Second Quarter Report - June 30, 2007
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 10, 2007
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:
Second quarter financial statements, notes and MD&A
Press release
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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IVANHOE MINES LTD.
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Date: August 10, 2007 |
By: |
/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, 2007
TABLE OF CONTENTS
ITEM 1. Financial Statements
Unaudited Consolidated Balance Sheets at June 30, 2007 and December 31, 2006
Unaudited Consolidated Statements of Operations for the Three and Six Month Periods
ended June 30, 2007 and 2006
Unaudited Consolidated Statement of Shareholders Equity for the Six Month Period
ended June 30, 2007
Unaudited Consolidated Statements of Cash Flows for the Three and Six Month Periods
ended June 30, 2007 and 2006
Notes to the Unaudited Consolidated Financial Statements
ITEM 2. 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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2007 |
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2006 |
(Unaudited) |
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ASSETS |
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CURRENT |
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Cash and cash equivalents |
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$ |
255,219 |
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$ |
363,572 |
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Accounts receivable |
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15,131 |
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|
24,739 |
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Inventories |
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3,387 |
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5,313 |
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Prepaid expenses |
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10,966 |
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7,941 |
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Other current assets |
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144 |
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|
286 |
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TOTAL CURRENT ASSETS |
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284,847 |
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401,851 |
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INVESTMENT HELD FOR SALE (Note 4) |
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143,162 |
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157,738 |
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LONG-TERM INVESTMENTS (Note 5) |
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52,143 |
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36,879 |
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NOTE RECEIVABLE FROM RELATED PARTY (Note 6) |
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7,014 |
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PROPERTY, PLANT AND EQUIPMENT |
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126,760 |
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101,994 |
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DEFERRED INCOME TAXES |
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624 |
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|
481 |
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OTHER ASSETS |
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5,258 |
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4,216 |
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TOTAL ASSETS |
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$ |
619,808 |
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$ |
703,159 |
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LIABILITIES |
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CURRENT |
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Accounts payable and accrued liabilities |
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$ |
47,727 |
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$ |
37,201 |
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TOTAL CURRENT LIABILITIES |
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47,727 |
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37,201 |
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LOANS PAYABLE TO RELATED PARTIES (Note 7) |
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5,088 |
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5,088 |
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DEFERRED INCOME TAXES |
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791 |
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660 |
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ASSET RETIREMENT OBLIGATIONS |
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6,771 |
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6,353 |
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TOTAL LIABILITIES |
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60,377 |
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49,302 |
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SHAREHOLDERS EQUITY |
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SHARE CAPITAL (Note 9) |
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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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374,749,332 (2006 -
373,463,637) common
shares |
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1,473,819 |
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1,462,039 |
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SHARE PURCHASE WARRANTS AND SHARE ISSUANCE COMMITMENT (Note 9 (b)) |
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23,062 |
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23,062 |
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ADDITIONAL PAID-IN CAPITAL |
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42,578 |
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33,705 |
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ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 5) |
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19,113 |
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13,233 |
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DEFICIT |
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(999,141 |
) |
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(878,182 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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559,431 |
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653,857 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
619,808 |
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$ |
703,159 |
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APPROVED BY THE BOARD:
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/s/ J. Weatherall
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/s/ D. Korbin |
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J. Weatherall, Director
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D. Korbin, Director |
The accompanying notes are an integral part of these interim consolidated 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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2007 |
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2006 |
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2007 |
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2006 |
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(Unaudited) |
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OPERATING EXPENSES |
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Exploration (Note 2) |
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$ |
(79,134 |
) |
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$ |
(43,664 |
) |
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$ |
(132,621 |
) |
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$ |
(75,267 |
) |
General and administrative (Note 9 (a)) |
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(5,907 |
) |
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(6,008 |
) |
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(11,103 |
) |
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(12,402 |
) |
Accretion |
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(125 |
) |
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(102 |
) |
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(247 |
) |
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(204 |
) |
Depreciation |
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(1,228 |
) |
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(1,231 |
) |
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(2,264 |
) |
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(2,143 |
) |
Mining property care and maintenance |
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(777 |
) |
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(980 |
) |
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(2,004 |
) |
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(1,700 |
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Gain on sale of other mineral property rights |
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2,724 |
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Write-down of carrying values of property, plant and equipment |
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(17 |
) |
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OPERATING LOSS |
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(87,171 |
) |
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(51,985 |
) |
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(148,256 |
) |
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(88,992 |
) |
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OTHER INCOME (EXPENSES) |
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Share of income from investment held for sale (Note 4) |
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(2,404 |
) |
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|
427 |
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|
2,056 |
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Interest income |
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|
3,673 |
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|
1,935 |
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|
7,847 |
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2,690 |
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Foreign exchange gains |
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|
6,694 |
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4,669 |
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7,508 |
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|
4,519 |
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Share of loss of significantly influenced investees |
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(1,857 |
) |
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(2,590 |
) |
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Gain on sale of long-term investments (Note 5 (a)) |
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1,018 |
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LOSS BEFORE INCOME TAXES AND OTHER ITEMS |
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(78,661 |
) |
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(47,785 |
) |
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(134,046 |
) |
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(79,727 |
) |
Provision for income taxes |
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(61 |
) |
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(230 |
) |
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(117 |
) |
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(450 |
) |
Minority interests (Note 8) |
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2,284 |
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3,344 |
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NET LOSS FROM CONTINUING OPERATIONS |
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(78,722 |
) |
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(45,731 |
) |
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(134,163 |
) |
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(76,833 |
) |
INCOME FROM DISCONTINUED OPERATIONS (Note 3) |
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4,564 |
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5,412 |
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13,204 |
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13,343 |
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NET LOSS |
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$ |
(74,158 |
) |
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$ |
(40,319 |
) |
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$ |
(120,959 |
) |
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$ |
(63,490 |
) |
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BASIC AND DILUTED (LOSS) EARNINGS PER SHARE FROM |
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CONTINUING OPERATIONS |
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$ |
(0.21 |
) |
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$ |
(0.14 |
) |
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$ |
(0.36 |
) |
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$ |
(0.24 |
) |
DISCONTINUED OPERATIONS |
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|
0.01 |
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0.02 |
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|
0.04 |
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|
0.04 |
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$ |
(0.20 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.20 |
) |
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000s) |
|
|
374,403 |
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|
329,998 |
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|
374,040 |
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|
323,255 |
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|
The accompanying notes are an integral part of these interim consolidated financial
statements.
IVANHOE MINES LTD.
Consolidated Statements of Shareholders Equity
(Stated in thousands of U.S. dollars, except for share amounts)
(Unaudited)
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Share Purchase |
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Accumulated |
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Share Capital |
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Warrants and |
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Additional |
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Other |
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Number |
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Share Issuance |
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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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Commitment |
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Capital |
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Income |
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Deficit |
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Total |
|
Balances, December 31, 2006 |
|
|
373,463,637 |
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|
$ |
1,462,039 |
|
|
$ |
23,062 |
|
|
$ |
33,705 |
|
|
$ |
13,233 |
|
|
$ |
(878,182 |
) |
|
$ |
653,857 |
|
Net loss |
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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(120,959 |
) |
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|
(120,959 |
) |
Other comprehensive income (unrealized gain on
available-for-sale securities) (Note 5): |
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5,880 |
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5,880 |
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Comprehensive loss |
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(115,079 |
) |
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Shares issued for: |
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Exercise of stock options |
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1,268,834 |
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11,620 |
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(3,641 |
) |
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7,979 |
|
Share purchase plan |
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14,001 |
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|
135 |
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135 |
|
Share purchase warrants (Note 9 (c)) |
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2,860 |
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25 |
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25 |
|
Dilution gain on issuance of shares by a subsidiary |
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3,141 |
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|
3,141 |
|
Stock compensation charged to operations |
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|
9,373 |
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|
|
|
|
|
|
9,373 |
|
|
Balances, June 30, 2007 |
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|
374,749,332 |
|
|
$ |
1,473,819 |
|
|
$ |
23,062 |
|
|
$ |
42,578 |
|
|
$ |
19,113 |
|
|
$ |
(999,141 |
) |
|
$ |
559,431 |
|
|
The accompanying notes are an integral part of these interim consolidated 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, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(74,158 |
) |
|
$ |
(40,319 |
) |
|
$ |
(120,959 |
) |
|
$ |
(63,490 |
) |
Income from discontinued operations |
|
|
(4,564 |
) |
|
|
(5,412 |
) |
|
|
(13,204 |
) |
|
|
(13,343 |
) |
Items not involving use of cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
6,899 |
|
|
|
5,662 |
|
|
|
9,373 |
|
|
|
13,607 |
|
Accretion expense |
|
|
125 |
|
|
|
102 |
|
|
|
247 |
|
|
|
204 |
|
Depreciation |
|
|
1,228 |
|
|
|
1,231 |
|
|
|
2,264 |
|
|
|
2,143 |
|
Gain on sale of other mineral property rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,724 |
) |
Write-down of carrying values of property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
Share of income from investment held for sale, net of cash distribution |
|
|
|
|
|
|
2,404 |
|
|
|
14,575 |
|
|
|
(2,056 |
) |
Unrealized foreign exchange gains |
|
|
(6,415 |
) |
|
|
(4,490 |
) |
|
|
(7,252 |
) |
|
|
(4,182 |
) |
Share of loss of significantly influenced investees |
|
|
1,857 |
|
|
|
|
|
|
|
2,590 |
|
|
|
|
|
Gain on sale of long-term investments |
|
|
|
|
|
|
|
|
|
|
(1,018 |
) |
|
|
|
|
Deferred income taxes |
|
|
(11 |
) |
|
|
(17 |
) |
|
|
(12 |
) |
|
|
62 |
|
Minority interests |
|
|
|
|
|
|
(2,284 |
) |
|
|
|
|
|
|
(3,344 |
) |
Net change in non-cash operating working capital items (Note 10) |
|
|
7,928 |
|
|
|
(5,548 |
) |
|
|
12,067 |
|
|
|
(11,719 |
) |
|
Cash used in operating activities |
|
|
(67,111 |
) |
|
|
(48,671 |
) |
|
|
(101,312 |
) |
|
|
(84,842 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued operations |
|
|
1,314 |
|
|
|
174 |
|
|
|
20,314 |
|
|
|
34,674 |
|
Purchase of long-term investments |
|
|
(10,066 |
) |
|
|
(1,951 |
) |
|
|
(10,066 |
) |
|
|
(1,951 |
) |
Loan to related party (Note 6) |
|
|
(7,014 |
) |
|
|
|
|
|
|
(7,014 |
) |
|
|
|
|
Proceeds from sale of other mineral property rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,724 |
|
Proceeds from sale of long-term investments |
|
|
|
|
|
|
|
|
|
|
1,163 |
|
|
|
|
|
Expenditures on property, plant and equipment |
|
|
(12,116 |
) |
|
|
(8,477 |
) |
|
|
(27,047 |
) |
|
|
(18,736 |
) |
(Expenditures on) proceeds from other assets |
|
|
(875 |
) |
|
|
(50 |
) |
|
|
(812 |
) |
|
|
77 |
|
Other |
|
|
(3 |
) |
|
|
620 |
|
|
|
|
|
|
|
90 |
|
|
Cash (used in) provided by investing activities |
|
|
(28,760 |
) |
|
|
(9,684 |
) |
|
|
(23,462 |
) |
|
|
16,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of share capital |
|
|
5,817 |
|
|
|
160,127 |
|
|
|
8,139 |
|
|
|
162,541 |
|
Minority interests investment in subsidiaries |
|
|
961 |
|
|
|
1,425 |
|
|
|
1,086 |
|
|
|
1,425 |
|
|
Cash provided by financing activities |
|
|
6,778 |
|
|
|
161,552 |
|
|
|
9,225 |
|
|
|
163,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
6,384 |
|
|
|
4,342 |
|
|
|
7,196 |
|
|
|
4,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH (OUTFLOW) INFLOW |
|
|
(82,709 |
) |
|
|
107,539 |
|
|
|
(108,353 |
) |
|
|
100,101 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
337,928 |
|
|
|
94,243 |
|
|
|
363,572 |
|
|
|
101,681 |
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
255,219 |
|
|
$ |
201,782 |
|
|
$ |
255,219 |
|
|
$ |
201,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS IS COMPRISED OF: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash on hand and demand deposits |
|
$ |
30,731 |
|
|
$ |
31,100 |
|
|
$ |
30,731 |
|
|
$ |
31,100 |
|
Short-term money market instruments |
|
|
224,488 |
|
|
|
170,682 |
|
|
|
224,488 |
|
|
|
170,682 |
|
|
|
|
$ |
255,219 |
|
|
$ |
201,782 |
|
|
$ |
255,219 |
|
|
$ |
201,782 |
|
|
Supplementary cash flow information (Note 10)
The accompanying notes are an integral part of these interim consolidated financial statements.
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
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 Ivanhoe Mines Ltd. (the Company) as set out in
the audited financial statements for the year ended December 31, 2006. |
|
|
|
|
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 audited
financial statements of the Company for the year ended December 31, 2006. |
|
|
|
|
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, 2007 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, 2007, 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, Aud$ to Australian currency, and $
to United States currency. |
|
|
(b) |
|
Basis of presentation |
|
|
|
|
For purposes of these consolidated financial statements, the Company, subsidiaries of
the Company, and variable interest entities for which the Company is the primary
beneficiary, are collectively referred to as Ivanhoe Mines. |
|
|
|
|
On February 27, 2007 the investment held for sale ceased being accounted for using the
equity method. From February 28, 2007 onwards, the investment held for sale has been
accounted for under the cost method (Note 4). |
|
|
(c) |
|
Comparative figures |
|
|
|
|
Certain of the comparative figures have been reclassified to conform with the
presentation as at and for the three and six months ended June 30, 2007. In
particular, for the three and six months ended June 30, 2006, $3,778,000 and $8,416,000
of stock-based compensation charged to operations has been reclassified from general
and administrative expenses to exploration expenses, respectively. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
1. |
|
SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
(d) |
|
Accounting changes |
|
|
|
|
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation clarifies the recognition threshold and measurement of a tax position
taken or expected to be taken on a tax return, and requires expanded disclosure with
respect to the uncertainty in income taxes. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosures, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. |
|
|
|
|
The Company adopted the provisions of FIN 48 on January 1, 2007. No cumulative effect
adjustment to the January 1, 2007 balance of the Companys deficit was required upon
the implementation of FIN 48. As of the date of adoption there were no unrecognized
tax benefits. Under current conditions and expectations, management does not foresee
any significant changes in unrecognized tax benefits that would have a material impact
on the Companys financial statements. |
|
|
|
|
The Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses. As of the date of adoption of
FIN 48 there was no accrued interest or accrued penalties. |
|
|
|
|
The Company files income tax returns in Canada and several foreign jurisdictions. The
Company is no longer subject to income tax audits by taxing authorities in Canada prior
to 2002. For other foreign jurisdictions, including Mongolia, all years remain subject
to tax authority examination. |
2. |
|
EXPLORATION EXPENSES |
|
|
|
Generally, exploration costs are charged to operations in the period incurred until such time
as it has been determined that a property has economically recoverable reserves, in which
case subsequent exploration costs and the costs incurred to develop a property are
capitalized. |
|
|
|
Included in exploration costs are engineering and development costs associated with the
Companys Oyu Tolgoi Project located in Mongolia. It is expected that the Company will
commence capitalizing costs of this nature once an Investment Agreement is finalized. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
2. |
|
EXPLORATION EXPENSES (Continued) |
|
|
|
During the three and six months ended June 30, 2007, the majority of the $79.1 million and
$132.6 million charged to exploration expenses, respectively, was spent on the Companys
Mongolian properties, which consisted of the following exploration and development costs: |
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2007 |
|
Oyu Tolgoi |
|
|
|
|
|
|
|
|
Concentrator and Infrastructure Engineering |
|
$ |
19,437 |
|
|
$ |
28,633 |
|
Site Construction |
|
|
21,088 |
|
|
|
39,788 |
|
Shaft No. 1 Sinking |
|
|
11,418 |
|
|
|
18,638 |
|
Exploration |
|
|
1,348 |
|
|
|
5,828 |
|
Owners Costs (a) |
|
|
9,802 |
|
|
|
17,316 |
|
|
|
|
|
|
|
|
|
|
|
63,093 |
|
|
|
110,203 |
|
|
|
|
|
|
|
|
|
|
Coal Division (a) |
|
|
4,598 |
|
|
|
5,825 |
|
Other Mongolia Exploration (including
SouthGobi) (a) |
|
|
6,127 |
|
|
|
9,246 |
|
|
|
|
|
73,818 |
|
|
|
125,274 |
|
|
(a) |
|
Includes non-cash stock-based compensation (Note 9 (a)). |
3. |
|
DISCONTINUED OPERATIONS |
|
|
|
In February 2005, Ivanhoe Mines sold the Savage River Iron Ore Project (the Project) for
two initial payments totalling $21.5 million, plus a series of contingent, annual payments
that commenced on March 31, 2006. The annual payments are based on annual iron ore pellet
tonnes sold and an escalating price formula based on the prevailing annual Nibrasco/JSM
pellet price. |
|
|
|
On March 30, 2007, Ivanhoe Mines received the second annual contingent payment of $19.0
million with an additional $1.3 million adjustment received in June 2007. This payment of
$20.3 million includes $8.6 million in contingent income recognized in the first quarter of
2007. |
|
|
|
At June 30, 2007 Ivanhoe Mines has accrued $4.6 million in relation to the third contingent
annual payment due in March 2008. To date, Ivanhoe Mines has received $70.0 million in
proceeds from the sale of the Project. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
4. |
|
INVESTMENT HELD FOR SALE |
|
|
|
As part of the negotiation of the Rio Tinto plc strategic partnership that was announced in
October 2006, Ivanhoe Mines agreed to divest all of its business interests and assets in
Myanmar, including its indirect interest held through its Monywa subsidiary in the Monywa
Copper Project. On February 27, 2007, Ivanhoe Mines relinquished ownership of the Monywa
subsidiary to an independent third-party trust (the Trust), pending its sale. The sole
purpose of the Trust is to sell the assets to one or more third parties. Ivanhoe Mines only
interest in the Trust is as an unsecured creditor under a promissory note issued by the Trust
on the transfer of the Myanmar assets, that is to be repaid once the assets are sold. |
|
|
|
Upon transfer of the Myanmar assets to the Trust effective February 27, 2007, Ivanhoe Mines
ceased accounting for the investment held for sale under the equity method due to an
inability to exercise significant influence. The investment held for sale is now accounted
for under the cost method. |
|
|
|
During the three months ended March 31, 2007, dividends of $30.0 million (net $15.0 million
to Ivanhoe Mines) were paid by the Monywa Copper Project which reduced the carrying value of
the investment held for sale. In July 2007, Ivanhoe Mines received a $6.6 million repayment
of the promissory note which further reduced the carrying value of the investment held for
sale. |
|
|
|
At June 30, 2007, Ivanhoe Mines reviewed the carrying value of the investment held for sale
and concluded that it was not impaired. Ivanhoe Mines will continue to review the carrying
value of this investment at each quarter end. |
|
5. |
|
LONG-TERM INVESTMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
December 31, 2006 |
|
|
Equity |
|
Cost/Equity |
|
Unrealized |
|
Fair/Equity |
|
Equity |
|
Cost/Equity |
|
Unrealized |
|
Fair/Equity |
|
|
Interest |
|
Basis |
|
Gain |
|
Value |
|
Interest |
|
Basis |
|
Gain |
|
Value |
Investment in companies subject
to significant influence: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinshan Gold Mines Inc. |
|
|
43.7 |
% |
|
$ |
10,331 |
|
|
|
N/a |
|
|
$ |
10,331 |
|
|
|
46.3 |
% |
|
$ |
10,866 |
|
|
|
N/a |
|
|
$ |
10,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intec Ltd. (a) |
|
|
6.1 |
% |
|
$ |
916 |
|
|
$ |
3,455 |
|
|
$ |
4,371 |
|
|
|
7.1 |
% |
|
$ |
1,062 |
|
|
$ |
7,088 |
|
|
$ |
8,150 |
|
Entrée Gold Inc. (b) |
|
|
14.9 |
% |
|
|
13,496 |
|
|
|
14,438 |
|
|
|
27,934 |
|
|
|
14.7 |
% |
|
|
10,156 |
|
|
|
6,044 |
|
|
|
16,200 |
|
Exco Resources N.L. (c) |
|
|
12.1 |
% |
|
|
6,727 |
|
|
|
896 |
|
|
|
7,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redox Diamonds Ltd. |
|
|
11.9 |
% |
|
|
1,451 |
|
|
|
|
|
|
|
1,451 |
|
|
|
13.8 |
% |
|
|
1,451 |
|
|
|
|
|
|
|
1,451 |
|
Wind Energy Group Inc. |
|
|
20.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Asia Now
Resources Corp. |
|
|
2.0 |
% |
|
|
103 |
|
|
|
324 |
|
|
|
427 |
|
|
|
2.0 |
% |
|
|
103 |
|
|
|
101 |
|
|
|
204 |
|
Other |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,699 |
|
|
$ |
19,113 |
|
|
$ |
41,812 |
|
|
|
|
|
|
$ |
12,780 |
|
|
$ |
13,233 |
|
|
$ |
26,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,030 |
|
|
$ |
19,113 |
|
|
$ |
52,143 |
|
|
|
|
|
|
$ |
23,646 |
|
|
$ |
13,233 |
|
|
$ |
36,879 |
|
|
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
5. |
|
LONG-TERM INVESTMENTS (Continued) |
|
(a) |
|
During the three month period ended March 31, 2007, Ivanhoe Mines sold 5.4
million shares of its investment in Intec Ltd. for $1,163,000. These transactions
resulted in a gain on sale of $1,018,000 being recognized. |
|
|
(b) |
|
During the three month period ended June 30, 2007, Ivanhoe Mines exercised 1.2
million Entreé Gold Inc. (Entreé) share purchase warrants to acquire 1.2 million
shares of Entreé at a cost of $3,340,000 (Cdn$3,552,000). |
|
|
(c) |
|
During the three month period ended June 30, 2007, Ivanhoe Mines purchased 26.4
million common shares of Exco Resources N.L. (Exco) and 21.1 million Exco share
purchase options for a total cost of $6,726,000 (Aud$7,920,000). Each Exco share
purchase option is exercisable until June 1, 2008 to purchase an additional Exco common
share at a price of Aud$0.35. |
6. |
|
NOTE RECEIVABLE FROM RELATED PARTY |
|
|
|
On June 26, 2007, Ivanhoe Mines participated in Jinshan Gold Mines Inc.s (B.C., Canada)
(Jinshan) private placement of senior unsecured promissory notes. Ivanhoe Mines purchased
$7.0 million (Cdn$7.5 million) of units. Each unit consists of one promissory note and 200
transferable share purchase warrants. Each note has a par value of Cdn$1,000 and will pay 12%
interest per annum, paid quarterly for three years. Each warrant is exercisable into one
common share for twenty-four months from the date of closing and has an exercise price of
Cdn$2.50 per share. Jinshan has the right to accelerate the expiry date of the warrants after
18 months from the issue date, if Jinshans common shares trade at or above a volume weighted
average share price of Cdn$4.30 for 20 consecutive trading days. Jinshan can also elect to
repay the notes after six months from the date of issue with no penalty. Ivanhoe Mines
notes are subordinate to the other notes issued by Jinshan. |
|
7. |
|
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 June 30, 2007, $70.0 million has been received from the sale
with a further $4.6 million accrued as receivable (Note 3). |
|
8. |
|
MINORITY INTERESTS |
|
|
|
At June 30, 2007 there were minority interests in Bakyrchik Mining Venture (BMV)
(Kazakhstan) (70% owned) and SouthGobi Energy Resources Ltd. (Formerly Asia Gold Corp.)
(Southgobi) (Canada) (86.7% owned). Jinshan (43.7% owned) ceased being consolidated on
August 31, 2006. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
8. |
|
MINORITY INTERESTS (Continued) |
|
|
|
Currently, losses applicable to the minority interests in BMV and Southgobi are being
allocated to Ivanhoe Mines since those losses exceed the minority interests in the net assets
of BMV and Southgobi. |
|
9. |
|
SHARE CAPITAL |
|
(a) |
|
Equity Incentive Plan |
|
|
|
|
During the six months ended June 30, 2007, 745,500 options were granted. These options
have a weighted average exercise price of Cdn$13.14, lives of five years, and vest over
periods ranging from immediately to four years. The weighted average grant-date fair
value of stock options granted during the six months ended June 30, 2007 was Cdn$4.94.
The fair value of these options was determined using the Black-Scholes option pricing
model. The option valuation was based on an average expected option life of 2.8 years,
a risk-free interest rate of 4.10%, an expected volatility of 50%, and a dividend yield
of nil%. |
|
|
|
|
During the six months ended June 30, 2007, 1,268,834 options were exercised and 230,600
options were cancelled. |
|
|
|
|
Stock-based compensation charged to operations was allocated between exploration
expenses and general and administrative expenses as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Exploration |
|
$ |
5,705 |
|
|
$ |
3,778 |
|
|
$ |
7,178 |
|
|
$ |
8,416 |
|
General and administrative |
|
|
1,194 |
|
|
|
1,884 |
|
|
|
2,195 |
|
|
|
5,191 |
|
|
|
|
|
|
$ |
6,899 |
|
|
$ |
5,662 |
|
|
$ |
9,373 |
|
|
$ |
13,607 |
|
|
|
|
|
(b) |
|
Rio Tinto Placement |
|
|
|
|
Under the terms of the Rio Tinto Agreement, Rio Tinto will take up the second tranche
of the private placement following the date upon which Ivanhoe Mines enters into an
Investment Agreement with the Government of Mongolia that is mutually acceptable to
Ivanhoe Mines and Rio Tinto. Rio Tinto has the option to exercise the second tranche
earlier. This second tranche will consist of approximately 46.3 million shares at a
subscription price of $8.38 per share, for proceeds totalling $388.0 million. |
IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
9. |
|
SHARE CAPITAL (Continued) |
|
(b) |
|
Rio Tinto Placement (Continued) |
|
|
|
|
The following share purchase warrants granted to Rio Tinto during 2006 were outstanding
as at June 30, 2007: |
|
(i) |
|
46,026,522 share purchase warrants with exercise prices ranging
between $8.38 and $8.54 per share. These warrants are exercisable until one year
after the earlier of the completion of the Investment Agreement and October 27,
2009. |
|
|
(ii) |
|
46,026,522 share purchase warrants with exercise prices ranging
between $8.38 and $9.02 per share. These warrants are exercisable until two years
after the earlier of the completion of the Investment Agreement and October 27,
2009. |
|
(c) |
|
Share Purchase Warrants |
|
|
|
|
During 2004 the Company issued 5,760,000 share purchase warrants. These warrants
entitled 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. On February 13,
2007, 28,600 of the share purchase warrants were exercised with the remaining 5,731,400
warrants expiring unexercised. |
10. |
|
SUPPLEMENTARY CASH FLOW INFORMATION |
|
|
|
Net change in non-cash operating working capital items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Decrease (increase) in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
3,581 |
|
|
$ |
(2,861 |
) |
|
$ |
2,498 |
|
|
$ |
(4,569 |
) |
Inventories |
|
|
1,228 |
|
|
|
(3,824 |
) |
|
|
1,926 |
|
|
|
(2,558 |
) |
Prepaid expenses |
|
|
(3,243 |
) |
|
|
2,891 |
|
|
|
(3,025 |
) |
|
|
2,622 |
|
Other current assets |
|
|
142 |
|
|
|
2,000 |
|
|
|
142 |
|
|
|
3,000 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued
liabilities |
|
|
6,220 |
|
|
|
(3,754 |
) |
|
|
10,526 |
|
|
|
(10,214 |
) |
|
|
|
$ |
7,928 |
|
|
$ |
(5,548 |
) |
|
$ |
12,067 |
|
|
$ |
(11,719 |
) |
|
|
|
|
|
|
|
|
2
|
|
Interim
Report for the
three and six
months ended June
30, 2007.
|
|
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.
|
|
Investor Information
All financial reports, news
releases and corporate
information can be accessed on
our web site at
www.ivanhoe-mines.com |
|
|
|
|
|
|
|
At August 10, 2007
the Company had
374.9 million
common shares
issued and
outstanding and
warrants and stock
options outstanding
for 12.8 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, B.C., Canada V6C 3E1
E-mail : info@ivanhoemines.com
Tel : (604) 688-5755 |
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
INTRODUCTION
This discussion and analysis of the financial position and results of operations (MD&A) of
Ivanhoe Mines Ltd. should be read in conjunction with the unaudited consolidated financial
statements of Ivanhoe Mines Ltd. and the notes thereto for the three and six months ended June 30,
2007, and with the audited consolidated financial statements of Ivanhoe Mines Ltd. and the notes
thereto for the year ended December 31, 2006. These financial statements have been prepared in
accordance with United States of America generally accepted accounting principles (U.S. GAAP). In
this MD&A, unless the context otherwise dictates, a reference to the Company refers to Ivanhoe
Mines Ltd. and a reference to Ivanhoe Mines refers to Ivanhoe Mines Ltd., together with its
subsidiaries. Additional information about the Company, including its Annual Information Form, is
available at www.sedar.com.
This discussion and analysis contains forward-looking statements. Please refer to the cautionary
language on page 29.
The effective date of this MD&A is August 10, 2007.
OVERVIEW
MONGOLIA
Oyu Tolgoi Investment Agreement currently being considered by Mongolias National Parliament
On April 10, 2007, after several months of negotiations, Ivanhoe Mines and its strategic
partner, Rio Tinto, announced that they had reached agreement in principle with the Mongolian
Governments Working Group on a draft Investment Agreement designed to stabilize tax and fiscal
issues and guide
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
the planned development and long-term operation of the Oyu Tolgoi copper-gold
project in Mongolias South Gobi Region.
Following a Cabinet review in June 2007, the draft Investment Agreement was duly presented to
Mongolias State Great Hural (National Parliament) in July 2007. Consideration and approval by the
National Parliament of the Investment Agreement is expected to be the final step in the process
being conducted in accordance with the revised Minerals Law enacted by Parliament last year.
The Parliaments Standing Committee on Economics discussed the draft agreement on August 6 and 7.
The Parliament has extended its spring session into August, but no date for the adjournment of the
current session has been announced. Ivanhoe Mines with the encouraging public support of its
Mongolian employees and suppliers and contractors has expressed its concern to all the Members of
Parliament, the Governments Cabinet and the President about potential adverse impacts on the cost
and timing for the project that would result from any further delays in the parliamentary approval
process. Ivanhoe will monitor the deliberations of the National Parliament and continue to assess
the implications for the Oyu Tolgoi development schedule.
The draft Investment Agreement also remains subject to approvals by the Ivanhoe Mines and Rio Tinto
boards of directors.
Oyu Tolgoi Development Activities
Site preparation continued during the quarter, positioning the project to commence full
construction following final approval of the Investment Agreement. Activities on site focussed on
the sinking of Shaft No. 1, pre-sinking of Shaft No. 2, excavation for the concentrator building
and enlargement of the construction camp facilities.
Shaft No. 1, the first deep underground development project of its type in Mongolia, was below the
1,170-metre mark at the end of July 2007 and sinking is expected to be completed in October 2007.
Shaft No. 1, with a planned depth of more than 1,300 metres, will allow for additional exploration
of the Oyu Tolgoi high-grade underground deposits and also will provide initial production, and
ultimately ventilation, to the underground mine. The expected completion of Shaft No. 1, together
with the horizontal exploration tunnels, will provide access to the Hugo Deposit, enabling the
company to complete its geotechnical assessment that is required to advance the underground deposit
to a feasibility level, a milestone currently expected to be reached in 2008.
Work continued on Shaft No. 2, which is planned to be the initial primary underground production
and service shaft at Oyu Tolgoi. Site work completed this quarter included finishing the pre-sink
to a depth of 26 metres and mobilizing the workforce to construct the shaft liner. Engineering work
is continuing on schedule. An order was placed for the production hoist for Shaft No. 2 in June
2007.
During the second quarter, the excavation of the concentrator building was completed. Excavation
work now is commencing on the thickener site. Concentrator engineering reached 61% completion at
the end of June 2007. Nine items of concentrator equipment were released for manufacture on July 1,
2007 to maintain the projects schedule.
2
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
Work also continued on the temporary facilities during Q207. Two existing accommodation camps were
refurbished and are now ready for occupancy by the construction crews. The combined capacity is
1,000 beds, increasing the construction camp capacity to approximately 1,500 beds. Planning for the
mobilization of the construction crew continued throughout the quarter.
Infrastructure engineering progressed during Q207 as well. Work began on the boiler house and
conceptual work continued on the Oyu Tolgoi village and the truck shop. The contract for the road
to China was issued to bidders in June 2007.
Discussions are well advanced with a preferred supplier for the open-pit mining equipment to ensure
that the equipment is available in time to meet an anticipated late-2009 or 2010 production start.
Oyu Tolgoi Strategic Planning
In Q207, the joint Ivanhoe MinesRio Tinto mine planning team completed its strategic review
of the mining options available in the high-grade Hugo North deposit. It was determined the highest
value mine plan would come from mining the Hugo North Deposit in two large block-caving lifts
similar to the original plan outlined in the 2005 Integrated Development Plan (2005 IDP). This plan
has been further optimized by avoiding early dilution from the large granodyrite dyke that runs
through the western edge of the high-grade zone of Hugo North until the second lift, thus keeping
the grades higher initially during lift 1 and early lift 2 production. This work, together with the
detailed engineering for plant and infrastructure and previous open-pit planning, will be updated
and incorporated into the Integrated Development Plan (2007 IDP) that is scheduled to be released
in the second half of 2007.
Ongoing drilling at Oyu Tolgoi and Javkhlant (Entrée GoldIvanhoe Mines earn-in joint-venture
property immediately south of Oyu Tolgoi)
Ivanhoe Mines completed approximately 15,227 metres of drilling on the Oyu Tolgoi Project
during Q207, including exploration on the Entrée Gold-Ivanhoe Mines earn-in joint-venture
property, Javkhlant, which adjoins Oyu Tolgoi on the southwest boundary.
On the Oyu Tolgoi property, geotechnical drilling has characterized the East Bat fault on the
eastern boundary of the Hugo North Deposit to a pre-feasibility level and currently is testing the
northern boundary fault at the northern end of the Hugo North Deposit. Sterilization drilling was
completed under the primary infrastructure sites in Q107 and now has started under the site of the
proposed coal-fired power plant in the southwest corner of the Oyu Tolgoi property.
On the Javkhlant joint-venture property, widely-spaced diamond drilling is ongoing with three rigs
at the Sparrow South target, a 3,000-metre-long IP anomaly approximately three kilometres southwest
of the south-western end of South West Oyu. Results indicate similar stratigraphy and copper and
gold mineralization distal to the South West Oyu deposits, but starting at greater depths and in a
structurally complex environment. Drilling is continuing in search of higher grades and a better
understanding of the complex geology.
Other copper-gold exploration projects in Mongolia
Ivanhoe Mines exploration activities during Q207 focused on the Kharmagtai project where a
5,100-metre diamond-drilling program commenced in mid-May. Drill targets were defined by the
65-line-
3
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
kilometre dipole-dipole IP survey carried out at Kharmagtai in the previous quarter. A
3D-IP program also is underway over the central Kharmagtai deposits. A total of 2,870 metres over
seven holes had been drilled by the end of Q207; the earlier holes focused on targets in the
Basin, Tsagaan Sudal, Duck and West Chun prospects. Drilling in the basin included one hole on a
large, circular magnetic anomaly located two kilometres east of the main deposits. The magnetic
anomaly is 500 metres in diameter, beneath 30 metres of colluvium cover, and associated with strong
chargeability from a depth of 200 metres. The drill hole intercepted 48 metres @ 0.34 g/t gold and
0.13% copper. The alteration and high gold/copper ratio is similar to the main deposits; further
drilling is required to test this large anomaly.
BHP Billiton Exploration (BHPB) work on the Falcon JV area included dipole-dipole IP surveys and
drilling on various targets, with no significant results to date. BHPB had spent approximately $8.1
million by the end of May and has met its earn-in commitment of $8.0 million. Geophysics and
drilling by BHPB is on hold in the JV area until the participation terms of the joint venture are
finalized.
Reconnaissance exploration by Ivanhoe Mines is also underway on various other targets outside the
BHPB joint venture area, including the Maanit Ovoo prospect in the Tsagaan Suvarga area.
AUSTRALIA
Cloncurry IOCG Project expanding exploration
Ivanhoe Mines recent exploration at the Cloncurry project has discovered a series of related
iron-oxide-copper-gold (IOCG) systems, with associated uranium. Since January 2007, Ivanhoe Mines
has increased its exploration efforts at Cloncurry and early results have been encouraging.
Swan Prospect. In Q207, 16 diamond core holes were drilled at the Swan Prospect, totalling 10,931
metres. This drilling has continued to expand the northern zone of deep mineralization at Swan. Six
drill rigs currently are located at Swan. The next stage of drilling at Swan will continue testing
the northwest strike extent, and commence drilling the Swell Elliott mineralization to the east of
Swan with a view to establishing the relationship between the Swan and Elliott deposits.
Amethyst Castle Prospect. Copper, gold and uranium are hosted in a widespread, large-scale breccia
body in the Amethyst Castle area. Ivanhoe Mines has identified the presence of uranium and the
IOCG-style of mineralization and has carried out magnetic, conductivity, IP and gravity surveys.
The drill results indicate a large breccia structure containing pods of high-grade gold, copper and
uranium that requires further investigation. To explore this prospect, further deep dipole-dipole
IP is planned for August, as well as drilling to the northeast.
Metal Ridge. Aircore drilling over the western portion of this prospect has identified a zone of
higher copper values associated with a gravity feature striking north-easterly from Amethyst Castle
across to Metal Ridge. Deep IP is planned in the next quarter.
Uranium Prospects. In addition to the IOCG prospects identified above, Ivanhoes Cloncurry Project
hosts a significant number of uranium exploration prospects, including Robert Heg, Elizabeth Anne,
Great Wall and Dairy Bore. Drilling on Robert Heg totalled 1,676 metres of diamond coring, with
five holes drilled. Uranium was encountered in chloritic shear zones and low-grade, possibly
disseminated
4
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
uranium within sections of the granite and calc silicate country rock. Secondary
uranium minerals were seen on many fracture planes as coatings that were easily washed off during
core cutting and drilling. This problem will be addressed in future core handling procedures. The
drill results re-affirm the results obtained by the early Rio Tinto drilling in 1991.
At Elizabeth Anne, a program of aircore drilling detected anomalous copper, lead and uranium, while
rock-chip samples highlighted the presence of strong secondary uranium minerals seen in ironstone
outcrops associated with this prospect.
Gravity and aircore drilling was completed over the Dairy Bore prospect, with assay results
confirming a correlation between copper magnetics and gravity features. This target is expected to
be an IOCG-style of mineralization, with drilling to follow a further detailed mapping program.
Further mapping over the northern tenements will be completed in 2007 and this will define
additional drill targets.
Ivanhoe Mines is continuing to assess financing alternatives for Cloncurry.
Bakyrchik Gold Project
The mine facilities remained on care-and-maintenance status during Q207. During Q207, the
main contracts for the construction of the Pilot Roasting Plant were signed and advance payments
made.
Ivanhoe Mines continues to work at improving the integrity of the geological information at the
Bakyrchik mine in preparation for more detailed studies. As part of this preparation, Ivanhoe Mines
recently employed consultants to provide a detailed laser scan digital terrain model of the
existing open pits and immediate mine area to enable more accurate planning of any possible future
open pit mining.
Ivanhoe Mines is continuing to assess financing alternatives for the project.
Ivanhoe Mines Coal Division merges with SouthGobi Energy Resources
On May 1, 2007, Ivanhoe Mines and SouthGobi announced that the Government of Mongolia had
completed the transfer of all 35 coal exploration licences held by Ivanhoe Mines in the South Gobi
region of Mongolia. On May 28, 2007, the coal transaction received final approval from the TSX
Venture Exchange. SouthGobi completed the purchase by issuing to Ivanhoe Mines 57.0 million common
shares and 25.6 million preferred shares. The common shares issued to Ivanhoe Mines,
when aggregated with Ivanhoe Mines existing holding of common shares, represent approximately 87%
of the total number of SouthGobi common shares currently issued and outstanding.
SouthGobi has commenced a major exploration program on six separate coal projects in Mongolias
South Gobi Region. Mobilization of drills, crews and camps was started in May 2007. The programs
are a combination of:
|
|
|
New greenfields exploration at Tavan Tolgoi. |
|
|
|
|
Determination of structure and quality on identified coal occurrences. |
5
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
|
|
|
Infill drilling on defined projects (Ovoot Tolgoi and Tsagaan Tolgoi). |
|
|
|
|
Additional resource definition at Ovoot Tolgoi Extension and Ovoot Tolgoi Underground. |
|
|
|
|
Greenfields exploration. |
The Ovoot Tolgoi coal resources are contained in two separate fields, the South-East Field and the
West Field. On August 8, 2007, SouthGobi announced that it has filed a formal application for a
Mining Licence for the development of an open-pit coal mine at Ovoot Tolgoi. The Geological
Resource Report for Ovoot Tolgoi was approved by the Mongolian Governments Resource Committee on
August 6, 2007. In May 2007, the projects Detailed Environmental Impact Assessment (DEIA) was
approved by the Mongolian Governments Ministry of Environment.
SouthGobi has commissioned Norwest Corporation to complete a Pre-Feasibility Study on Ovoot Tolgoi.
The study is expected to be completed by the end of Q307 and will be an enhancement of two earlier
Scoping Studies. This report will be used to fulfill the legal requirement to file a technical and
economical study with applicable Mongolian authorities within 60 days of receiving a mining
licence. Mining equipment has been evaluated and is ready for order, pending formal mining licence
approval. Site facilities have been designed and also are awaiting official licence approval.
Further drilling in the Ovoot Tolgoi Extension will focus on gaining a better geological,
structural and quality understanding of the coal resources from identified coal occurrences on two
different fields.
In June 2007, Norwest completed a study of Ovoot Tolgois underground mining potential in a
furtherance of SouthGobis plans for the potential development of Ovoot Tolgois underground coal
seams, which has been prompted by increasing demand for high-quality metallurgical and thermal coal
from Northern China. The Ovoot Tolgoi Underground project requires further drilling, expected to
take place through to December 2007, to establish a basis for resource delineation.
CHINA
Inner Mongolia and Northern China exploration
Reconnaissance field exploration continued in western Inner Mongolia and elsewhere in Northern
China during the second quarter of 2007, consisting of existing private tenement and surrounding
unlicensed area assessments. The aim of the program is the acquisition of semi-advanced,
high-quality projects and licensing of new areas with mineralization potential. The program
consists of continuing data compilations, systematic rock-chip and channel sampling and trench
re-sampling of existing tenements and new surrounding target areas.
Gold Production Commences at Jinshans 120,000-ounce per year CSH 217 Gold Mine
On July 31, 2007, Jinshan Gold Mines Inc. (Jinshan) announced the pouring of the first
500-ounce gold doré bar at the CSH 217 Gold Mine in Inner Mongolia, China. The pouring marked the
start of production at the mine, which is expected to produce an average of approximately 120,000
ounces per year once full production is achieved over the next few months.
6
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
A drilling program at the CSH 217 Gold Mine that commenced in late spring is designed to
potentially delineate additional mineralization along strike, to infill zones with Inferred
resources and bring them up to the Indicated category, and to expand other mineralized zones that
remain open or untested. The drilling program recently has been increased to approximately 8,000
metres, up from the originally planned 5,000 metres. Once this drilling is complete, an updated
resource estimate will be commissioned and is expected by the end of 2007.
An expansion study, expected to be completed by the end of 2007, is underway to determine the
potential to scale up the mine to approximately 180,000 ounces per year. Ivanhoe Mines owns
approximately 44% of the issued shares of Jinshan.
REVIEW OF OPERATIONS
Ivanhoe Mines is engaged primarily in exploration activities, although a significant portion
of its expenditures relate directly to development activities at its Oyu Tolgoi Project in
Mongolia. Exploration costs are charged to operations in the period incurred and often constitute
the bulk of the Companys operating loss for that period. It is expected that the Company will
commence capitalizing costs of this nature once an Investment Agreement is finalized with the
Government of Mongolia. In Q207, Ivanhoe Mines recorded a net loss of $74.2 million (or $0.20 per
share), compared to a net loss of $40.3 million (or $0.12 per share) in Q206. The $33.9 million
increase in the loss from 2006 to 2007 was primarily due to a $35.4 million increase in exploration
expenses. Included in exploration expenses are shaft sinking and engineering and development costs
for the Oyu Tolgoi Project that have been expensed and not capitalized. Results for the quarter
also were affected by a $1.7 million increase in interest income, a $2.0 million increase in
foreign exchange gains less a $0.8 million decrease in income from discontinued operations.
7
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
INDEX
|
The MD&A is comprised of the following sections: |
|
1. Selected Quarterly Data |
2. Review of Operations |
A. Exploration Activities |
B. Investment Held for Sale |
C. Discontinued Operations |
D. Administrative and Other |
3. Liquidity and Capital Resources |
4. Share Capital |
5. Outlook |
6. Off-Balance-Sheet Arrangements |
7. Contractual Obligations |
8. Changes in Accounting Policies |
9. Critical Accounting Estimates |
10. Recent Accounting Pronouncements |
11. Risks and Uncertainties |
12. Related-Party Transactions |
13. Changes in Internal Control over Financial Reporting |
14. Qualified Persons |
15. Cautionary Statements |
16. Forward-Looking Statements |
8
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
SELECTED QUARTERLY DATA
($ in millions of U.S. dollars, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Jun-30 |
|
Mar-31 |
|
Dec-31 |
|
Sep-30 |
|
|
2007 |
|
2007 |
|
2006 |
|
2006 |
|
Exploration expenses |
|
$ |
(79.1 |
) |
|
$ |
(53.5 |
) |
|
$ |
(70.4 |
) |
|
$ |
(67.3 |
) |
General and administrative |
|
$ |
(5.9 |
) |
|
$ |
(5.2 |
) |
|
$ |
(8.9 |
) |
|
$ |
(6.9 |
) |
Share of income from investment held for sale |
|
$ |
0.0 |
|
|
$ |
0.4 |
|
|
$ |
7.4 |
|
|
$ |
9.0 |
|
Foreign exchange gains (losses) |
|
$ |
6.7 |
|
|
$ |
0.8 |
|
|
$ |
(3.7 |
) |
|
$ |
(0.4 |
) |
Net (loss) from continuing operations |
|
$ |
(78.7 |
) |
|
$ |
(55.4 |
) |
|
$ |
(73.5 |
) |
|
$ |
(68.0 |
) |
Income from discontinued operations |
|
$ |
4.6 |
|
|
$ |
8.6 |
|
|
$ |
4.8 |
|
|
$ |
1.5 |
|
Net (loss) |
|
$ |
(74.2 |
) |
|
$ |
(46.8 |
) |
|
$ |
(68.7 |
) |
|
$ |
(66.5 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.21 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.20 |
) |
Discontinued operations |
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
Total |
|
$ |
(0.20 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Jun-30 |
|
Mar-31 |
|
Dec-31 |
|
Sep-30 |
|
|
2006 |
|
2006 |
|
2005 |
|
2005 |
|
Exploration expenses |
|
$ |
(43.7 |
) |
|
$ |
(31.6 |
) |
|
$ |
(41.7 |
) |
|
$ |
(30.5 |
) |
General and administrative |
|
$ |
(6.0 |
) |
|
$ |
(6.4 |
) |
|
$ |
(4.2 |
) |
|
$ |
(5.7 |
) |
Share of income (loss) from investment held for sale |
|
$ |
(2.4 |
) |
|
$ |
4.5 |
|
|
$ |
(0.5 |
) |
|
$ |
8.0 |
|
Foreign exchange gains (losses) |
|
$ |
4.7 |
|
|
$ |
(0.2 |
) |
|
$ |
(0.4 |
) |
|
$ |
7.1 |
|
Net (loss) from continuing operations |
|
$ |
(45.7 |
) |
|
$ |
(31.1 |
) |
|
$ |
(49.8 |
) |
|
$ |
(20.6 |
) |
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 operations |
|
$ |
(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 |
) |
9
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
REVIEW OF OPERATIONS
Ivanhoe Mines is engaged primarily in exploration activities, although a significant portion
of its expenditures relate directly to development activities at its Oyu Tolgoi Project in
Mongolia. Exploration costs are charged to operations in the period incurred and often constitute
the bulk of the Companys operating loss for that period. It is expected that the Company will
commence capitalizing costs of this nature once an Investment Agreement is finalized with the
Government of Mongolia. In Q207, Ivanhoe Mines recorded a net loss of $74.2 million (or $0.20 per
share), compared to a net loss of $40.3 million (or $0.12 per share) in Q206. The $33.9 million
increase in the loss from 2006 to 2007 was primarily due to a $35.4 million increase in exploration
expenses. Included in exploration expenses are shaft sinking and engineering and development costs
for the Oyu Tolgoi Project that have been expensed and not capitalized. Results for the quarter
also were affected by a $1.7 million increase in interest income, a $2.0 million increase in
foreign exchange gains less a $0.8 million decrease in income from discontinued operations.
A. EXPLORATION ACTIVITIES
Ivanhoe Mines is engaged primarily in exploration activities, although a significant portion
of its expenditures in Mongolia relate directly to development activities at its Oyu Tolgoi
Project.
In Q207, Ivanhoe Mines expensed $79.1 million in exploration and development activities, compared
to $43.7 million in Q206. Included in exploration costs are engineering and development costs for
the Oyu Tolgoi Project. It is expected that the Company will commence capitalizing costs of this
nature once an Investment Agreement is finalized.
The majority of the $79.1 million was spent on Ivanhoe Mines Mongolian properties ($73.8 million
in Q207, compared to $33.0 million in Q206), which consisted of the following exploration and
development costs:
MONGOLIA EXPLORATION EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Q207 |
|
|
% of Total |
|
($ in millions) |
|
|
|
|
|
|
|
|
Oyu Tolgoi |
|
|
|
|
|
|
|
|
Concentrator and Infrastructure Engineering |
|
$ |
19.4 |
|
|
|
26 |
% |
Site Construction |
|
|
21.1 |
|
|
|
29 |
% |
Shaft No. 1 Sinking |
|
|
11.4 |
|
|
|
16 |
% |
Exploration |
|
|
1.4 |
|
|
|
2 |
% |
Owners Costs (a) |
|
|
9.8 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
63.1 |
|
|
|
|
|
Coal Division (a) |
|
|
4.6 |
|
|
|
6 |
% |
Other Mongolia Exploration (including SouthGobi) (a) |
|
|
6.1 |
|
|
|
8 |
% |
|
|
|
$ |
73.8 |
|
|
|
100 |
% |
|
|
|
|
(a) |
|
Includes non-cash stock-based compensation. |
10
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
Exploration and development expenditures capitalized in Q207 totalled $12.1 million, compared
to $8.5 million in Q206. During Q207, the $12.1 million capitalized related mainly to $7.8
million capitalized at Oyu Tolgoi for plant and equipment, camp and office buildings.
MONGOLIA
OYU TOLGOI
The Oyu Tolgoi Project consists of two groups of deposits the Southern Oyu Deposits and the
Hugo Dummett Deposits that are contained within an aggregate area of approximately
6.3 kilometres north-south by 3.0 kilometres east-west. In March 2007, an updated Oyu Tolgoi
Technical Report prepared by GRD Minproc was released. It contained a revised estimate of the
Projects mineral resources at the Hugo North Deposit that had been independently estimated by AMEC
Americas Ltd. The revised estimates can be found in the 2006 Annual Information Form on
www.sedar.com.
Oyu Tolgoi Investment Agreement currently being considered by Mongolias National Parliament
On April 10, 2007, after several months of negotiations, Ivanhoe Mines and its strategic
partner, Rio Tinto, announced that they had reached agreement in principle with the Mongolian
Governments Working Group on a draft Investment Agreement designed to stabilize tax and fiscal
issues and guide the planned development and long-term operation of the Oyu Tolgoi copper-gold
project in Mongolias South Gobi Region.
Following a Cabinet review in June 2007, the draft Investment Agreement was duly presented to
Mongolias State Great Hural (National Parliament) in July 2007. Consideration and approval by the
National Parliament of the Investment Agreement is expected to be the final step in the process
being conducted in accordance with the revised Minerals Law enacted by Parliament last year.
The Parliaments Standing Committee on Economics discussed the draft agreement on August 6 and 7.
The Parliament has extended its spring session into August, but no date for the adjournment of the
current session has been announced. Ivanhoe Mines with the encouraging public support of its
Mongolian employees, suppliers and contractors has expressed its concern to all the Members of
Parliament, the Governments Cabinet and the President about potential adverse impacts on the cost
and timing for the project that would result from any further delays in the parliamentary approval
process. Ivanhoe Mines will monitor the deliberations of the National Parliament and continue to
assess the implications for the Oyu Tolgoi development schedule.
11
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
The draft Investment Agreement also remains subject to approvals by the Ivanhoe Mines and Rio Tinto
boards of directors.
Oyu Tolgoi Development Activities
Site preparation continued during the quarter, positioning the project to commence full
construction following final approval of the Investment Agreement. Activities on site focused on
the sinking of Shaft No. 1, pre-sinking of Shaft No. 2, excavation for the concentrator building
and enlargement of the construction camp facilities.
Shaft No. 1, the first deep underground development project of its type in Mongolia, was below the
1,170-metre mark at the end of July 2007 and sinking is expected to be completed in October 2007.
Shaft No. 1, with a planned depth of more than 1,300 metres, will allow for additional exploration
of the Oyu Tolgoi high-grade underground deposits and also will provide
initial production, and ultimately ventilation, to the underground mine. The expected completion of
Shaft No. 1, together with the horizontal exploration tunnels, will provide access to the Hugo
Deposit, enabling the Company to complete its geotechnical assessment that is required to advance
the underground deposit to a feasibility level, a milestone currently expected to be reached in
2008.
Work continued on Shaft No. 2, which is planned to be the initial primary underground production
and service shaft at Oyu Tolgoi. Site work completed this quarter included finishing the pre-sink
to a depth of 26 metres and mobilizing the workforce to construct the shaft liner. Engineering work
is continuing on schedule. An order was placed for the production hoist for Shaft No. 2 in June
2007.
During Q207, the excavation of the concentrator building was completed. Excavation work now is
commencing on the thickener site. Concentrator engineering reached 61% completion at the end of
June 2007. Nine items of concentrator equipment were released for manufacture on July 1, 2007 to
maintain the projects schedule.
Work also continued on the temporary facilities during Q207. Two existing accommodation camps were
refurbished and are now ready for occupancy by the construction crews. The combined capacity is
1,000 beds, increasing the construction camp capacity to approximately 1,500 beds. Planning for the
mobilization of the construction crew continued throughout the quarter.
Infrastructure engineering progressed during Q207 as well. Work began on the boiler house and
conceptual work continued on the Oyu Tolgoi village and the truck shop. The contract for the road
to China was issued to bidders in June 2007.
Discussions are well advanced with a preferred supplier for the open-pit mining equipment to ensure
that the equipment is available in time to meet an anticipated late-2009 or 2010 production start.
12
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
Oyu Tolgoi Strategic Planning
In Q207, the joint Ivanhoe MinesRio Tinto mine planning team completed its strategic review
of the mining options available in the high-grade Hugo North deposit. It was determined the highest
value mine plan would come from mining the Hugo North Deposit in two large block-caving lifts
similar to the original plan outlined in the 2005 Integrated Development Plan (2005 IDP). This plan
has been further optimized by avoiding early dilution from the large granodyrite dyke that runs
through the western edge of the high-grade zone of Hugo North until the second lift, thus keeping
the grades higher initially during lift 1 and early lift 2 production. This work, together with the
detailed engineering for plant and infrastructure and previous open-pit planning, will be updated
and incorporated into the Integrated Development Plan (2007 IDP) that is scheduled to be released
in the second half of 2007.
Ongoing drilling at Oyu Tolgoi and Javkhlant (Entrée GoldIvanhoe Mines earn-in joint-venture
property immediately south of Oyu Tolgoi)
Ivanhoe Mines completed approximately 15,227 metres of drilling on the Oyu Tolgoi Project
during Q207, including exploration on the Entrée Gold-Ivanhoe Mines earn-in joint-venture
property, Javkhlant, which adjoins Oyu Tolgoi on the southwest boundary.
On the Oyu Tolgoi property, geotechnical drilling has characterized the East Bat fault on the
eastern boundary of the Hugo North Deposit to a pre-feasibility level and currently is testing the
northern boundary fault at the northern end of the Hugo North Deposit. Sterilization drilling was
completed under the primary infrastructure sites in Q107 and now has started under the site of the
proposed coal-fired power plant in the southwest corner of the Oyu Tolgoi property.
On the Javkhlant joint-venture property, widely-spaced diamond drilling is ongoing with three rigs
at the Sparrow South target, a 3,000-metre-long IP anomaly approximately three kilometres southwest
of the south-western end of South West Oyu. Results indicate similar stratigraphy and copper and
gold mineralization distal to the South West Oyu deposits, but starting at greater depths and in a
structurally complex environment. Drilling is continuing in search of higher grades and a better
understanding of the complex geology.
MONGOLIA
Other copper-gold exploration projects
Ivanhoe Mines exploration activities during Q207 focused on the Kharmagtai project where a
5,100-metre diamond-drilling program commenced in mid-May. Drill targets were defined by the
65-line-kilometre dipole-dipole IP survey carried out at Kharmagtai in the previous quarter. A
3D-IP program also is underway over the central Kharmagtai deposits. A total of 2,870 metres over
seven holes had been drilled by the end of Q207; the earlier holes focused on targets in the
Basin, Tsagaan Sudal, Duck and West Chun prospects. Drilling in the basin included one hole on a
large, circular magnetic
13
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
anomaly located two kilometres east of the main deposits. The magnetic
anomaly is 500 metres in diameter, beneath 30 metres of colluvium cover, and associated with strong
chargeability from a depth of 200 metres. The drill hole intercepted 48
metres @ 0.34 g/t gold and 0.13% copper. The alteration and high gold/copper ratio is similar to
the main deposits; further drilling is required to test this large anomaly.
BHP Billiton Exploration (BHPB) work on the Falcon JV area included dipole-dipole IP surveys and
drilling on various targets, with no significant results to date. BHPB had spent approximately $8.1
million by the end of May and has met its earn-in commitment of $8.0 million. Geophysics and
drilling by BHPB is on hold in the JV area until the participation terms of the joint venture are
finalized.
Reconnaissance exploration by Ivanhoe Mines is also underway on various other targets outside the
BHPB joint venture area, including the Maanit Ovoo prospect in the Tsagaan Suvarga area.
A 1,200-metre diamond drilling program at two prospects on the Oyut Ulaan Project will commence in
August. A trenching program has commenced at Chandman Uul and 1,800 metres of diamond drilling is
planned for September.
Ivanhoe Mines held approximately 6.7 million hectares at the end of 2006, including ground held for
the Coal Division. A total of 2.7 million hectares were relinquished in the first half of 2007. In
Q207, approximately 1.6 million hectares (35 licences) were transferred to SouthGobi Energy
Resources Ltd. as part of the coal transaction. The total ground holding by Ivanhoe Mines is 2.5
million hectares. This includes 1.1 million hectares remaining within the BHPB joint venture area.
A further 0.5 million hectares are scheduled to be relinquished over the next 12 months.
AUSTRALIA
Ivanhoe Australia Enters into Investment Agreement with Exco Resources
On May 9, 2007, Ivanhoe Mines 100%-owned subsidiary, Ivanhoe Australia, entered into a private
placement investment in, and a joint-venture agreement with, Exco Resources NL (Exco). Exco is an
Australian mineral exploration company listed on the Australian Stock Exchange. Exco holds
extensive exploration tenements in the Cloncurry copper, uranium and gold region in northwest
Queensland and the White Dam gold project in South Australia.
The private placement consisted of 26.4 million Units at a price of A$0.30 per Unit, for a cost of
A$7.9 million. Each Unit consists of one common share and 0.8 share purchase warrants. One full
share-purchase warrant allows Ivanhoe Australia to purchase, subject to Exco shareholders
approval, one Exco common share at a price of A$0.35 on, or before, June 1, 2008. If all the
warrants are exercised, the total investment will be $A15.3 million and will result in Ivanhoe
Australia holding approximately 19.9% of Excos common shares.
14
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
In addition to this investment, Ivanhoe Australia has entered into an exploration joint venture on
approximately 725 square kilometres of Excos 100%-owned tenements south of the Kuridala tenements,
which form the northern part of Ivanhoe Australias 2,450-square-kilometre Cloncurry copper,
uranium and gold project. The terms of the joint
venture call for Ivanhoe Australia to spend A$5 million over three years to earn an 80% interest in
Excos tenements.
Cloncurry IOCG Project expanding exploration
Ivanhoe Mines recent exploration at the Cloncurry project has discovered a series of related
iron-oxide-copper-gold (IOCG) systems, with associated uranium. Since January 2007, Ivanhoe Mines
has increased its exploration efforts at Cloncurry and early results have been encouraging.
Swan Prospect. In Q207, 16 diamond core holes were drilled at the Swan Prospect, totalling 10,931
metres. This drilling has continued to expand the northern zone of deep mineralization at Swan. Six
drill rigs currently are located at Swan. The next stage of drilling at Swan will continue testing
the northwest strike extent, and commence drilling the Swell Elliott mineralization to the east of
Swan with a view to establishing the relationship between the Swan and Elliott deposits.
Amethyst Castle Prospect. Copper, gold and uranium are hosted in a widespread, large-scale breccia
body in the Amethyst Castle area. Ivanhoe Mines has identified the presence of uranium and the
IOCG-style of mineralization and has carried out magnetic, conductivity, IP and gravity surveys.
The drill results indicate a large breccia structure containing pods of high-grade gold, copper and
uranium that requires further investigation. To explore this prospect, further deep dipole-dipole
IP is planned for August, as well as drilling to the northeast.
Metal Ridge. Aircore drilling over the western portion of this prospect has identified a zone of
higher copper values associated with a gravity feature striking north-easterly from Amethyst Castle
across to Metal Ridge. Deep IP is planned in the next quarter.
Uranium Prospects. In addition to the IOCG prospects identified above, Ivanhoes Cloncurry Project
hosts a significant number of uranium exploration prospects, including Robert Heg, Elizabeth Anne,
Great Wall and Dairy Bore. Drilling on Robert Heg totalled 1,676 metres of diamond coring, with
five holes drilled. Uranium was encountered in chloritic shear zones and low-grade, possibly
disseminated uranium within sections of the granite and calc silicate country rock. Secondary
uranium minerals were seen on many fracture planes as coatings that were easily washed off during
core cutting and drilling. This problem will be addressed in future core handling procedures. The
drill results re-affirm the results obtained by the early Rio Tinto drilling in 1991.
At Elizabeth Anne, a program of aircore drilling detected anomalous copper, lead and uranium, while
rock-chip samples highlighted the presence of strong secondary uranium minerals seen in ironstone
outcrops associated with this prospect.
15
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
Gravity and aircore drilling was completed over the Dairy Bore prospect, with assay results
confirming a correlation between copper magnetics and gravity features. This target is expected to
be an IOCG-style of mineralization, with drilling to follow a further detailed mapping program.
Further mapping over the northern tenements will be completed in 2007 and this will define
additional drill targets.
Ivanhoe Mines is continuing to assess financing alternatives for Cloncurry.
KAZAKHSTAN
Bakyrchik Gold Project
The mine facilities remained on care-and-maintenance status during Q207. Expenditures for
Q207 totalled $0.8 million, compared to $1.0 million in Q206. During Q207, the main contracts
for the construction of the Pilot Roasting Plant were signed and advance payments made.
Ivanhoe Mines continues to work at improving the integrity of the geological information at the
Bakyrchik mine in preparation for more detailed studies. As part of this preparation, Ivanhoe Mines
recently employed consultants to provide a detailed laser scan digital terrain model of the
existing open pits and immediate mine area to enable more accurate planning of any possible future
open pit mining.
Ivanhoe Mines is continuing to assess financing alternatives for the project.
CHINA
Inner Mongolia and Northern China exploration
Reconnaissance field exploration continued in western Inner Mongolia and elsewhere in Northern
China during the second quarter of 2007, consisting of existing private tenement and surrounding
unlicensed area assessments. The aim of the program is the acquisition of semi-advanced,
high-quality projects and licensing of new areas with mineralization potential. The program
consists of continuing data compilations, systematic rock-chip and channel sampling and trench
re-sampling of existing tenements and new surrounding target areas.
16
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
SOUTHGOBI ENERGY RESOURCES (87% owned)
Ivanhoe Mines Coal Division merges with SouthGobi
In 2006, Ivanhoe Mines announced a plan to transfer the Companys Mongolian Coal Division to
SouthGobi Energy Resources (formerly Asia Gold) in exchange for approximately 82.6 million shares
of SouthGobi. This transaction was approved by the minority shareholders of SouthGobi on August 8,
2006. Closing of the transaction was subject to the fulfilment of certain conditions precedent,
including completion of the transfer of certain mineral exploration licences in Mongolia.
On May 1, 2007, Ivanhoe Mines and SouthGobi announced that the Government of Mongolia had completed
the transfer of all 35 coal exploration licences held by Ivanhoe Mines in the South Gobi region of
Mongolia. On May 28, 2007, the coal transaction received final approval from the TSX Venture
Exchange. On May 29, 2007, SouthGobi completed the purchase by issuing to Ivanhoe Mines 57.0
million common shares and 25.6 million preferred shares. The common shares issued to Ivanhoe Mines,
when aggregated with Ivanhoe Mines existing holding of common shares, represent approximately 87%
of the total number of SouthGobi common shares currently issued and outstanding.
Coal Projects, Exploration, Licensing and Development
SouthGobi has commenced a major exploration program on six separate coal projects in
Mongolias South Gobi Region. Mobilization of drills, crews and camps was started in May 2007. The
programs are a combination of:
|
|
|
New greenfields exploration at Tavan Tolgoi. |
|
|
|
|
Determination of structure and quality on identified coal occurrences. |
|
|
|
|
Infill drilling on defined projects (Ovoot Tolgoi and Tsagaan Tolgoi ). |
|
|
|
|
Additional resource definition at Ovoot Tolgoi Extension and Ovoot Tolgoi
Underground. |
|
|
|
|
Greenfields exploration. |
The Ovoot Tolgoi coal resources are contained in two separate fields, the South-East Field and the
West Field. On August 8, 2007, SouthGobi announced that it has filed a formal application for a
Mining Licence for the development of an open-pit coal mine at Ovoot Tolgoi. The Geological
Resource Report for Ovoot Tolgoi was approved by the Mongolian Governments Resource Committee on
August 6, 2007. In May 2007, the projects Detailed Environmental Impact Assessment (DEIA) was
approved by the Mongolian Governments Ministry of Environment. The company has also received
formal support for its Ovoot Tolgoi project from the Omnugovi aimag (province) and local soum
(township to proceed with development of the planned Ovoot Tolgoi mine.
SouthGobi has commissioned Norwest Corporation to complete a Pre-Feasibility Study on Ovoot Tolgoi.
The study is expected to be completed by the end of Q307 and will be an enhancement of
17
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
two earlier
Scoping Studies. This report will be used to fulfill the legal requirement to file a technical and
economical study with applicable Mongolian authorities
within 60 days of receiving a mining licence. Mining equipment has been evaluated and is ready for
order, pending formal mining licence approval. Site facilities have been designed and also are
awaiting official licence approval.
Further drilling in the Ovoot Tolgoi Extension will focus on gaining a better geological,
structural and quality understanding of the coal resources from identified coal occurrences on two
different fields.
In June 2007, Norwest completed a study of Ovoot Tolgois underground mining potential in a
furtherance of SouthGobis plans for the potential development of Ovoot Tolgois underground coal
seams, which has been prompted by increasing demand for high-quality metallurgical and thermal coal
from Northern China. The Ovoot Tolgoi Underground project requires further drilling, expected to
take place through to December 2007, to establish a basis for resource delineation.
JINSHAN (44% owned)
Gold Production Commences at Jinshans 120,000-ounce per year CSH 217 Gold Mine
On July 31, 2007, Jinshan Gold Mines Inc. (Jinshan) announced the pouring of the first
500-ounce gold doré bar at the CSH 217 Gold Mine in Inner Mongolia, China. The pouring marked the
start of production at the mine, which is expected to produce an average of approximately 120,000
ounces per year once full production is achieved over the next few months.
A drilling program at the CSH 217 Gold Mine that commenced in late spring is designed to
potentially delineate additional mineralization along strike, to infill zones with Inferred
resources and bring them up to the Indicated category, and to expand other mineralized zones that
remain open or untested. The drilling program recently has been increased to approximately 8,000
metres, up from the originally planned 5,000 metres. Once this drilling is complete, an updated
resource estimate will be commissioned and is expected by the end of 2007.
An expansion study, expected to be completed by the end of 2007, is underway to determine the
potential to scale up the mine to approximately 180,000 ounces per year.
Ivanhoe Mines participates in Jinshan note offering
On June 26, 2007, Jinshan announced the closing of a private placement of senior unsecured
promissory notes, which consisted of 20,000 units for gross proceeds of $18.7 million (C$20
million). Ivanhoe Mines purchased $7.0 million (C$7.5 million) of the units. Each unit consists of
one promissory note and 200 transferable share purchase warrants. Each note has a par value of
C$1,000 and will pay 12% interest per annum, paid quarterly for three years. Each warrant is
18
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
exercisable into one common share for 24 months from the date of closing and has an exercise price
of C$2.50 per share. Jinshan has the right to accelerate the expiry date of the warrants after 18
months from the issue date, if Jinshans common shares trade at or above a volume
weighted average share price of C$4.30 for 20 consecutive trading days. Jinshan also can elect to
repay the notes after six months from the date of issue with no penalty. Ivanhoe Mines notes are
subordinate to the other notes issued by Jinshan.
B. INVESTMENT HELD FOR SALE
As part of the agreement that established the Rio Tinto strategic partnership announced in
October 2006, Ivanhoe Mines agreed to divest all of its business interests and assets in Myanmar
including its indirect interest in the Monywa Copper Project that were held through its Monywa
subsidiary. On February 27, 2007, Ivanhoe Mines transferred ownership of the Monywa subsidiary to a
company owned by an independent third-party trust (the Trust) in consideration for a promissory
note. The sole purpose of the Trust is to sell the shares of the Monywa subsidiary to one or more
arms-length third parties. The promissory note will be repaid in full upon the completion of the
sale of the shares of the Monywa subsidiary. The company owned by the Trust (Trust Holdco) that now
holds the shares of the Monywa subsidiary for sale also must use the proceeds of any dividends or
other distributions it receives from the Monywa Copper Project to partially repay the promissory
note. Other than the promissory note, Ivanhoe Mines retains no interest in the Monywa subsidiary or
any of its assets.
Upon transfer of the shares of the Monywa subsidiary to Trust Holdco in February 2007, Ivanhoe
Mines ceased accounting for its investment in the Monywa Copper Project under the equity method due
to an inability to exercise significant influence. The investment now is accounted for under the
cost method.
In March 2007, Trust Holdco engaged a third party (the Sale Service Provider) who will be
responsible for identifying potential third-party purchasers, soliciting expressions of interest
from such potential purchasers, negotiating sale terms and facilitating the sale of the Myanmar
assets on behalf of the Trust. During the quarter, the Sale Service Provider was engaged in
discussions with potential purchasers. These discussions are ongoing.
In July 2007, Ivanhoe Mines received a $6.6 million repayment of the promissory note following
receipt by Trust Holdco of a dividend from the Monywa Copper Project. The receipt of this
repayment reduced the carrying value of the investment to $136.6 million.
C. DISCONTINUED OPERATIONS
In February 2005, the Company sold its Savage River mining operations (Savage River) in
Tasmania, Australia, for two initial payments totalling $21.5 million ($15.0 million received in
2005 and $6.5 million received in January 2006), plus a series of five contingent, annual payments
that commenced on March 31, 2006.
19
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
In 2006, Ivanhoe Mines received the first contingent annual payment of $28.2 million.
On March 30, 2007, Ivanhoe Mines received the second annual contingent payment of $19.0 million
with an additional $1.3 million adjustment received in June 2007.
To date, Ivanhoe Mines has received $70.0 million in proceeds from the sale of Savage River.
At June 30, 2007, Ivanhoe Mines had accrued a $4.6 million receivable in relation to the third
contingent annual payment due in March 2008. This amount is calculated based upon the actual tonnes
of iron ore sold during the three-month period ended June 30, 2007 and the escalating price
formula.
D. ADMINISTRATIVE AND OTHER
General and administrative costs. Administrative costs in Q207 were consistent with Q206.
Interest Income. The $1.7 million increase in interest income is due to significantly higher
average cash balances in Q207, coupled with higher interest rates in Q207 compared to Q206.
Foreign exchange gain. The foreign exchange gain during the Q207 was mainly attributable to the
strengthening of the Canadian dollar against the U.S. dollar.
Share of loss on significantly influenced investee. The $1.9 million share of loss on significant
influenced investee represents Ivanhoe Mines share of Jinshans net loss for Q207, in Q206
Ivanhoe Mines investment in Jinshan was consolidated.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Operating activities. The $67.1 million of cash used in operating activities from continuing
operations in Q207 primarily was the result of $73.4 million in cash exploration expenditures,
offset by the receipt of $5.2 million of Mongolian VAT receivable in Q207.
Investing activities. In Q207, $28.8 million of cash was used in investing activities, consisting
of the $6.7 million paid to acquire shares of Exco Resources NL, $3.3 million paid to Entrée upon
exercise of warrants, $7.0 million to purchase unsecured promissory notes of Jinshan and $12.1
million in property, plant and equipment acquisitions and construction mainly relating to Oyu
Tolgoi.
Financing activities. Financing activities of $6.8 million in Q207 were primarily due to proceeds
received from the exercise of stock options.
20
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
Liquidity and Capital Resources
At June 30, 2007, consolidated working capital was $237.1 million, including cash of $255.2
million, compared with working capital of $364.7 million and cash of $363.6 million at December 31,
2006.
The bulk of the Companys expenditures is of a discretionary nature and as such can be deferred
based on the status of the Companys cash resources. Based on the Companys financial position at
June 30, 2007, the Company believes that existing funds should be
sufficient to fund its minimum obligations, including planned Australian and Bakyrchik obligations
and general corporate activities, for at least the next 12 months. Should the Company be unable to
negotiate an Investment Agreement that is acceptable to Rio Tinto, with the result that Rio Tinto
elects not to proceed with the second tranche private placement, Ivanhoe Mines may delay, postpone
or curtail certain of its planned activities for 2007 and thereafter. The Company will continue to
assess the need for project financing relating to the development of power and other
infrastructure-related activities in association with the Oyu Tolgoi Project. See Outlook for
further details.
Financial Instruments
The Companys financial instruments consist of cash, accounts receivable, other current
assets, long-term investments, accounts payable and accrued liabilities and loans payable to
related parties.
The fair value of Ivanhoe Mines long-term investments was determined by reference to published
market quotations, which may not be reflective of future values.
The fair value of Ivanhoe Mines loan payable to related parties was estimated by discounting
future payments to their present value.
The fair value of Ivanhoe Mines remaining financial instruments was estimated to approximate their
carrying value, due primarily to the immediate or short-term maturity of these financial
instruments.
Ivanhoe Mines is exposed to credit risk with respect to its accounts receivable. The significant
concentrations of credit risk are situated in Mongolia and Australia. Ivanhoe Mines does not
mitigate the balance of this risk in light of the credit worthiness of its major debtors.
21
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
SHARE CAPITAL
At August 10, 2007, the Company had a total of:
|
o |
|
374.9 million common shares outstanding. |
|
|
o |
|
12.8 million incentive stock options outstanding, with a weighted average exercise
price per share of Cdn$9.54. Each option is exercisable to purchase a common share of the
Company at prices ranging from Cdn$3.25 to Cdn$16.79 per share. |
|
|
o |
|
92.1 million share purchase warrants outstanding granted to Rio Tinto, with exercise
prices ranging between US$8.38 and US$9.02 per share. These warrants are exercisable until
two years after the earlier of completion of the Investment Agreement and October 27,
2009. |
|
|
o |
|
Under the terms of the Rio Tinto Agreement, Rio Tinto will take up the second tranche
of the private placement following the date upon which Ivanhoe Mines enters into an
Investment Agreement with the Government of Mongolia that is mutually acceptable to
Ivanhoe Mines and Rio Tinto. Rio Tinto has the option to exercise the second tranche
earlier. This second tranche will consist of 46.3 million shares at a price of US$8.38 per
share, for total proceeds of US$388 million. |
OUTLOOK
On April 10, 2007, after several months of negotiations, Ivanhoe Mines and Rio Tinto reached
an agreement in principle with the Mongolian Governments Working Group on a draft Investment
Agreement for the development and long-term operation of the Oyu Tolgoi copper-gold project in the
South Gobi Region.
The terms of the draft Investment Agreement provide a necessary period of development and long-term
operational stability and certainty of principal tax and fiscal issues that will allow for the
realization of Oyu Tolgois benefits for the people of Mongolia and for shareholders of the
investors: Ivanhoe Mines and Rio Tinto. The agreement would have an initial term of 30 years, with
the opportunity to extend the agreement for additional 20-year terms.
The draft Investment Agreement remains subject to consideration and approval by Mongolias State
Great Hural (National Parliament) and also is subject to review and approval by the respective
boards of directors of Ivanhoe Mines and Rio Tinto.
In accordance with revised terms of Mongolias Mineral Law enacted last year, Oyu Tolgoi is
designated a strategic deposit. As a result, the draft Investment Agreement provides for Mongolia
to acquire 34% of the shares of Ivanhoe Mines Mongolia Inc. (IMMI), the Ivanhoe subsidiary that
owns
22
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
and is developing Oyu Tolgoi. As a shareholder, the State of Mongolia would be responsible for
its share of the total capital required by IMMI to develop an initial open-pit mine, projected to
be in production in 2010, and a phase-two underground mine projected to be in operation in 2014. If
necessary, Ivanhoe Mines would contribute, some or all,
of Mongolias share of capital costs during the first six years of the project, which then would be
repaid, with interest, from Mongolias share of dividends from ownership of IMMIs shares.
Other provisions in the draft agreement include:
|
|
The Mongolian Government would be entitled to appoint
three of the nine directors of IMMI. The projects management
team would be nominated by Ivanhoe. |
|
|
|
The rates of more than 20 taxes, fees and charges under
Mongolian laws would be stabilized for the term of the
agreement. While current rates would apply, any lower rates
introduced in the future also would be applied to Oyu Tolgoi. |
|
|
|
Gold produced at Oyu Tolgoi would be sold to the Central
Bank of Mongolia at international market prices, and
therefore would be exempt from the 68% Windfall Profits Tax
enacted by the Mongolian Parliament last year. IMMI has
pledged to facilitate, possibly with other parties, the
construction of a copper smelter in Mongolia within five
years of the start of production at Oyu Tolgoi, ensuring that
copper ore and copper produced at Oyu Tolgoi also would be
exempt from the Windfall Profits Tax for the full term of the
agreement. |
|
|
|
During operation of the mines, a minimum of 90% of Oyu
Tolgoi project employees would be Mongolian nationals. During
construction, a maximum of 25% of employees would be foreign
nationals. |
|
|
|
IMMI is committed to an extensive skills training
program. The Companys goal is to ensure that Mongolians fill
51% of engineering positions within 10 years of start up. The
company would establish a graduate scholarship program,
targetting engineering-related fields, at Mongolian and
international universities to help qualify 100 Mongolians for
advanced mining jobs in six years. |
The draft Investment Agreement was presented to Mongolias National Parliament on July 9, 2007.
Consideration and approval by the National Parliament is expected to be the final step in the
process being conducted in accordance with the revised Minerals Law enacted by Parliament last
year.
The Parliaments Standing Committee on Economics discussed the draft agreement on August 6 and 7.
The Parliament has extended its spring session into August, but no date for the adjournment of the
current session has been announced. Ivanhoe Mines with the encouraging public support of its
Mongolian employees, suppliers and contractors has expressed its concern to all the Members of
Parliament, the Governments Cabinet and the President about potential adverse impacts on the cost
23
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
and timing for the project that would result from any further delays in the parliamentary approval
process. Ivanhoe Mines will monitor the deliberations of the National Parliament and continue to
assess the implications for the Oyu Tolgoi development schedule.
The final substantive step in achieving the approval of the draft Investment Agreement rests with
the National Parliament. There can be no assurance that Parliament will approve the
existing draft agreement, as presently written, or that the approved agreement will contain all of
the terms and conditions sought by Ivanhoe Mines and/or Rio Tinto as presently negotiated. In
addition, there can be no assurance that the Company will receive approval by Parliament in the
foreseeable future or at all. Consequently, without final approval or timely approval by
Parliament, the Company may not be able to close future financings, including the private placement
and warrant transactions with Rio Tinto, obtain project financing or otherwise raise capital before
its existing cash resources are expended with the result that the Oyu Tolgoi Project may not be
constructed in a timely manner, or at all. See Risks and Uncertainties in Ivanhoe Mines
Managements Discussion and Analysis for the year ended December 31, 2006.
The Investment Agreement that was negotiated with the Mongolian Governments Working Group
addressed the various salient issues presented by amendments that were enacted by Parliament in
2006 to the Minerals Law and Tax Laws. These issues include, but are not necessarily limited to,
the following:
Strategic Deposit. Pursuant to the 2006 Amended Minerals Law, the Government of Mongolia was
provided the option to acquire interests in mineral deposits deemed to be mineral deposits of
strategic importance. The Government gained 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 era of the former Soviet
Union. The Oyu Tolgoi discoveries on the Companys licences, and on the adjoining Entrée Gold joint
venture property, were financed entirely by private capital.
The Amended Minerals Law states that any acquisition of a state interest in a mining project will
be subject to negotiation with the licence holder as part of the Investment Agreement process.
Royalty rates. The Governments royalty on all metals increased from 2.5% to 5.0% and is based on
gross sales.
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%.
Licence maturity. The term of an exploration licence was increased from seven to nine years. The
maximum term for a mining licence, including possible extensions, was reduced from 100 years to 70
years (30 years with two possible extensions of 20 years).
24
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
Employment requirements. A licence holder is obligated to employ no more than 10% foreign citizens
or face a monthly surcharge of 10 times the minimum monthly salary for each foreign citizen
employee above the 10% limit.
Listing requirements. An entity holding a mining licence for a deposit classified as a mineral
deposit of strategic importance now is required to list at least 10% of its shares on the
Mongolian Stock Exchange. It is uncertain, at present, how this requirement will be implemented in
practice and what steps may need to be taken to accomplish such listing.
Maximum duration of Investment Agreements. The maximum duration of Investment Agreements has been
prescribed in the Amended Minerals Law as follows:
|
n |
|
Investment between $50-$100 million 10-year term |
|
|
n |
|
Investment between $100-$300 million 15-year term |
|
|
n |
|
Investment greater than $300 million 30-year term. |
The Oyu Tolgoi Project qualifies for an Investment Agreement with an initial 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 two-year loss-carry-forward provision 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 as licence holders. Presently,
mining is not considered by the Government of Mongolia to qualify for the investment tax credit.
Excess Profits Tax. In May 2006, a 68% excess profits tax was approved by the Mongolian Parliament.
The tax applies to sales revenue, net of all selling and treatment charges, which exceeds certain
threshold levels for gold and copper ore and concentrates. Based on the Companys initial
assessment, the effective price at which the tax will apply to Oyu Tolgoi copper currently is
estimated to be $1.45 per pound, since the legislated base price of $1.18 per pound, along with the
cost of external smelting and realization costs, can be deducted from sales proceeds.
The Government also has confirmed that the new excess profits tax would not be applied to copper
smelted in Mongolia and would not apply to the gold contained in copper concentrate. It is
envisaged that the Oyu Tolgoi Project will be a producer of copper concentrate and gold produced at
Oyu Tolgoi will be contained in copper concentrate.
OFF-BALANCE-SHEET
ARRANGEMENTS
During the quarter ended June 30, 2007, Ivanhoe Mines was not a party to any off-balance-sheet
arrangements that have, or are reasonably likely to have, a current or future effect on the results
of operations, financial condition, revenues or expenses, liquidity, capital expenditures or
capital resources of the Company.
25
IVANHOE MINES LTD.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
CONTRACTUAL OBLIGATIONS
As at June 30, 2007, there were no significant changes in Ivanhoe Mines contractual
obligations and commercial commitments from those reported in Ivanhoe Mines Managements
Discussion and Analysis for the year ended December 31, 2006.
CHANGES IN ACCOUNTING POLICIES
On January 1, 2007, the Company adopted the provisions of the FASB issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN
48). This interpretation clarifies the recognition threshold and measurement of a tax
position taken or expected to be taken on a tax return, and requires expanded disclosure with
respect to the uncertainty in income taxes. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosures and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did
not have an impact on the Companys consolidated financial condition or results of operations.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States requires the Company to establish accounting policies and to make
estimates that affect both the amount and timing of the recording of assets, liabilities, revenues
and expenses. Some of these estimates require judgments about matters that are inherently
uncertain.
The Companys significant accounting policies and the estimates derived therefrom identified as
being critical are substantially unchanged from those disclosed in its MD&A for the year ended
December 31, 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no new recently issued United States accounting pronouncements that impact the
Company other than those the Company previously disclosed in its MD&A for the year ended December
31, 2006.
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, 2006.
26
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
RELATED-PARTY
TRANSACTIONS
The following tables summarize related party expenses incurred by Ivanhoe Mines, primarily on
a cost recovery basis, with an officer of a subsidiary of Ivanhoe Mines, a company subject to
significant influence by Ivanhoe Mines, companies affiliated with Ivanhoe Mines, or with companies
related by way of directors or shareholders in common. For further details regarding the nature and
relationship of these related party expenditures please refer to the MD&A for the year ended
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Global Mining Management Corporation |
|
$ |
2,243 |
|
|
$ |
1,433 |
|
|
$ |
3,816 |
|
|
$ |
2,810 |
|
Ivanhoe Capital Aviation LLC |
|
|
960 |
|
|
|
960 |
|
|
|
1,920 |
|
|
|
1,920 |
|
Fognani & Faught, PLLC |
|
|
611 |
|
|
|
393 |
|
|
|
888 |
|
|
|
607 |
|
Ivanhoe Capital Pte. Ltd. |
|
|
|
|
|
|
(16 |
) |
|
|
10 |
|
|
|
37 |
|
Ivanhoe Capital Services Ltd. |
|
|
176 |
|
|
|
156 |
|
|
|
363 |
|
|
|
325 |
|
Rio Tinto plc |
|
|
302 |
|
|
|
|
|
|
|
302 |
|
|
|
|
|
|
|
|
$ |
4,292 |
|
|
$ |
2,926 |
|
|
$ |
7,299 |
|
|
$ |
5,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Legal |
|
$ |
611 |
|
|
$ |
393 |
|
|
$ |
888 |
|
|
$ |
607 |
|
Office and administrative |
|
|
747 |
|
|
|
598 |
|
|
|
1,317 |
|
|
|
1,137 |
|
Project related expenses |
|
|
302 |
|
|
|
|
|
|
|
302 |
|
|
|
|
|
Salaries and benefits |
|
|
1,672 |
|
|
|
975 |
|
|
|
2,872 |
|
|
|
2,035 |
|
Travel (including aircraft rental) |
|
|
960 |
|
|
|
960 |
|
|
|
1,920 |
|
|
|
1,920 |
|
|
|
|
$ |
4,292 |
|
|
$ |
2,926 |
|
|
$ |
7,299 |
|
|
$ |
5,699 |
|
|
The above-noted transactions were in the normal course of operations and were measured at the
exchange amount, which is the amount of consideration established and agreed to by the related
parties.
Accounts receivable and accounts payable at June 30, 2007, included $302,374 and $2,499,635,
respectively (June 30, 2006 $299,768 and $1,410,191, respectively), which were due from/to a
company under common control, companies affiliated with Ivanhoe Mines, or companies related by way
of directors in common.
27
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
At June 30, 2007, Ivanhoe Mines note receivable from Jinshan was $7,013,934 (June 30, 2006 -
$nil).
At the end of June 30, 2007, Ivanhoe Mines discontinued Savage River operations owed approximately
$5.1 million to the Companys Chairman. This debt originated as a result of the December 2000
acquisition by Ivanhoe Mines of the Savage River operation. Following the sale of the Savage River
operations in February 2005, repayment of this balance is contingent upon Ivanhoe Mines receiving
proceeds in excess of approximately $111.1 million from the sale of the Savage River operations. To
date, $70.0 million has been received from the sale.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended June 30, 2007, there were no changes in the Companys internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
QUALIFIED PERSONS
Disclosure of a scientific or technical nature in this MD&A in respect of each of the
following projects 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:
|
|
|
|
|
|
|
|
|
Relationship to |
Project |
|
Qualified Person |
|
Ivanhoe Mines |
|
Mongolia Other Copper Gold
Exploration Projects
|
|
Douglas Kirwin
|
|
Employee of the Company |
|
|
|
|
|
Australia Cloncurry Project
|
|
James Heape
|
|
Employee of a
subsidiary of the
Company |
|
|
|
|
|
Jinshan CSH 217 Gold Mine
|
|
Calvin McKee
|
|
Employee of Jinshan
Gold Mines Inc. |
CAUTIONARY STATEMENTS
LANGUAGE REGARDING RESERVES AND RESOURCES
Readers are advised that National Instrument 43-101 Standards of Disclosure for Mineral Projects
(NI 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
28
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
year ended December 31, 2006, and other continuous disclosure documents filed by the Company since
January 1, 2007, at www.sedar.com.
NOTE TO UNITED STATES INVESTORS CONCERNING ESTIMATES OF MEASURED, INDICATED AND INFERRED RESOURCES
This document, including the documents incorporated by reference herein, has been prepared in
accordance with the requirements of securities laws in effect in Canada, which differ from the
requirements of United States securities laws. Without limiting the foregoing, this document,
including the documents incorporated by reference herein, uses the terms measured, indicated
and inferred resources. United States investors are advised that, while such terms are recognized
and required by Canadian securities laws, the SEC does not recognize them. Under United States
standards, mineralization may not be classified as a reserve unless the determination has been
made that the mineralization could be
economically and legally produced or extracted at the time the reserve determination is made.
United States investors are cautioned not to assume that all or any part of measured or indicated
resources will ever be converted into reserves. Further, inferred resources have a great amount
of uncertainty as to their existence and as to whether they can be mined legally or economically.
It cannot be assumed that all or any part of the inferred resources will ever be upgraded to a
higher category. Therefore, United States investors are also cautioned not to assume that all or
any part of the inferred resources exist, or that they can be mined legally or economically.
Disclosure of contained ounces is a permitted disclosure under Canadian regulations; however, the
SEC only permits issuers to report resources as in place tonnage and grade without reference to
unit measures. Accordingly, information concerning descriptions of mineralization and resources
contained in this document, or in the documents incorporated by reference, may not be comparable to
information made public by United States companies subject to the reporting and disclosure
requirements of the SEC. National Instrument 43-101
Standards of Disclosure for Mineral Projects (NI 43-101) is a rule developed by the Canadian
Securities Administrators that establishes standards for all public disclosure an issuer makes of
scientific and technical information concerning mineral projects. Unless otherwise indicated, all
reserve and resource estimates contained in or incorporated by reference in this document have been
prepared in accordance with NI 43-101. These standards differ significantly from the requirements
of the SEC, and reserve and resource information contained herein and incorporated by reference
herein may not be comparable to similar information disclosed by U.S. companies. NI 43-101 permits
a historical estimate made prior to the adoption of NI 43-101 that does not comply with NI 43-101
to be disclosed using the historical terminology if the disclosure: (a) identifies the source and
date of the historical estimate; (b) comments on the relevance and reliability of the historical
estimate; (c) states whether the historical estimate uses categories other than those prescribed by
NI 43-101; and (d) includes any more recent estimates or data available.
FORWARD-LOOKING STATEMENTS
Certain statements made herein, including statements relating to matters that are not
historical facts and statements of our beliefs, intentions and expectations about developments,
results and events
29
IVANHOE MINES LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars, except where noted)
which will or may occur in the future, which constitute forward-looking
information within the meaning of applicable Canadian securities legislation and forward-looking
statements within the meaning of the safe harbor provisions of the United States Private
Securities Litigation Reform Act of 1995. Forward-looking information and statements are typically
identified by words such as anticipate, could, should, expect, seek, may, intend,
likely, plan, estimate, believe and similar expressions suggesting future outcomes or
statements regarding an outlook. 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; the
expected timing and outcome of Ivanhoe Mines discussions with representatives of the Government of
Mongolia for an Investment Agreement in respect of the Oyu Tolgoi Project; the estimated timing and
cost of bringing the Oyu Tolgoi Project into commercial production; anticipated future production
and cash flows; target milling rates; the impact of amendments to the laws of Mongolia and other
countries in which Ivanhoe Mines
carries on business; the timing for completion of the 2007 IDP and changes in mine plan
contemplated thereunder; the timing of commencement of full construction of the Oyu Tolgoi Project;
the completion of an updated mine plan for the Ovoot Tolgoi Project; the potential sale of the
Monywa Copper Project by the Trust to a third party; 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.
All such forward-looking information and statements are based on certain assumptions and analyses
made by Ivanhoe Mines management in light of their experience and perception of historical trends,
current conditions and expected future developments, as well as other factors management believes
are appropriate in the circumstances. These statements, however, 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 information or 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
information or statements.
This MD&A also contains references to estimates of mineral reserves and mineral resources. The
estimation of reserves and resources is inherently uncertain and involves subjective judgments
about many relevant factors. The accuracy of any such estimates is a function of the quantity and
quality of available data, and of the assumptions made and judgments used in engineering and
geological interpretation, which may prove to be unreliable. There can be no assurance that these
estimates will be accurate or that such mineral reserves and mineral resources can be mined or
processed profitably. Mineral resources that are not mineral reserves do not have demonstrated
economic viability. Except as required by law, 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
30
IVANHOE MINES ANNOUNCES Q2 2007 RESULTS
Singapore Ivanhoe Mines today announced its results for the second quarter of 2007
(Q207). All figures are in US dollars, unless otherwise stated.
MONGOLIA
Oyu Tolgoi Investment Agreement currently being considered by Mongolias National Parliament
On April 10, 2007, after several months of negotiations, Ivanhoe Mines and its strategic
partner, Rio Tinto, announced that they had reached agreement in principle with the Mongolian
Governments Working Group on a draft Investment Agreement designed to stabilize tax and fiscal
issues and guide the planned development and long-term operation of the Oyu Tolgoi copper-gold
project in Mongolias South Gobi Region.
Following a Cabinet review in June 2007, the draft Investment Agreement was duly presented to
Mongolias State Great Hural (National Parliament) in July 2007. Consideration and approval by the
National Parliament of the Investment Agreement is expected to be the final step in the process
being conducted in accordance with the revised Minerals Law enacted by Parliament last year.
The Parliaments Standing Committee on Economics discussed the draft agreement on August 6 and 7.
The Parliament has extended its spring session into August, but no date for the adjournment of the
current session has been announced. Ivanhoe Mines with the encouraging public support of its
Mongolian employees and suppliers and contractors has expressed its concern to all the Members of
Parliament, the Governments Cabinet and the President about potential adverse impacts on the cost
and timing for the project that would result from any further delays in the parliamentary approval
process. Ivanhoe will monitor the deliberations of the National Parliament and continue to assess
the implications for the Oyu Tolgoi development schedule.
The draft Investment Agreement also remains subject to approvals by the Ivanhoe Mines and Rio Tinto
boards of directors.
Oyu Tolgoi Development Activities
Site preparation continued during the quarter, positioning the project to commence full
construction following final approval of the Investment Agreement. Activities on site focussed
on the sinking of Shaft No. 1, pre-sinking of Shaft No. 2, excavation for the concentrator building
and enlargement of the construction camp facilities.
Shaft No. 1, the first deep underground development project of its type in Mongolia, was below the
1,170-metre mark at the end of July 2007 and sinking is expected to be completed in October 2007.
Shaft No. 1, with a planned depth of more than 1,300 metres, will allow for additional exploration
of the Oyu Tolgoi high-grade underground deposits and also will provide initial production, and
ultimately ventilation, to the underground mine. The expected completion of Shaft No. 1, together
with the horizontal exploration tunnels, will provide access to the Hugo Deposit, enabling the
company to
2
complete its geotechnical assessment that is required to advance the underground deposit
to a feasibility level, a milestone currently expected to be reached in 2008.
Work continued on Shaft No. 2, which is planned to be the initial primary underground production
and service shaft at Oyu Tolgoi. Site work completed this quarter included finishing the pre-sink
to a depth of 26 metres and mobilizing the workforce to construct the shaft liner. Engineering work
is continuing on schedule. An order was placed for the production hoist for Shaft No. 2 in June
2007.
During the second quarter, the excavation of the concentrator building was completed. Excavation
work now is commencing on the thickener site. Concentrator engineering reached 61% completion at
the end of June 2007. Nine items of concentrator equipment were released for manufacture on July 1,
2007 to maintain the projects schedule.
Work also continued on the temporary facilities during Q207. Two existing accommodation camps were
refurbished and are now ready for occupancy by the construction crews. The combined capacity is
1,000 beds, increasing the construction camp capacity to approximately 1,500 beds. Planning for the
mobilization of the construction crew continued throughout the quarter.
Infrastructure engineering progressed during Q207 as well. Work began on the boiler house and
conceptual work continued on the Oyu Tolgoi village and the truck shop. The contract for the road
to China was issued to bidders in June 2007.
Discussions are well advanced with a preferred supplier for the open-pit mining equipment to ensure
that the equipment is available in time to meet an anticipated late-2009 or 2010 production start.
Oyu Tolgoi Strategic Planning
In Q207, the joint Ivanhoe MinesRio Tinto mine planning team completed its strategic review
of the mining options available in the high-grade Hugo North deposit. It was determined the highest
value mine plan would come from mining the Hugo North Deposit in two large block-caving lifts
similar to the original plan outlined in the 2005 Integrated Development Plan (2005 IDP). This plan
has been further optimized by avoiding early dilution from the large granodyrite dyke that runs
through the western edge of the high-grade zone of Hugo North until the
second lift, thus keeping the grades higher initially during lift 1 and early lift 2 production.
This work, together with the detailed engineering for plant and infrastructure and previous
open-pit
planning, will be updated and incorporated into the Integrated Development Plan (2007 IDP) that is
scheduled to be released in the second half of 2007.
Ongoing drilling at Oyu Tolgoi and Javkhlant (Entrée GoldIvanhoe Mines earn-in joint-venture
property immediately south of Oyu Tolgoi)
Ivanhoe Mines completed approximately 15,227 metres of drilling on the Oyu Tolgoi Project
during Q207, including exploration on the Entrée Gold-Ivanhoe Mines earn-in joint-venture
property, Javkhlant, which adjoins Oyu Tolgoi on the southwest boundary.
On the Oyu Tolgoi property, geotechnical drilling has characterized the East Bat fault on the
eastern boundary of the Hugo North Deposit to a pre-feasibility level and currently is testing the
northern boundary fault at the northern end of the Hugo North Deposit. Sterilization drilling was
completed under the primary infrastructure sites in Q107 and now has started under the site of the
proposed coal-fired power plant in the southwest corner of the Oyu Tolgoi property.
On the Javkhlant joint-venture property, widely-spaced diamond drilling is ongoing with three rigs
at the Sparrow South target, a 3,000-metre-long IP anomaly approximately three kilometres southwest
3
of the south-western end of South West Oyu. Results indicate similar stratigraphy and copper and
gold mineralization distal to the South West Oyu deposits, but starting at greater depths and in a
structurally complex environment. Drilling is continuing in search of higher grades and a better
understanding of the complex geology.
Other copper-gold exploration projects in Mongolia
Ivanhoe Mines exploration activities during Q207 focused on the Kharmagtai project where a
5,100-metre diamond-drilling program commenced in mid-May. Drill targets were defined by the
65-line-kilometre dipole-dipole IP survey carried out at Kharmagtai in the previous quarter. A
3D-IP program also is underway over the central Kharmagtai deposits. A total of 2,870 metres over
seven holes had been drilled by the end of Q207; the earlier holes focused on targets in the
Basin, Tsagaan Sudal, Duck and West Chun prospects. Drilling in the basin included one hole on a
large, circular magnetic anomaly located two kilometres east of the main deposits. The magnetic
anomaly is 500 metres in diameter, beneath 30 metres of colluvium cover, and associated with strong
chargeability from a depth of 200 metres. The drill hole intercepted 48 metres @ 0.34 g/t gold and
0.13% copper. The alteration and high gold/copper ratio is similar to the main deposits; further
drilling is required to test this large anomaly.
BHP Billiton Exploration (BHPB) work on the Falcon JV area included dipole-dipole IP surveys and
drilling on various targets, with no significant results to date. BHPB had spent approximately $8.1
million by the end of May and has met its earn-in commitment of $8.0 million. Geophysics and
drilling by BHPB is on hold in the JV area until the participation terms of the joint venture are
finalized.
Reconnaissance exploration by Ivanhoe Mines is also underway on various other targets
outside the BHPB joint venture area, including the Maanit Ovoo prospect in the Tsagaan Suvarga
area.
AUSTRALIA
Cloncurry IOCG Project expanding exploration
Ivanhoe Mines recent exploration at the Cloncurry project has discovered a series of related
iron-oxide-copper-gold (IOCG) systems, with associated uranium. Since January 2007, Ivanhoe Mines
has increased its exploration efforts at Cloncurry and early results have been encouraging.
Swan Prospect. In Q207, 16 diamond core holes were drilled at the Swan Prospect, totalling 10,931
metres. This drilling has continued to expand the northern zone of deep mineralization at Swan. Six
drill rigs currently are located at Swan. The next stage of drilling at Swan will continue testing
the northwest strike extent, and commence drilling the Swell Elliott mineralization to the east of
Swan with a view to establishing the relationship between the Swan and Elliott deposits.
Amethyst Castle Prospect. Copper, gold and uranium are hosted in a widespread, large-scale breccia
body in the Amethyst Castle area. Ivanhoe Mines has identified the presence of uranium and the
IOCG-style of mineralization and has carried out magnetic, conductivity, IP and gravity surveys.
The drill results indicate a large breccia structure containing pods of high-grade gold, copper and
uranium that requires further investigation. To explore this prospect, further deep dipole-dipole
IP is planned for August, as well as drilling to the northeast.
Metal Ridge. Aircore drilling over the western portion of this prospect has identified a zone of
higher copper values associated with a gravity feature striking north-easterly from Amethyst Castle
across to Metal Ridge. Deep IP is planned in the next quarter.
4
Uranium Prospects. In addition to the IOCG prospects identified above, Ivanhoes Cloncurry Project
hosts a significant number of uranium exploration prospects, including Robert Heg, Elizabeth Anne,
Great Wall and Dairy Bore. Drilling on Robert Heg totalled 1,676 metres of diamond coring, with
five holes drilled. Uranium was encountered in chloritic shear zones and low-grade, possibly
disseminated uranium within sections of the granite and calc silicate country rock. Secondary
uranium minerals were seen on many fracture planes as coatings that were easily washed off during
core cutting and drilling. This problem will be addressed in future core handling procedures. The
drill results re-affirm the results obtained by the early Rio Tinto drilling in 1991.
At Elizabeth Anne, a program of aircore drilling detected anomalous copper, lead and uranium, while
rock-chip samples highlighted the presence of strong secondary uranium minerals seen in ironstone
outcrops associated with this prospect.
Gravity and aircore drilling was completed over the Dairy Bore prospect, with assay results
confirming a correlation between copper magnetics and gravity features. This target is expected to
be an IOCG-style of mineralization, with drilling to follow a further detailed mapping program.
Further mapping over the northern tenements will be completed in 2007 and this will define
additional drill targets.
Ivanhoe Mines is continuing to assess financing alternatives for Cloncurry.
Bakyrchik Gold Project
The mine facilities remained on care-and-maintenance status during Q207. During Q207, the
main contracts for the construction of the Pilot Roasting Plant were signed and advance payments
made.
Ivanhoe Mines continues to work at improving the integrity of the geological information at the
Bakyrchik mine in preparation for more detailed studies. As part of this preparation, Ivanhoe Mines
recently employed consultants to provide a detailed laser scan digital terrain model of the
existing open pits and immediate mine area to enable more accurate planning of any possible future
open pit mining.
Ivanhoe Mines is continuing to assess financing alternatives for the project.
Ivanhoe Mines Coal Division merges with SouthGobi Energy Resources
On May 1, 2007, Ivanhoe Mines and SouthGobi announced that the Government of Mongolia had
completed the transfer of all 35 coal exploration licences held by Ivanhoe Mines in the South Gobi
region of Mongolia. On May 28, 2007, the coal transaction received final approval from the TSX
Venture Exchange. SouthGobi completed the purchase by issuing to Ivanhoe Mines 57.0 million common
shares and 25.6 million preferred shares. The common shares issued to Ivanhoe Mines, when
aggregated with Ivanhoe Mines existing holding of common shares, represent approximately 87% of
the total number of SouthGobi common shares currently issued and outstanding.
SouthGobi has commenced a major exploration program on six separate coal projects in Mongolias
South Gobi Region. Mobilization of drills, crews and camps was started in May 2007. The programs
are a combination of:
|
|
|
New greenfields exploration at Tavan Tolgoi. |
|
|
|
|
Determination of structure and quality on identified coal occurrences. |
5
|
|
|
Infill drilling on defined projects (Ovoot Tolgoi and Tsagaan Tolgoi). |
|
|
|
|
Additional resource definition at Ovoot Tolgoi Extension and Ovoot Tolgoi
Underground. |
|
|
|
|
Greenfields exploration. |
The Ovoot Tolgoi coal resources are contained in two separate fields, the South-East Field and the
West Field. On August 8, 2007, SouthGobi announced that it has filed a formal application for a
Mining Licence for the development of an open-pit coal mine at Ovoot Tolgoi. The Geological
Resource Report for Ovoot Tolgoi was approved by the Mongolian Governments Resource Committee on
August 6, 2007. In May 2007, the projects Detailed
Environmental Impact Assessment (DEIA) was approved by the Mongolian Governments Ministry of
Environment.
SouthGobi has commissioned Norwest Corporation to complete a Pre-Feasibility Study on Ovoot Tolgoi.
The study is expected to be completed by the end of Q307 and will be an enhancement of two earlier
Scoping Studies. This report will be used to fulfill the legal requirement to file a technical and
economical study with applicable Mongolian authorities within 60 days of receiving a mining
licence. Mining equipment has been evaluated and is ready for order, pending formal mining licence
approval. Site facilities have been designed and also are awaiting official licence approval.
Further drilling in the Ovoot Tolgoi Extension will focus on gaining a better geological,
structural and quality understanding of the coal resources from identified coal occurrences on two
different fields.
In June 2007, Norwest completed a study of Ovoot Tolgois underground mining potential in a
furtherance of SouthGobis plans for the potential development of Ovoot Tolgois underground coal
seams, which has been prompted by increasing demand for high-quality metallurgical and thermal coal
from Northern China. The Ovoot Tolgoi Underground project requires further drilling, expected to
take place through to December 2007, to establish a basis for resource delineation.
CHINA
Inner Mongolia and Northern China exploration
Reconnaissance field exploration continued in western Inner Mongolia and elsewhere in Northern
China during the second quarter of 2007, consisting of existing private tenement and surrounding
unlicensed area assessments. The aim of the program is the acquisition of semi-advanced,
high-quality projects and licensing of new areas with mineralization potential. The program
consists of continuing data compilations, systematic rock-chip and channel sampling and trench
re-sampling of existing tenements and new surrounding target areas.
Gold Production Commences at Jinshans 120,000-ounce per year CSH 217 Gold Mine
On July 31, 2007, Jinshan Gold Mines Inc. (Jinshan) announced the pouring of the first
500-ounce gold doré bar at the CSH 217 Gold Mine in Inner Mongolia, China. The pouring marked the
start of production at the mine, which is expected to produce an average of approximately 120,000
ounces per year once full production is achieved over the next few months.
A drilling program at the CSH 217 Gold Mine that commenced in late spring is designed to
potentially delineate additional mineralization along strike, to infill zones with Inferred
resources and bring them up to the Indicated category, and to expand other mineralized zones that
remain open or untested. The drilling program recently has been increased to approximately 8,000
metres, up from the originally planned 5,000 metres. Once this drilling is complete, an updated
resource estimate will be commissioned and is expected by the end of 2007.
6
An expansion study, expected to be completed by the end of 2007, is underway to determine the
potential to scale up the mine to approximately 180,000 ounces per year. Ivanhoe Mines
owns approximately 44% of the issued shares of Jinshan.
REVIEW OF OPERATIONS
Ivanhoe Mines is engaged primarily in exploration activities, although a significant portion
of its expenditures relate directly to development activities at its Oyu Tolgoi Project in
Mongolia. Exploration costs are charged to operations in the period incurred and often constitute
the bulk of the Companys operating loss for that period. It is expected that the Company will
commence capitalizing costs of this nature once an Investment Agreement is finalized with the
Government of Mongolia. In Q207, Ivanhoe Mines recorded a net loss of $74.2 million (or $0.20 per
share), compared to a net loss of $40.3 million (or $0.12 per share) in Q206. The $33.9 million
increase in the loss from 2006 to 2007 was primarily due to a $35.4 million increase in exploration
expenses. Included in exploration expenses are shaft sinking and engineering and development costs
for the Oyu Tolgoi Project that have been expensed and not capitalized. Results for the quarter
also were affected by a $1.7 million increase in interest income, a $2.0 million increase in
foreign exchange gains less a $0.8 million decrease in income from discontinued operations.
Ivanhoes results for the first six months of 2007 are contained in the unaudited Consolidated
Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of
Operations, available on the SEDAR website at www.sedar.com and Ivanhoes website at
www.ivanhoemines.com.
QUALIFIED PERSONS
Disclosure of a scientific or technical nature in this MD&A in respect of each of the
following projects of Ivanhoe Mines was prepared by or under the supervision of the qualified
persons (as that term is defined in NI 43-101) listed below:
Mongolia other copper and gold exploration projects: Douglas Kirwin, an employee of Ivanhoe
Mines.
Australia Cloncurry Project: James Heape, an employee of a subsidiary of Ivanhoe Mines.
7
SELECTED QUARTERLY DATA
($ in millions of U.S. dollars, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Jun-30 |
|
Mar-31 |
|
Dec-31 |
|
Sep-30 |
|
|
2007 |
|
2007 |
|
2006 |
|
2006 |
|
Exploration expenses |
|
$ |
(79.1 |
) |
|
$ |
(53.5 |
) |
|
$ |
(70.4 |
) |
|
$ |
(67.3 |
) |
General and administrative |
|
$ |
(5.9 |
) |
|
$ |
(5.2 |
) |
|
$ |
(8.9 |
) |
|
$ |
(6.9 |
) |
Share of income from investment held for sale |
|
$ |
0.0 |
|
|
$ |
0.4 |
|
|
$ |
7.4 |
|
|
$ |
9.0 |
|
Foreign exchange gains (losses) |
|
$ |
6.7 |
|
|
$ |
0.8 |
|
|
$ |
(3.7 |
) |
|
$ |
(0.4 |
) |
Net (loss) from continuing operations |
|
$ |
(78.7 |
) |
|
$ |
(55.4 |
) |
|
$ |
(73.5 |
) |
|
$ |
(68.0 |
) |
Income from discontinued operations |
|
$ |
4.6 |
|
|
$ |
8.6 |
|
|
$ |
4.8 |
|
|
$ |
1.5 |
|
Net (loss) |
|
$ |
(74.2 |
) |
|
$ |
(46.8 |
) |
|
$ |
(68.7 |
) |
|
$ |
(66.5 |
) |
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.21 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.20 |
) |
Discontinued operations |
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
Total |
|
$ |
(0.20 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Jun-30 |
|
Mar-31 |
|
Dec-31 |
|
Sep-30 |
|
|
2006 |
|
2006 |
|
2005 |
|
2005 |
|
Exploration expenses |
|
$ |
(43.7 |
) |
|
$ |
(31.6 |
) |
|
$ |
(41.7 |
) |
|
$ |
(30.5 |
) |
General and administrative |
|
$ |
(6.0 |
) |
|
$ |
(6.4 |
) |
|
$ |
(4.2 |
) |
|
$ |
(5.7 |
) |
Share of income (loss) from investment held for sale |
|
$ |
(2.4 |
) |
|
$ |
4.5 |
|
|
$ |
(0.5 |
) |
|
$ |
8.0 |
|
Foreign exchange gains (losses) |
|
$ |
4.7 |
|
|
$ |
(0.2 |
) |
|
$ |
(0.4 |
) |
|
$ |
7.1 |
|
Net (loss) from continuing operations |
|
$ |
(45.7 |
) |
|
$ |
(31.1 |
) |
|
$ |
(49.8 |
) |
|
$ |
(20.6 |
) |
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 operations |
|
$ |
(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 |
) |
Information contacts:
Investors: Bill Trenaman: +1.604.688.5755 / Media: Bob Williamson: +1.604.688.5755
Forward-Looking Statements Certain statements made herein, including statements relating
to matters that are not historical facts and statements of our beliefs, intentions and expectations
about developments, results and events which will or may occur in the future, which constitute
forward-looking information within the meaning of applicable Canadian securities legislation and
forward-looking statements within the meaning of the safe harbor provisions of the United
States Private Securities Litigation Reform Act of 1995. Forward-looking information and
statements are typically identified by words such as anticipate, could, should, expect,
seek, may, intend, likely, plan, estimate, believe and similar expressions suggesting
future outcomes or statements regarding an outlook. 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; the expected timing and outcome of Ivanhoe Mines discussions with
representatives of the Government of Mongolia for an Investment Agreement in respect of the Oyu
Tolgoi Project; the estimated timing and cost of bringing the Oyu Tolgoi Project into commercial
production; anticipated future production and cash flows; target milling rates; the impact of
amendments to the laws of Mongolia and other countries
8
in which Ivanhoe Mines carries on business;
the timing for completion of the 2007 IDP and changes in mine plan contemplated thereunder; the
timing of commencement of full construction of the Oyu Tolgoi
Project; the completion of an updated mine plan for the Ovoot Tolgoi Project;; and other statements
that are not historical facts.
FORM 52-109F2 CERTIFICATION OF INTERIM FILINGS
I, John Macken, President and 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 ending June 30, 2007; |
|
|
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; |
|
|
4. |
|
The issuers other certifying officers and I are responsible for establishing and
maintaining disclosure controls and internal control over financial reporting for the
issuer, and we have: |
|
(a) |
|
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; and |
|
|
(b) |
|
designed such internal control over financial reporting, or caused it
to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with the issuers GAAP; and |
|
5. |
|
I have caused the issuer to disclose in the interim MD&A any change in the issuers
internal control over financial reporting that occurred during the issuers most recent
interim period that has materially affected, or is reasonably likely to materially affect,
the issuers internal control over financial reporting. |
Date: August 10, 2007
|
|
|
John Macken
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
Ivanhoe Mines Ltd. |
|
|
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 ending June 30, 2007; |
|
|
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; |
|
|
4. |
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The issuers other certifying officers and I are responsible for establishing and
maintaining disclosure controls and internal control over financial reporting for the
issuer, and we have: |
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(a) |
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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; and |
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(b) |
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designed such internal control over financial reporting, or caused it
to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with the issuers GAAP; and |
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5. |
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I have caused the issuer to disclose in the interim MD&A any change in the issuers
internal control over financial reporting that occurred during the issuers most recent
interim period that has materially affected, or is reasonably likely to materially affect,
the issuers internal control over financial reporting. |
Date: August 10, 2007
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Tony Giardini
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Chief Financial Officer |
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Ivanhoe Mines Ltd. |
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