people of Mongolia are in a position to make an informed decision on the
development of Oyu Tolgoi is essential to the projects success.
The most significant changes in the Tax Laws are in the form of increased mineral royalties and
reduced corporate taxation. Royalties rose from 2.5% of net sales to 5%, while the corporate tax
rate was reduced from 30% to 25%.
The revised Minerals and Tax Laws have not yet been released in definitive form. However, the
Company has conducted a preliminary review of the changes to the laws, based on information
released by the Government and analysis by our Mongolian and international legal team. The review
determined that the underlying value of Oyu Tolgoi, as presented in the September 2005 Integrated
Development Plan, has not been materially affected. This assessment used discounted cash-flow
analysis, assuming an 8% discount rate, under the original pricing assumptions used for the
Integrated Development Plan of
US$1.00/lb. copper and $400/oz. gold. With the continued strength in current copper and gold
prices, the Company expects that future development plans will be based on long-term metal prices
in the range of $1.10-$1.20/lb. for copper and $500/oz. for gold.
The Company was disappointed that in May 2006, prior to the revision of the minerals and taxation
laws, an additional tax on excess profit was approved by the Mongolian Parliament with little
industry consultation. The manner in which the tax was introduced has been criticized by the
Company and the global mining and investment communities. The Companys preliminary analysis of the
Excess Profit Tax Law, guided by directives issued by the Mongolian taxation authorities, indicates
that the tax does not act as a tax on gross revenue, as it initially appeared. The effective price
at which the tax should apply to Oyu Tolgoi copper is currently estimated to be $1.45 per pound,
since the legislated base price of $1.18/lb, along with the cost of external smelting and
realization costs, can be deducted from sales proceeds.
Clarification received from the Government also has confirmed that the new tax would not be applied
to copper smelted in Mongolia and it would not apply to the gold contained in a copper concentrate.
Oyu Tolgoi will be a producer of copper concentrate and gold produced at Oyu Tolgoi will be
contained in copper concentrate.
In meetings with senior Government representatives earlier this year, the Company reaffirmed its
willingness to work with the Government to have downstream smelting capacity built in Mongolia that
could serve Oyu Tolgoi and other mines and help produce value-added products for domestic and
export markets.
Page 4 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Coal Division, Mongolia
Nariin Sukhait Coal Project
Mining operations at the Coal Divisions Nariin Sukhait Project are expected to start in 2007 at
approximately one million tonnes per year and increase to four million tonnes per year over a
five-year period. During the quarter, a letter of intent was signed with a Chinese company
contemplating the sale of up to four million tonnes of coal per year.
Engineering mine plans and a Detailed Environmental Impact Assessment for the Nariin Sukhait
Project are being completed in preparation for the application for a mining license. An
exploration and drilling program was underway in Q206, in addition to improvements to an airstrip
located near the Nariin Sukhait coal property.
Coal Division merger with Asia Gold to Create Ivanhoe Coal Ltd.
On August 8th, the minority shareholders of Asia Gold approved a proposed merger
transaction under which Ivanhoe Mines will transfer its Coal Division to Asia Gold in exchange for
approximately 82.6 million common shares of Asia Gold. The transaction, once completed, will
result in Ivanhoe Mines owning approximately 90.0% of the issued and outstanding shares of Asia
Gold. As part of the transaction, Ivanhoe Mines has agreed to extend an interim working line of
credit to Asia Gold of $10 million, which can be increased to $15 million by mutual agreement.
Closing of the transaction is subject to receipt of final approval from securities regulatory
authorities and the fulfillment of certain conditions precedent, including completion of the
transfer of certain mineral exploration licenses in Mongolia. Transfer applications have been
submitted to the relevant Mongolian governmental authorities and are pending.
The new company will be re-named Ivanhoe Coal Ltd. after the transaction has closed.
Other Projects
S&K Mine, Monywa Copper Joint Venture, Myanmar
The mine resumed normal operations on April 2, 2006. Copper cathode production for the quarter
totalled 5,141 tonnes, representing a 57% increase over Q106 and a 44% decrease from Q205.
During the second quarter, the management for the S&K Mine joint venture increased its provision
for income tax for the 2005 and 2006 tax years that cover the period from April 1, 2004 to June 30,
2006. The joint venture had filed its 2003 and 2004 returns on the basis that it would receive a
50% exemption on the 30% corporate tax rate, however, this did not occur. This ruling by the
taxation authorities is being appealed by the joint venture. Notwithstanding the appeal, the joint
venture has increased its accrued income tax payable for the April 1, 2004 to June 30, 2006 period
to reflect the tax rate of 30%. At June 30, 2006, the joint venture had accrued in accounts
payable $39.7 million (net $19.8 million to Ivanhoe Mines) in income tax. The net impact on the
mines results of operations was an additional one-time charge of $18.5 million (net $9.3 million
to Ivanhoe Mines) in income-tax expense for the three months ended June 30, 2006.
Page 5 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the quarter, the Company continued its detailed discussions with interested parties
regarding the possible sale of an interest in the S&K Mine.
Bakyrchik Gold Project, Kazakhstan
The rise in the gold price during 2006 significantly improves the economics of this project. In
Q106, discussions were held between representatives from the Company and various Kazakhstan
Government authorities on the current status and future prospects of the Bakyrchik Project.
Ivanhoe Mines reached a satisfactory agreement with the Kazakhstan Government authorities in Q106
that extended the Project exploration licenses for five years. The Company has received a similar
five-year extension for its investment commitment for the project.
The Company is reviewing an updated Technical Report and is planning a major exploration program on
its Kazakhstan mineral licenses during the second half of 2006. The start of the program will be
subject to the receipt of various Government approvals that will allow expatriate personnel to
enter the country and commence the exploration program.
Financing alternatives, including a possible public offering of a company holding the Bakyrchik
Project, are being considered.
Update on Operations at Savage River Mine, Australia
A brief fire occurred in the concentrator at the Savage River iron ore mine in Tasmania, Australia,
at the end of June06. The temporary curtailment of operations as a result of this fire and a 3%
decrease in pellet prices announced for the 2006-2007 year are expected to affect the total pellet
premium proceeds to be received by the Company in March 2007, which are estimated at approximately
$20 million. The fire did not impact the mines current mineral reserves. The Company expects
that the aggregate future contingent payments will not be affected.
Jinshan Gold Mine Nearing Production in China
On April 24, 2006, Jinshan Gold Mines Inc., a company that is 52% owned by Ivanhoe Mines,
announced the completion of the final feasibility study for its CSH (217) Gold Project open-pit
mine in Inner Mongolia, China. The study indicates that the mine would be capable of producing
approximately 117,000 ounces of gold per year for an initial mine life of approximately nine years
at an average cash cost of approximately $253 per ounce. The feasibility study estimates total
Proven and Probable open-pit reserves at 66.7 million tonnes averaging 0.75 grams per tonne gold,
containing approximately 1.2 million ounces of recovered gold. The study was prepared by KD
Engineering of Tucson, Arizona, pursuant to Canadas National Instrument 43-101.
Jinshan is negotiating bank financings to complete the development of the CSH (217) Project.
Jinshan expects to receive its mining permit in the third quarter of 2006, which will authorize the
start of commercial gold mining operations. Assuming all the required permits are received as
scheduled, Jinshan expects that it will be capable of commencing commercial gold production in the
fourth quarter of 2006 or in the spring of 2007. In the meantime, mine construction and excavation
is underway including the construction of a
Page 6 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
crushing plant, the excavation and pouring of concrete
foundations for the process plant, construction of the pregnant solution and overflow pounds,
installation of the modular process plant and the installation of the leach pad.
The following discussion, analysis and financial review is comprised of ten sections:
|
1. |
|
Review of operations. |
|
|
2. |
|
Summary of quarterly results. |
|
|
3. |
|
Cash resources and liquidity. |
|
|
4. |
|
Share capital. |
|
|
5. |
|
Outlook. |
|
|
6. |
|
Contractual obligations and off-balance-sheet arrangements. |
|
|
7. |
|
Critical accounting estimates and recent accounting pronouncements. |
|
|
8. |
|
Risks and uncertainties. |
|
|
9. |
|
Related-party transactions. |
|
|
10. |
|
Cautionary statements. |
Page 7 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REVIEW OF OPERATIONS
SELECTED FINANCIAL INFORMATION
($ in millions of U.S. dollars, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Exploration expenses |
|
|
(39.9 |
) |
|
|
(33.8 |
) |
|
|
(66.9 |
) |
|
|
(58.2 |
) |
General and administrative costs |
|
|
(9.8 |
) |
|
|
(5.9 |
) |
|
|
(20.8 |
) |
|
|
(10.7 |
) |
Share of (loss) income from Joint venture |
|
|
(2.4 |
) |
|
|
7.8 |
|
|
|
2.1 |
|
|
|
15.5 |
|
Foreign exchange gains |
|
|
4.7 |
|
|
|
1.7 |
|
|
|
4.5 |
|
|
|
1.1 |
|
Net (loss) from continuing operations |
|
|
(45.7 |
) |
|
|
(31.1 |
) |
|
|
(76.8 |
) |
|
|
(55.3 |
) |
Net income from discontinued operations |
|
|
5.4 |
|
|
|
5.9 |
|
|
|
13.3 |
|
|
|
21.6 |
|
Net (loss) |
|
|
(40.3 |
) |
|
|
(25.2 |
) |
|
|
(63.5 |
) |
|
|
(33.7 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
($0.14 |
) |
|
|
($0.10 |
) |
|
|
($0.24 |
) |
|
|
($0.18 |
) |
Discontinued operations |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
0.07 |
|
Total assets |
|
|
494.0 |
|
|
|
435.8 |
|
|
|
494.0 |
|
|
|
435.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint venture operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper cathode 50% share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units sold tonnes |
|
|
2,174 |
|
|
|
4,543 |
|
|
|
4,100 |
|
|
|
9,213 |
|
Units produced tonnes |
|
|
2,571 |
|
|
|
4,559 |
|
|
|
4,213 |
|
|
|
9,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sale price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper cathode US$/pound |
|
$ |
4.00 |
|
|
$ |
1.59 |
|
|
$ |
3.40 |
|
|
$ |
1.60 |
|
EXPLORATION
In Q206, Ivanhoe Mines expensed $39.9 million in exploration and development activities,
compared to $33.8 million in Q205. The majority of the $39.9 million was spent on Ivanhoe Mines
Mongolian properties ($33.0 million compared to $29.3 million
in Q205). Approximately $24.1 million (73%) of the $33.0 million was spent on the Oyu Tolgoi
Project and various coal exploration activities in the South Gobi region of Mongolia. The
remaining 27% was mainly spent on regional reconnaissance, license holding fees and general,
in-country administrative charges.
Total development expenditures capitalized in Q206 totalled approximately $8.2 million, compared
to $4.9 million in Q205. In Q206, approximately $3.2 million was spent on capital expenditures
in Mongolia and $4.6 million was spent on Jinshans 217 Project.
a) |
|
Oyu Tolgoi Project, Mongolia |
i) Oyu Tolgoi Exploration.
Drilling program In Q206, the bulk of Ivanhoe Mines drilling efforts were focused on an
infill drilling program on the Hugo North Deposit and completing condemnation drilling
required to finalize the location of the airport landing strip.
Page 8 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
At the end of Q206, six
drill rigs were performing geotechnical, condemnation and resource delineation drilling.
The objective of the current infill drilling program on the sub-level cave area of Hugo
North is to bring additional inferred resources to an indicated resource category for
pre-feasibility-level studies. The drilling program is scheduled to be completed in late
October to November. Ongoing geotechnical and condemnation drilling is planned to continue
in 2007 with two to three drills.
ii) Oyu Tolgoi Integrated Development Plan (IDP)
Mine Planning Update During the quarter the Company continued to focus on the completion
of various engineering studies and designs aimed at optimizing a smaller high-grade
underground starter mine. Recent analysis highlighted a significant high-grade block in
the southern end of the Hugo North Deposit that was originally intended to be mined during
a later part of the IDP initial block cave mining phase. The starter-mine mineralization
is located higher in elevation than the main high-grade Hugo North deposit and closer to
the initial Shaft #1 development. Current plans are to use either a sub-level-cave
operation or smaller block-cave operation for the starter mine. The starter mine would
utilize the same infrastructure as envisaged by the original IDP plan and would result in
lowering the overall financial risk for the project by providing operating cash flows that
can help finance the expansion of the deeper portions of the Hugo North deposit.
Production in a range of 15,000 to 20,000 tonnes per day is being targeted from this
proposed starter mine.
The starter mine would also significantly lower the overall project technical risks, as
knowledge gained from the development of the starter mine would be incorporated in the
design and operations of the deeper Hugo North block cave mining phase.
The objective for the current infill drilling is to upgrade the mineral resources of the
starter mine to an indicated category suitable for reserve reporting later in 2006.
Pre-feasibility-level metallurgical test work for this area also is ongoing.
Geotechnical investigations for underground infrastructure will continue during 2006,
focusing on the location of Shaft #2 and the location of access corridors between the Hugo
Dummett deposits and planned infrastructure development.
Planning is well advanced on work associated with the open-pit phase of the project,
covering the Southwest open-pit development and the construction of the concentrator and
related infrastructures. Major elements or issues yet to be finalized include interim and
long-term power, potential rail access and the completion of environmental assessments.
Detailed design of plant and infrastructure is on going and an update to the IDP is planned
to commence later in 2006 to incorporate the starter-mine scenario and various other
process improvements.
Shaft #1 Progress All surface installations for the shaft were completed by the end of
January 2006, including pre-sinking to a depth of 35 metres. Sinking of
Page 9 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the shaft has
reached a depth of approximately 400 metres below surface in early August, recently
progressing at an average rate of approximately 3.1 metres per day. The sinking of 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.
Development shaft (Shaft #2) To maximize project value from the high-grade Hugo North
Deposit, the Company plans to commence construction of a 10-metre-diameter
production/service shaft. Sinking of the shaft is scheduled to commence in late 2007.
During the quarter, ongoing work on the shaft included bulk excavation work for the head
frame and various excavations for haul roadways, as well as various engineering studies on
design and equipment procurement.
At the end of July, the overall engineering progress on the construction of the
concentrator totalled approximately 16% of the total budgeted engineering hours. A
decision was made during July to change the process from a single SAG mill followed by two
large ball mills to two effectively independent trains with two SAG mills followed by four
ball mills. Procurement activities continued during the quarter. The Company expects to
complete in 2006 the selection and award of all large process equipment, as well as the
acquisition of all vendor information required to complete the design of the concentrator.
All infrastructure development, including temporary facilities required to support
construction, are proceeding at a pace required to support the planned production schedule.
b) |
|
Other Mongolian copper/gold exploration projects. |
|
|
|
During Q206, Ivanhoe Mines continued its exploration efforts on various other
Mongolian prospects. Work was focused on the Baruun Tal and Under Naran porphyry
prospects, 50 kilometers west of the Kharmagtai Project and 20 kilometers northeast of the
Oyut Ulaan Project respectively. Limited trenching activities are planned in Q306 for
both these projects. Regional reconnaissance has condemned large areas, much of this under
thick cover, and relinquishment of mineral licenses for these areas is underway. |
|
c) |
|
Mongolian coal projects. |
|
|
|
In Q206, the Company announced its plans to vend its Mongolian Coal Division, including
its interest in the Nariin Sukhait Coal Project and the Tsagaan Tolgoi Coal Project, into
Asia Gold Corp. in exchange for majority ownership of Asia Gold Corp. See Exploration
Other Mongolia: Asia Gold Corp in (v) below. |
Page 10 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
Nariin Sukhait Coal Project The Nariin Sukhait Coal Project, covering an area of 3,240
square kilometers, is located 45 kilometers north of the Mongolia-China border and the
shipping terminus for a newly constructed, 450-kilometer 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 permit. |
|
|
|
In Q106, the Company also announced the results of an updated resource estimate for the
Nariin Sukhait Coal Project. Total coal resources contained in two separate fields, the
South-East Field and the West Field, were estimated at 124.0 million tonnes of Measured
plus Indicated resources, (79.5 million tonnes of Measured resources and 44.5 million
tonnes of Indicated resources), and an additional Inferred resource of approximately 33.8
million tonnes. The new estimate was independently prepared by Norwest Corporation of Salt
Lake City, Utah, pursuant to Canadas National Instrument 43-101. Details of the
classification, estimation and reporting of coal resources are contained in Ivanhoe Mines
February 14, 2006, news release. Steven B. Kerr, Senior Geologist with Norwest Corporation,
a qualified person, reviewed and approved the technical and scientific information in the
release. |
|
|
|
In Q206, an exploration and drilling program was undertaken. Exploration and drilling
contractors were mobilized along with the hiring of field and support staff. To improve
future access to the site, the refurbishment of an airstrip located near the property was
started during the quarter. In Q306, the Coal Division plans to complete an updated
mining study on the Nariin Sukhait Coal Project in accordance with National Instrument
43-101. A mine throughput of 4 million tonnes of coal per year is being evaluated by
Ivanhoe Mines and its independent consultants. Annual production is expected to yield
thermal coal for power generation, pulverized coal injection and metallurgical (coking)
coal for blending. |
|
|
|
Discussions with various potential Chinese customers interested in coal supply from Nariin
Sukhait are ongoing. During the quarter, a letter of intent for the sale of up to four
million tonnes of coal per year, starting in 2007, was signed with a
Chinese company. Mining operations at Nariin Sukhait are expected to start in 2007 at a
capacity of approximately one million tonnes per year and increase to four million tonnes
per year over a five-year period. |
|
|
|
Tsagaan Tolgoi Coal Project This project, discovered by Ivanhoe Mines, is located
approximately 100 kilometers west of the Oyu Tolgoi Project. Significant coal thicknesses
were encountered along a strike length of six kilometers as a result of deep-trenching
efforts and a drilling program that included a total of 46 drill holes. However, due to
the wide spacing of the holes, an estimate of coal resources cannot be made at this time.
Drilling equipment was moved from the Nariin Sukhait project to the Tsagaan Tolgoi project
in August 2006. A drilling program on the Tsagaan Tolgoi project is expected to be
completed in 2006, followed by the issuance of a technical report prepared in accordance
with |
Page 11 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
National Instrument 43-101 that will present a summary of total coal resources
delineated on the project. The objective of the drilling program is to delineate
sufficient thermal coal resources to support the preparation of a formal study on the
development of 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) |
|
Kazakhstan: Bakyrchik Project. |
|
|
|
The rise in the gold price in 2006 significantly improves the economics of this project.
In Q206, the Company continued its discussions with representatives of various Kazakhstan
Government authorities on the current status and future prospects of the Bakyrchik Project.
Ivanhoe Mines reached a satisfactory agreement with the Kazakhstan Government authorities
in Q106 that extended the Projects exploration licenses for five years. The Company has
received a similar five-year extension for its investment commitment for the project. |
|
|
|
The Company is reviewing an updated Technical Report and is planning a major exploration
program of its Kazakhstan mineral licenses during the second half of 2006. The start of
the program will be subject to the receipt of various Government approvals that will allow
expatriate personnel to enter the country and commence the exploration program. |
|
|
|
Financing alternatives, including a possible public offering of a company holding the
Bakyrchik Project, are being considered. |
|
ii) |
|
China: Inner Mongolia |
|
|
|
During Q206, Ivanhoe Mines continued its exploration efforts on various prospects located
in Inner Mongolia. |
|
iii) |
|
Australia: Cloncurry |
|
|
|
The Cloncurry Project, covering an area of more than 1,450 square kilometers, 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. |
|
|
|
In Q206, the Company initiated a 5,000-metre drill program focused on the strongest
combined anomalies identified from the recently completed geophysical program and previous
copper and gold soil anomalies on the Amethyst Castle Project and the Three Amigos Project. |
|
|
|
Amethyst Castle Project (copper, gold and uranium) The Amethyst Castle Project is
considered to be an Iron Oxide Copper-Gold-Uranium (IOCG) mineralized system. In Q106,
Ivanhoe Mines completed a geophysical program over a 2.5-kilometer by 2.0-kilometer grid,
followed by a dipole-dipole Induced Polarization (IP) survey over a 1.5-kilometer by 1.0
kilometer grid. The IP survey lines will be extended to investigate additional anomalies
on three sides of the |
Page 12 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
grid. The magnetic survey results established the potential for
significant near-surface mineralization to the depth of the IP response. |
|
|
|
Three Amigos Project (copper gold) The Three Amigos Project is located approximately 700
metres south of the Amethyst Castle Project. Assay results of soil samples confirmed the
presence of moderately to highly anomalous gold, copper and cobalt. The presence of
anomalous copper, gold and cobalt could suggest similarities to Amethyst Castle or an
extension of Amethyst Castle to the south. |
iv) |
|
China: Jinshan Gold Mines Inc. (Jinshan). |
|
|
|
On April 24, 2006, Jinshan announced the completion of the final feasibility study for its
CSH (217) Project open-pit gold mine in Inner Mongolia, China. The study indicates that
the mine would be capable of producing approximately 117,000 ounces of gold per year for an
initial mine life of approximately nine years at an average cash cost of approximately $253
per ounce. The feasibility study estimated total Proven and Probable open-pit reserves at
66.7 million tonnes averaging 0.75 gram per tonne gold, containing approximately 1.2
million ounces of recovered gold. Details of the study, which was prepared by KD
Engineering of Tucson, Arizona, pursuant to Canadas National Instrument 43-101, are
contained in Jinshans April 24, 2006, news release. Joseph Keane, President of KD
Engineering, Mario E. Rossi, of GeoSystems International Inc., and John Nilsson, of
Vancouver, Canada, qualified persons, supervised the preparation of the technical and
scientific information contained in the release. |
|
|
|
Starting at the beginning of May 2006, all development expenditures are being capitalized.
Out of a total of $3.7 million spent on plant and equipment during the quarter, a total of
approximately $1.0 million was capitalized. |
|
|
|
During Q206, Jinshan continued its discussion with financial institutions for a $35 to $40
million loan facility. If obtained, the funds from this facility would be used to finance
the ongoing construction of mine infrastructure. During the quarter, Jinshan also engaged
in discussions with various third parties for potential joint venture arrangements to
assist in the financing of future exploration activities on some of its other Chinese
projects. |
|
v) |
|
Mongolia: Asia Gold Corp. (Asia Gold) |
|
|
|
Coal Transaction On April 26, 2006, Ivanhoe Mines announced an agreement in principle to
vend its Coal Division into Asia Gold in exchange for additional shares of Asia Gold. The
transaction would result in Ivanhoe Mines owning approximately 90% of the issued and
outstanding common shares of Asia Gold. Ivanhoe Mines held 45% of Asia Golds common
shares at the end of Q206. |
|
|
|
As part of the transaction, Ivanhoe Mines has agreed to extend an interim working line of
credit to Asia Gold of up to $15 million. Asia Golds proposed acquisition of the Coal
Division, which is a related-party transaction, was approved on
August 8, 2006,
by Asia Golds minority shareholders. Closing of the transaction |
Page 13 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
|
is subject to receipt of
final approval from securities regulatory authorities and the fulfillment of certain
conditions precedent, including completion of the transfer of certain mineral exploration
licenses in Mongolia, applications for which have been submitted to the relevant Mongolian
governmental authorities and are pending. The new company will be re-named Ivanhoe Coal
Ltd. once the transaction has closed. |
|
|
|
Exploration activities In Q206, Asia Gold continued its exploration activities on
various projects, including the Khongor copper-gold project and the Naran Bulag gold
project. |
|
|
|
During the quarter, the second phase of a 3,000-metre diamond drilling program was
completed on the Khongor project. From a total of 18 holes, 10 intersected porphyry-style
mineralization, including six holes with high-grade mineralization. Further drilling is
planned to fully test the extent of mineralization. |
|
|
|
Also during the quarter, Asia Gold completed the first phase of a drilling program on the
Naran Bulag project. The drilling program included 84 reverse-circulation holes, for a
total of 3,205 metres, and five diamond drill holes totalling 787 metres. Four
shallow-dipping shoots of gold mineralization were defined, ranging in thickness from one
to five metres, with gold grades ranging from one to 16 grams per tonne. Further drilling
will be required to test the full extent and grade of the mineralization. A bulk sample
will also be required to provide a better understanding of the gold distribution and more
representative gold average grade. |
|
|
|
During the quarter, Asia Gold completed the initial phase of a geophysical gravity survey.
Up to 20 target areas have been identified, including 16 areas with porphyry copper
potential and four potential coal sub-basins. Drilling by BHP Billiton on the coal targets
commenced in July 2006. Other exploration activities included a 741-metre drilling program
on the epithermal gold project property located in Bulgaria and a trenching, geochemical
sampling and ground magnetic and IP survey on the Kaputusan copper-gold project located in
Indonesia. |
Page 14 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INVESTMENT IN JOINT VENTURE
MONYWA COPPER (S&K MINE), MYANMAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended June 30, |
|
|
|
Total Operation |
|
|
Companys 50% net share |
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
2006 |
|
|
2005 |
|
|
(decrease) |
|
|
2006 |
|
|
2005 |
|
|
(decrease) |
|
|
|
|
|
|
Total tonnes moved (1) |
|
Tonnes (000s) |
|
|
3,402 |
|
|
|
3,283 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Tonnes of ore to heap |
|
Tonnes (000s) |
|
|
2,952 |
|
|
|
2,085 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Ore grade |
|
CuCN % |
|
|
0.33 |
% |
|
|
0.44 |
% |
|
|
(25 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Strip ratio |
|
Waste/Ore |
|
|
0.11 |
|
|
|
0.54 |
|
|
|
(80 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Cathode production |
|
Tonnes |
|
|
5,141 |
|
|
|
9,118 |
|
|
|
(44 |
%) |
|
|
2,571 |
|
|
|
4,559 |
|
|
|
(44 |
%) |
Tonnage sold |
|
Tonnes |
|
|
4,348 |
|
|
|
9,086 |
|
|
|
(52 |
%) |
|
|
2,174 |
|
|
|
4,543 |
|
|
|
(52 |
%) |
Average sale price received |
|
US$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4.00 |
|
|
$ |
1.59 |
|
|
|
151 |
% |
Sales |
|
US$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,047 |
|
|
|
15,614 |
|
|
|
(10 |
%) |
Cost of operations |
|
US$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,317 |
|
|
|
4,026 |
|
|
|
(42 |
%) |
Operating profit |
|
US$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,460 |
|
|
|
10,052 |
|
|
|
4 |
% |
Cost of operations |
|
US$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.48 |
|
|
$ |
0.40 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six month period ended June 30, |
|
|
|
Total Operation |
|
|
Companys 50% net share |
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
|
|
2006 |
|
|
2005 |
|
|
(decrease) |
|
|
2006 |
|
|
2005 |
|
|
(decrease) |
|
|
|
|
|
|
Total tonnes moved (1) |
|
Tonnes (000s) |
|
|
5,529 |
|
|
|
6,898 |
|
|
|
(20 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Tonnes of ore to heap |
|
Tonnes (000s) |
|
|
4,840 |
|
|
|
4,529 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Ore grade |
|
CuCN % |
|
|
0.39 |
% |
|
|
0.53 |
% |
|
|
(26 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Strip ratio |
|
Waste/Ore |
|
|
0.18 |
|
|
|
0.47 |
|
|
|
(62 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Cathode production |
|
Tonnes |
|
|
8,426 |
|
|
|
18,721 |
|
|
|
(55 |
%) |
|
|
4,213 |
|
|
|
9,361 |
|
|
|
(55 |
%) |
Tonnage sold |
|
Tonnes |
|
|
8,200 |
|
|
|
18,425 |
|
|
|
(55 |
%) |
|
|
4,100 |
|
|
|
9,213 |
|
|
|
(55 |
%) |
Average sale price received |
|
$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.40 |
|
|
$ |
1.60 |
|
|
|
113 |
% |
Sales |
|
$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,083 |
|
|
|
30,758 |
|
|
|
(18 |
%) |
Cost of operations |
|
$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,341 |
|
|
|
8,083 |
|
|
|
3 |
% |
Operating profit |
|
$(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,153 |
|
|
|
19,216 |
|
|
|
(26 |
%) |
Cost of operations |
|
US$/pound |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.92 |
|
|
$ |
0.40 |
|
|
|
132 |
% |
|
|
|
(1) |
|
Includes ore and waste material |
Copper prices on the London Metal Exchange (LME) averaged $3.29 per pound in Q206, compared to
$1.54 per pound in Q205 and $2.24 per pound in Q106, representing an increase of 114% and 46%
respectively. All exports of copper currently are being settled using the average LME copper price
for the second month following the month of shipment. Due to the 46% increase in LME average
copper prices in Q206 over the prior quarter, copper cathode sales from the first quarter were
settled in the second quarter at approximately $5 million higher than initially estimated. Total
copper cathode production from the S&K Mine in Q206 totalled 5,141 tonnes, representing a decrease
of 44% over Q205.
Mining operations resumed at the beginning of April, following a shut-down in March 2006. During
the quarter, the operations suffered from a shortage of equipment, tires and chemical reagents.
Page 15 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Mine operations during the quarter continued to be affected by a shortage of trucking capacity
caused by delays in obtaining the necessary import permits. Total tonnage moved in Q206 increased
by 4% compared to Q205. Total cathode production in Q206 decreased by 44% primarily due to a 25%
decrease in copper grade.
During Q206, operating cash costs decreased by approximately 11% compared to Q205. The net
decrease in operating cash costs was mainly attributed to decreases in power (-38%) and chemicals
(-43%), less increases in fuel (+170%). The decrease in power and chemicals was mainly attributed
to the 44% decrease in cathode production, while the increase in fuel was mainly attributed to
increases in oil prices.
In early Q306, the management of the S&K Mine was able to obtain from the Myanmar authorities the
necessary import permits for its previously ordered equipment. The equipment arrived at the
minesite at the beginning of August 2006 and is being assembled. This equipment will enable the
mine to increase its mining and cathode production.
At the end of Q206, the S&K Mine had $84.3 million in cash, representing a $31.7 million increase
over the balance at the end of the previous quarter.
Other issues affecting joint venture financial results.
During Q206, the S&K Mine paid $8.1 million (net $4.0 million to Ivanhoe Mines) in commercial tax
on export sales, which was previously accrued, to the Myanmar tax authorities for tax claimed
retroactively for the period January 1, 2003 to March 31, 2004. At June 30, 2006, the mine
accounts payable balance included $22.4 million (net $11.2 million to Ivanhoe Mines) in commercial
tax for the period April 1, 2004 to June 30, 2006. The management of the S&K Mine believes that
the tax provisions in the S&K mine joint venture agreement clearly exempt the mines copper exports
from all tax of a commercial tax nature and therefore it has lodged an appeal with the tax
authorities regarding the application of this tax.
Also, during the second quarter, the management for the S&K Mines joint venture increased its
provision for income tax for the 2005 and 2006 tax years that cover the period from April 1, 2004
to June 30, 2006. The joint venture had filed its 2003 and 2004 returns on the basis that it would
receive a 50% exemption on the 30% corporate tax rate; however, this did not occur. This ruling by
the tax authorities is being appealed by the joint venture. Notwithstanding the appeal, the joint
venture has increased its accrued income tax payable for the April 1, 2004 to June 30, 2006 period
to reflect the tax rate of 30%. At June 30, 2006, the joint venture had accrued in accounts
payable $39.7 million (net $19.8 million to Ivanhoe Mines) in income tax. The net impact on the
mines results of operations was an additional one-time charge of $18.5 million (net $9.3 million
to Ivanhoe Mines) in income tax expense for the three months ended June 30, 2006.
Page 16 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
In February 2005, the Company sold its Savage River Mine located in Tasmania, Australia. In
Q106, the Company received a total of $34.7 million, which included $6.7 million representing
principal and accrued interest repayment of the final tranche of the $21.5 million guaranteed cash
payments and $28 million representing the first contingent annual payment covering the period from
April 1, 2005 to March 31, 2006. A total of $7.9 million of the $28 million was accrued as income
from discontinued operations in Q106 and the balance of the $28 million was accrued as income in
2005. An additional $0.2 million adjustment was received in Q206. Based on 2006 iron ore pellet
prices and actual sales volumes for Q206, the Company accrued $5.4 million in the second quarter
as income from the mine.
At the end of June 2006, the mines concentrator was damaged by a fire. As a result, pellet
production for the 12-month-period ended March 31, 2007 now is estimated by the management of the
Savage River Mine to total 1.7 million tonnes down from a previous estimate of 2.2 million tonnes.
Also, based on the 3% reduction in pellet prices negotiated in Q206, the Company is expecting to
receive approximately $20 million in total pellet premium at the end of March 2007, representing a
29% reduction from the year ended March 31, 2006. Under the Companys agreement to sell the mine,
this reduction will be recouped in future years as the fire did not impact the mines current
reserves.
ADMINISTRATIVE AND OTHER
General and administrative
The $3.9 million increase in general and administrative expenditures in Q206 was primarily due to
a $3.5 million increase in stock-based compensation charges.
Interest Income
Interest income increased by $1.3 million in Q206 due to holding higher amounts of cash and cash
equivalents and earning higher rates of interest on Canadian dollar investments.
Foreign Exchange Gains
The $3.0 million increase in foreign exchange gains in Q206 was due to holding higher amounts of
Canadian dollar cash and cash equivalents, while the Canadian dollar strengthened against the U.S.
dollar.
Page 17 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY OF QUARTERLY RESULTS
The following table summarizes our quarterly results for the last eight financial quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Jun 30 |
|
Mar 31 |
|
Dec 31 |
|
Sept 30 |
(Expressed in millions of U.S. dollars, except per share amounts) |
|
2006 |
|
2006 |
|
2005 |
|
2005 |
|
Exploration expenses |
|
|
(39.9 |
) |
|
|
(27.0 |
) |
|
|
(40.1 |
) |
|
|
(28.9 |
) |
General and Administrative |
|
|
(9.8 |
) |
|
|
(11.0 |
) |
|
|
(5.8 |
) |
|
|
(7.3 |
) |
Share of (loss) income from joint venture |
|
|
(2.4 |
) |
|
|
4.5 |
|
|
|
(0.5 |
) |
|
|
8.0 |
|
Gain (loss) on foreign exchange |
|
|
4.7 |
|
|
|
(0.2 |
) |
|
|
(0.4 |
) |
|
|
7.1 |
|
Net (loss) from continuing operations |
|
|
(45.7 |
) |
|
|
(31.1 |
) |
|
|
(49.8 |
) |
|
|
(20.6 |
) |
Net income from discontinued operations |
|
|
5.4 |
|
|
|
7.9 |
|
|
|
7.9 |
|
|
|
6.4 |
|
Net (loss) |
|
|
(40.3 |
) |
|
|
(23.2 |
) |
|
|
(41.8 |
) |
|
|
(14.3 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operation |
|
|
(0.14 |
) |
|
|
(0.10 |
) |
|
|
(0.16 |
) |
|
|
(0.07 |
) |
Discontinued operations |
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
|
0.02 |
|
|
Total |
|
|
(0.12 |
) |
|
|
(0.07 |
) |
|
|
(0.13 |
) |
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun 30 |
|
Mar 31 |
|
Dec 31 |
|
Sept 30 |
|
|
2005 |
|
2005 |
|
2004 |
|
2004 |
|
Exploration expenses |
|
|
(33.8 |
) |
|
|
(24.4 |
) |
|
|
(24.2 |
) |
|
|
(28.5 |
) |
General and Administrative |
|
|
(5.9 |
) |
|
|
(4.8 |
) |
|
|
(6.2 |
) |
|
|
(6.0 |
) |
Share of income from joint venture |
|
|
7.8 |
|
|
|
7.7 |
|
|
|
6.5 |
|
|
|
4.6 |
|
Gain (loss) on foreign exchange |
|
|
1.7 |
|
|
|
(0.6 |
) |
|
|
3.5 |
|
|
|
4.2 |
|
Net (loss) from continuing operations |
|
|
(31.1 |
) |
|
|
(24.2 |
) |
|
|
(26.6 |
) |
|
|
(25.5 |
) |
Net income from discontinued operations |
|
|
5.9 |
|
|
|
15.7 |
|
|
|
9.5 |
|
|
|
0.7 |
|
Net (loss) |
|
|
(25.2 |
) |
|
|
(8.5 |
) |
|
|
(17.1 |
) |
|
|
(24.8 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operation |
|
|
(0.10 |
) |
|
|
(0.08 |
) |
|
|
(0.08 |
) |
|
|
(0.09 |
) |
Discontinued operations |
|
|
0.02 |
|
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.00 |
|
|
Total |
|
|
(0.08 |
) |
|
|
(0.03 |
) |
|
|
(0.05 |
) |
|
|
(0.09 |
) |
|
CASH RESOURCES AND LIQUIDITY
At June 30, 2006, consolidated working capital was $218.1 million, including cash of $201.8
million, compared with working capital of $127.6 million and cash of $101.7 million at December 31,
2005.
Operating activities. The $48.7 million of cash used in operating activities from continuing
operations in Q206 primarily was the result of $39.9 million in exploration expenditures, general
and administration costs of approximately $4.1 million and $5.5 million net outlays in working
capital items.
Investing activities. In Q206, $9.7 million was used in investing activities, mainly consisting
of $1.5 million to purchase 8.3 million units of Redox Diamonds Ltd. and $8.5 million invested in
property plant and equipment acquisitions.
Page 18 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financing activities. Financing activities of $161.6 million in Q206 were due to the net proceeds
of a private placement of 18.4 million shares and proceeds received from the exercise of stock
options.
On April 25, 2006, Ivanhoe Mines completed a financing that consisted of 18.4 million common shares
at a price of $9.08 per common share (Cdn$10.28), representing an aggregate amount of $167.2
million (Cdn$189.2 million). The net proceeds of the offering ($159.0 million) are intended to be
used to further the development of various Mongolian projects, including the Oyu Tolgoi Project.
SHARE CAPITAL
At August 11, 2006, the Company had a total of 335.3 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)
|
|
|
|
2/15/2007 (2)
|
|
$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 August 11, 2006, the Company had a total of approximately 14,512,700 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.
OUTLOOK
Development of the Oyu Tolgoi Project
Since its inception in 1994, mineral exploration has been the Companys principal business focus.
In Q206, 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 also is assessing
the extent, value and development potential of the strategically located coal resources recently
discovered on Ivanhoe Mines exploration concessions in southern Mongolia.
Page 19 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Contract with Mongolian Government
In May 2006, an excess profit tax was passed by the Mongolian Parliament. This was followed by a
series of revisions to the Tax Law and, on July 8, 2006, a revised Minerals Law. These provisions
have not yet been released in definitive form. The Company will be conducting a detailed review of
the definitive form of the Minerals Law and Tax Law changes when they are released to assess the
effect that the changes will have on the plan to develop the Oyu Tolgoi Project.
The Company has conducted a preliminary review of the impact of the new laws, when applied in
conjunction with the continued development of mine planning opportunities, and has determined that
the underlying value of Oyu Tolgoi as presented in the September 2005 Integrated Development Plan
has not been materially affected.
The Company believes that the revised Minerals and Tax laws will lead to the resumption of
negotiations on a formal, long-term Investment Contract with the Company.
The Investment Contract is intended to be a comprehensive agreement that will create a stable tax
and royalty environment, cover arrangements for essential infrastructure, including roads, the
supply of interim and long-term electrical power, and confirm the Companys commitments to maximize
opportunities to educate, train and employ Mongolians.
Amendments to Minerals Law and Tax Law
Significant amendments to the Minerals and Tax laws include the following:
Strategic Deposits
The Government of Mongolia has the option to acquire interests in mineral deposits deemed
to be strategic. The law defines a strategic deposit as one with potential to have an
impact on Mongolias national security, economic and social development, with minerals that
are in strong international demand; or a deposit capable of annual mineral production that
exceeds 5% of Mongolias gross domestic product. The Government will have a qualified
right to acquire an interest of 1) up to 34% in strategic deposits discovered through
privately financed exploration; and 2) up to 50% in deposits that were discovered through
the use of state funds during the former Soviet era. The Oyu Tolgoi discoveries on the
Companys licenses, and on the adjoining Entrée Gold joint-venture property, were financed
entirely by private capital. The Companys coal discoveries in the Nariin Sukhait region,
and at Tsagaan Tolgoi, west of the Oyu Tolgoi Project, also have been funded solely by
private capital.
The Minerals Law states that any acquisition of a state interest in a mining project will
be subject to negotiation with the license holder as part of the Investment Contract
process. Although details of the new amendments to the law need to be addressed, the
extent of state participation will be determined in part on a project-by-project basis by
the proportion of the project capital that the state is prepared to invest. For the last
several years, the Company has stated that it was prepared to consult closely with
Mongolian Government leaders to assess all strategic
Page 20 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
alternatives available for the development of the Oyu Tolgoi Project, including the
possibility of accepting one of more minority investments from official, government-owned
entities whose involvement could be profoundly beneficial to the projects long-term
success.
Increased royalty
The Governments royalty on all metals was doubled to 5.0%.
Lower tax rates
The 30% income tax rate on personal and corporate income was reduced to 10% and 25%
respectively. The value added tax was reduced from 15% to 10%.
Amendments to license maturity
The term of an exploration license was increased from seven to nine years. The maximum
term for a mining license was reduced from 100 years to 70 years. At this time, it is not
clear if those amendments will apply retroactively to existing licenses.
Listing requirements
Entities holding a mining license for a deposit classified as being of strategic importance
now are required to list at least 10% of their shares on the Mongolian Stock Exchange.
Amendments to the maximum duration of Investment Contracts
The maximum duration of Investment Contracts has been set as follows:
|
|
|
Investment between $50-$100 million 10-year term |
|
|
|
|
Investment between $100-$300 million 15-year term |
|
|
|
|
Investment greater than $300 million 30-year term. |
Other income tax amendments
Amendments to the Tax Law also include the introduction of a 10% investment tax credit, the
introduction of a three-year loss-carry-forward and improved depreciation allowances.
These amendments are expected to compensate for the elimination of the tax holidays that
previously applied only to foreign-owned companies, and not to domestic entities.
Excess Profit Tax
In May 2006, an excess profit tax was approved by the Mongolian Parliament. The tax, at a rate of
68%, will apply to sales revenue, net of all selling and treatment charges, which exceeds certain
threshold levels for copper and gold.
Based on the Companys initial assessment, the effective price at which the tax will apply to Oyu
Tolgoi copper is currently estimated to be $1.45 per pound, since the legislated base price of
$1.18/lb along with the cost of external smelting and realization costs can be deducted from sales
proceeds.
Page 21 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Clarification received from the Government also has confirmed that the new tax would not be applied
to copper smelted in Mongolia and it would not apply to the gold contained in a copper concentrate.
Oyu Tolgoi will be a producer of copper concentrate and gold produced at Oyu Tolgoi will be
contained in copper concentrate.
In meetings with senior Government representatives, the Company reaffirmed its willingness to work
with the Government to have downstream smelting capacity built in Mongolia. The IDP financial
results, released in September 2005, were based on metal prices that are below the metal-price
thresholds set by this new tax on revenue. As a result, the management of the Company believes
that the new tax on revenue should not compromise the basis for the development of the Oyu Tolgoi
Project.
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 advance the development of the project while
continuing to discuss financing options with various parties. The Company has engaged CIBC World
Markets and BMO Nesbitt Burns to assist in this process.
During Q206, the Company continued its discussions with major international mining companies
capable of financing and developing the project. 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
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.
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 an MOU
with three large established Korean corporations with the intent to sell a significant portion of
the Companys interest in the S&K Mine. The MOU, which is non-binding, is subject to completion of
due diligence, currently ongoing, and various approvals, including approval from Myanmar
governmental authorities. The Companys principal objectives are to generate, or otherwise
preserve, cash and to devote more managerial and financial resources to the Oyu Tolgoi Project.
There can be no assurance that any disposition of non-core assets presently under consideration
will occur on a timely basis, or at all.
Page 22 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and future funding requirements
Since its inception, the Company has relied on capital markets (and in particular equity markets)
to fund its exploration and other activities. As a result, the bulk of the Companys expenditures
have tended to be of a discretionary nature and as such may be deferred, based on the status of the
Companys cash resources. 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. Ivanhoe Mines cash resources are considered sufficient to
maintain the Companys minimum level of activities for the next 12 months. On April 25, 2006,
Ivanhoe Mines completed a financing that consisted of 18.4 million common shares at a price of
$9.08 per common share (Cdn$10.28), representing an aggregate amount of $167.2 million (Cdn$189.2
million). 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 finalization of an Investment Contract with Mongolian authorities, 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 continues to pursue a number of other
capital-raising initiatives. The Company cannot predict how soon the discussions in respect of the
Investment Contract can be finalized. Accordingly, there can be no assurance that an Investment
Contract containing all of the terms sought by Ivanhoe Mines can be obtained in the foreseeable
future, or at all. In addition, 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.
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. If the Companys existing cash resources are insufficient to fund
the Companys additional planned expenditures, or if the Company is unable to obtain other
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.
Page 23 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONTRACTUAL OBLIGATIONS and OFF BALANCE SHEET ARRANGEMENTS
As of June 30, 2006, there were no significant changes in our contractual obligations and
commercial commitments from those reported in our Managements Discussion and Analysis for the year
ended December 31, 2005.
At the end of June 30, 2006, the Company did not have any off-balance sheet arrangements that have,
or are reasonably likely to have, a current or future effect on the results of operations or
financial condition of the Company.
CRITICAL ACCOUNTING ESTIMATES and RECENT ACCOUNTING PRONOUNCEMENTS
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires the Company to establish accounting policies
and to make estimates that affect both the amount and timing of the recording of assets,
liabilities, revenues and expenses. Some of these estimates require judgments about matters that
are inherently uncertain. The Companys significant accounting policies and the estimates derived
there from identified as being critical are substantially unchanged from those disclosed in its
MD&A for the year ended December 31, 2005.
On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based Payment,
on a modified prospective basis. Prior to January 1, 2006, the Company recorded compensation costs
using the fair value based method in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation.
RISKS AND UNCERTAINTIES
Material risks and uncertainties affecting Ivanhoe Mines, their potential impact, and the
Companys principal risk management strategies are substantially unchanged from those disclosed in
its MD&A for the year ended December 31, 2005.
RELATED-PARTY TRANSACTIONS
The Companys related-party transactions in Q206 are substantially unchanged from the
disclosure in its MD&A for the year ended December 31, 2005.
CAUTIONARY STATEMENTS
LANGUAGE REGARDING RESERVES AND RESOURCES
Readers are advised that National Instrument 43-101 of the Canadian Securities Administrators
requires that each category of mineral reserves and mineral resources be reported separately. For
detailed information related to Company resources and reserves, readers should refer to the Annual
Information Form of the Company for the year ended December 31, 2005, and other continuous
disclosure documents filed by the Company since January 1, 2006,
at www.sedar.com.
Page 24 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NOTE TO UNITED STATES INVESTORS CONCERNING ESTIMATES OF MEASURED, INDICATED AND INFERRED RESOURCES
The information contained herein uses the terms Measured, Indicated and Inferred Resources.
United States investors are advised that while such terms are recognized and required by Canadian
regulations, the United States Securities and Exchange Commission does not recognize them.
Inferred Mineral Resources have a great amount of uncertainty as to their existence, as to their
economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral
Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred
Mineral Resources may not form the basis of feasibility or other economic studies. United States
investors are cautioned not to assume that all or any part of Measured or Indicated Mineral
Resources will ever be converted into Mineral Reserves. United States investors are also cautioned
not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or
legally mineable.
FORWARD-LOOKING STATEMENTS
Certain statements made herein, other than statements of historical fact relating to Ivanhoe
Mines, are forward-looking statements. These include, but are not limited to, statements respecting
anticipated business activities, planned expenditures, corporate strategies, proposed acquisitions
and dispositions of assets, discussions with third parties respecting material agreements,
participation in projects and financing, the expected timing and outcome of Ivanhoe Mines
discussions with representatives of the Government of Mongolia for an investment contract in
respect of the Oyu Tolgoi Project, the impact of recent amendments to the laws of Mongolia and
other countries in which Ivanhoe Mines carries on business, the estimated cost of bringing the Oyu
Tolgoi Project into commercial production, anticipated future production and cash flows, target
milling rates, the outcome of Ivanhoe Mines discussions with its joint venture partner in the
Monywa Copper Project and with certain governmental authorities in Myanmar aimed at resolving
impediments to the ongoing operation and potential expansion of the project, the possibility of
having to record, in the future, a significant reduction of the projects carrying value on the
Companys financial statements and other statements that are not historical facts. When used in
this MD&A, the words such as could, plan, estimate, expect, intend, may, potential,
should and similar expressions, are forward-looking statements. Although Ivanhoe Mines believes
that its expectations reflected in these forward-looking statements are reasonable, such statements
involve risks and uncertainties and no assurance can be given that actual results will be
consistent with these forward-looking statements. Forward-looking statements are based on the
opinions and estimates of management at the date the statements are made, and are subject to a
variety of risks and uncertainties and other factors that could cause actual events or results to
differ materially from those projected in the forward-looking statements. Important factors that
could cause actual results to differ from these forward-looking statements include those described
under the heading Risks and Uncertainties elsewhere in this MD&A. The reader is cautioned not to
place undue reliance on forward-looking statements.
Page 25 of 26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MD&A also contains references to estimates of mineral reserves and mineral resources. The
estimation of reserves and resources is inherently uncertain and involves subjective judgments
about many relevant factors. The accuracy of any such estimates is a function of the quantity and
quality of available data, and of the assumptions made and judgments used in engineering and
geological interpretation, which may prove to be unreliable. There can be no assurance that these
estimates will be accurate or that such mineral reserves and mineral resources can be mined or
processed profitably. Mineral resources that are not mineral reserves do not have demonstrated
economic viability. The Company does not assume the obligation to revise or update these
forward-looking statements after the date of this document or to revise them to reflect the
occurrence of future unanticipated events, except as may be required under applicable securities
laws.
Page 26 of 26
FORM 52-109F2 CERTIFICATION OF INTERIM FILINGS
I, John Macken, Chief Executive Officer of Ivanhoe Mines Ltd., certify that:
|
1. |
|
I have reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings) of
Ivanhoe Mines Ltd., (the issuer) for the interim period ended June 30, 2006; |
|
|
2. |
|
Based on my knowledge, the interim filings do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated or that is necessary
to make a statement not misleading in light of the circumstances under which it was made,
with respect to the period covered by the interim filings; |
|
|
3. |
|
Based on my knowledge, the interim financial statements together with the other
financial information included in the interim filings fairly present in all material
respects the financial condition, results of operations and cash flows of the issuer, as
of the date and for the periods presented in the interim filings; and |
|
|
4. |
|
The issuers other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures for the issuer, and we have designed such
disclosure controls and procedures, or caused them to be designed under our supervision,
to provide reasonable assurance that material information relating to the issuer,
including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the interim filings are being prepared. |
Date: August 11, 2006
|
|
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John Macken
John Macken
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Chief Executive Officer |
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Ivanhoe Mines Ltd. |
|
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FORM 52-109F2 CERTIFICATION OF INTERIM FILINGS
I, Tony Giardini, Chief Financial Officer of Ivanhoe Mines Ltd., certify that:
|
1. |
|
I have reviewed the interim filings (as this term is defined in Multilateral
Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings) of
Ivanhoe Mines Ltd., (the issuer) for the interim period ended June 30, 2006; |
|
|
2. |
|
Based on my knowledge, the interim filings do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated or that is necessary
to make a statement not misleading in light of the circumstances under which it was made,
with respect to the period covered by the interim filings; |
|
|
3. |
|
Based on my knowledge, the interim financial statements together with the other
financial information included in the interim filings fairly present in all material
respects the financial condition, results of operations and cash flows of the issuer, as
of the date and for the periods presented in the interim filings; and |
|
|
4. |
|
The issuers other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures for the issuer, and we have designed such
disclosure controls and procedures, or caused them to be designed under our supervision,
to provide reasonable assurance that material information relating to the issuer,
including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the interim filings are being prepared. |
Date:
August 11, 2006
|
|
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Tony Giardini
Tony Giardini
|
|
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Chief Financial Officer |
|
|
Ivanhoe Mines Ltd. |
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|
August 14, 2006
IVANHOE MINES ANNOUNCES Q2 2006 RESULTS
NEW MINE-PLAN INITIATIVES DESIGNED TO RAISE RETURNS AND REDUCE RISK
AS FIRST SHAFT AT OYU TOLGOI COPPER-GOLD PROJECT PASSES 400 METRES IN DEPTH
Singapore Ivanhoe Mines today announced its results for the second-quarter of 2006. (All figures
are in US dollars unless otherwise stated).
Ivanhoe Mines is continuing to make significant progress in realizing the potential of its copper,
gold and coal resources in southern Mongolia. Strategic planning and development activities for the
Oyu Tolgoi copper and gold mine complex have centered on reducing the projects production and
technical risk and optimizing underground mine planning. The Company has made a decision to move to
a dual grinding-circuit configuration in the layout of the concentrator. This is seen as a
significant step by Company management to reduce technical risk as it brings the SAG Mill and other
equipment specifications in line with proven technology at similar plants operating around the
world. In addition, dual circuits will reduce production risk by providing a means of continuing
production in the event of equipment/mining outages once Oyu Tolgoi is operational.
Engineering work is well advanced to develop a starter underground mine employing a sub-level
caving mining method sequenced between the initial open pit mine at Southern Oyu and the large
block cave development of the Hugo North deposit. The sub-level caving method would access high
grade mineralization high up in the Hugo North deposit, using the infrastructure of Shaft #1
currently under construction. In addition to reducing the technical risk of the underground mine, a
sub-level cave could provide a significant source of cash-flow to develop the block cave and
enhance project value.
Work on Shaft # 1, a 6.7-metre-diameter exploration and production shaft at Oyu Tolgoi, continues
on plan. The shaft sinking, presently averaging 3.1 metres per day, has reached a depth of
approximately 400 metres below surface. The sinking of Shaft #1 to a planned depth of 1,340 metres
below surface is expected to be completed in late-2007, with underground drifting and drilling
occurring in 2007 and 2008. The completion of this shaft will allow for the early exploitation of
a high-grade upper portion of the Hugo North deposit, as well as expedite the conversion of the
current Hugo North resources into proven and probable reserves.
Initial development work for Shaft # 2, a 10-metre-diameter production and service shaft, has
commenced. In addition, preliminary construction activities involving site preparation, excavation
for concentrator foundations and the construction of accommodation facilities are in progress.
These activities, in conjunction with engineering and procurement efforts, are seen as critical to
minimizing any schedule risk associated with the project.
The Company is at a very important transition point as it moves from exploration-focused activities
into the mine development phase and ultimately into operations. The Companys most significant
short-term objective is to have all necessary approvals for the development of its Oyu Tolgoi
flagship project before January 2007. It is anticipated that first production could commence in
less than 30 months from that date, giving a potential start-up date of mid-2009.
The Mongolian Government met its publicly stated commitment to finalize important changes to
specific taxation and minerals legislation early in July 2006. This was an important development as
2
the Mongolian Government had previously publicly stated that it wanted to have the revised laws
approved by parliament before it negotiated an Investment Contract with Ivanhoe. The finalization
of an Investment Contract with the Mongolian Government will be a very important milestone toward
the development of Oyu Tolgoi. Formal Investment Contract discussions with the Government are now
expected to commence during the third quarter of 2006.
There has been a concerted effort by the Company in recent months to build a broad, general
understanding among the Government, Members of Parliament, civic groups and the general public of
the Oyu Tolgoi Project and the benefits it will bring to Mongolia. Ivanhoe Mines considers this to
be a critical support activity for the finalization of the Investment Contract.
To support the development of Oyu Tolgoi, Ivanhoe Mines is continuing to investigate the
opportunities its other projects present in providing funds to advance the development of Oyu
Tolgoi. The Company continues to believe that its projects in Australia, Myanmar and Kazakhstan
remain undervalued by the market. Realizing their potential in a full or partial sale in the
private or public markets would provide additional funds for the development of Oyu Tolgoi and
confirm their true worth to the investment community.
The Company recently has been engaged in detailed discussions with numerous potential industry
partners who have expressed an interest in the development of Oyu Tolgoi and its related
infrastructure, as well as in overall strategic partnerships. The Company believes that the
continuing consolidation of the mining industry highlights the scarcity of attractive greenfields
development projects. Oyu Tolgoi is unique in its location, size and grade a fact now recognized
by major players in the industry.
Mongolia: Coal division merger with Asia Gold
The second quarter also was highlighted by the announcement of a plan to transfer the Companys
Mongolian Coal division to Asia Gold Corp. in exchange for approximately 82.6 million shares of
Asia Gold. On August 8th, the minority shareholders of Asia Gold voted 99% in favor of approving
the merger transaction. Closing of the transaction is subject to receipt of final approval from
securities regulatory authorities and the fulfillment of certain conditions precedent, including
completion of the transfer of certain mineral exploration licenses in Mongolia, applications for
which have been submitted to the relevant Mongolian governmental authorities and are pending. The
new company will be re-named Ivanhoe Coal Ltd. once the transaction has closed.
Kazakhstan: Bakyrchik Gold Project
The rise in the gold price during 2006 significantly improves the economics of this project. In
Q106, discussions were held between representatives from the Company and various Kazakhstan
Government authorities on the current status and future prospects of the Bakyrchik Project.
Ivanhoe Mines reached a satisfactory agreement with the Kazakhstan Government authorities in Q106
that extended the project exploration licenses for five years. The Company has received a similar
five-year extension for its investment commitment for the project.
The Company is reviewing an updated Technical Report and is planning a major exploration program on
its Kazakhstan mineral licenses during the second half of 2006. The start of the program will be
subject to the receipt of various Government approvals that will allow expatriate personnel to
enter the country and commence the exploration program.
Financing alternatives, including a possible public offering of a company holding the Bakyrchik
Project, are being considered.
3
Myanmar: S&K Copper Mine Joint Venture
The S&K mine resumed normal operations on April 2, 2006. Copper cathode production for the quarter
totalled 5,141 tonnes, representing a 57% increase over Q106 and a 44% decrease from Q205.
During the quarter, the Company continued its detailed discussions with interested parties
regarding the possible sale of an interest in the S&K Mine. Ivanhoe Mines has a 50% interest in the
company that operates the S&K Mine.
Australia: Update on Operations at Savage River iron ore mine
A brief fire occurred in the concentrator at the Savage River iron ore mine in Tasmania, Australia,
at the end of June06. The temporary curtailment of operations as a result of this fire and a 3%
decrease in pellet prices announced for the 2006-2007 year are expected to affect the total pellet
premium proceeds expected to be received by the Company in March 2007, which are estimated at
approximately $20 million. The fire did not impact the mines current mineral reserves. The
Company expects that the aggregate future contingent payments will not be affected.
Australia: Cloncurry Project
The Cloncurry Project, covering an area of more than 1,450 square 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.
In Q206, the Company initiated a 5,000-metre drill program focused on the strongest combined
anomalies identified from the recently completed geophysical program and previous copper and gold
soil anomalies on the Amethyst Castle Project and the Three Amigos Project.
China: Jinshan Gold Mine Nearing Production
On April 24, 2006, Jinshan Gold Mines Inc., a company that is 52% owned by Ivanhoe Mines,
announced the completion of the final feasibility study for its CSH (217) Gold Project open-pit
mine in Inner Mongolia, China. The study indicates that the mine would be capable of producing
approximately 117,000 ounces of gold per year for an initial mine life of approximately nine years
at an average cash cost of approximately $253 per ounce. The feasibility study estimates total
Proven and Probable open-pit reserves at 66.7 million tonnes averaging 0.75 grams per tonne gold,
containing approximately 1.2 million ounces of recovered gold. The study was prepared by KD
Engineering of Tucson, Arizona, pursuant to Canadas National Instrument 43-101.
Jinshan is negotiating bank financings to complete the development of the CSH (217) Project.
Jinshan expects to receive its mining permit in the third quarter of 2006, which will authorize the
start of commercial gold mining operations. Assuming all the required permits are received as
scheduled, Jinshan expects that it will be capable of commencing commercial gold production in
early 2007. In the meantime, mine construction and excavation is underway, including the
construction of a crushing plant, the excavation and pouring of concrete foundations for the
process plant, construction of the pregnant solution and overflow pounds, installation of the
modular process plant and the installation of the leach pad.
4
Senior Executives Appointed
On May 16, 2006, Ivanhoes President John Macken was appointed Chief Executive Officer and Tony
Giardini was appointed Chief Financial Officer. Robert Friedland, the Companys previous CEO and
Chairman, was appointed Executive Chairman; Peter Meredith, previously CFO of the Company, was
appointed Deputy Chairman; and David Korbin was appointed to the Companys Board of Directors.
These appointments have strengthened the senior management team and board of directors as the
Company continues with the development and construction of the Oyu Tolgoi copper and gold project.
Financial Results
During the quarter, the Company recorded a net loss of $40.3 million (or $0.12 per share), compared
to a net loss of $25.2 million (or $0.08 per share) in Q205. The increase in the loss from 2005
to 2006 was primarily due to a $6.1 million increase in exploration expenses, a $3.5 million
increase in stock compensation expense and a $10.2 million decrease in income from the Monywa
Copper joint venture, less a $3.0 million increase in foreign exchange gains. Exploration costs
are charged to operations in the period incurred and as a result often constitute the bulk of the
Companys operation loss for that period.
Ivanhoes results for the Q206 and the first six months of 2006 are contained in the unaudited
Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition
and Results of Operations, available on the SEDAR website at
www.sedar.com and Ivanhoes website at
www.ivanhoemines.com.
SUMMARY OF QUARTERLY RESULTS
The following table summarizes our quarterly results for the last eight financial
quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Jun 30 |
|
Mar 31 |
|
Dec 31 |
|
Sept 30 |
(Expressed in millions of U.S. dollars, except per share amounts) |
|
2006 |
|
2006 |
|
2005 |
|
2005 |
|
Exploration expenses |
|
|
(39.9 |
) |
|
|
(27.0 |
) |
|
|
(40.1 |
) |
|
|
(28.9 |
) |
General and Administrative |
|
|
(9.8 |
) |
|
|
(11.0 |
) |
|
|
(5.8 |
) |
|
|
(7.3 |
) |
Share of (loss) income from joint venture |
|
|
(2.4 |
) |
|
|
4.5 |
|
|
|
(0.5 |
) |
|
|
8.0 |
|
Gain (loss) on foreign exchange |
|
|
4.7 |
|
|
|
(0.2 |
) |
|
|
(0.4 |
) |
|
|
7.1 |
|
Net (loss) from continuing operations |
|
|
(45.7 |
) |
|
|
(31.1 |
) |
|
|
(49.8 |
) |
|
|
(20.6 |
) |
Net income from discontinued operations |
|
|
5.4 |
|
|
|
7.9 |
|
|
|
7.9 |
|
|
|
6.4 |
|
Net (loss) |
|
|
(40.3 |
) |
|
|
(23.2 |
) |
|
|
(41.8 |
) |
|
|
(14.3 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operation |
|
|
(0.14 |
) |
|
|
(0.10 |
) |
|
|
(0.16 |
) |
|
|
(0.07 |
) |
Discontinued operations |
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
|
0.02 |
|
|
Total |
|
|
(0.12 |
) |
|
|
(0.07 |
) |
|
|
(0.13 |
) |
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun 30 |
|
Mar 31 |
|
Dec 31 |
|
Sept 30 |
|
|
2005 |
|
2005 |
|
2004 |
|
2004 |
|
Exploration expenses |
|
|
(33.8 |
) |
|
|
(24.4 |
) |
|
|
(24.2 |
) |
|
|
(28.5 |
) |
General and Administrative |
|
|
(5.9 |
) |
|
|
(4.8 |
) |
|
|
(6.2 |
) |
|
|
(6.0 |
) |
Share of income from joint venture |
|
|
7.8 |
|
|
|
7.7 |
|
|
|
6.5 |
|
|
|
4.6 |
|
Gain (loss) on foreign exchange |
|
|
1.7 |
|
|
|
(0.6 |
) |
|
|
3.5 |
|
|
|
4.2 |
|
Net (loss) from continuing operations |
|
|
(31.1 |
) |
|
|
(24.2 |
) |
|
|
(26.6 |
) |
|
|
(25.5 |
) |
Net income from discontinued operations |
|
|
5.9 |
|
|
|
15.7 |
|
|
|
9.5 |
|
|
|
0.7 |
|
Net (loss) |
|
|
(25.2 |
) |
|
|
(8.5 |
) |
|
|
(17.1 |
) |
|
|
(24.8 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operation |
|
|
(0.10 |
) |
|
|
(0.08 |
) |
|
|
(0.08 |
) |
|
|
(0.09 |
) |
Discontinued operations |
|
|
0.02 |
|
|
|
0.05 |
|
|
|
0.03 |
|
|
|
0.00 |
|
|
Total |
|
|
(0.08 |
) |
|
|
(0.03 |
) |
|
|
(0.05 |
) |
|
|
(0.09 |
) |
|
Ivanhoe shares are listed on the Toronto and New York stock exchanges and NASDAQ under the
symbol IVN.
Information contacts:
Investors: Bill Trenaman: +1.604.688.5755 / Media: Bob Williamson: +1.604.688.5755
Forward-Looking Statements: This document includes forward-looking statements.
Forward-looking statements include, but are not limited to, statements concerning estimates of the
planned development and engineering at the Oyu Tolgoi project, statements concerning the expected
timing and outcome of Ivanhoe Mines discussions with representatives of the Government of Mongolia
for a stability agreement in respect of the Oyu Tolgoi project, statements relating to planned sale
of the Mongolian Coal Division to Asia Gold, statements relating to expected production from the
Nariin Sukhait coal project, statements relating to future, contingent payments for the sale of
Savage River mine, statements relating to the continued advancement of Ivanhoe Mines projects and
other statements which are not historical facts. When used in this document, the words such as
could, plan, estimate, expect, intend, may, potential, should, and similar
expressions are forward-looking statements. Although Ivanhoe believes that its expectations
reflected in these forward-looking statements are reasonable, such statements involve risks and
uncertainties and no assurance can be given that actual results will be consistent with these
forward-looking statements. Important factors that could cause actual results to differ from these
forward-looking statements are disclosed under the heading Risk
Factors and elsewhere in the corporations periodic filings with Canadian and US securities
regulators.