Ivanhoe Mines (TSX:IVN)(NYSE:IVN)(NASDAQ:IVN) today announced its
results for the quarter ended September 30, 2011. All figures are
in US dollars, unless otherwise stated.
HIGHLIGHTS DURING THE QUARTER AND SUBSEQUENT WEEKS
-- Overall construction at Oyu Tolgoi continues to advance on budget and
reached a 54.4% level of completion at the end of Q3'11. Key elements of
the project, including the concentrator complex, primary crusher and
tailings-thickening ponds, remain ahead of schedule. Total capital
invested in the project to the end of Q3'11 was approximately $3.2
billion. Facilities required for first ore production in mid-2012 remain
on schedule and commercial production is expected to commence in the
first half of 2013.
-- Pre-stripping for the phase-one open-pit mine on the gold-rich Southern
Oyu deposits at Oyu Tolgoi began in August 2011. By the end of Q3'11,
approximately 1.3 million tonnes of overburden material had been moved.
-- The development of the first lift of the phase-two underground block-
cave mine at the Hugo North Deposit continued successfully during Q3'11.
Lateral mine development 1,300 metres below surface at Hugo North is on
schedule, achieving an advance during Q3'11 of 1,187 metres, for a total
of 9,126 metres completed since tunnelling started in 2008.
-- Construction of Shaft #2 infrastructure is progressing well. The
headframe and ancillary buildings were 59.9% complete at the end of
Q3'11. Sinking of the shaft is expected to commence in the second half
of November 2011.
-- Oyu Tolgoi's site-based construction workforce was approximately 14,760
at the end of Q3'11, with approximately 11,680 working on site each day
and the balance on leave. Approximately 7,820 Mongolians were employed
at the Oyu Tolgoi site, with an additional 3,300 Mongolians
participating in offsite training and educational programs. These
Mongolian employees will form the bulk of the eventual production
workforce.
-- In May 2011, the Oyu Tolgoi Project received the final approvals
required to proceed with construction of a 220-kilovolt power
transmission line from Oyu Tolgoi along a 95- kilometre route south to
the Mongolia-China international border. Construction of the
transmission towers was completed in October 2011 and the stringing of
power cables is expected to commence in spring 2012. The transmission
line is planned to be extended across the Mongolian border by Chinese
contractors to tie into the neighbouring Inner Mongolian electrical grid
in China.
-- Discussions between the Mongolian and Chinese governments were held
during Q2'11 and Q3'11 and are expected to conclude a bilateral
agreement that would secure the supply of initial electrical power from
China. Subject to negotiations and final agreement, the remaining
permits, commercial arrangements and power-purchase tariffs are expected
to be expedited to ensure that imported power will be available at the
Oyu Tolgoi site by Q3'12. In the meantime, additional diesel-powered
generating capacity has been approved to meet the project's requirements
during the remaining stages of construction.
-- During Q3'11, Ivanhoe Mines' 58%-owned subsidiary, SouthGobi Resources
(TSX:SGQ)(HK:1878), reported coal sales of $60.5 million from its Ovoot
Tolgoi mine in southern Mongolia, representing approximately 1.37
million tonnes of coal sold to customers in China at an average realized
price (before royalties and selling fees) of approximately $54 per
tonne.
-- Ivanhoe Mines' 59%-owned subsidiary, Ivanhoe Australia
(TSX:IVAN)(ASX:IVA), continues to advance its copper, gold, molybdenum
and rhenium mine development projects in the Cloncurry region of
Queensland. The Osborne copper and gold project is scheduled to begin
initial production in the first half of 2012; construction of the
decline to access the Merlin molybdenum and rhenium deposit had
progressed to 1,438 metres by the end of Q3'11.
-- Altynalmas Gold, 50%-owned by Ivanhoe Mines, is continuing its drilling
program designed to further delineate and upgrade resources and reserves
to NI 43-101 standards at the Kyzyl Gold Project in Kazakhstan.
Altynalmas Gold is proceeding to advance the development of the project
following the completion of a pre-feasibility study in 2010.
-- In Q3'11, Ivanhoe Mines recorded net income of $7.3 million ($0.01
per share), compared to a net loss of $24.9 million ($0.05 per
share) in Q3'10, which was an increase of $32.2 million. Results for
Q3'11 mainly were affected by $79.6 million in exploration expenses,
$54.0 million in cost of sales, $21.4 million in general and
administrative expenses, $35.6 million in foreign exchange losses, a
$19.3 million share of loss of significantly influenced investees, a
$9.1 million loss from discontinued operations and $1.9 million in
interest expense. These amounts were offset by coal revenue of $60.5
million, a $62.1 million change in the fair value of embedded
derivatives, a $103.0 million gain on settlement of a long-term note
receivable, and $5.3 million in interest income.
MONGOLIA
OYU TOLGOI COPPER-GOLD-SILVER PROJECT (66%-owned by Ivanhoe
Mines)
Construction of the Oyu Tolgoi copper-gold-silver complex
advancing toward planned start of commercial production in the
first half of 2013
The Oyu Tolgoi Project initially is being developed as an
open-pit operation, with the first phase of mining to start at the
near-surface Southern Oyu deposits, which include Southwest Oyu and
Central Oyu. A copper concentrator plant, related facilities and
necessary infrastructure that will support an initial throughput of
100,000 tonnes of ore per day are being constructed to process ore
scheduled to be mined from the Southern Oyu open pit. Commercial
production of copper-gold-silver concentrate is projected to begin
in the first half of 2013.
Along with the surface activities, an 85,000-tonne-per-day
underground block-cave mine also is being developed at the Hugo
North Deposit, with initial production expected to begin in 2015.
The throughput capacity of the concentrator plant is expected to be
expanded up to approximately 160,000 tonnes of ore per day when the
underground mine begins production.
Fluor Corporation is in charge of overall Oyu Tolgoi program
management, as well as services related to engineering, procurement
and construction management for the ore processing plant and
mine-related infrastructure, such as roads, water supply, a
regional airport and administration buildings.
Current operations activities related to the phase-one
concentrator are focused on finalizing the operational readiness
plan. Detailed commissioning, operation and maintenance plans are
being developed for all the components of the concentrator
circuits. Representatives of various manufacturers and engineering
groups are assisting with the preparation of the operational
readiness plan. Pre-stripping for the open-pit mine began in early
August 2011; assembly of the mining fleet is continuing.
In early May 2011, the Oyu Tolgoi Project received the final
approvals required to proceed with construction of a 220-kilovolt
power transmission line from Oyu Tolgoi along a 95-kilometre route
south to the Mongolia-China international border. The construction
approval from Mongolia's Energy Regulatory Authority and a land-use
contract from the governor of Khanbogd soum (township), which
includes Oyu Tolgoi, now have been received. Both are key to the
plan to import electrical power from China to operate the Oyu
Tolgoi complex during its initial four years of commercial
production. Contracts have been awarded to Mongolian companies for
construction of the power transmission line to the border.
Construction of the towers to the Mongolian border was completed in
October 2011 and line stringing is expected to commence in spring
2012. The transmission line is planned to be extended across the
Mongolian border by Chinese contractors to tie into the
neighbouring Inner Mongolian electrical grid in China.
Discussions between the Mongolian and Chinese governments were
held during Q2'11 and Q3'11 and are continuing toward the objective
of concluding a bilateral agreement that would secure the supply of
electrical power from China. Subject to negotiations and final
agreement, the remaining permits, commercial arrangements and
power-purchase tariffs are expected to be expedited to ensure that
imported power will be available at the Oyu Tolgoi site by Q3'12.
In the meantime, additional diesel- powered generating capacity has
been approved to meet the project's requirements during the
remaining stages of construction.
The long-term Investment Agreement for the development and
operation of Oyu Tolgoi, signed by Ivanhoe Mines, Rio Tinto and the
Government of Mongolia on October 6, 2009, recognized that the
reliable supply of electrical power is critical to the project and
that Ivanhoe Mines has the right to obtain electrical power from
inside or outside Mongolia, including China, to meet its initial
electrical power requirements. The agreement also established a)
that Ivanhoe Mines has the right to build or sub- contract
construction of a coal-fired power plant at an appropriate site in
Mongolia's South Gobi Region to supply Oyu Tolgoi; and b) that all
of the project's power requirements would be sourced from within
Mongolia no later than four years after Oyu Tolgoi begins
commercial production. In November 2011, the Mongolian Government
passed a cabinet resolution allowing for the future construction by
Oyu Tolgoi LLC of a dedicated coal-fired power plant in Mongolia
for the project.
Oyu Tolgoi LLC is finalizing a study of alternative
power-generation arrangements that could be implemented if it
became apparent that interim imported power would not be available
by Q3'12. To date, the study demonstrates that advancing the
construction of a coal-fired power plant in Mongolia would be the
most appropriate option.
A dedicated coal-fired power plant would require certain
Mongolian Government permits, the negotiation of commercial
agreements with the Mongolian Government and coal suppliers and the
arrangement of financing for the accelerated construction. If
necessary, such an approach would impact the Oyu Tolgoi
construction schedule and adversely affect the project's ability to
achieve full commercial production in 2013, as planned. Although
construction of a power plant is expected as part of the Oyu Tolgoi
Project's future development, there is no provision for a plant in
the current capital cost estimates for 2011 and 2012 and the
financing that would be required is not contemplated as part of the
Company's current financing plan. The Heads of Agreement signed
with Rio Tinto in December 2010 provided that if construction of a
50-megawatt or greater power plant was started before January 1,
2015, the construction would be funded by loans from Rio Tinto,
with 40% of the outstanding balance to be repaid in 2015 and the
remainder in 2016.
Overall construction of the Oyu Tolgoi Project was 54.4%
complete at the end of Q3'11
Overall construction reached a 54.4% level of completion at the
end of Q3'11. Total capital invested in the project by the end of
Q3'11 was approximately $3.2 billion. Overall construction is
projected to be over 70% complete by the end of 2011.
Major updates for Q3'11 and plans for Q4'11 include:
-- Pre-stripping of overburden began in August 2011 as part of the
construction of the phase-one open-pit mine to recover ore from the
Southern Oyu deposits. At the end of Q3'11, approximately 1.3 million
tonnes of material had been moved.
-- The development of the first lift of the phase-two underground block-
cave mine at the Hugo North Deposit continued successfully during Q3'11.
Lateral mine development 1,300 metres below surface at Hugo North is on
schedule and achieved an advance during Q3'11 of 1,187 metres, for a
total of 9,126 metres completed since tunnelling started in 2008.
-- Shaft #2 construction is progressing well. The headframe and ancillary
buildings were 59.9% complete at the end of Q3'11. Preparations are
underway for sinking, which is expected to begin in November 2011.
-- Oyu Tolgoi's site-based construction workforce was approximately 14,760
at the end of Q3'11, with approximately 11,680 working on site each day
and the balance on leave. Approximately 7,820 Mongolians were employed
at the Oyu Tolgoi site, with an additional 3,300 Mongolians
participating in offsite training and educational programs. These
Mongolian employees will form the bulk of the eventual production
workforce, particularly in the open-pit operations.
-- Construction of the concentrator was 56.2% complete at the end of Q3'11.
The structural steel and the cladding for the concentrator building
reached substantial completion during Q3'11 (except where openings are
needed for equipment installation). The shells for SAG mill #2 and for
ball mills #3 and #4 were assembled; heads for the mills were installed;
and trunnion bearings were installed for ball mill #3.
-- Progress of the construction of offsite facilities and infrastructure
reached 52.8% at the end of Q3'11, which was slightly behind the plan of
54.1%. The cumulative shortfall was due to delays with the Oyu Tolgoi-
Gashuun Sukhait road to the Mongolia-China border and the Khanbumbat
permanent airport, and the decision to defer until spring 2012 the
stringing of cables on the power line to the Mongolia-China border.
Facilities required for the production of the first ore are on schedule.
-- A diesel management study is underway to review options for onsite and
offsite storage of diesel fuel to ensure reliability of supply. An
initial indication of the study proposes an additional five-million-
litre storage facility on site.
-- Non-binding concentrate sales memorandums of understandings with two
large Chinese smelters and two international trading companies were
agreed to during Q3'11. Contracts are expected to be finalized with the
smelters and trading companies during the next several months. Most of
the concentrate initially produced at Oyu Tolgoi is expected to be
delivered to customers in China.
Phase one construction on budget
In December 2010, Ivanhoe Mines announced that a $2.3 billion
capital budget had been approved for 2011 - the peak year of
construction activity on the first phase of the Oyu Tolgoi Project.
In addition to the $2.3 billion capital budget, approval also was
received for an additional $150 million budget for operation of the
Ulaanbaatar office during 2011 and $100 million for the second tax
prepayment that was made to the Mongolian Government in June 2011.
At the end of Q3'11, $2.2 billion had been spent in 2011, which was
slightly over the budget of $2.1 billion due to the strategy of
bringing forward certain activities into 2011.
Capital required from January 1, 2011, through to completion of
the phase-one, 100,000-tonne-per-day project and the commencement
of commercial production scheduled for 2013 is expected to total
approximately $4.5 billion. This estimate includes approximately
$280 million in remaining contingencies; no provision has been made
for foreign exchange variances or cost increases on construction
commitments that may be incurred.
The Oyu Tolgoi 2012 budget is expected to be reviewed and
approved in December 2011 by the Oyu Tolgoi Board of Directors and
the Ivanhoe Mines Board of Directors. The 2012 budget is expected
to be in line with the costs estimated for 2012 in the overall
phase-one budget, taking into account some shifts in timing of
certain activities.
Capital invested in phase-one construction to support future
expansion
The engineering and construction stages have recognized the need
to accommodate a major increase in ore-processing capacity in the
future, while minimizing potential disruption to operations that
will be underway at that time.
Wherever possible, Oyu Tolgoi has taken the opportunity to allow
for expansion with minimal impact on operations. Oyu Tolgoi's plans
call for initial production of 100,000 tonnes of ore per day, which
is expected to increase up to approximately 160,000 tonnes per day
when ore from the underground mine becomes available. To facilitate
this expansion, Oyu Tolgoi has constructed a third ore-reclaim
tunnel that will increase the capacity to feed ore to the
concentrator by 50-60% over the initial rate of production. To
cater to future increased production, a pipeline has been installed
that, with minor modifications, could supply water for processing
up to 160,000 tonnes a day. Oyu Tolgoi also has allowed for
expansion in the concentrator by adding space in the flotation area
and installing other equipment to handle higher production rates.
Studies examining options to process additional ore are
ongoing.
Pre-stripping of open-pit mine started as planned in Q3'11
Pre-stripping of overburden to gain access to ore in the
phase-one open-pit mine began on schedule in August 2011. Work
began with the construction fleet hauling clay material to the
tailing-storage facility and the infrastructure projects, including
roads, laydowns and access ramps. Commissioning of the initial
open-pit mining fleet began in September 2011 with the release of
the first Bucyrus RH340 hydraulic shovel and Komatsu 930E haul
trucks. Deliveries of heavy mobile equipment, assembly and
commissioning are ongoing and all operational-readiness activities
are on schedule. The full fleet of 28 trucks is expected to be in
operation in August 2012.
Underground development of Hugo North Mine proceeding on
schedule
The development of the first lift of the phase-two underground
block-cave mine at the Hugo North Deposit continued successfully
during Q3'11. Lateral mine development 1,300 metres below surface
at Hugo North is on schedule.
The first ventilation raise pilot-hole broke through to the
1,300-metre level in Q2'11. Initial reaming from the 1,300-metre
level has proven difficult and additional concrete grouting is
being undertaken to stabilize the ground. Work has begun on two
more ventilation raise holes that will provide additional air flow
to the underground workings and help to increase lateral
development performance. The underground development of Shaft #1 is
expected to connect with the bottom of Shaft #2 in early 2013 and
production from the first lift of the Hugo North block-cave mine is
scheduled to begin in 2015.
Rio Tinto working with Ivanhoe Mines to complete international
project-finance package of up to $4.0 billion
Ivanhoe Mines, Rio Tinto, a core lending group and their
respective advisers are working together to finalize an approximate
$4.0 billion project-finance facility for the Oyu Tolgoi Project,
with the objective of signing loan documentation in early
Q2'12.
The initial core lending group of Mandated Lead Arrangers is
comprised of European Bank for Reconstruction and Development,
International Finance Corporation, Export Development Canada, BNP
Paribas and Standard Chartered Bank. USExim Bank - together with
its adviser, Standard Bank - Multilateral Investment Guarantee
Agency, a member of the World Bank Group and the Australian Export
Finance and Insurance Corporation recently joined the lender group
and have begun their due diligence processes with a view to
supporting the financing.
Recent meetings with lenders also were attended by Erdenes MGL
LLC, the Mongolian state-owned shareholder that owns 34% of Oyu
Tolgoi LLC, and representatives from Oyu Tolgoi LLC.
Preparation of a term sheet outlining the main terms and
conditions common to all lenders is well advanced. Lenders have
built a financial model and are expected to finalize their
technical, marketing, financial, legal, insurance, environmental
and social due diligence later this year.
During Q3'11, project finance activities focused on the
following:
-- Completion tests. A meeting was held with lender representatives and the
outcome was a tentatively agreed position on outstanding issues. This
agreement remains subject to further discussions, most particularly the
finalization of covenant ratios associated with the financial model.
On other outstanding term sheet points, the scope of certain
financial definitions and ratios, sponsor covenants and permitted
Rio Tinto senior debt remain outstanding; however, finalization of
the completion tests likely also will involve finalization of
definitions and ratios at a minimum. Progress on reporting
requirements was made during Q3'11, with drafts exchanged between
Oyu Tolgoi LLC and the lender group.
-- Working capital facility. Progress was made in finalizing a term sheet
with four main Mongolian banks for an unsecured working capital facility
for Oyu Tolgoi LLC. The term sheet will be discussed with the Mongolian
banks in Q4'11 in conjunction with an update on the project financing to
be presented to the Oyu Tolgoi LLC board by the project finance team.
Although not central to the financing plan, the Mongolian facility is
seen as an important aspect, providing the Mongolian banks with the
opportunity to participate in the financing of Oyu Tolgoi.
-- With financial close approaching, discussion on the syndication strategy
commenced during Q2'11. Ivanhoe Mines and Rio Tinto were presented with
a proposal by a commercial bank to underwrite a significant portion of
the project finance debt in syndication. Ivanhoe Mines and Rio Tinto are
reviewing the proposal.
-- Environmental Social Impact Assessment (ESIA). The ESIA is nearing
completion, with an objective of seeking Oyu Tolgoi LLC Board of
Directors approval in Q4'11.
-- Other due diligence work streams are progressing and do not currently
pose any issues for the project financing.
Prior to first drawdown, it is expected that Ivanhoe Mines will
utilize a $1.8 billion interim funding facility provided by Rio
Tinto as bridge financing. This facility will be repaid from the
first drawdown of the project finance facility.
Final terms of a third-party project-finance facility for the
Oyu Tolgoi Project remain subject to the approval of the Oyu Tolgoi
LLC Board of Directors, the Ivanhoe Mines Board of Directors and
the joint Ivanhoe Mines-Rio Tinto Technical Committee.
Skills training and community programs well advanced
The Oyu Tolgoi Project's staffing strategy continues to rely on
the employment and training of Mongolian nationals throughout the
construction phase. At the end of Q3'11, more than 13,000
Mongolians were working on the project with 69 contractor
companies. Approximately 370 Mongolians are contracted to Oyu
Tolgoi as trainees and are developing operator and maintenance
skills, required for Oyu Tolgoi's scheduled start-up in 2012, at
four selected Mongolian technical and vocational education training
(TVET) schools and two major original equipment manufacturer (OEM)
vendor companies, Transwest and Wagner Asia. In addition, more than
3,300 Mongolians are participating in a special government employee
training scheme funded by Oyu Tolgoi that is further adding to the
overall skills development pool.
Oyu Tolgoi has committed more than $85 million in funding over
five years toward technical and vocational training in
Mongolia.
Support for Investment Agreement reaffirmed
During Q3'11, 20 members of Mongolia's 76-seat national
parliament petitioned the government to pursue changes to the Oyu
Tolgoi Investment Agreement ahead of Mongolia's general election
set for June 2012. The MPs wanted to accelerate the timing of the
government's option to increase its current 34% interest in Oyu
Tolgoi to 50%, which is permitted after 30 years under provisions
of the 2009 Investment Agreement. After being invited by the
government to discuss potential changes to the Investment
Agreement, Ivanhoe Mines and Rio Tinto advised the government that
they were not prepared to renegotiate terms of the agreement. Any
change would require written consent of all three parties.
Following discussions, the government, Ivanhoe Mines and Rio Tinto
issued a joint statement on October 6, 2011, reaffirming their
continued support for the Investment Agreement. The statement said,
in part: "All stakeholders, investors, lenders, employees,
contractors, civil society and local communities can have full
confidence in the future of Oyu Tolgoi."
Exploration drilling continued in Q3'11
Ivanhoe Mines continued its drilling program on the Oyu Tolgoi
Project during Q3'11 with 12,322 metres of surface resource geology
drilling (including geotechnical and mine-development investigation
holes), 1,517 metres of underground geotechnical drilling and 6,291
metres of surface exploration diamond drilling.
Four drill rigs currently are conducting surface exploration
drilling at Oyu Tolgoi. Two rigs are focused on delineating an
initial resource estimate for the Heruga North Deposit, a
2.5-kilometre, mineralized extension of the Heruga Deposit,
stretching north from the southern border of the Oyu Tolgoi mining
licence to the Southern Oyu deposits.
One rig tested the northern extension to the Hugo Dummett ore
body, approximately 150 metres north of the last significant copper
and gold mineralization. The fourth rig is testing the Javkhlant
prospect at the southwestern end of the Oyu Tolgoi mineralized
trend.
Detailed geological mapping also is being conducted in the area
east of the Javkhlant prospect. A five-kilometre-long
north-east-trending belt of Devonian cover rocks has been
recognized. A detailed ground magnetometer survey was completed
over the same area to better define the geology.
Exploration at Ulaan Khud North (50% owned)
Copper-molybdenum-gold zone being drilled on Ivanhoe-BHP
Billiton joint-venture licence
In March 2011, Ivanhoe Mines and BHP Billiton discovered a new
zone of shallow copper-molybdenum-gold mineralization approximately
10 kilometres north of the Oyu Tolgoi Project. The discovery, known
as Ulaan Khud North, extended the known strike length of the Oyu
Tolgoi structural corridor by an additional three kilometres to the
north, to total more than 23 kilometres.
Ulaan Khud North is located on a 19,625-hectare exploration
licence that is part of Ivanhoe Mines' jointventure partnership
with BHP Billiton, formed in 2005. BHP Billiton has earned a 50%
interest in the joint venture, which includes the Ulaan Khud North
property, by spending $8 million in exploration costs.
A 3-D induced polarization survey commenced in May 2011 and
identified five geophysical targets. Drilling commenced in July
2011 and by the end of Q3'11 a total of 6,878 metres of diamond
drilling and 1,321 metres of drilling had been completed in 19
holes.
MONGOLIA
SOUTHGOBI RESOURCES (58% owned)
Ongoing expansion of SouthGobi's Ovoot Tolgoi coal mine
SouthGobi continues to mine and sell coal produced at its Ovoot
Tolgoi Mine in Mongolia's South Gobi Region, approximately 40
kilometres north of the Shivee Khuren-Ceke crossing at the
Mongolia-China border.
In Q3'11, SouthGobi had sales of approximately 1.37 million
tonnes of coal at an average realized selling price (before
royalties and selling fees) of approximately $54 per tonne. This
was an improvement over the sale of approximately 190,000 tonnes in
Q3'10 at an average realized selling price (before royalties and
selling fees) of $37 per tonne. Revenue (net of royalties and
selling fees) increased from $6.6 million in Q3'10 to a quarterly
record of $60.5 million in Q3'11 due to the increased sales volumes
and increased selling prices for individual coal types (a 45%
increase for raw semi-soft coking coal and a 57% increase for raw
higher-ash coal).
SouthGobi is subject to a 5% royalty on all coal sold based on a
set reference price per tonne published monthly by the Government
of Mongolia. Effective January 1, 2011, SouthGobi also is subject
to a sliding scale additional royalty of up to 5% based on the set
reference price of coal. Based on the reference price for the
Q3'11, SouthGobi was subject to an average 9% royalty, based on a
weighted average reference price of $102 per tonne. SouthGobi's
effective royalty rate for Q3'11, based on its average realized
sales price of $54 per tonne, was 16%.
Cost of sales of $54.0 million for Q3'11 was $39.1 million
higher than Q3'10 ($14.9 million). Cost of sales is comprised of
the cost of the product sold, inventory write-downs, mine
administration costs, equipment depreciation, depletion of
pre-production stripping costs and stock-based compensation costs.
The increase from 2010 is largely due to the significantly higher
sales volume.
Commissioning of a dry coal-handling facility at the Ovoot
Tolgoi Mine is expected before the end of 2011. The facility
includes a 300-tonne-capacity dump hopper, which will receive
run-of-mine coal and feed a rotary breaker that will size the coal
to a maximum of 50 millimetres and reject oversize ash. The
facility also will include dry-air separation as an additional
stage, through the insertion of dry-air separation modules, and is
expected to be completed by mid-2012.
AUSTRALIA
IVANHOE AUSTRALIA (59% owned)
Ivanhoe Australia continues to progress its four main projects -
the Osborne copper-gold project, the Merlin molybdenum and rhenium
project, the Mount Elliott copper-gold project and the Mount Dore
cathode copper project. All the projects are on granted mining
leases.
During Q3'11, work focused on preparation for production at the
Osborne and Kulthor mines and Osborne Processing Complex,
construction of the Merlin decline and finalizing the Merlin,
Osborne Copper-Gold and Mount Dore studies.
Ivanhoe Australia incurred exploration expenses of $47.1 million
in Q3'11, compared to $15.7 million in Q3'10. The $31.4 million
increase was largely due to work on the Merlin decline tunnel,
underground work at the Osborne and Kulthor deposits and work on
the various ongoing studies.
Copper-gold production expected in 2012
During Q3'11, Ivanhoe Australia released preliminary results
from the Osborne Copper-Gold study, followed by the release of the
final results on October 28, 2011, and the filing of the NI 43-101-
compliant report on SEDAR (www.sedar.com). The Preliminary Economic
Assessment (a Canadian NI 43-101-compliant technical report)
evaluated ore sources only for an initial four-year period. Ore
included in the initial mine plan is to be sourced from the
Osborne, Kulthor and Starra 276 underground mines and the Osborne
open pit. The scheduled start of production from Osborne in the
first half of 2012 will be an important strategic step for Ivanhoe
Australia, advancing Ivanhoe Australia's status from explorer to
producer.
During Q3'11, a total of 994 metres were advanced on underground
development work at Osborne and Kulthor, increasing the total to
1,290 metres. Access to the Kulthor Deposit was achieved in late
August 2011 and access to the first two production levels was
achieved later in Q3'11. At Osborne, the decline development
continued and access was completed to two of the three planned
production levels. Refurbishment work continued on the Osborne
concentrator and shaft area. All major works are expected to be
completed in late December 2011.
Merlin molybdenum and rhenium development study
The Merlin molybdenum and rhenium deposit is the lower-most
mineralized zone in the Mount Dore Deposit, starting near the
surface and dipping east at between 45 and 55 degrees. To date,
drilling has defined mineralization to vertical depths ranging from
60 to 580 metres and over a strike length of 1,000 metres. The
overall mineralized zone at Merlin has an average true width of 3.9
metres and ranges between two and 20 metres. The mineralization
zone consists of high-grade breccias and a lower- grade, generally
thicker, disseminated zone. Mineralization thins to the north,
where the copper, zinc and gold content increases, while to the
south it flattens and pinches out. The Little Wizard Deposit
represents the southern-most extent of the Merlin molybdenum
mineralization of economic interest found to date.
At the end of Q3'11, construction of the Merlin decline was on
schedule and budget. The decline face had progressed to 1,439
metres. Cross-cut developments to the ventilation raises also were
completed during Q3'11. Work began on an access drive into the
Little Wizard Deposit, designed to obtain bulk samples for
metallurgical and roaster testwork and to better understand the
geotechnical aspects of the deposit, which is expected to be
completed in Q4'11.
Equity Issuance
In September 2011, Ivanhoe Australia announced that it would
raise up to A$150 million of net proceeds and extinguish
approximately A$30.6 million of debt owed to Ivanhoe Mines. Ivanhoe
Australia has issued approximately A$180 million of new, fully-paid
ordinary shares to institutional, sophisticated and accredited
investors, including Ivanhoe Mines, at A$1.39 (Cdn$1.41) per share.
The placement was completed in two tranches.
In September 2011, Ivanhoe Australia received approximately A$88
million from the institutional placement. Upon closing this
tranche, Ivanhoe Mines' interest in Ivanhoe Australia was reduced
from 62.0% to 53.7%.
The remaining A$92 million from Ivanhoe Mines then was received
on November 9, 2011, following approval in a vote at an
extraordinary general meeting held on November 8, 2011. Following
completion of the share purchase, Ivanhoe Mines now owns 59% of
Ivanhoe Australia.
KAZAKHSTAN
Kyzyl Gold Project (50% owned)
Altynalmas Gold holds 100% ownership of the Kyzyl Gold Project
in northeastern Kazakhstan. The Kyzyl Gold Project contains the
Bakyrchik and Bolshevik gold deposits, as well as a number of
satellite deposits. Altynalmas Gold is proceeding to advance the
development of the Kyzyl Gold Project following the successful
completion of the pre-feasibility study in 2010.
Exploration continuing with 20,000 metres of drilling planned
for Q4'11
Altynalmas Gold is continuing its drilling program that is
designed to further delineate resources at the Kyzyl Gold Project.
A total of 26,729 metres were drilled during Q3'11, making a total
of 69,396 metres to date this year. Of this, 17,454 metres were
drilled on the Bakyrchik Mining Lease (60,121 metres for the year
to date), focusing on exploring the down-dip extensions of known
gold resources, as well as on the flanks of known gold lenses. The
remaining 9,275 metres were drilled on the Bakyrchik Exploration
Licence as Altynalmas Gold commenced the delineation of numerous
satellite deposits surrounding the Bakyrchik Deposit.
For the remainder of 2011, an additional 2,500 metres are
planned to be drilled on the Mining Lease and a further 17,500
metres are planned on the Exploration Licence.
Mine optimization underway
A feasibility study for the Kyzyl Gold Project was received from
Fluor Canada Ltd. in September 2011. Altynalmas Gold is proceeding
with an optimization study phase prior to the release of a NI
43-101-compliant technical report expected to be completed in early
2012. The optimization study is being conducted in conjunction with
further engineering work and further test work on the process of
stabilization of wastes containing arsenic. Tender requests have
been circulated by Altynalmas Gold for the fabrication of certain
long-lead mining equipment.
OTHER DEVELOPMENTS
Rio Tinto's stake in Ivanhoe Mines increases to 49.0%
In August 2011, Ivanhoe Mines received $535.9 million (Cdn$529.5
million) from Rio Tinto following Rio Tinto's decision to exercise
its subscription right to acquire an additional 27,896,570 common
shares of Ivanhoe Mines. The acquisition raised Rio Tinto's
interest in Ivanhoe Mines from 46.5% to 48.5%. The price paid per
share was Cdn$18.98. The subscription right was granted to Rio
Tinto as a part of the terms of the December 2010 Heads of
Agreement negotiated between Ivanhoe Mines and Rio Tinto.
In September 2011, Rio Tinto purchased an additional 3,700,000
common shares of Ivanhoe Mines through a privately negotiated share
purchase agreement for Cdn$73.1 million. The price paid per share
was Cdn$19.75. The acquisition raised Rio Tinto's interest in
Ivanhoe Mines from 48.5% to 49.0%.
Rio Tinto's combined investment in Ivanhoe Mines since October
2006 amounts to approximately $4.2 billion through the purchase of
shares, the exercise of warrants and a converted debt facility.
Arbitration update
The arbitration proceeding between Ivanhoe Mines and Rio Tinto
regarding Ivanhoe Mines' Shareholder Rights Plan resumed during
June 2011 following the expiry of a six-month suspension that was
agreed upon by the companies as part of the Heads of Agreement
signed in December 2010.
Ivanhoe Mines is confident that the rights plan, overwhelmingly
supported by 95% of the votes cast by its minority shareholders in
May 2010, is not in breach of any of Rio Tinto's existing
contractual rights. Ivanhoe Mines is committed to vigorously
protecting the rights of all of its shareholders and has received
very strong support from institutional shareholders for its
insistence that all shareholders be treated fairly during any
takeover bid.
Ivanhoe Mines submitted a statement of defence in October 2010
that rejected Rio Tinto's claim and also filed a counter-claim
contending that Rio Tinto had breached certain covenants in its
October 2006 private placement agreement with Ivanhoe Mines (the
PPA). Rio Tinto has filed a statement of defence to the Ivanhoe
Mines counterclaim.
Hearings began before the arbitrator on October 4, 2011 and
concluded on November 4, 2011. A ruling is expected in December
2011.
Standstill Covenant
Following its purchase of an additional 3,700,000 common shares
of Ivanhoe Mines in September 2011, Rio Tinto's ownership in
Ivanhoe Mines is now at the maximum permitted level of 49.0% (the
Standstill Cap) until the current standstill limitation expires on
January 18, 2012. Prior to that time, Rio Tinto is prohibited,
subject to certain exceptions, from engaging in certain specified
activities (including acquiring additional common shares or making
a takeover bid for the Company's outstanding common shares).
The only exceptions to the Standstill Cap are acquisitions
pursuant to Rio Tinto's existing right of first offer (the ROFO)
under the PPA, its right of first refusal on Robert Friedland's
common shares, and as set out in Section 6.3 of the PPA. The
Standstill Cap will remain in effect until January 18, 2012,
subject to earlier termination (i) in certain specified
circumstances if Rio Tinto exercises its ROFO under the PPA, (ii)
if the Company commits a significant breach of the RT/IVN
Governance Agreement (as defined below), or (iii) if the Company
appoints to its Board of Directors any individual who is not a Rio
Tinto nominee under Part 4 of the PPA or a current director of the
Company.
After that date, Rio Tinto is free to engage in the currently
prohibited activities if it so chooses, subject to the provisions
of its contractual agreements with Ivanhoe Mines and the provisions
of the Shareholder Rights Plan (assuming it is upheld in the
arbitration proceeding discussed above, and not waived by the
Ivanhoe Mines board with respect to a third-party bid that does not
qualify as a Permitted Bid as defined in the Shareholder Rights
Plan). Rio Tinto has agreed that prior to the expiry or termination
of the Standstill Cap and subject to certain exceptions it will not
exercise its voting rights to increase its representation on the
Company's Board of Directors beyond a number of directors
proportionate to its shareholding from time to time.
After the expiry or termination of the Standstill Cap, or upon a
change of control of the Company in favour of Rio Tinto, (i) one
incumbent Company director (selected by the Company's incumbent
senior management and acceptable to Rio Tinto) who is independent,
but who was not nominated by Rio Tinto pursuant to its rights under
Part 4 of the PPA; and (ii) two incumbent Company directors
(selected by Robert Friedland and acceptable to Rio Tinto)
conditional upon Robert Friedland continuing to own at least 10% of
the Company's outstanding common shares, may remain as directors of
the Company (on a board of 14 directors) and Rio Tinto will
exercise its voting power to vote in favour of the election of such
directors from time to time until the earlier of January 18, 2014,
and the date the Company ceases to be a reporting issuer. Rio Tinto
has also agreed that after the termination or expiry of the
Standstill Cap or upon a change of control of the Company in favour
of Rio Tinto, at least eight of the 14 directors will be
independent until January 18, 2014.
Financial Results
In Q3'11, Ivanhoe Mines recorded net income of $7.3 million
($0.01 per share), compared to a net loss of $24.9 million ($0.05
per share) in Q3'10, which was an increase of $32.2 million.
Results for Q3'11 mainly were affected by $79.6 million in
exploration expenses, $54.0 million in cost of sales, $21.4 million
in general and administrative expenses, $35.6 million in foreign
exchange losses, a $19.3 million share of loss of significantly
influenced investees, a $9.1 million loss from discontinued
operations and $1.9 million in interest expense. These amounts were
offset by coal revenue of $60.5 million, a $62.1 million change in
the fair value of embedded derivatives, a $103.0 million gain on
settlement of a long- term note receivable, and $5.3 million in
interest income.
Exploration expenses of $79.6 million in Q3'11 increased $31.5
million from $48.1 million in Q3'10. Exploration expenses included
$30.1 million spent in Mongolia ($30.4 million in Q3'10), primarily
for Oyu Tolgoi and SouthGobi's Ovoot Tolgoi and Soumber deposits,
and $47.1 million incurred by Ivanhoe Australia ($15.7 million in
Q3'10). Exploration costs are charged to operations in the period
incurred and often represent the bulk of Ivanhoe Mines' operating
loss for that period.
Ivanhoe Mines' cash position, on a consolidated basis at
September 30, 2011, was $1.4 billion. As at November 14, 2011,
Ivanhoe Mines' consolidated cash position was approximately $1.1
billion.
SELECTED QUARTERLY DATA
This selected financial information is in accordance with U.S. GAAP.
($ in millions of dollars, except per share information)
Quarter Ended
--------------------------------
Sep-30 Jun-30 Mar-31 Dec-31
2011 2011 2011 2010
--------------------------------------------------------------------------
Revenue $60.5 $47.3 $20.2 $41.6
Cost of sales (54.0) (49.7) (20.3) (46.4)
Exploration expenses (79.6) (68.6) (46.2) (59.6)
General and administrative (21.4) (19.5) (25.3) (46.4)
Foreign exchange (losses) gains (35.6) 2.3 3.2 6.6
Change in fair value of derivative - - (432.5) 135.7
Gain on settlement of note receivable 103.0 - - -
Change in fair value of embedded
derivatives 62.1 70.4 (36.8) (20.0)
Net income (loss) from continuing
operations 16.4 0.6 (492.5) 37.3
Income (loss) from discontinued operations (9.1) - - -
Net income (loss) 7.3 0.6 (492.5) 37.3
Net income (loss) per share - basic
Continuing operations $0.02 $0.00 ($0.79) $0.07
Discontinued operations ($0.01) $0.00 $0.00 $0.00
Total $0.01 $0.00 ($0.79) $0.07
Net income (loss) per share - diluted
Continuing operations $0.02 $0.00 ($0.79) $0.06
Discontinued operations ($0.01) $0.00 $0.00 $0.00
Total $0.01 $0.00 ($0.79) $0.06
--------------------------------------------------------------------------
Quarter Ended
--------------------------------
Sep-30 Jun-30 Mar-31 Dec-31
2010 2010 2010 2009
--------------------------------------------------------------------------
Revenue $6.6 $17.7 $13.9 $9.9
Cost of sales (14.9) (13.2) (20.3) (8.5)
Exploration expenses (48.1) (39.5) (71.4) (67.2)
General and administrative (15.0) (14.7) (8.3) (15.0)
Foreign exchange gains (losses) 5.3 (4.9) 1.7 2.2
Change in fair value of embedded
derivatives 49.8 72.2 (1.4) (45.0)
Loss on conversion of convertible credit
facility - - (154.3) -
Net income (loss) from continuing
operations (24.9) (30.0) (200.5) (138.7)
Income (loss) from discontinued operations - - 6.6 9.2
Net income (loss) (24.9) (30.0) (193.9) (129.5)
Net income (loss) per share - basic
Continuing operations ($0.05) ($0.06) ($0.44) ($0.32)
Discontinued operations $0.00 $0.00 $0.01 $0.02
Total ($0.05) ($0.06) ($0.43) ($0.30)
Net income (loss) per share - diluted
Continuing operations ($0.05) ($0.06) ($0.44) ($0.32)
Discontinued operations $0.00 $0.00 $0.01 $0.02
Total ($0.05) ($0.06) ($0.43) ($0.30)
--------------------------------------------------------------------------
Ivanhoe Mines' results for the three months ended September 30,
2011, are contained in the unaudited Consolidated Financial
Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations, available on the SEDAR website
at www.sedar.com and Ivanhoe Mines' website at
www.ivanhoemines.com.
Ivanhoe Mines shares are listed on the Toronto, New York and
NASDAQ stock exchanges under the symbol IVN.
QUALIFIED PERSON
Disclosures of a scientific or technical nature in this release
and the Company's MD&A in respect to the Oyu Tolgoi Project
were prepared by, or under the supervision of, Stephen Torr, P.
Geo., an employee of the Company and a qualified person as defined
in NI 43-101.
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, 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," "will," "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;
statements concerning the schedule for carrying out and completing
construction of the Oyu Tolgoi Project; the statement that overall
construction of the Oyu Tolgoi Project is projected to be over 70%
complete by the end of 2011; the statement that commercial
production of copper-gold-silver concentrate is projected to begin
in the first half of 2013; the statements concerning the expected
timing of initial production from the Hugo North block-cave mine in
2015; statements related to the expansion of throughput capacity of
the concentrator; statements concerning possible expansion
scenarios for the Oyu Tolgoi Project; the statement that the
electrical power transmission line stringing is expected to
commence in spring 2012; the statements regarding the plans to
extend the electrical transmission power line from across the
Mongolian border into the Inner Mongolian electrical grid; the
statements concerning the timing and outcome of discussions between
the Mongolian and Chinese governments regarding importing
electrical power from China; the statements concerning the
development of alternative power generation arrangements relating
to the Oyu Tolgoi Project if a timely agreement to secure
electrical power from China is not secured by the Mongolian
Government; the statements concerning the construction of a power
plant at Oyu Tolgoi; statements concerning the anticipated sinking
of Shaft #2; statements regarding the expectation of finalizing
concentrate sales contracts in the next several months; statements
concerning the expected markets for concentrate produced at the Oyu
Tolgoi Project; statements related to the anticipated capital costs
and the phase-one budget of the Oyu Tolgoi Project; statements
concerning the review and approval of the Oyu Tolgoi 2012 by both
the Oyu Tolgoi Board of Directors and the Ivanhoe Mines Board of
Directors; statements concerning the expectation that the 2012
budget is in line with the costs estimated for 2012 in the overall
phase-one budget taking into account some shifts in timing of
certain activities; statements regarding the timing of replacing
the construction fleet with a mining fleet at the Oyu Tolgoi
Project;
the estimated delivery of the first ores from the Southern Oyu
open pit to the concentrator; the schedule of receipt of permits,
commercial arrangements and power-purchase tariffs from the
Mongolian Government relating to energy, land use, a permanent
airport and roads; initial production estimates; the Oyu Tolgoi
Project's anticipated yearly production of copper and gold; the
ability of Ivanhoe Mines to arrange acceptable financing
commitments for the Oyu Tolgoi Project and the timing of such
commitments; statements concerning the utilization of the interim
funding facility provided by Rio Tinto and the repayment of the
same from project financing; implementation of the Oyu Tolgoi
Project's training, activities and development strategy; the
composition of the Oyu Tolgoi production workforce; statements
concerning mineralization potential and planned drilling activities
at Ulaan Khud North; target milling rates, mining plans and
production forecasts for the coal mine at Ovoot Tolgoi, Mongolia;
the schedule for carrying out and completing an expansion of the
production capability of the Ovoot Tolgoi Coal Project; anticipated
outcomes with respect to the ongoing marketing of coal products
from the Ovoot Tolgoi Coal Project; the statements concerning the
expected ash yields that can be achieved from coal wet washing
facility; the statements concerning the timing of the expected
completion of the Ovoot Tolgoi coal-handling facility by mid-2012;
the statements concerning the expected timing of construction and
the intended capacity of the planned paved highway from Ovoot
Tolgoi to the Mongolia-China border; the statements concerning
SouthGobi's expected coal sales and prices in Q4'11; the statements
concerning the commencement of the agreement between SouthGobi and
Ejinaqi Jinda;
the statements concerning the creation of a separate transport
agreement regarding the transportation of medium and higher-ash
coals processed though Ovoot Tolgoi's on-site dry coal handling
facility, and the expected ash content and yield of these coals;
the expected completion of major works of Ivanhoe Australia in late
December, 2011; the expected completion of the access drive into
the Little Wizard Deposit by Q4'11; the statements concerning the
anticipated timing of production from Ivanhoe Australia's
copper-gold business in mid-2012; the statements concerning the
expected completion of all major copper-gold business development
works by late December 2011; the statements concerning the
sufficiency of Ivanhoe Australia's existing funds to fund its
minimum obligations; the statements concerning the development and
construction of the Merlin Project; the statements concerning the
anticipated timing of the Mount Dore pre-feasibility study and the
Mount Elliott scoping study; the statements that Altynalmas Gold's
NI 43-101-compliant technical report is expected to be completed in
early 2012; planned drilling on the Bakyrchik Mining Lease and the
surrounding exploration licence; Ivanhoe Mines' position that its
Shareholder Rights Plan is not in breach of Rio Tinto's existing
contractual rights; statements concerning the anticipated ruling
date of the arbitration; the expectation the lenders for Oyu Tolgoi
Project financing will finalize their due diligence later this
year; the impact of amendments to the laws of Mongolia and other
countries in which Ivanhoe Mines carries on business, particularly
with respect to taxation; statements concerning global economic
expectations and future demand for commodities; and the anticipated
timing, cost and outcome of plans to continue the development of
non-core projects, 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 the Company's
MD&A. The reader is cautioned not to place undue reliance on
forward-looking information or statements.
Contacts: Ivanhoe Mines Ltd. - Investors Bill Trenaman
+1.604.688.5755 Ivanhoe Mines Ltd. - Media Bob Williamson
+1.604.688.5755www.ivanhoemines.com
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