Form 20-F-
|
o | Form 40-F- | þ |
Yes:
|
o | No: | þ |
IVANHOE MINES LTD. |
||||
Date: November 14, 2006 | By: | /s/ Beverly A. Bartlett | ||
BEVERLY A. BARTLETT | ||||
Vice President & Corporate Secretary |
ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
CURRENT |
||||||||
Cash and cash equivalents |
$ | 131,568 | $ | 101,681 | ||||
Accounts receivable |
19,606 | 33,350 | ||||||
Inventories |
4,807 | 3,547 | ||||||
Prepaid expenses |
8,085 | 6,353 | ||||||
Other current assets |
286 | 3,286 | ||||||
TOTAL CURRENT ASSETS |
164,352 | 148,217 | ||||||
INVESTMENT IN JOINT VENTURE (Note 3) |
150,825 | 139,874 | ||||||
LONG-TERM INVESTMENTS (Note 4) |
27,377 | 18,417 | ||||||
PROPERTY, PLANT AND EQUIPMENT |
96,016 | 85,706 | ||||||
DEFERRED INCOME TAXES |
61 | 171 | ||||||
OTHER ASSETS |
4,221 | 4,394 | ||||||
TOTAL ASSETS |
$ | 442,852 | $ | 396,779 | ||||
LIABILITIES |
||||||||
CURRENT |
||||||||
Accounts payable and accrued liabilities |
$ | 24,039 | $ | 20,594 | ||||
TOTAL CURRENT LIABILITIES |
24,039 | 20,594 | ||||||
LOANS PAYABLE TO RELATED PARTIES (Note 5) |
5,088 | 5,088 | ||||||
DEFERRED INCOME TAXES |
323 | 315 | ||||||
ASSET RETIREMENT OBLIGATIONS |
6,285 | 6,231 | ||||||
TOTAL LIABILITIES |
35,735 | 32,228 | ||||||
MINORITY INTERESTS (Note 6) |
| 8,928 | ||||||
SHAREHOLDERS EQUITY |
||||||||
SHARE CAPITAL (Note 7) |
||||||||
Authorized |
||||||||
Unlimited number of preferred shares without par value |
||||||||
Unlimited number of common shares without par value |
||||||||
Issued and outstanding |
||||||||
335,660,037 (2005 - 315,900,668) common shares |
1,159,741 | 994,442 | ||||||
ADDITIONAL PAID-IN CAPITAL |
44,113 | 25,174 | ||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME |
3,902 | 6,711 | ||||||
DEFICIT |
(800,639 | ) | (670,704 | ) | ||||
TOTAL SHAREHOLDERS EQUITY |
407,117 | 355,623 | ||||||
TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS EQUITY |
$ | 442,852 | $ | 396,779 | ||||
/s/ John Weatherall
|
/s/ Kjeld Thygesen
|
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(Unaudited) | ||||||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Exploration |
$ | (65,111 | ) | $ | (28,884 | ) | $ | (131,962 | ) | $ | (87,119 | ) | ||||
General and administrative |
(9,094 | ) | (7,263 | ) | (29,912 | ) | (17,975 | ) | ||||||||
Accretion |
(103 | ) | (89 | ) | (307 | ) | (266 | ) | ||||||||
Depreciation |
(1,098 | ) | (485 | ) | (3,241 | ) | (1,704 | ) | ||||||||
Mining property care and maintenance |
(1,091 | ) | (481 | ) | (2,791 | ) | (2,232 | ) | ||||||||
OPERATING LOSS |
(76,497 | ) | (37,202 | ) | (168,213 | ) | (109,296 | ) | ||||||||
OTHER INCOME (EXPENSES) |
||||||||||||||||
Share of income from joint venture (Note 3) |
8,991 | 7,965 | 11,047 | 23,477 | ||||||||||||
Interest income |
1,653 | 1,293 | 4,343 | 2,556 | ||||||||||||
Foreign exchange (losses) gains |
(371 | ) | 7,111 | 4,148 | 8,234 | |||||||||||
Share of loss of significantly influenced investees |
(673 | ) | (383 | ) | (673 | ) | (1,004 | ) | ||||||||
Dilution gain on investment in significantly influenced investee |
72 | | 72 | | ||||||||||||
Gain on sale of other mineral property rights |
| | 2,724 | | ||||||||||||
Gain on sale of long-term investments |
| | | 115 | ||||||||||||
Write-down of carrying value of long-term investment (Note 4 (c)) |
(1,000 | ) | | (1,000 | ) | (1,438 | ) | |||||||||
LOSS BEFORE TAXES AND OTHER ITEMS |
(67,825 | ) | (21,216 | ) | (147,552 | ) | (77,356 | ) | ||||||||
Provision for income taxes |
(159 | ) | (82 | ) | (609 | ) | (212 | ) | ||||||||
Minority interests (Note 6) |
25 | 657 | 3,369 | 1,658 | ||||||||||||
NET LOSS FROM CONTINUING OPERATIONS |
(67,959 | ) | (20,641 | ) | (144,792 | ) | (75,910 | ) | ||||||||
NET INCOME AND GAIN ON SALE FROM
DISCONTINUED OPERATIONS (Note 2) |
1,514 | 6,378 | 14,857 | 27,992 | ||||||||||||
NET LOSS |
$ | (66,445 | ) | $ | (14,263 | ) | $ | (129,935 | ) | $ | (47,918 | ) | ||||
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE FROM
CONTINUING OPERATIONS |
$ | (0.20 | ) | $ | (0.07 | ) | $ | (0.44 | ) | $ | (0.25 | ) | ||||
DISCONTINUED OPERATIONS |
0.00 | 0.02 | 0.04 | 0.09 | ||||||||||||
$ | (0.20 | ) | $ | (0.05 | ) | $ | (0.40 | ) | $ | (0.16 | ) | |||||
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000s) |
335,336 | 314,011 | 327,326 | 302,006 | ||||||||||||
Accumulated | ||||||||||||||||||||||||
Share Capital | Additional | Other | ||||||||||||||||||||||
Number | Paid-In | Comprehensive | ||||||||||||||||||||||
of Shares | Amount | Capital | Income | Deficit | Total | |||||||||||||||||||
Balances, December 31, 2005 |
315,900,668 | $ | 994,442 | $ | 25,174 | $ | 6,711 | $ | (670,704 | ) | $ | 355,623 | ||||||||||||
Net loss |
| | | | (129,935 | ) | (129,935 | ) | ||||||||||||||||
Other comprehensive loss (unrealized loss on
available-for-sale securities) (Note 4) |
| | | (2,809 | ) | | (2,809 | ) | ||||||||||||||||
Comprehensive loss |
(132,744 | ) | ||||||||||||||||||||||
Shares issued for: |
||||||||||||||||||||||||
Private placement, net of issue costs of $8,162 |
18,400,000 | 158,993 | | | | 158,993 | ||||||||||||||||||
Exercise of stock options |
1,327,493 | 6,089 | (2,031 | ) | | | 4,058 | |||||||||||||||||
Bonus shares |
16,666 | 97 | | | | 97 | ||||||||||||||||||
Share purchase plan |
15,210 | 120 | | | | 120 | ||||||||||||||||||
Dilution gain on issuance of shares by a subsidiary |
| | 4,439 | | | 4,439 | ||||||||||||||||||
Stock compensation charged to operations |
| | 16,531 | | | 16,531 | ||||||||||||||||||
Balances, September 30, 2006 |
335,660,037 | $ | 1,159,741 | $ | 44,113 | $ | 3,902 | $ | (800,639 | ) | $ | 407,117 | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(Unaudited) | ||||||||||||||||
OPERATING ACTIVITIES |
||||||||||||||||
Net loss |
$ | (66,445 | ) | $ | (14,263 | ) | $ | (129,935 | ) | $ | (47,918 | ) | ||||
Items not involving use of cash
|
||||||||||||||||
Depreciation |
1,098 | 485 | 3,241 | 1,704 | ||||||||||||
Stock-based compensation |
2,924 | 2,050 | 16,531 | 5,739 | ||||||||||||
Bonus shares |
97 | | 97 | | ||||||||||||
Accretion expense |
103 | 89 | 307 | 266 | ||||||||||||
Unrealized foreign exchange losses (gains) |
377 | (7,003 | ) | (3,805 | ) | (8,262 | ) | |||||||||
Share of income from joint venture, net of cash distribution |
(8,991 | ) | (7,965 | ) | (11,047 | ) | (13,477 | ) | ||||||||
Share of loss of significantly influenced investees |
673 | 383 | 673 | 1,004 | ||||||||||||
Dilution gain on investment in significantly influenced investee |
(72 | ) | | (72 | ) | | ||||||||||
Net income and gain on sale from discontinued operations |
(1,514 | ) | (6,378 | ) | (14,857 | ) | (27,992 | ) | ||||||||
Gain on sale of long-term investments |
| | | (115 | ) | |||||||||||
Write-down of carrying value of long-term investments |
1,000 | | 1,000 | 1,438 | ||||||||||||
Gain on sale of other mineral property rights |
| | (2,724 | ) | | |||||||||||
Deferred income taxes |
56 | (8 | ) | 118 | (17 | ) | ||||||||||
Minority interests |
(25 | ) | (657 | ) | (3,369 | ) | (1,658 | ) | ||||||||
Net change in non-cash operating working capital items (Note 8 (b)) |
3,752 | (9,280 | ) | (7,967 | ) | (9,844 | ) | |||||||||
Cash used in operating activities of continuing operations |
(66,967 | ) | (42,547 | ) | (151,809 | ) | (99,132 | ) | ||||||||
Cash provided by operating activities of discontinued operations |
| | | 2,592 | ||||||||||||
Cash used in operating activities |
(66,967 | ) | (42,547 | ) | (151,809 | ) | (96,540 | ) | ||||||||
INVESTING ACTIVITIES |
||||||||||||||||
Proceeds from sale of discontinued operations |
| | 34,674 | 15,000 | ||||||||||||
Purchase of long-term investments |
(500 | ) | (2,199 | ) | (2,451 | ) | (6,309 | ) | ||||||||
Proceeds from sale of other mineral property rights |
| | 2,724 | | ||||||||||||
Proceeds from sale of long-term investments |
| | | 4,539 | ||||||||||||
Cash reduction on commencement of equity accounting (Note 4 (a)) |
(4,202 | ) | | (4,202 | ) | | ||||||||||
Expenditures on property, plant and equipment |
(7,823 | ) | (13,140 | ) | (26,559 | ) | (22,000 | ) | ||||||||
Proceeds from (expenditures on) other assets |
140 | (660 | ) | 217 | (1,898 | ) | ||||||||||
Other |
5 | | 95 | (2,078 | ) | |||||||||||
Cash (used in) provided by investing activities of continuing operations |
(12,380 | ) | (15,999 | ) | 4,498 | (12,746 | ) | |||||||||
Cash used in investing activities of discontinued operations |
| | | (502 | ) | |||||||||||
Cash (used in) provided by investing activities |
(12,380 | ) | (15,999 | ) | 4,498 | (13,248 | ) | |||||||||
FINANCING ACTIVITIES |
||||||||||||||||
Issue of share capital |
630 | 328 | 163,171 | 121,609 | ||||||||||||
Minority interests investment in subsidiaries |
8,884 | 1,000 | 10,309 | 1,000 | ||||||||||||
Cash provided by financing activities of continuing operations |
9,514 | 1,328 | 173,480 | 122,609 | ||||||||||||
Cash used in financing activities of discontinued operations |
| | | (37 | ) | |||||||||||
Cash provided by financing activities |
9,514 | 1,328 | 173,480 | 122,572 | ||||||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
(381 | ) | 6,987 | 3,718 | 8,280 | |||||||||||
NET CASH INFLOW |
(70,214 | ) | (50,231 | ) | 29,887 | 21,064 | ||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
201,782 | 183,773 | 101,681 | 112,478 | ||||||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 131,568 | $ | 133,542 | $ | 131,568 | $ | 133,542 | ||||||||
CASH AND CASH EQUIVALENTS IS COMPRISED OF: |
||||||||||||||||
Cash on hand and demand deposits |
$ | 43,912 | $ | 21,374 | $ | 43,912 | $ | 21,374 | ||||||||
Short-term money market instruments |
87,656 | 112,168 | 87,656 | 112,168 | ||||||||||||
$ | 131,568 | $ | 133,542 | $ | 131,568 | $ | 133,542 | |||||||||
1. | SIGNIFICANT ACCOUNTING POLICIES |
(a) | Basis of preparation | ||
These unaudited interim consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (U.S. GAAP). The accounting policies followed in preparing these consolidated financial statements are those used by the Company as set out in the audited financial statements for the year ended December 31, 2005, except that on January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based Payment, on a modified prospective basis. The adoption of SFAS No. 123 (R) did not have an impact on the Companys consolidated financial position and results of operations (Note 7). In the case of Ivanhoe Mines Ltd. (the Company), U.S. GAAP differs in certain respects from accounting principles generally accepted in Canada (Canadian GAAP) as explained in Note 9. | |||
Certain information and note disclosures normally included for annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. These interim consolidated financial statements should be read together with the Companys audited financial statements for the year ended December 31, 2005. | |||
In the opinion of management, all adjustments considered necessary (including reclassifications and normal recurring adjustments) to present fairly the financial position, results of operations and cash flows at September 30, 2006 and for all periods presented, have been included in these financial statements. The interim results are not necessarily indicative of results for the full year ending December 31, 2006, or future operating periods. For further information, see the Companys annual consolidated financial statements, including the accounting policies and notes thereto, included in the Annual Information Form. | |||
The Company operates in a single reportable segment, being exploration and development of mineral properties. | |||
References to Cdn$ refer to Canadian currency and $ to United States currency. | |||
(b) | Principles of consolidation | ||
For purposes of these consolidated financial statements, the Company and its subsidiaries and joint venture are collectively referred to as Ivanhoe Mines. | |||
Jinshan Gold Mines Inc. (Jinshan) ceased being a subsidiary of the Company in August 2006. From September 1, 2006 it has been accounted for as an equity investment (Note 4 (a)). |
1. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
(c) | Recent accounting pronouncements | ||
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140 (SFAS 155). This Statement amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. This Statement will be effective for financial instruments acquired or issued by the Company after the beginning of its 2007 fiscal year. The Company expects that the adoption of this Statement will not have a material effect on its financial condition or results of operations. | |||
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140 (SFAS 156). This Statement provides guidance addressing the recognition and measurement of separately recognized servicing assets and liabilities, common with mortgage securitization activities, and provides an approach to simplify efforts to obtain hedge accounting treatment. SFAS 156 is effective after the beginning of an entitys fiscal year that begins after September 15, 2006. The Company expects that the adoption of this Statement will have no impact on its financial condition or results of operations. | |||
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation clarifies the recognition threshold and measurement of a tax position taken on a tax return, and requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact, if any, that adoption of FIN 48 will have on its financial condition or results of operations. | |||
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). This Statement defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company expects that adoption of SFAS 157 will not have a material impact on its financial condition or results of operations. | |||
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 permits companies to record the cumulative effect of initially applying this approach in the first fiscal year ending after November 15, 2006 by recording necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. The Company expects that adoption of SAB 108 will not have a material impact on its financial condition and results of operations. |
2. | DISCONTINUED OPERATIONS | |
In February 2005, Ivanhoe Mines disposed of the Savage River Iron Ore Project (the Project). | ||
Ivanhoe Mines sold the Project for two initial payments totalling $21.5 million, plus a series of five contingent, annual payments that commenced on March 31, 2006. The annual payments are based on the annual iron ore pellet tonnes sold and an escalating price formula based on the prevailing annual Nibrasco/JSM pellet price. | ||
To date, Ivanhoe Mines has received $49.7 million in proceeds from the sale of the Project. The first initial payment of $15.0 million was received in 2005 and the second initial payment of $6.5 million was received in January 2006. In March 2006, Ivanhoe Mines received its first contingent annual payment of $28.0 million with an additional $0.2 million adjustment received in April 2006. This $28.2 million payment included $7.9 million in contingent income which was recognized in the first quarter of 2006 for tonnes sold during the quarter. | ||
At September 30, 2006, Ivanhoe Mines has accrued $6.9 million as receivable in relation to the tonnes of iron ore sold during the six month period ended September 30, 2006. This amount will form part of the second contingent annual payment to be received in March 2007. | ||
The following table presents summarized financial information related to discontinued operations: |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 (1) | |||||||||||||
Revenue |
$ | | $ | | $ | | $ | 18,031 | ||||||||
Cost of operations |
| | | (11,965 | ) | |||||||||||
General and administrative |
| | | (195 | ) | |||||||||||
Interest expense |
| | | (203 | ) | |||||||||||
OPERATING PROFIT |
| | | 5,668 | ||||||||||||
OTHER INCOME (EXPENSES) |
| | | |||||||||||||
Interest income |
| | | 16 | ||||||||||||
Foreign exchange losses |
| | | (285 | ) | |||||||||||
INCOME BEFORE TAXES |
| | | 5,399 | ||||||||||||
Recovery of income taxes |
| | | 7 | ||||||||||||
NET INCOME |
| | | 5,406 | ||||||||||||
Contingent income |
1,514 | 6,378 | 14,857 | 12,319 | ||||||||||||
Gain on sale of Savage River Project |
| | | 10,267 | ||||||||||||
NET INCOME AND GAIN ON
SALE FROM DISCONTINUED
OPERATIONS |
$ | 1,514 | $ | 6,378 | $ | 14,857 | $ | 27,992 | ||||||||
(1) | Net income for the nine month period ended September 30, 2005, includes only two months of results for the Project as it was sold on February 28, 2005. |
3. | INVESTMENT IN JOINT VENTURE | |
Ivanhoe Mines investment in Myanmar Ivanhoe Copper Company Limited (JVCo) (Myanmar) (50% owned), which is subject to joint control, is accounted for using the equity method. | ||
During 2006 there have been developments regarding certain circumstances that were reported in the Companys 2005 annual consolidated financial statements. |
| In Myanmar, all air and sea imports and exports require prior approval from the Myanmar Trade Council. During the third quarter, JVCo obtained the necessary import permits from the Trade Council for its previously ordered mining equipment. The equipment arrived at the minesite at the beginning of August 2006 and was commissioned in September 2006. | ||
| During the third quarter, JVCo paid $8.7 million (net $4.4 million to Ivanhoe Mines) in commercial tax on export sales to the Myanmar tax authorities for tax claimed retroactively for the period April 2004 to March 31, 2005. Previously, in the second quarter, JVCo paid $8.1 million (net $4.0 million to Ivanhoe Mines) in commercial tax for the period January 1, 2003 to March 31, 2004. Both these amounts had been previously accrued. | ||
At September 30, 2006, JVCos accounts payable balance included $17.3 million (net $8.6 million to Ivanhoe Mines) in commercial tax for the period April 1, 2005 to September 30, 2006. JVCo believes that the tax provisions in the S&K mine joint venture agreement clearly exempt the mines copper exports from all tax of a commercial tax nature. In September 2006, JVCo received an unfavourable ruling from the tax authorities on its appeal regarding the application of this tax for the 2003/2004 tax year. In October 2006, JVCo filed a second appeal with the tax authorities for the 2003/2004 tax year and filed a first appeal regarding the application of tax on the 2004/2005 year. | |||
| During the second quarter, JVCo increased its provision for income tax for the 2005 and 2006 tax years, which cover the period from April 1, 2004 to September 30, 2006. JVCo had filed its 2003 and 2004 returns on the basis that it would receive a 50% exemption on the 30% corporate tax rate; however, this did not occur. This ruling by the tax authorities is being appealed. Notwithstanding the appeal, JVCo has increased its accrued income tax payable to reflect this potentially increased tax rate. | ||
During the third quarter, JVCo remitted the previously accrued, $16.6 million (net $8.3 million to Ivanhoe Mines) in income tax for 2004/2005 tax year. At September 2006, JVCos accounts payable balance included $31.8 million (net $15.9 million to Ivanhoe Mines) in income tax for the period April 2005 to September 2006. |
3. | INVESTMENT IN JOINT VENTURE(Continued) | |
The following tables summarize Ivanhoe Mines 50% share of the financial position of JVCo as at September 30, 2006 and December 31, 2005 and its share of the results of operations and cash flows for the three and nine month periods ended September 30, 2006 and 2005. |
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
Cash and cash equivalents |
$ | 42,819 | $ | 22,843 | ||||
Accounts receivable |
3,451 | 11,364 | ||||||
Inventories |
16,429 | 16,754 | ||||||
Prepaid expenses |
2,955 | 1,558 | ||||||
Property, plant and equipment |
147,069 | 128,405 | ||||||
Deferred income tax assets |
610 | 432 | ||||||
Other assets |
1,569 | 1,585 | ||||||
Accounts payable and accrued liabilities |
(29,730 | ) | (14,784 | ) | ||||
Deferred income tax liabilities |
(28,700 | ) | (11,321 | ) | ||||
Other liabilities |
(5,647 | ) | (16,962 | ) | ||||
SHARE OF NET ASSETS OF JOINT VENTURE |
$ | 150,825 | $ | 139,874 | ||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenue (1) |
$ | 18,858 | $ | 15,439 | $ | 43,941 | $ | 46,197 | ||||||||
Cost of operations |
(3,647 | ) | (4,633 | ) | (11,988 | ) | (12,716 | ) | ||||||||
Depreciation and depletion |
(950 | ) | (1,401 | ) | (3,308 | ) | (4,357 | ) | ||||||||
General and administrative |
(122 | ) | (110 | ) | (202 | ) | (321 | ) | ||||||||
Interest expense |
(75 | ) | (129 | ) | (226 | ) | (421 | ) | ||||||||
OPERATING PROFIT |
14,064 | 9,166 | 28,217 | 28,382 | ||||||||||||
Interest income |
236 | 65 | 682 | 229 | ||||||||||||
Foreign exchange (losses) gains |
(601 | ) | 97 | (620 | ) | (38 | ) | |||||||||
INCOME BEFORE TAXES |
13,699 | 9,328 | 28,279 | 28,573 | ||||||||||||
Provision for income taxes |
(4,708 | ) | (1,363 | ) | (17,232 | ) | (5,096 | ) | ||||||||
SHARE OF INCOME
FROM JOINT VENTURE |
$ | 8,991 | $ | 7,965 | $ | 11,047 | $ | 23,477 | ||||||||
(1) | - 2006 revenue is net of commercial tax. |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Cash flows |
||||||||||||||||
From operating activities |
$ | 3,577 | $ | 10,283 | $ | 32,837 | $ | 19,270 | ||||||||
For investing activities |
(2,904 | ) | (2,586 | ) | (12,861 | ) | (4,561 | ) | ||||||||
For financing activities |
| (3,750 | ) | | (7,500 | ) | ||||||||||
$ | 673 | $ | 3,947 | $ | 19,976 | $ | 7,209 | |||||||||
4. | LONG-TERM INVESTMENTS |
September 30, 2006 | December 31, 2005 | |||||||||||||||||||||||||||||||
Equity | Cost/Equity | Unrealized | Fair/Equity | Equity | Cost/Equity | Unrealized | Fair/Equity | |||||||||||||||||||||||||
Interest | Basis | Gain | Value | Interest | Basis | Gain | Value | |||||||||||||||||||||||||
Investments in company subject
to significant influence: |
||||||||||||||||||||||||||||||||
Jinshan Gold Mines Inc. (a) |
48.6 | % | $ | 10,318 | N/a | $ | 10,318 | N/a | N/a | N/a | N/a | |||||||||||||||||||||
Investments available-for-sale: |
||||||||||||||||||||||||||||||||
Intec Ltd. |
10.1 | % | $ | 1,446 | $ | 3,804 | $ | 5,250 | 12.5 | % | $ | 1,446 | $ | 1,331 | $ | 2,777 | ||||||||||||||||
Entrée Gold Inc. |
14.8 | % | 10,157 | (76 | ) | 10,081 | 15.0 | % | 10,157 | 5,380 | 15,537 | |||||||||||||||||||||
Asia Now Resources Corp. |
2.0 | % | 103 | 174 | 277 | 3.1 | % | 103 | | 103 | ||||||||||||||||||||||
Redox Diamonds Ltd. (b) |
14.6 | % | 1,451 | | 1,451 | | | | | |||||||||||||||||||||||
Wind Energy Group Inc. (c) |
22.1 | % | | | | | | | | |||||||||||||||||||||||
$ | 13,157 | $ | 3,902 | $ | 17,059 | $ | 11,706 | $ | 6,711 | $ | 18,417 | |||||||||||||||||||||
$ | 23,475 | $ | 3,902 | $ | 27,377 | $ | 11,706 | $ | 6,711 | $ | 18,417 | |||||||||||||||||||||
(a) | On August 31, 2006, Jinshan completed a private placement which diluted Ivanhoe Mines investment in Jinshan to 48.9%. As a result of this transaction, Ivanhoe Mines ceased consolidating Jinshan on August 31, 2006 and commenced equity accounting for its investment. During September 2006, Ivanhoe Mines recorded a $0.7 million equity loss on this investment. | ||
(b) | During the three month period ended June 30, 2006, Ivanhoe Mines purchased 8.3 million units of Redox Diamonds Ltd. (Redox) at a cost of $1.5 million. Each unit consists of one Redox common share and one Redox share option exercisable until April 2008 to purchase an additional Redox common share at a price ranging from Cdn$0.30 to Cdn$0.35. | ||
(c) | During the nine month period ended September 30, 2006, Ivanhoe Mines purchased 1.0 million common shares of Wind Energy Group Inc. (Wind Energy), in two $0.5 million tranches, at a cost of $1.0 million. In September 2006, Ivanhoe Mines recorded an impairment provision of $1.0 million against this investment based on an assessment of the underlying book value of Wind Energys net assets. |
5. | LOANS PAYABLE TO RELATED PARTIES | |
These loans are payable to the Chairman of the Company or a company controlled by him. They are non-interest bearing, unsecured and repayable in U.S. dollars. Repayment of these loans has been postponed until Ivanhoe Mines receives an aggregate of $111.1 million from the sale of the Savage River Project. At September 30, 2006, proceeds received from the sale of the Project totaled $49.7 million (Note 2). |
6. | MINORITY INTERESTS | |
At September 30, 2006, there were minority interests in the Bakyrchik Mining Venture (BMV) (Kazakhstan) (70% owned) and Asia Gold Corp (Asia Gold) (Canada) (45% owned). Jinshan ceased being consolidated on August 31, 2006 (Note 4 (a)). | ||
Currently, losses applicable to the minority interest in the BMV and Asia Gold are being allocated to Ivanhoe Mines since those losses exceed the minority interest in the net assets of the BMV and Asia Gold. |
Minority Interests | ||||||||||||||||
Asia Gold | Jinshan | BMV | Total | |||||||||||||
Balances, December 31, 2005 |
$ | 1,581 | $ | 7,347 | $ | | $ | 8,928 | ||||||||
Minority interests share of loss |
(2,063 | ) | (1,306 | ) | | (3,369 | ) | |||||||||
Increase in minority interest arising
from share issuances by subsidiary |
482 | 5,388 | | 5,870 | ||||||||||||
Commencement of equity accounting
for investment in Jinshan |
| (11,429 | ) | | (11,429 | ) | ||||||||||
Balance, September 30, 2006 |
$ | | $ | | $ | | $ | | ||||||||
7. | SHARE CAPITAL |
(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. |
(a) | Equity Incentive Plan (Continued) | ||
During the three and nine months ended September 30, 2006, 400,000 and 8,419,000 stock options were granted, respectively (2005: 225,000 and 975,000). The weighted average grant-date fair value of the stock options granted during the three and nine months ended September 30, 2006 was Cdn$2.55 and Cdn$4.33, respectively (2005: Cdn$4.87 and Cdn$4.97). The fair value of these options was determined using the Black-Scholes option pricing model, using the following weighted average assumptions: |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Risk-free interest rate |
4.06 | % | 3.65 | % | 4.12 | % | 3.72 | % | ||||||||
Expected life |
2.8 years | 5 years | 3.3 years | 5.0 years | ||||||||||||
Expected volatility |
50 | % | 60 | % | 50 | % | 61 | % | ||||||||
Expected dividends |
$Nil | $Nil | $Nil | $Nil |
A summary of stock option activity and information concerning options available for grant under the Companys Equity Incentive Plan, options outstanding, and exercisable options at September 30, 2006 is as follows: |
Options Outstanding | ||||||||||||
Options | Number of | Weighted | ||||||||||
Available | Common | Average | ||||||||||
for Grant | Shares | Exercise Price | ||||||||||
(Expressed in | ||||||||||||
Canadian dollars) | ||||||||||||
Balances, December 31, 2005 |
8,305,936 | 7,416,700 | $ | 7.27 | ||||||||
Increase in amount authorized |
3,000,000 | | | |||||||||
Options granted |
(8,419,000 | ) | 8,419,000 | 9.37 | ||||||||
Options exercised |
| (1,354,100 | ) | 3.61 | ||||||||
Options cancelled |
97,600 | (97,600 | ) | 7.76 | ||||||||
Shares issued under bonus plan |
(16,666 | ) | | | ||||||||
Shares issued under share
purchase plan |
(15,210 | ) | | | ||||||||
Balances, September 30, 2006 |
2,952,660 | 14,384,000 | $ | 8.84 | ||||||||
At September 30, 2006, the U.S. dollar equivalent of the weighted average exercise price was $7.91. |
(a) | Equity Incentive Plan (Continued) | ||
The following table summarizes information about stock options outstanding at September 30, 2006: |
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||
Range of | Average | Average | Average | |||||||||||||||||
Exercise | Number | Remaining | Exercise Price | Number | Exercise Price | |||||||||||||||
Prices | Outstanding | Life (in years) | Per Share | Exercisable | Per Share | |||||||||||||||
(Expressed in | (Expressed in | (Expressed in | ||||||||||||||||||
Canadian | Canadian | Canadian | ||||||||||||||||||
dollars) | dollars) | dollars) | ||||||||||||||||||
$2.31 to $3.50
|
934,100 | 1.23 | $ | 3.19 | 777,200 | $ | 3.17 | |||||||||||||
$3.51 to $6.75
|
293,500 | 1.92 | 6.75 | 237,500 | 6.75 | |||||||||||||||
$6.76 to $7.69
|
1,591,400 | 3.55 | 7.24 | 561,066 | 7.30 | |||||||||||||||
$7.70 to $8.20
|
2,050,000 | 5.69 | 7.90 | 1,018,000 | 7.87 | |||||||||||||||
$8.21 to $8.99
|
1,090,000 | 3.32 | 8.64 | 485,000 | 8.62 | |||||||||||||||
$9.00 to $10.51
|
7,120,000 | 6.27 | 9.72 | 1,803,500 | 9.70 | |||||||||||||||
$10.52 to $12.70
|
1,305,000 | 6.51 | 12.20 | 780,500 | 12.62 | |||||||||||||||
14,384,000 | 5.27 | $ | 8.84 | 5,662,766 | $ | 8.42 | ||||||||||||||
As at September 30, 2006, there was $25.3 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 1.71 years. | |||
(b) | Share Purchase Warrants | ||
At September 30, 2006, the Company had 5,760,000 share purchase warrants outstanding that were issued in 2004. These warrants entitle the holder to acquire one-tenth of a common share of the Company at any time on or before February 15, 2007, at a price of $8.68 per common share. |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Income taxes paid |
12 | 183 | 399 | 277 |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(Increase) decrease in: |
||||||||||||||||
Accounts receivable |
$ | (7,116 | ) | $ | (1,403 | ) | $ | (11,685 | ) | $ | (1,929 | ) | ||||
Inventories |
1,298 | 680 | (1,260 | ) | 627 | |||||||||||
Prepaid expenses |
(4,791 | ) | (890 | ) | (2,169 | ) | (1,296 | ) | ||||||||
Other current assets |
| | 3,000 | | ||||||||||||
Increase (decrease) in: |
||||||||||||||||
Accounts payable and accrued liabilities |
14,361 | (7,667 | ) | 4,147 | (7,246 | ) | ||||||||||
$ | 3,752 | $ | (9,280 | ) | $ | (7,967 | ) | $ | (9,844 | ) | ||||||
9. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES |
As indicated in Note 1, these consolidated financial statements have been prepared in accordance with U.S. GAAP, which, in the case of the Company, conform in all material respects with Canadian GAAP, except as set forth below. | |||
Consolidated Balance Sheets |
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
Total assets in accordance with U.S. GAAP |
$ | 442,852 | $ | 396,779 | ||||
Reverse equity accounting for investment in joint venture (a) |
64,077 | 43,067 | ||||||
Reversal of amortization of other mineral property interests (b) |
6,329 | 6,329 | ||||||
Adjustment to carrying value of long-term investments (c) |
| (6,711 | ) | |||||
Total assets in accordance with Canadian GAAP |
$ | 513,258 | $ | 439,464 | ||||
Total liabilities in accordance with U.S. GAAP |
$ | 35,735 | $ | 32,228 | ||||
Reverse equity accounting for investment in joint venture (a) |
64,077 | 43,067 | ||||||
Income tax effect of U.S. GAAP adjustments for: |
||||||||
Reversal of amortization of other mineral property interests (b) |
882 | 882 | ||||||
Total liabilities in accordance with Canadian GAAP |
$ | 100,694 | $ | 76,177 | ||||
Total minority interests in accordance with U.S.
and Canadian GAAP |
$ | | $ | 8,928 | ||||
Total shareholders equity in accordance with U.S. GAAP |
$ | 407,117 | $ | 355,623 | ||||
Decrease in the deficit for: |
||||||||
Reversal of amortization of other mineral property interests (b) |
5,447 | 5,447 | ||||||
Other comprehensive income (c) |
| (6,711 | ) | |||||
Total shareholders equity in accordance with Canadian GAAP |
$ | 412,564 | $ | 354,359 | ||||
9. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
Consolidated Statements of Operations (in thousands, except for share and per share amounts) |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net (loss) from continuing operations in accordance with
U.S. GAAP |
$ | (67,959 | ) | $ | (20,641 | ) | $ | (144,792 | ) | $ | (75,910 | ) | ||||
Dilution gain on issuance of shares by a subsidiary (d) |
3,954 | 473 | 4,439 | 473 | ||||||||||||
Net (loss) from continuing operations in accordance with
Canadian GAAP |
$ | (64,005 | ) | $ | (20,168 | ) | $ | (140,353 | ) | $ | (75,437 | ) | ||||
Net income from discontinued operations in accordance
with U.S. GAAP |
$ | 1,514 | $ | 6,378 | $ | 14,857 | $ | 27,992 | ||||||||
Gain on sale of Savage River Project (e) |
| (3,483 | ) | | (19,691 | ) | ||||||||||
Net income from discontinued operations in accordance
with Canadian GAAP |
$ | 1,514 | $ | 2,895 | $ | 14,857 | $ | 8,301 | ||||||||
Net (loss) in accordance with Canadian GAAP |
$ | (62,491 | ) | $ | (17,273 | ) | $ | (125,496 | ) | $ | (67,136 | ) | ||||
Weighted-average number of shares outstanding under
Canadian GAAP (in thousands) |
335,336 | 314,011 | 327,326 | 302,006 | ||||||||||||
Basic and diluted (loss) earnings per share in accordance
with Canadian GAAP from: |
||||||||||||||||
Continuing operations |
$ | (0.19 | ) | $ | (0.06 | ) | $ | (0.43 | ) | $ | (0.25 | ) | ||||
Discontinued operations |
| 0.01 | 0.05 | 0.03 | ||||||||||||
$ | (0.19 | ) | $ | (0.05 | ) | $ | (0.38 | ) | $ | (0.22 | ) | |||||
Under Canadian GAAP, the components of shareholders equity would be as follows: |
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
Share capital |
$ | 1,164,671 | $ | 999,372 | ||||
Additional paid-in capital |
32,452 | 17,952 | ||||||
Accumulated other comprehensive income (c) |
3,902 | | ||||||
Deficit |
(788,461 | ) | (662,965 | ) | ||||
$ | 412,564 | $ | 354,359 | |||||
9. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
Consolidated Statements of Cash Flows |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Cash used in operating activities in accordance with
U.S. GAAP |
$ | (66,967 | ) | $ | (42,547 | ) | $ | (151,809 | ) | $ | (96,540 | ) | ||||
Reverse equity accounting for investment in
joint venture (a) |
3,577 | 10,283 | 32,837 | 19,270 | ||||||||||||
Cash used in operating activities in accordance with
Canadian GAAP |
(63,390 | ) | (32,264 | ) | (118,972 | ) | (77,270 | ) | ||||||||
Cash (used in) provided by investing activities in accordance
with U.S. GAAP |
(12,380 | ) | (15,999 | ) | 4,498 | (13,248 | ) | |||||||||
Reverse equity accounting for investment in
joint venture (a) |
(2,904 | ) | (2,586 | ) | (12,861 | ) | (4,561 | ) | ||||||||
Cash used in investing activities in
accordance with Canadian GAAP |
(15,284 | ) | (18,585 | ) | (8,363 | ) | (17,809 | ) | ||||||||
Cash provided by financing activities in
accordance with U.S. GAAP |
9,514 | 1,328 | 173,480 | 122,572 | ||||||||||||
Reverse equity accounting for investment in
joint venture (a) |
| (3,750 | ) | | (7,500 | ) | ||||||||||
Cash provided by (used in) financing activities in accordance
with Canadian GAAP |
9,514 | (2,422 | ) | 173,480 | 115,072 | |||||||||||
Effect of exchange rate changes on cash |
(381 | ) | 6,987 | 3,718 | 8,280 | |||||||||||
Net cash inflow (outflow) in accordance with Canadian GAAP |
(69,541 | ) | (46,284 | ) | 49,863 | 28,273 | ||||||||||
Cash, beginning of period in accordance with Canadian GAAP |
243,928 | 197,134 | 124,524 | 122,577 | ||||||||||||
Cash, end of period in accordance with Canadian GAAP |
$ | 174,387 | $ | 150,850 | $ | 174,387 | $ | 150,850 | ||||||||
9. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
(a) | Investment in Joint Venture | ||
Under U.S. GAAP, Ivanhoe Mines has accounted for its joint venture interest in JVCo (Note 3) using the equity method. Under Canadian GAAP, interests in joint ventures are accounted for on a proportionate consolidation basis. | |||
Under Canadian GAAP, the carrying amount of Ivanhoe Mines investment and its share of equity of JVCo is eliminated and replaced with Ivanhoe Mines proportionate share of each line item of JVCos assets, liabilities, revenue and expenses which is included in the corresponding line items of Ivanhoe Mines financial statements. All intercompany balances and transactions would be eliminated. Note 3 discloses the asset, liabilities, revenues and expenses of JVCo that would have been included in the corresponding line items on Ivanhoe Mines financial statements had Canadian GAAP been applied. | |||
(b) | Other mineral property interests | ||
Under U.S. GAAP, where mineral property interests are, at the date of acquisition, without economically recoverable reserves, these costs are generally considered to be exploration costs that are expensed as incurred. Under Canadian GAAP, the costs of the acquisition of mineral property interests are capitalized. | |||
In accordance with EITF 04-02, Whether Mining Rights are Tangible or Intangible Assets, the Company classifies its mineral exploration licenses as tangible assets and there is no difference between Canadian and U.S. GAAP. Prior to January 2004, the costs of acquisition of Ivanhoe Mines mineral exploration licenses were classified as intangible assets under U.S. GAAP and amortized over the term of the licenses. As a result, for Canadian GAAP purposes, the $6,329,000, net of deferred income taxes of $882,000, in amortization or write-offs of other mineral property interests under U.S. GAAP has been reversed. | |||
(c) | Financial Instruments | ||
On January 1, 2006, the Company adopted CICA Section 1530, Comprehensive Income, Section 3855, Financial Instruments Recognition and Measurement, Section 3861, Financial Instruments Disclosure and Presentation and Section 3865, Hedges. These new standards increased harmonization between U.S. and Canadian GAAP. | |||
Under U.S. and Canadian GAAP, portfolio investments are classified as available-for-sale securities, which are carried at market value (Note 4). The resulting unrealized gains or losses are included in the determination of comprehensive income, net of income taxes where applicable. Prior to adopting Sections 3855 and 1530, these investments were carried at their original cost less provisions for impairment under Canadian GAAP. Upon adoption, the Company recorded a retroactive balance representing the unrealized gains on available-for-sale securities of $6,711,000 at January 1, 2006. Available-for-sale securities generated comprehensive gain of $465,000 and a loss of $2,809,000 under both Canadian and U.S. GAAP for the three and nine month periods ended September 30, 2006. |
9. | DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued) |
(d) | Dilution gain on investment in subsidiary | ||
Under U.S. GAAP, dilution gain on investment in a subsidiary of $3,954,000 and $4,439,000 for the three and nine month periods ended September 30, 2006 was accounted for as part of additional paid-in capital. Under Canadian GAAP, the dilution gain was included in the net loss for the three and nine month periods ended September 30, 2006. | |||
(e) | Gain on Sale of Savage River Project | ||
Under U.S. GAAP, the net book value of ABM when it was sold in February 2005 was $11.2 million, whereas under Canadian GAAP it was $30.9 million. At September 30, 2005, total proceeds from the sale were $33.8 million. Therefore, under Canadian GAAP the gain on sale was $19.7 million less than under U.S. GAAP. | |||
(f) | Income taxes | ||
Under U.S. GAAP, deferred income taxes are calculated based on enacted tax rates applicable to future years. Under Canadian GAAP, future income taxes are calculated based on enacted or substantively enacted tax rates applicable to future years. This difference in GAAP did not have any effect on the financial position or results of operations of the Company for the three and nine month periods ended September 30, 2006 and 2005. |
10. | SUBSEQUENT EVENTS |
(a) | On October 18, 2006, Ivanhoe Mines and Rio Tinto Plc (Rio Tinto) announced that they had reached an agreement to form a strategic partnership whereby Rio Tinto would invest in Ivanhoe Mines and form a joint Ivanhoe Mines Rio Tinto Technical Committee, to engineer, construct and operate Ivanhoe Miness Oyu Tolgoi project in Mongolia. This agreement creates a defined path for Rio Tinto to become the largest shareholder in Ivanhoe Mines. | ||
On October 27, 2006, Rio Tinto completed the first private placement tranche under the agreement consisting of 37.1 million shares at a price of $8.18 per share, for proceeds totalling $303.4 million. Rio Tinto now owns approximately 9.95% of Ivanhoe Mines issued share capital. | |||
The agreement provides for Rio Tinto to make additional investments in the equity of Ivanhoe Mines, under defined conditions, of up to approximately US$1.5 billion. Ivanhoe Mines has agreed to use at least 90% of the proceeds received from Rio Tinto to finance the development of Oyu Tolgoi. |
10. | SUBSEQUENT EVENTS (Continued) |
(a) | (Continued) | ||
Further investments by Rio Tinto in Ivanhoe Mines will be structured in the following stages: |
| Rio Tinto will take up a second tranche private placement following the satisfactory conclusion of an Investment Agreement between Ivanhoe Mines and the Mongolian Government. Rio Tinto has the option to exercise the second tranche earlier. This second tranche will consist of 46.3 million shares at a subscription price of US$8.38 per share, for proceeds totalling US$388.0 million. Completion of second tranche and an additional top-up right, will give Rio Tinto up to 19.9% of Ivanhoe Mines issued share capital. | ||
| In addition to the two private placements, Rio Tinto has been granted non-transferable warrants over approximately 92 million Ivanhoe Mines shares in two equal tranches of approximately 46 million shares at various exercise prices. When exercised, the warrants will result in additional funds to Ivanhoe Mines of up to US$808 million that, when combined with the private placements, will total approximately US$1.5 billion. These warrants entitle Rio Tinto to increase its interest in Ivanhoe Mines to up to 33.35% of the companys fully diluted issued share capital. Exercise of the warrants is conditional on the approval of Ivanhoe Mines shareholders at a special meeting to be convened on November 30, 2006. |
Pursuant to the private placement agreement with Rio Tinto, Ivanhoe Mines has also agreed to dispose of its interest in JVCo (Note 3), and any other assets held by Ivanhoe Mines in the Union of Myanmar, by February 1, 2007. If such disposition does not occur by that date, Rio Tinto has the right to cause Ivanhoe Mines to transfer all of its Myanmar assets into a trust of which none of Rio Tinto, Robert M. Friedland, the Company, their respective affiliates, any person related to any of them, or persons resident or controlled by residents of Myanmar are trustees or beneficiaries. In consideration for such transfer, Ivanhoe Mines would receive a promissory note issued by the trust in an amount not less than US$40 million plus 50% of the cash receivable from the Myanmar assets at the time of sale. Ivanhoe Mines would be entitled to additional compensation from any such future sale of the Myanmar assets by the trust in an amount to be determined but not less than 50% of the amount by which such sale proceeds exceed the amount outstanding under the promissory note. | |||
(b) | In July 2006, Ivanhoe Mines and Asia Gold Corp. (Asia Gold) signed a definitive agreement whereby Asia Gold will acquire Ivanhoe Mines Coal Division by issuing 82,576,383 shares of Asia Gold to Ivanhoe Mines. This reorganization was approved by Asia Golds shareholders on August 8, 2006. This transaction remains subject to the fulfillment of certain conditions precedent, including the completion of the transfer of certain mineral exploration licenses in Mongolia that are currently held by Ivanhoe Mines. The reorganization will result in Ivanhoe Mines owning approximately 90% of Asia Golds issued and outstanding share capital | ||
On November 1, 2006, Asia Gold and Ivanhoe Mines announced that the Mongolian authorities have accepted applications filed by Ivanhoe Mines to transfer the ownership of these licenses. The companies have agreed not to set a time limit on the completion of the formal license transfer process that has been initiated. | |||
As part of the agreement, Ivanhoe Mines extended to Asia Gold an interim line of credit of US$10.0 million (which can be increased to US$15.0 million by mutual agreement). At September 30, 2006, $4.0 million has been drawn down by Asia Gold from this facility. |
Share Information | Investor Information | |||||
3 |
Interim Report For the three and nine months ended September 30, 2006 |
Common shares of Ivanhoe Mines Ltd. are listed for trading under the symbol IVN on the New York Stock Exchange, NASDAQ and the Toronto Stock Exchange. | All financial reports, news releases and corporate information can be accessed on our web site at www.ivanhoe-mines.com | |||
At November 14, 2006 the Company had 373.1 million common shares issued and outstanding and warrants and stock options outstanding for 107 million additional common shares. |
Transfer Agents and Registrars CIBC Mellon Trust Company 320 Bay Street Toronto, Ontario, Canada M5H 4A6 Toll free in North America: 1-800-387-0825 |
Contact Information Investors: Bill Trenaman Media : Bob Williamson Suite 654-999 Canada Place Vancouver, BC, Canada V6C 3E1 E-mail : info@ivanhoemines.com Tel : (604) 688-5755 |
Page 2 of 34
§ | Rio Tinto and Ivanhoe Mines are establishing a Technical Committee to manage all aspects of the engineering, construction, development and operation of the Oyu Tolgoi Project. The Technical Committee consists of two representatives of Ivanhoe Mines, two representatives of Rio Tinto and a fifth member who will act as committee chairman and senior manager of the Oyu Tolgoi Project. | ||
§ | John Macken, the Company President and CEO, will serve as Technical Committee chairman and senior project manager for the first five years as the project ramps up to full production. During this period, unanimous consent of all Technical Committee members will be required for certain specified decisions, including acquisitions, or budgetary commitments exceeding US$100 million and material amendments to the long-term Oyu Tolgoi mine plan. After five years, Rio Tinto will have the right to appoint the subsequent chairman and senior project manager. | ||
§ | Rio Tinto will make available, at cost during the first five years, its engineering, mining and metallurgical staff to assist Ivanhoe Mines in the mine planning, engineering, design and construction of the Oyu Tolgoi Project. In consultation with the Technical Committee, Rio Tinto also will second appropriate employees to the Oyu Tolgoi Project, as required. |
Page 3 of 34
| 101,590,000 tonnes of measured resources grading 0.64% copper and 1.10 grams per tonne (g/t) gold; | ||
| 1.046,970,000 tonnes of indicated resources grading 1.34% copper and 0.42 g/t gold; and | ||
| 1,250,550,000 tonnes of inferred resources grading 1.04% copper and 0.24 g/t gold. |
| 127,000,000 tonnes of proven reserves at 0.58% copper and o.93 g/t gold; and | ||
| 803,000,000 tonnes of probable reserves at 0.48% copper and 0.27 g/t gold. |
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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. |
Nine months ended | ||||||||||||||||
Quarter ended September 30, | September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Exploration expenses |
(65.1 | ) | (28.9 | ) | (132.0 | ) | (87.1 | ) | ||||||||
General and administrative costs |
(9.1 | ) | (7.3 | ) | (29.9 | ) | (18.0 | ) | ||||||||
Share of income from joint venture |
9.0 | 8.0 | 11.0 | 23.5 | ||||||||||||
Foreign exchange (losses) gains |
(0.4 | ) | 7.1 | 4.1 | 8.2 | |||||||||||
Net (loss) from continuing operations |
(68.0 | ) | (20.6 | ) | (144.8 | ) | (75.9 | ) | ||||||||
Net income from discontinued operations |
1.5 | 6.4 | 14.9 | 28.0 | ||||||||||||
Net (loss) |
(66.4 | ) | (14.3 | ) | 129.9 | (47.9 | ) | |||||||||
Net (loss) income per share |
||||||||||||||||
Continuing operations |
$ | (0.20 | ) | $ | (0.07 | ) | $ | (0.44 | ) | $ | (0.25 | ) | ||||
Discontinued operations |
$ | 0.00 | $ | 0.02 | $ | 0.04 | $ | 0.09 | ||||||||
Total assets |
442.9 | 413.8 | 442.9 | 413.8 |
Page 9 of 34
a) | Oyu Tolgoi Project, Mongolia | ||
The comments below relating to the development and exploration activities at the Oyu Tolgoi Project are based on activities carried out during the third quarter and reflect managements current plans but do not incorporate any discussions with Rio Tinto. The first technical review meeting with representatives of Rio Tinto is planned to be held in November 2006. This will be the first time that Rio Tinto personnel will have the opportunity to provide their input into the project development, particularly with regard to the underground mine development of the Hugo North deposit. Key topics of discussion will include the projected location for Shaft #2, future plans for the sub-level cave (SLC) mine and the expected depth and production capacity of the first large lift at Hugo North. | |||
i) Oyu Tolgoi Integrated Development Plan (IDP) | |||
Mine Planning Update Planning and development activities continued to focus on assessing both the benefits of a low volume, high value starter mine in Hugo North and its impacts on the longer term mine plan. Analysis has been undertaken to evaluate the relative benefits of an initial SLC as compared to undertaking a small block cave in the same area. The latter alternative would effectively replace the Hugo Lift #1, previously proposed in the IDP, with a smaller, higher grade SLC approach resulting in a reduction in the initial capital cost estimate. Future planning efforts will focus in optimizing the depth and production profile for Lift #2. | |||
Engineering, procurement and construction activities for the Oyu Tolgoi Project continued to progress throughout the quarter. The surface facilities excavation of Hugo Shaft #2 is complete and, to date, the sinking of Hugo Shaft #1 has reached a depth of approximately 600 metres. | |||
The Company continues to focus on health, safety, environment and security issues at the Oyu Tolgoi site, community relations and sustainable development for local Mongolian communities near the Oyu Tolgoi site. | |||
Planning & Development Current plans are to complete studies required to bring the SLC starter mine to feasibility level. The information gathered for the SLC starter mine may prove sufficient to fulfill the geotechnical and geologic data requirements for the preparation of a feasibility study for the Hugo North deposit. The anticipated benefits of developing the underground SLC starter mine include: |
§ | A reduction in the initial capital costs and technical risks associated with the planned large underground block cave mining operation; | ||
§ | An expected enhancement in the overall Oyu Tolgoi Project value by planning to mine high grade copper and gold mineralization earlier than previously estimated; |
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§ | The generation of a significant source of near-term, cash-flow that can be used to fund development of the larger Hugo North block cave mining operation; and, | ||
§ | An expected reduction, of up to one year, in the time to complete the underground exploration and development program for the SLC starter mine. This reduction is as a result of expected shorter and shallower underground drifting distances than previously projected by the IDP. |
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Geotechnical drilling with the objective to further define the geotechnical characteristics of the Hugo North deposit will continue through Q406. Three holes have been collared immediately north of the Entrée JV property line. The objective of drilling south into the axis of Ivanhoe Mines 100% owned Hugo North deposit is to provide pre-feasibility level information on the caving characteristics of the deposit. | |||
b) | Other Mongolian copper/gold exploration projects. | ||
During Q306, Ivanhoe Mines continued its exploration efforts on various other Mongolian prospects. During this period, project work focused on the Baruun Tal and Undur Naran porphyry targets, located 50 kilometres west of Ivanhoe Mines Kharmagtai Project and 20 kilometres northeast of the Oyut Ulaan Project respectively. Limited trenching, soil geochemistry and ground magnetic surveys carried out during Q306 at both these projects is summarized below: | |||
Undur Naran project Trenching at Undur Naran totaled 3,768 metres (13 trenches) and targeted the North and the Central zones, two areas of sub-cropping stockworked syenites that returned anomalous gold and copper rock-chip assays. The most significant intercepts are associated with stockwork quartz-sulphide veins. Further mapping and rock-chip sampling is planned at the Undur Naran project. | |||
Baruun Tal project The numerous prospects at the Baruun Tal project, including the BTT and the BTU prospect, are located along a 12 kilometres by 5 kilometres area, much of which is under cover. Trenching totaled 7,625 metres over 32 trenches and was mostly in the areas under cover along strike from anomalous rock-chip samples. Trench intercepts at the BTT prospect were generally narrow and of low grade. At the BTU prospect, a 20 by 100 metres wide area of sheeted to stockwork quartz-hematite-malachite-chalcopyrite veins, hosted in silica-sericite-albite altered monzodiorite, returned 6 metres at 0.43%, including 2 metres at 10.60 parts per million (ppm) gold. Narrow intercepts were also recorded from other prospects. Trench results are under review and no further fieldwork is planned at the Baruun Tal project for this year. | |||
Other new medium priority targets include Baga Haich, near Tsagaan Tolgoi, where granite-hosted quartz-chalcopyrite veins outcrop over a 560 by 360 metres area. Eleven of the 67 samples assayed 0.24 % to 1.78 % copper, whilst 18 returned 104 to 6340 ppm molybdenum. | |||
The tenement relinquishment program was ongoing throughout 2006. At the end of the quarter, 1.2 million hectares of the approximately 8.8 million hectares held at the beginning of 2006 had been relinquished; whilst an additional 3.1 million hectares are earmarked for relinquishment. The objective of future reconnaissance efforts is to further decrease the existing tenements holdings. |
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c) | Mongolian coal projects. | ||
Coal Division merger with Asia Gold On August 8, 2006, Asia Golds minority shareholders approved the proposed merger transaction under which Ivanhoe Mines will transfer its Mongolian Coal Division to Asia Gold in exchange for approximately 82.6 million common shares of Asia Gold (for further details see heading d) Other iv) Mongolia: Asia Gold Corp (Asia Gold)). | |||
Nariin Sukhait Nariin Sukhait is located in the southwest corner of the Omnogovi Aimag (province) of Mongolia. The deposit is within the Gurvantes Soum (township), 320 kilometres southwest of the provincial capital of Dalanzadgad and 950 kilometres south of the nations capital Ulaanbaatar. Nariin Sukhait is located 45 kilometres north of the Mongolia-China border. At present one north/south 450-kilometre long rail line has been built within China up to the China/Mongolia border. A second east/west railway line to Ceke has been started with an estimated late 2008 completion date. | |||
A four month drilling and exploration program at Nariin Sukhait was concluded in July 2006 and 113 holes were drilled. The emphasis was to better delineate the coal within the mine design area, extend the ore body along strike and down dip, add quality data and to increase the known resource. Drilling for hydrology and geotechnical information was also carried out. Results will be interpreted and a new geological report will be generated by year end. A new mine plan will also be developed. In Q106 total coal resources contained in two separate fields, the South-East Field and the West Field, were estimated at 124.0 million tonnes of Measured plus Indicated resources, (79.5 million tonnes of Measured resources and 44.5 million tonnes of Indicated resources). An additional Inferred resource of approximately 33.8 million tonnes was also calculated. Coal samples from the 2006 program were shipped to Tianjin, China for quality testing. Initial results have been positive with confirmations of steam, semi soft and metallurgical qualities within the coal at Nariin Sukhait. Quality modeling will also be carried out to determine the product distribution. | |||
Norwest Corporation is assisting the Company in planning the mine development at Nariin Sukhait. The mine plan is expected to support an operation capable of producing four million tonnes of saleable coal per year. Ultimate capacity is planned to be reached in 5 years. This mine plan will be used by Asia Gold as the basis for applying for the mining licence required for the operations of the Nariin Sukhait Project. A detailed EIA is being completed and expected to be submitted along with the mining application. Newly enacted Mongolian laws provides a ten-year tax protection guarantee for projects exceeding $50 million in investment made within the first five years of the project life. The Nariin Sukhait project is expected to qualify for a ten year Investment Agreement. | |||
The project is scheduled to start development and construction work following the closing of the Coal Division merger transaction with Asia Gold and the issuance of the required permits. Plans for the delivery of mining equipment are in place. Coal production is projected nine months following the start of pre-stripping |
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operations. Initial coal production for the first twelve months of operations is projected at one million tonnes. | |||
The airstrip and infrastructure, located approximately 2 kilometres from the mine site, have been completed. A test flight and landing was carried out by the Mongolian Civil Aviation Authority and the airstrip was certified for operation in September 2006. A camp facility has been designed and will be built approximately 1.5 kilometres from the airstrip. It will house all mine workers in a rotating work schedule as well as management and visitors. | |||
Letters of intent for the sale of up to four million tonnes of coal per year were signed with two Chinese companies. | |||
Tsagaan Tolgoi Coal Project This project is located approximately 105 kilometres west of the Oyu Tolgoi Project. In 2004 significant coal thicknesses were encountered along a strike length of six kilometres as a result of deep-trenching efforts and a drilling program that included a total of 46 drill holes. During the quarter, a 73 drill-hole program was completed at Tsagaan Tolgoi. The geological model will be updated and incorporated in a technical report prepared in accordance with National Instrument 43-101. | |||
The objective of the drilling program is to delineate sufficient thermal coal resources to support the preparation of a formal study on the development of long-life, coal-fired power plant. This plant is projected to have the capacity to supply electricity to the Oyu Tolgoi Project and the residents of the sparsely populated southern part of Mongolia. Earlier this year Norwest Corporation developed a preliminary mine design and mine plans. Preliminary engineering on various power plant options using Tsagaan Tolgoi coal for fuel was also completed during the quarter. |
i) | Kazakhstan: Bakyrchik Project. | ||
During Q306 the mine facilities continued under care and maintenance status and the necessary winterization activities were completed. Expenditures for the quarter totalled $1.1 million compared to $0.5 million in Q305. | |||
As part of the Sale and Purchase Agreement and Subsoil Use Contract amendments, which extended the investment commitment and exploration license by 5 years, the exploration portion of the work program, approved by the Ministry of Energy and Natural Resources, started at the end of September 2006. | |||
As a result, the roasting plant construction activities continued to be suspended except for the completion of some minor construction work, such as the reconstruction of the gold room. The project group is updating the capital cost of the roasting plant in order to incorporate the impact of inflation in current construction costs. |
Page 15 of 34
The metallurgical testing laboratory continued to conduct optimization tests on Bakyrchik ores. All results to date indicate that whole ore roasting remains a viable option available for Bakyrchik double refractory ores. During the quarter, tailings stabilization tests using cement were performed. Also, the mining engineering group continued to supervise the paste fill plant design work carried out by a local design institute. | |||
In Q306, the Company sent senior geologists from Mongolia to Bakyrchik to review the mine geology and exploration potential of the project area. A program of diamond drilling and surface exploration will be prepared and submitted to the appropriate authorities for approval. It is the Companys intention to re-establish a team of Kazakh geologists at the mine site assisted by key senior geologists seconded from the exploration team at Oyu Tolgoi. Once the approvals are received for this work and work permits provided for the key personnel, the work should commence. | |||
Financing alternatives, including a possible public offering of a company holding the Bakyrchik Project, are currently being considered. | |||
ii) | China: Inner Mongolia. | ||
Advanced Exploration Program A total of 2,995 metres of diamond drilling (22 holes) were completed and 16.9 infill line kilometres (683 soil samples) were taken from the primary Anomaly Five target area. Holes were targeted on zones with anomalous surface and soil gold-silver geochemistry and all zones have been adequately tested by the completed program. Gold and gold-silver mineralized vein zones were intercepted in several holes, however, the narrow (15 centimetres to 70 centimetres), erratic nature of mineralization and lack of gold-silver grade continuity within veins and lodes has downgraded the property. No further work is planned in Q406. | |||
Reconnaissance Exploration Program Two potential gold-silver-copper targets were identified. | |||
Follow-up exploration, consisting of detailed geological-structural mapping, systematic rock chip sampling, trenching and ground geophysics will be completed over both prospects in early 2007, with an aim of defining drill targets for testing in the later part of 2007. | |||
iii) | Australia: Cloncurry. | ||
The Cloncurry Project covers an area of more than 1,450 square kilometres in northwestern Queensland in Australias storied Mount Isa-Cloncurry mining district. Since acquiring the property in September 2003 Ivanhoe Mines initially has focused on three high potential copper gold targets: Mt Dore, Swan and Amethyst Castle. Ten holes, totalling 4,621 metres, were drilled in the quarter. | |||
In Q306, diamond drilling on the Iron Oxide Copper Gold (IOCG) mineralized systems at Swan and Amethyst Castle yielded encouraging geological information and several drill intercepts of haematite matrix sulphide-bearing hydrothermal |
Page 16 of 34
breccias, indicating that Ivanhoe Mines exploration might have clipped the top of deeper copper-gold-uranium bodies. | ||
At Amethyst Castle, RC drilling into geophysical targets (mainly induced polarization targets) yielded intercepts of copper, gold and uranium in the eastern side of the breccia body. This drilling was followed by a diamond drilling program, with four holes completed during the quarter and two additional holes drilled after September. The diamond core has confirmed the presence at Amethyst of a large-scale breccia body hosting IOCG mineralization, with associated uranium. Further drilling is planned after assay results are received. | ||
At the Swan prospect, six holes were drilled for a total of 3,142 metres, with targets designed to explore the large magnetic anomaly. The southern side of the anomaly proved to be less mineralized than the northern side and drilling now is extending mineralization to the northeast. Copper and gold mineralization is associated with widespread intense albitisation (red rock), which is overprinted by pyroxene, magnetite, pyrite and chalcopyrite veinlets. Common native copper and chalcocite (supergene?) also have been observed. Swan is located within a large, distinctive magnetic anomaly that also underlies the former Mt. Elliot mine and Swell and northern Gossan prospects. This deep-seated feature appears to have a circular form, with a diameter of approximately one kilometre. Preliminary drilling and the widespread sodium-calcium alteration at these targets indicate they are all related to one large mineralized system that remains to be tested at depth. Extensive drilling is being planned to test this concept. Testing for potential oxide and primary copper-gold resources at Swan will be evaluated by pattern drilling, initially at 100-metre drill centres. | ||
In October, drilling moved onto a third prospect, Metal Ridge North, where surface copper geochemical anomalies, combined with magnetic and conductivity features, are the target for a three-hole diamond-drill program and a 20-hole RC-drill program. The mineralization occurs along a northerly trend for several kilometres and appears to be associated with carbonaceous shales that also display widespread, intense albitisation. | ||
During the quarter, a comprehensive review of 30 years of previous exploration was conducted. This resulted in the recognition of numerous new target areas, most of which have IOCG signatures. There are more than 100 known mineral occurrences and prospects within Ivanhoe Mines tenements. Some of these are centered on uranium occurrences that were only partially explored during the 1970s. The historic Kuridala copper mining district, situated in the northern part of Ivanhoe Mines tenements, has numerous copper, gold and uranium prospects that will be studied further in preparation for extensive drilling. Universal Tracking Systems has been engaged to fly a 6,000-line-kilometre survey over selected parts of Ivanhoe Mines land package, particularly those with associated uranium, to enhance drill target selection. | ||
The number of quality IOCG targets that require drill testing is extraordinary and a very significantly increased exploration program is being planned for Q406 and |
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2007. A dedicated corporate management team, including specialist consultants, will be assembled to take the Cloncurry Project forward into 2007. | ||
iv) | Mongolia: Asia Gold Corp. (Asia Gold). | |
Coal Transaction On August 8, 2006 the minority shareholders of Asia Gold approved the acquisition of Ivanhoe Mines Mongolian Coal Division. The acquisition agreement provides for Asia Gold to acquire the Coal Division in exchange for approximately 82.6 million Asia Gold shares. The proposed transaction would result in Asia Gold becoming a majority-owned (88.8% on a fully diluted basis), publicly-traded subsidiary of the Company, with coal and mineral exploration divisions. | ||
Asia Gold and the Company have agreed to extend, on an indefinite basis, the closing date for the transaction to take into account unanticipated delays in obtaining regulatory approval in Mongolia for the transfer of certain coal exploration licenses. The transaction is expected to close following receipt from the Mongolian authorities of approval for these license transfers. | ||
Mongolia Exploration Exploration results from the Khongor porphyry copper-gold project in southern Mongolia confirm a mineralized strike length of 2 kilometres. About half of this strike length (Khongor North) is located within the West Falcon Gobi Property, a joint-venture property with BHP Billiton World Exploration Inc. (BHP Billiton). The balance is located on the Tsakhir license, referred to as Khongor South, which is optioned by Asia Gold from Solomon Resources Limited and Gallant Minerals Ltd. | ||
In August 2006, further work was completed to improve the resolution of the induced polarization survey conducted in April 2006. The phase two drilling program, which was completed in early July 2006, intersected high grade mineralization and further mapping, sampling and ground magnetic surveys have defined four new drill targets. Two new zones of strong quartz stock work were also discovered in August 2006. | ||
Pursuant to an Option Agreement with BHP Billiton dated June 30, 2005, BHP Billiton can earn a 50% interest in the West Falcon Gobi Property by spending $3.5 million on exploration prior to December 31, 2007, and an additional 20% interest by funding a feasibility study up to a maximum value of $45 million. | ||
After a Falcon airborne gravity gradiometer survey, BHP Billiton mobilized a multipurpose drill rig to test for the presence of favorable coal targets and directly test for the depth extension of coal seams. A total of 34 holes were drilled. | ||
Bulgaria Exploration In the joint venture agreement with Hereward Ventures Bulgaria AD, Asia Gold can earn up to an 80% interest in certain licenses by completing two $2 million exploration programs. On September 21, 2006 Asia Gold completed the first stage and has earned a 51% participating interest in the joint venture. Asia Gold now has the option to earn an additional 29% interest in |
Page 18 of 34
the four licenses, for a total of 80%, by spending an additional $2 million in exploration expenditures before March 2009. | ||
A nine-hole diamond drilling program totalling 1,441 metres with was completed in July 2006. The drilling program targeted the Tashlaka Main and Tashlaka South prospects gold system. The drill results were encouraging and further drilling is required to fully test the extent of mineralization. Soil sampling and trenching were also being conducted on other parts of the licenses. | ||
Indonesia Effective September 7, 2006 a definitive Joint Venture Agreement and Cooperation Agreement was signed with Harita Mineral. Under the terms of this agreement, Asia Gold can earn up to an 85% interest in the Kaputusan prospect by spending $300,000 on exploration during the first year of the joint venture. | ||
Camp construction, line cutting and logistical preparation has been established on the Kaputusan porphyry copper-gold project. A first-stage exploration program comprising geological mapping, an IP geophysical survey and trenching began in March 2006. Detailed geological mapping by Asia Gold has confirmed the presence of a porphyry copper-gold mineralization and new trenches are now being dug to extend the mineralized zones. A 3,000-metre diamond drill program is being planned for 2007. | ||
Qualified Persons The Oyu Tolgoi Project and the Nariin Sukhait Project have been identified as the mineral projects that are material to Ivanhoe Mines. | ||
Disclosure of a scientific or technical nature in this MD&A in respect of each of these mineral resource properties of Ivanhoe Mines was prepared by or under the supervision of the qualified persons (as that term is defined in NI 43-101) listed below: |
Property | Qualified Person | Relationship to the Company | ||
Oyu Tolgoi Project
|
Charles P.N. Forster | Employee | ||
Nariin Sukhait Project
|
Steven Kerr (Norwest Corporation) | Independent consultant |
Page 19 of 34
Three month period ended September 30, | ||||||||||||||||||||||||||||
Total Operation | Companys 50% net share | |||||||||||||||||||||||||||
% Increase | % Increase | |||||||||||||||||||||||||||
2006 | 2005 | (decrease) | 2006 | 2005 | (decrease) | |||||||||||||||||||||||
Total tonnes moved (1) |
Tonnes(000s) | 2,405 | 3,357 | (28 | %) | |||||||||||||||||||||||
Tonnes of ore to heap |
Tonnes(000s) | 1,602 | 2,151 | (26 | %) | |||||||||||||||||||||||
Ore grade |
CuCN% | 0.32 | % | 0.51 | % | (37 | %) | |||||||||||||||||||||
Strip ratio |
Waste/Ore | 0.45 | 0.56 | (20 | %) | |||||||||||||||||||||||
Cathode production |
Tonnes | 5,980 | 8,497 | (30 | %) | 2,990 | 4,249 | (30 | %) | |||||||||||||||||||
Tonnage sold |
Tonnes | 5,649 | 8,222 | (31 | %) | 2,825 | 4,111 | (31 | %) | |||||||||||||||||||
Average sale price received |
US$/pound | $ | 3.51 | $ | 1.80 | 95 | % | |||||||||||||||||||||
Sales |
US$(000) | 18,858 | 15,439 | 22 | % | |||||||||||||||||||||||
Cost of operations |
US$(000) | 3,647 | 4,633 | (21 | %) | |||||||||||||||||||||||
Operating profit |
US$(000) | 14,064 | 9,166 | 53 | % | |||||||||||||||||||||||
Unit cost of operations |
US$/pound | $ | 0.59 | $ | 0.51 | 15 | % |
Nine month period ended September 30, | ||||||||||||||||||||||||||||
Total Operation | Companys 50% net share | |||||||||||||||||||||||||||
% Increase | % Increase | |||||||||||||||||||||||||||
2006 | 2005 | (decrease) | 2006 | 2005 | (decrease) | |||||||||||||||||||||||
Total tonnes moved (1) |
Tonnes(000s) | 7,934 | 10,256 | (23 | %) | |||||||||||||||||||||||
Tonnes of ore to heap |
Tonnes(000s) | 6,442 | 6,679 | (4 | %) | |||||||||||||||||||||||
Ore grade |
CuCN% | 0.37 | % | 0.53 | % | (30 | %) | |||||||||||||||||||||
Strip ratio |
Waste/Ore | 0.25 | 0.49 | (49 | %) | |||||||||||||||||||||||
Cathode production |
Tonnes | 14,406 | 27,218 | (47 | %) | 7,203 | 13,609 | (47 | %) | |||||||||||||||||||
Tonnage sold |
Tonnes | 13,849 | 26,647 | (48 | %) | 6,925 | 13,324 | (48 | %) | |||||||||||||||||||
Average sale price received |
$/pound | $ | 3.44 | $ | 1.66 | 108 | % | |||||||||||||||||||||
Sales |
$(000) | 43,941 | 46,197 | (5 | %) | |||||||||||||||||||||||
Cost of operations |
$(000) | 11,988 | 12,716 | (6 | %) | |||||||||||||||||||||||
Operating profit |
$(000) | 28,217 | 28,382 | (1 | %) | |||||||||||||||||||||||
Unit cost of operations |
US$/pound | $ | 0.79 | $ | 0.43 | 81 | % |
(1) | Includes ore and waste material |
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Quarter ended | ||||||||||||||||
Sept 30 | Jun 30 | Mar 31 | Dec 31 | |||||||||||||
2006 | 2006 | 2006 | 2005 | |||||||||||||
Exploration expenses |
(65.1 | ) | (39.9 | ) | (27.0 | ) | (40.1 | ) | ||||||||
General and administrative |
(9.1 | ) | (9.8 | ) | (11.0 | ) | (5.8 | ) | ||||||||
Share of (loss) income from joint venture |
9.0 | (2.4 | ) | 4.5 | (0.5 | ) | ||||||||||
Gain (loss) on foreign exchange |
(0.4 | ) | 4.7 | (0.2 | ) | (0.4 | ) | |||||||||
Net (loss) from continuing operations |
(68.0 | ) | (45.7 | ) | (31.1 | ) | (49.8 | ) | ||||||||
Net income from discontinued operations |
1.5 | 5.4 | 7.9 | 7.9 | ||||||||||||
Net (loss) |
(66.4 | ) | (40.3 | ) | (23.2 | ) | (41.8 | ) | ||||||||
Net (loss) income per share |
||||||||||||||||
Continuing operation |
(0.20 | ) | (0.14 | ) | (0.10 | ) | (0.16 | ) | ||||||||
Discontinued operations |
0.00 | 0.02 | 0.03 | 0.03 | ||||||||||||
Total |
(0.20 | ) | (0.12 | ) | (0.07 | ) | (0.13 | ) | ||||||||
Sept 30 | Jun 30 | Mar 31 | Dec 31 | |||||||||||||
2005 | 2005 | 2005 | 2004 | |||||||||||||
Exploration expenses |
(28.9 | ) | (33.8 | ) | (24.4 | ) | (24.2 | ) | ||||||||
General and administrative |
(7.3 | ) | (5.9 | ) | (4.8 | ) | (6.2 | ) | ||||||||
Share of income from joint venture |
8.0 | 7.8 | 7.7 | 6.5 | ||||||||||||
Gain (loss) on foreign exchange |
7.1 | 1.7 | (0.6 | ) | 3.5 | |||||||||||
Net (loss) from continuing operations |
(20.6 | ) | (31.1 | ) | (24.2 | ) | (26.6 | ) | ||||||||
Net income from discontinued operations |
6.4 | 5.9 | 15.7 | 9.5 | ||||||||||||
Net (loss) |
(14.3 | ) | (25.2 | ) | (8.5 | ) | (17.1 | ) | ||||||||
Net (loss) income per share |
||||||||||||||||
Continuing operation |
(0.07 | ) | (0.10 | ) | (0.08 | ) | (0.08 | ) | ||||||||
Discontinued operations |
0.02 | 0.02 | 0.05 | 0.03 | ||||||||||||
Total |
(0.05 | ) | (0.08 | ) | (0.03 | ) | (0.05 | ) | ||||||||
Page 23 of 34
| 5.76 million share purchase warrants exercisable until February 15, 2007 to purchase up to 576,000 common shares of the Company at $8.68 per share. Each 10 share purchase warrants entitle the holder to purchase one common share. During 2006, the expiry date of these share purchase warrants was extended from February 2006 until February 2007; | ||
| approximately 14 million incentive stock options outstanding, with a weighted average exercise price per share of Cdn$8.93. Each option is exercisable to purchase a common share of the Company at prices ranging from Cdn$2.31 to Cdn$12.70 per share. | ||
| on October 27, 2006, Rio Tinto was granted non-transferable warrants over approximately 92 million Company shares in two equal tranches of approximately 46 million shares at various exercise prices. When exercised, the warrants will result in additional funds to the Company of up to US$808 million that, when combined with the private placements, will total approximately US$1.5 billion. These warrants entitle Rio Tinto to increase its interest in the Company to up to 33.35% of the Companys fully diluted issued share capital. Exercise of the warrants is conditional on the approval of the Companys shareholders at a special meeting to be convened on November 30, 2006. |
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| On October 27, 2006, Rio Tinto purchased approximately 37.1 million shares of the Company at a price of $8.18. This investment gave Rio Tinto 9.95% of the Companys issued share capital as enlarged by the placement, for a total investment of $303 million. | ||
| Rio Tinto will take up a second tranche private placement following the satisfactory conclusion of an Investment Agreement between Ivanhoe Mines and the Government of Mongolia on terms mutually acceptable to the Company and Rio Tinto. Rio Tinto has the option to purchase the second tranche earlier. This second tranche will consist of approximately 46.3 million shares at a subscription price of $8.38, giving total proceeds to the Company of a further $388 million. Together, the first and second tranches, an additional top-up right, will give Rio Tinto 19.9% of the Companys enlarged issued share capital for a total combined investment of at least $691 million. | ||
| As part of the first tranche private placement, Rio Tinto also received non-transferable warrants in two equal tranches exercisable to purchase up to 92 million shares additional shares of the Company at various exercise prices. If exercised, the warrants will result in additional funds to the Company of up to $808 million that, when combined with the private placements, will total approximately $1.5 billion. These warrants entitle Rio Tinto to increase its interest in the Company to up to 33.35% of the Companys fully diluted share capital. Exercise of the warrants is conditional on the approval of the Companys shareholders at a special meeting that is to be convened on November 30, 2006. |
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| Investment between $50-$100 million 10-year term | ||
| Investment between $100-$300 million 15-year term | ||
| Investment greater than $300 million 30-year term. |
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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 September 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. |
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 September 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. |
| Rio Tinto will take up a second tranche private placement following the satisfactory conclusion of an Investment Agreement between Ivanhoe and the Mongolian Government on terms mutually acceptable to the company and Rio Tinto. Rio Tinto has the option to purchase the second tranche earlier. This second tranche will consist of approximately 46.3 million shares at a subscription price of US$8.38, giving total proceeds to Ivanhoe of a further US$388 million. The subscription price represents a 33% premium to Ivanhoes 20-day moving-average share price of US$6.29, and 28% to the closing price on October 17, 2006. Completion of the first and second tranches, and an additional top-up right, will give Rio Tinto up to 19.9% of Ivanhoes enlarged issued share capital, for a total combined investment of at least US$691 million. | ||
| In addition to the two private placements, Rio Tinto has been granted non-transferable warrants to purchase approximately 92 million Ivanhoe shares in two equal tranches of approximately 46 million shares at various exercise prices. When exercised, the warrants will result in additional funds to Ivanhoe of up to US$808 million that, when combined with the private placements, will total approximately US$1.5 billion. These warrants entitle Rio Tinto to increase its interest in Ivanhoe to up to 33.35% of the companys fully diluted share capital. Exercise of the warrants is conditional on the approval of Ivanhoe shareholders at a special meeting to be convened in Vancouver, B.C., Canada, on November 30, 2006. |
| Rio Tinto and Ivanhoe have established a Technical Committee to manage all aspects of the engineering, construction, development and operation of the Oyu Tolgoi complex. The Technical Committee will consist of two representatives from Ivanhoe, two representatives from Rio Tinto and a fifth member who will act as committee chairman and senior manager of the Oyu Tolgoi project. | ||
| John Macken, Ivanhoe President and CEO, will serve as Technical Committee chairman and senior project manager for the first five years as the project ramps up to full production. During this period, unanimous consent of all Technical Committee members will be required for certain specified decisions, including acquisitions, or budgetary commitments exceeding US$100 million and material amendments to the long-term Oyu Tolgoi mine plan. After five years, Rio Tinto will have the right to appoint the subsequent chairman and senior project manager. | ||
| Rio Tinto will make available, at cost during the first five years, its engineering, mining and metallurgical staff to assist Ivanhoe in the mine planning, engineering, design and construction of the Oyu Tolgoi project. In consultation with the Technical Committee, Rio Tinto also will second appropriate employees to the Oyu Tolgoi project, as required. |
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Quarter ended | ||||||||||||||||
Sept 30 | Jun 30 | Mar 31 | Dec 31 | |||||||||||||
2006 | 2006 | 2006 | 2005 | |||||||||||||
Exploration expenses |
(65.1 | ) | (39.9 | ) | (27.0 | ) | (40.1 | ) | ||||||||
General and administrative |
(9.1 | ) | (9.8 | ) | (11.0 | ) | (5.8 | ) | ||||||||
Share of (loss) income from joint venture |
9.0 | (2.4 | ) | 4.5 | (0.5 | ) | ||||||||||
Gain (loss) on foreign exchange |
(0.4 | ) | 4.7 | (0.2 | ) | (0.4 | ) | |||||||||
Net (loss) from continuing operations |
(68.0 | ) | (45.7 | ) | (31.1 | ) | (49.8 | ) | ||||||||
Net income from discontinued operations |
1.5 | 5.4 | 7.9 | 7.9 | ||||||||||||
Net (loss) |
(66.4 | ) | (40.3 | ) | (23.2 | ) | (41.8 | ) | ||||||||
Net (loss) income per share |
||||||||||||||||
Continuing operation |
(0.20 | ) | (0.14 | ) | (0.10 | ) | (0.16 | ) | ||||||||
Discontinued operations |
0.00 | 0.02 | 0.03 | 0.03 | ||||||||||||
Total |
(0.20 | ) | (0.12 | ) | (0.07 | ) | (0.13 | ) | ||||||||
Sept 30 | Jun 30 | Mar 31 | Dec 31 | |||||||||||||
2005 | 2005 | 2005 | 2004 | |||||||||||||
Exploration expenses |
(28.9 | ) | (33.8 | ) | (24.4 | ) | (24.2 | ) | ||||||||
General and administrative |
(7.3 | ) | (5.9 | ) | (4.8 | ) | (6.2 | ) | ||||||||
Share of income from joint venture |
8.0 | 7.8 | 7.7 | 6.5 | ||||||||||||
Gain (loss) on foreign exchange |
7.1 | 1.7 | (0.6 | ) | 3.5 | |||||||||||
Net (loss) from continuing operations |
(20.6 | ) | (31.1 | ) | (24.2 | ) | (26.6 | ) | ||||||||
Net income from discontinued operations |
6.4 | 5.9 | 15.7 | 9.5 | ||||||||||||
Net (loss) |
(14.3 | ) | (25.2 | ) | (8.5 | ) | (17.1 | ) | ||||||||
Net (loss) income per share |
||||||||||||||||
Continuing operation |
(0.07 | ) | (0.10 | ) | (0.08 | ) | (0.08 | ) | ||||||||
Discontinued operations |
0.02 | 0.02 | 0.05 | 0.03 | ||||||||||||
Total |
(0.05 | ) | (0.08 | ) | (0.03 | ) | (0.05 | ) | ||||||||