Ivanhoe Mines Ltd. (TSX:IVN)(NYSE:IVN)(NASDAQ:IVN) today announced
its financial results for the year ended December 31, 2011. All
figures are in US dollars unless otherwise stated.
HIGHLIGHTS
-- Overall construction of the first phase of the Oyu Tolgoi copper-gold
mining complex in southern Mongolia was 72.7% complete at the end of
February 2012 and remains on track to meet the mine's targeted start of
initial production in Q3'12. Commercial production is projected to begin
in the first half of 2013.
-- Total capital invested in the construction of the first phase of the Oyu
Tolgoi Project to the end of 2011 was approximately $4.0 billion.
-- Arrangements are proceeding to ensure that electrical power from China
will be available for the start of initial production that presently is
expected in Q3'12. In early March 2012, Chinese contractors began
construction of the power line and switching station as part of the 87-
kilometre, 220-kilovolt power transmission line to be built from the
electrical distribution grid in Inner Mongolia, China, to the China-
Mongolia border. Construction of the transmission towers along the 95-
kilometre section of the power line from the Oyu Tolgoi mine site to the
Mongolia-China border was completed in October 2011.
-- Oyu Tolgoi's total site-based construction workforce peaked at 14,760 in
October 2011. At the end of 2011, approximately 6,550 Mongolians were
employed at the Oyu Tolgoi site, with an additional 3,600 Mongolians
participating in offsite training.
-- Pre-stripping of the Oyu Tolgoi open pit is ahead of schedule, which
will allow for the delivery of ore to the primary crusher ahead of
schedule. This will enable the pre-commissioning of the primary crusher,
overland conveyor and coarse-ore stockpile circuits to begin in April
2012.
-- Installation of the two ore-processing production lines in the Oyu
Tolgoi concentrator and pre-commissioning works are progressing ahead of
plan. The concentrator, which will have an initial capacity of 100,000
tonnes per day, was 73.2% complete at the end of 2011, ahead of the
planned completion of 68.6%.
-- Construction of Shaft #2 at the Hugo North underground mine is
progressing well. The headframe and ancillary buildings were 81.5%
complete at the end of 2011 and ahead of schedule. Shaft-sinking
activities began in December 2011 and the bottom now is approximately
120 metres below surface.
-- Non-binding memorandums of understanding for concentrate sales to two
large Chinese smelters were agreed to during Q3'11. Contracts are
expected to be finalized with these smelter companies during the next
several months. In addition, non-binding agreements on principal sales
terms have been reached with two international trading companies;
conversion of these agreements to binding contracts is under discussion.
-- Ivanhoe Mines, Rio Tinto, a core lending group and their respective
advisers are continuing to work together to finalize an approximate $4.0
billion project-finance facility for the Oyu Tolgoi Project. Ivanhoe
Mines' objective is to sign loan documentation in Q3'12.
-- During 2011, Ivanhoe Mines' 58%-owned subsidiary, SouthGobi Resources
Ltd. (TSX:SGQ)(HK:1878) had sales of approximately 4.0 million tonnes of
coal at an average realized selling price, before royalties and selling
fees, of approximately $54 per tonne. Revenue, net of royalties and
selling fees, increased from $79.8 million in 2010 to $179.0 million in
2011 due to the increased sales volumes and increased selling prices for
individual coal types.
-- On March 8, 2012, Ivanhoe Mines' 59%-owned subsidiary, Ivanhoe Australia
Limited (TSX:IVA)(ASX:IVA) began initial production of copper and gold
concentrate at its Osborne mine and processing facilities south of
Cloncurry, in northwestern Queensland. The start-up at Osborne is an
important strategic step for Ivanhoe Australia, advancing the company
from an explorer to a producer.
-- Ivanhoe Mines, through its 50% interest in Altynalmas Gold Ltd., is
advancing the Kyzyl Gold Project in Kazakhstan. In February 2012,
Altynalmas announced the results of an independent feasibility study.
-- In 2011, Ivanhoe Mines expensed $282.6 million in exploration
activities, compared to $218.6 million in 2010. In 2011, most of Ivanhoe
Mines' exploration activities were focused in Mongolia and Australia.
-- Ivanhoe Mines' cash position, on a consolidated basis at December 31,
2011, was $998.1 million. As at March 19, 2012, Ivanhoe Mines'
consolidated cash position was $917.7 million.
MONGOLIA
OYU TOLGOI COPPER-GOLD PROJECT (66% owned)
The Oyu Tolgoi Project is approximately 550 kilometres south of
Ulaanbaatar, Mongolia's capital city, and 80 kilometres north of
the Mongolia-China border. Mineralization on the property consists
of porphyry-style copper, gold, silver and molybdenum contained in
a linear structural trend (the Oyu Tolgoi Trend) that has a strike
length extending over 23 kilometres. Mineral resources have been
identified in a series of deposits throughout this trend. They
include, from south to north, the Heruga Deposit, the Southern Oyu
deposits (Southwest Oyu, South Oyu, Wedge and Central Oyu) and the
Hugo Dummett deposits (Hugo South, Hugo North and Hugo North
Extension).
Ivanhoe Mines began capitalizing Oyu Tolgoi development costs on
April 1, 2010. During 2011, additions to property, plant and
equipment for the Oyu Tolgoi Project totalled $2.8 billion, which
included development costs. In 2011, Ivanhoe Mines incurred
exploration expenses of $31.8 million at Oyu Tolgoi, compared to
$83.4 million incurred in 2010.
Construction of the Oyu Tolgoi copper-gold complex is advancing
toward its planned start-up in 2012 and 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, with related facilities
and necessary infrastructure to support an initial throughput of
100,000 tonnes of ore per day, is being constructed to process ore
scheduled to be mined from the Southern Oyu open pit. Initial
production of copper-gold-silver concentrate is expected in Q3'12
and commercial production is projected to begin in the first half
of 2013.
In conjunction with the surface activities, an
85,000-tonne-per-day underground block-cave mine also is being
developed at the Hugo North Deposit. The throughput capacity of the
concentrator plant is expected to be between 150,000 and 160,000
tonnes of ore per day when the underground mine begins
production.
Fluor Corporation is in charge of overall Oyu Tolgoi
construction 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.
Progress continuing to be made on supply of interim electrical
power
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. The
agreement also confirmed that Ivanhoe Mines has the right to obtain
electrical power from inside or outside Mongolia, including China,
to meet its initial electrical power requirements for up to four
years after Oyu Tolgoi begins commercial production. The agreement
established that a) 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) all of the project's power requirements would be
sourced from within Mongolia no later than four years after the
start of commercial production.
Oyu Tolgoi LLC is proceeding with arrangements to ensure that
electrical power from China will be available for the start of
initial production that is expected in Q3'12. In early March 2012,
Chinese contractors began construction of the power line and
switching station as part of the 87-kilometre, 220-kilovolt power
transmission line to be built from the electrical distribution grid
in Inner Mongolia, China, to the China-Mongolia border. The
construction of the transmission towers along the 95-kilometre
section of the power line from the Oyu Tolgoi mine site to the
Mongolia-China border was completed in October 2011.
A separate power-purchase agreement establishing a supply
arrangement between Mongolian and Chinese authorities is required
before Chinese electrical power can be imported into Mongolia. Oyu
Tolgoi LLC will be a party to any agreement for the purchase and
supply of electrical power.
Subject to negotiations and final agreement, 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 is being provided, with
expansion planned for April 2012 to meet the project's more
immediate requirements during the remaining stages of
construction.
In November 2011, the Mongolian government provided Oyu Tolgoi
LLC with a cabinet resolution allowing for the future construction
by Oyu Tolgoi LLC of a coal-fired power plant in Mongolia dedicated
to the Oyu Tolgoi Project. Such a 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
the establishment of a dedicated power plant is required for the
early production at Oyu Tolgoi, the required revisions to the
construction schedule for the Oyu Tolgoi Project could adversely
affect the project's ability to achieve the planned start of
commercial production in 2013. 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 2012 and the financing that would be
required for such a plant 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 70% complete at
the end of 2011
Overall construction of Oyu Tolgoi's first phase of development
reached 70.0% completion at the end of 2011 and had advanced to
72.7% completion at the end of February 2012. Total capital
invested in the construction of the first phase of the Oyu Tolgoi
Project to the end of 2011 was approximately $4.0 billion.
Among major updates for 2011 and plans for Q1'12:
-- 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. Pre-stripping is progressing ahead of schedule.
Ore from the open-pit is expected to be available for pre-commissioning
of the primary crusher, overland conveyor and coarse-ore stockpile
circuits in April 2012, ahead of the previously planned date of June 15,
2012. Diesel generators on site will supply the power for this pre-
commissioning work.
-- Construction of the concentrator was 73.2% complete at the end of 2011,
ahead of the planned completion of 68.6%. One of two SAG mills and two
of four ball mills were assembled and aligned.
-- Line #1 of the concentrator is on track to be completed and pre-
commissioned by August 15, 2012. Line #2 is on track to be completed and
pre-commissioned by October 31, 2012. Commissioning of the
concentrator's Line #1 circuit with mined ore will depend on the
availability of power from China.
-- The development of the first lift of the phase-two underground block-
cave mine at the Hugo North Deposit continued successfully during 2011.
Lateral mine development 1,300 metres below surface at Hugo North is on
schedule and achieved an advance during 2011 of 6,460 metres, for a
total of 10,241 metres completed since tunnelling started in 2008.
Underground lateral development was suspended as planned in February
2012 to enable the upgrade of hoisting equipment at Shaft #1, which is
expected to continue until August 2012. Underground lateral development
is scheduled to resume in September 2012.
-- Shaft #2 construction is progressing well. The headframe and ancillary
buildings were 81.5% complete at the end of 2011 and ahead of schedule.
Sinking of the shaft began in December 2011 and the bottom now is
approximately 120 metres below surface.
-- Oyu Tolgoi's total site-based construction workforce peaked at 14,760 in
October 2011. At the end of 2011, the workforce on site totalled 11,508;
approximately 6,550 Mongolians were employed at the Oyu Tolgoi site,
with an additional 3,600 Mongolians participating in offsite training.
-- Progress of the construction of off-site facilities and infrastructure
reached 66.9% at the end of 2011, which was behind the planned
completion of 68.5%. The cumulative shortfall was due to delays during
the building of the Oyu Tolgoi-Gashuun Sukhait road to the Mongolia-
China border and the Khanbumbat permanent airport, and the deferral of
the stringing of transmission cables on the power line to the Mongolia-
China border until spring 2012. Facilities required for the production
of the first ore are on schedule.
-- Non-binding memorandums of understanding for concentrate sales to two
large Chinese smelters were agreed to during Q3'11. Contracts are
expected to be finalized with these smelters during the next several
months. In addition, non-binding agreements on principal sales terms
have been reached with two international trading companies; conversion
of these agreements to binding contracts is under discussion. Most of
the concentrate initially produced at Oyu Tolgoi is expected to be
delivered to customers in China.
Phase one construction budget
In December 2010, Ivanhoe Mines announced its approval of a $2.3
billion capital budget for 2011 - the peak year of construction
activity on the first phase of the Oyu Tolgoi Project. 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 also were
approved, bringing the total budget for 2011 to $2.6 billion. A
total of $3.0 billion was spent in 2011- over the budgeted spending
due to the strategy of bringing certain activities forward into
2011, which resulted in certain activities being ahead of
schedule.
The 2011 capital budget was a key component of an overall
phase-one control budget of $6.0 billion. The scope of work for the
phase-one project was to bring the initial, 100,000 tonne-per-day
concentrator into production, with the required infrastructure and
operational team to begin commercial production in 2013. The
phase-one project also includes underground lateral development
until June 2012 and the completion of Shaft #2, which are essential
to the continued development of the high-value underground mine at
Oyu Tolgoi. The phase-one control budget had no provision for
foreign exchange variances and, as of the end of 2011, the
calculated, actual foreign exchange exposure was $87 million. The
forecast total foreign exchange exposure on phase-one is
approximately $170 million.
With approved scope changes of $37 million to date, the
phase-one current budget is $6.0 billion. A Definitive Forecast
Final Cost will be completed in March 2012 and is expected to be
approximately $6.2 billion, or 3% over budget, excluding foreign
exchange exposures but including $122 million in project
contingencies to mitigate the remaining risks on the project.
The budget forecast for the phase-one project in 2012 is $2.1
billion, which would increase the total phase-one spending to bring
Oyu Tolgoi into commercial production in 2013 to $6.1 billion. The
increase in the 2012 forecast budget primarily is due to increased
infrastructure costs, transmission-line construction delays and
changes in contracting strategy.
The Oyu Tolgoi Board of Directors approved the first six months
of 2012's budgeted expenditures in December 2011 and the balance of
the 2012 budget in March 2012.
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. Wherever possible, the Oyu Tolgoi Project has
taken the opportunity to consider allowing for future expansion
with minimal impact on operations.
The Oyu Tolgoi Project's plans call for initial production of
100,000 tonnes of ore per day, which is expected to increase to
between 150,000 and 160,000 tonnes per day when ore from the
underground mine becomes available. To facilitate this expansion,
the Oyu Tolgoi Project 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 of ore per day. The Oyu Tolgoi Project's plans also
have allowed for expansion in the concentrator by adding space in
the flotation area and installing other equipment to handle higher
production rates. Ongoing studies are examining options to process
additional ore.
Pre-stripping of open-pit mine started as planned in August
2011
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 hauling of clay material to the tailings-storage
facility and construction of infrastructure, 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, assembly and commissioning of heavy mobile equipment
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.
At the end of 2011, a total of 13.2 million tonnes of overburden
had been moved, approximately 80,000 metres had been drilled and
more than 3,000 tonnes of explosives had been used in blasting.
Underground development of Hugo North Mine continued
successfully in 2011
The development of the first lift of the phase-two underground
block-cave mine at the Hugo North Deposit continued successfully
during 2011. Lateral mine development 1,300 metres below surface at
Hugo North achieved an advance during 2011 of 6,460 metres, for a
total of 10,241 metres completed since tunnelling started in 2008.
Underground lateral development was suspended as planned in
February 2012 to permit the upgrading of hoisting equipment at
Shaft #1, which is expected to continue until August 2012.
Underground lateral development is scheduled to resume in September
2012.
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 proved difficult and additional concrete grouting was applied
to stabilize the ground. The first ventilation raise hole was
stabilized and work started to re-establish the pilot hole. A
second raise pilot-hole was drilled through from surface to the
1,300-metre level. The underground development from Shaft #1 is
expected to connect with the bottom of Shaft #2 in 2013 to enable
the installation of the ore-handling system and production from the
first lift of the Hugo North block-cave mine.
Comprehensive financing plan under discussion with Rio Tinto
A team of Ivanhoe Mines management executives, independent
directors and advisers presented a comprehensive financing plan to
Rio Tinto in February 2012 for the completion and start-up of the
Oyu Tolgoi Project in Mongolia.
Rio Tinto and Ivanhoe Mines exchanged proposals and have been
working together in an attempt to reach agreement on a
comprehensive financing approach that would accommodate their
mutual interest of advancing Oyu Tolgoi's development.
Ivanhoe Mines has invested more than $5.0 billion in Oyu
Tolgoi's exploration and development during the past decade. The
expenditures have been financed through a combination of equity and
short-term debt facilities. A proposed major, project-financing
facility has been under negotiation for more than a year.
On March 18, 2012, the Ivanhoe Mines Board of Directors approved
a conditional comprehensive financing plan that contains three
principal elements: project finance, bridge finance and equity.
-- The cornerstone of the financing plan continues to be a $4.0 billion
project-finance facility, which now is in an advanced stage of
discussion with a core lending group comprised of European Bank for
Reconstruction and Development, Export Development Canada, International
Finance Corporation, BNP Paribas and Standard Chartered Bank. US Ex-Im
Bank and its adviser, Standard Bank, the World Bank Group's Multilateral
Investment Guarantee Agency and the Australian Export Finance and
Insurance Corporation have joined the lender group and are finalizing
their due diligence processes with a view to supporting the financing.
The company's objective is to sign loan documentation in Q3'12.
-- Ivanhoe Mines is seeking the required approvals for the project-finance
facility from Erdenes Oyu Tolgoi LLC (Erdenes OT) and the Mongolian
government. Erdenes OT, which holds the Mongolian government's 34% stake
in Oyu Tolgoi, has appointed a legal adviser.
-- Ivanhoe Mines has approved a facility to be provided by a major
international bank as an interim, bridge-financing measure. The formal
loan agreement has been submitted to the international bank's credit
committee for final approval and remains subject to approval by Rio
Tinto. Alternative bridge-financing arrangements proposed by Rio Tinto
also are being considered. The bridge-financing facility would be in
addition to the existing $1.8 billion interim funding facility
previously provided by Rio Tinto. The Rio Tinto interim funding facility
and any additional bridge-financing facilities are expected to be repaid
from the planned project-finance facility.
-- A number of equity financing alternatives, including a possible rights
offering, also are being considered.
During 2011, project finance activities focused on the
following:
-- Term sheet. Negotiations on the term sheet are advancing, with further
discussions scheduled for late March 2012 with lenders, who are close to
finalizing their financial model. The other due diligence work streams
are progressing and are expected to be finalized in the coming months.
Agreement in principle on completion testing has been reached with
lenders, although certain aspects remain 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, with further discussions to be held to finalize
these points.
-- Syndication. Finalization of the detailed financing plan that would be
taken forward for syndication beyond the current lender group began in
December 2011 and is a key focus for the first half of 2012.
-- Oyu Tolgoi LLC Working Group. With the project financing moving toward
conclusion, Oyu Tolgoi LLC now has taken a lead role and has added
resources to help finalize the terms. A key part of process will be the
approval by the Oyu Tolgoi LLC Board of Directors of the project finance
facility; workshops have been held with Erdenes OT in preparation for a
vote.
-- Environmental Social Impact Assessment (ESIA). The ESIA, required by the
potential lenders, is nearing completion; it will be released for public
review following its formal approval by the Oyu Tolgoi LLC Board of
Directors, which could occur in the coming weeks. ESIA information
workshops have been held with Erdenes OT and representatives of the
Mongolian government.
-- Other due-diligence work streams are progressing and currently do not
pose any material issues or delays for the project financing.
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.
Ivanhoe Mines drawing down on Rio Tinto Interim Funding
Facility
In December 2010, Rio Tinto committed to provide Ivanhoe Mines
with an initial, non-revolving, interim funding facility of $1.8
billion to assist in sustaining Oyu Tolgoi construction while a
project-finance package was being negotiated. The interim funding
facility is intended to be refinanced with funds to be provided
under the project-finance package. The interim facility is on
arm's-length terms, with funds to be advanced to the project on a
month-to-month basis, if and when required.
In December 2011, Ivanhoe Mines made its first draw on the
facility. A total of $400.7 million had been drawn down by December
31, 2011, which increased to $972.1 million as at March 19,
2012.
Skills training programs preparing Mongolians for jobs
The Oyu Tolgoi Project's staffing strategy for the start of
operations in July 2012 continues to rely heavily on the
utilization of Mongolian men and women whose skills are being
developed and who are receiving training throughout the
construction phase. As of the end of January 2012, 70 Oyu Tolgoi
contractors were employing more than 6,000 Mongolians. In total,
the Oyu Tolgoi Project was providing jobs for 7,800 Mongolians,
including 360 trainees enrolled at four selected Mongolian
technical and vocational education training schools and in
apprenticeship training with two major vendors, Transwest and
Wagner Asia. In addition, 3,300 Mongolians are participating in a
special government employee-training program, funded by Oyu Tolgoi,
which is adding to Mongolia's overall skills-development pool.
Oyu Tolgoi has committed more than $85.0 million in funding over
five years for education and training programs in Mongolia.
Exploration drilling at Oyu Tolgoi continued in 2011
During 2011, Ivanhoe Mines continued its drilling program on the
Oyu Tolgoi Project, completing 50,130 metres of surface resource
geology drilling (including geotechnical and mine-development
investigation holes), 10,560 metres of underground geotechnical
drilling and 30,059 metres of surface exploration diamond
drilling.
Five rigs are conducting surface exploration drilling at Oyu
Tolgoi. Two of these rigs are delineating an initial resource
estimate for the Heruga North Deposit, a 2.5-kilometre, mineralized
extension of the Heruga Deposit, which extends northward from the
southern border of the Oyu Tolgoi mining licence to the Southern
Oyu deposits.
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.
Sales and operations
In 2011, SouthGobi had sales of approximately 4.0 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 2.5 million tonnes in
2010 at an average realized selling price, before royalties and
selling fees, of $35 per tonne. Revenue, net of royalties and
selling fees, increased from $79.8 million in 2010 to $179.0
million in 2011 due to the increased sales volumes and increased
selling prices for individual coal types - a 52% increase for raw,
semi-soft coking coal and a 47% increase for raw, higher-ash
coal.
In 2011, SouthGobi produced 4.6 million tonnes of raw coal with
a strip ratio of 3.63 compared to 2.8 million tonnes of raw coal
produced in 2010 with a strip ratio of 3.47. Mining capacity
increased in 2011 due to the commissioning of additional mining
equipment. Mining activities also commenced in the Sunrise Pit
during Q3'11. In 2010, production also was negatively impacted by
the Sunset Pit realignment in the first half of 2010, which
required substantial, above-trend waste removal that resulted in
lower production volumes.
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 became
subject to a sliding-scale additional royalty of up to 5% based on
the set reference price of coal. Based on the reference prices over
2011, SouthGobi was subject to an average 8% royalty, based on a
weighted average reference price of $99 per tonne. SouthGobi's
effective royalty rate for 2011, based on its average realized
sales price of $54 per tonne, was 15%.
Cost of sales was $168.2 million in 2011, compared to $94.8
million in 2010. 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 was due
to higher sales volumes and higher unit costs.
Coal processing
In February 2012, SouthGobi successfully commissioned and
started up the dry-coal handling facility (DCHF) at the Ovoot
Tolgoi Mine. The DCHF has the capacity to process nine million
tonnes of run-of-mine (ROM) coal per year. The facility includes a
300-tonne-capacity dump hopper, which receives ROM coal to feed a
rotary breaker, and screens that size coal to a maximum of 50
millimetres and reject oversize ash. The DCHF will be upgraded
during 2012 to include dry-air separation, as well as covered
load-out conveyors with fan stackers to transfer processed coals to
stockpiles that will enable blending.
In July 2011, SouthGobi entered into an agreement with Ejinaqi
Jinda Coal Industry Co. Ltd. (Ejin Jinda), a subsidiary of China
Mongolia Coal Co. Ltd., to toll-wash coal from the Ovoot Tolgoi
Mine. The five-year agreement, expected to begin in Q2'12, provides
for an annual washing capacity of approximately 3.5 million tonnes
of raw coal.
Ejin Jinda's washing facility is approximately 10 kilometres
inside China from the Mongolia-China border crossing, approximately
50 kilometres from the Ovoot Tolgoi Mine. Medium- and higher-ash
coals processed through the DCHF will be transported from the Ovoot
Tolgoi Mine to the washing facility. Based on preliminary samples,
SouthGobi expects that the washed coal generally will meet
semi-soft coking coal specifications.
Sale of Tsagaan Tolgoi property
On March 5, 2012, SouthGobi announced an agreement to sell its
Mongolian thermal coal property, the Tsagaan Tolgoi Deposit, to
Modun Resources Limited (Modun), a company listed on the Australian
Stock Exchange. Under the transaction, SouthGobi expects to receive
$30 million of total consideration, comprising $7.5 million
up-front in cash, $12.5 million up-front in Modun shares and
deferred consideration of an additional $10.0 million also payable
in Modun shares.
AUSTRALIA
IVANHOE AUSTRALIA (59% owned)
Production of copper and gold has begun at Osborne Mine
Ivanhoe Australia announced on March 8, 2012, that it had joined
the ranks of producing companies with its successful,
ahead-of-schedule start-up of the Osborne copper-gold mine and
processing complex in northwestern Queensland.
Following initial production of concentrate on February 28,
2012, Osborne officially began regular operations on March 7, 2012,
with the achievement of steady-state production of copper-gold
concentrate and the dispatch of the first truckload of concentrate
to the port at Townsville, on Australia's east coast.
Production throughput at the Osborne plant for 2012 is expected
to be approximately 700,000-900,000 tonnes of ore, increasing to
1.8-2.0 million tonnes in 2013.
Ivanhoe Australia acquired the Osborne complex less than 18
months ago and is developing the Kulthor underground resource to
help supply the plant.
Ivanhoe Australia is continuing exploration and resource
definition work near the mine at Osborne and also to the north,
along the Starra Line, to expand Ivanhoe Australia's understanding
and definition of the field, reinforcing confidence in the
projected mine life of 15 to 20 years.
In January 2011, the Ivanhoe Australia board approved A$30
million of capital to develop the Osborne and Kulthor underground
resources. Underground development work began in Q2'11 and a total
of 2,412 metres had been completed by the end of 2011 - 1,511
metres at Kulthor and 901 metres at Osborne.
All major refurbishment work on the Osborne concentrator and
shaft was completed by the end of 2011. Decline development work
began at Starra 276, a deposit that is expected to form one of the
key ore sources for the Osborne complex in 2013.
In September 2011, 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 technical report on www.sedar.com. The Preliminary
Economic Assessment, an NI 43-101-compliant technical report,
evaluated ore sources only for an initial four-year period.
Work also progressing on three other main projects
Ivanhoe Australia also is continuing to advance its three other
core projects: the Merlin molybdenum and rhenium project, the Mount
Dore cathode copper project and the Mount Elliott copper-gold
project. All the projects are on granted mining leases.
During 2011, work focused on:
-- construction of the Merlin decline and accessing the Little Wizard
Deposit;
-- completion of the Osborne Copper-Gold Study, Merlin Pre-Feasibility
Study and Mount Dore Scoping Study; and
-- the start of a scoping study for Mount Elliott.
Ivanhoe Australia incurred exploration expenses of $166.5
million in 2011, compared to $73.8 million in 2010. The $92.7
million increase was largely due to work on the Merlin decline
tunnel, underground work at the Osborne and Kulthor deposits,
drilling programs and work on the various ongoing studies.
Merlin molybdenum and rhenium project
The Merlin molybdenum and rhenium deposit is the lower-most
mineralized zone in the Mount Dore deposit, starting near the
surface and dipping eastward 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; 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.
On October 28, 2011, Ivanhoe Australia announced final results
of the Merlin Pre-Feasibility Study, which demonstrated that the
project is expected to provide strong, long-term cash flows. The NI
43-101-compliant technical report is filed on www.sedar.com. The
Merlin Feasibility Study is underway.
Construction of the decline to access the Merlin Deposit
continued on time and on budget during the year. The first phase of
the decline's development was completed in January 2012. The second
phase of development will begin upon completion of the feasibility
study and receipt of project approval.
Access to the very-high-grade Little Wizard Deposit was achieved
in late December 2011. A cross-cut completed through the Little
Wizard Deposit visually confirmed that the high-grade mineralized
zone is wider than was estimated in the Mineral Resource modelling.
In addition, mining of the cross-cut has identified that ground
conditions at Little Wizard are marginally better than expected.
Assays are pending on samples taken from the cross-cut; bulk
samples also will be taken from the cross-cut for metallurgical and
roaster testwork.
Mount Dore cathode copper project
The scoping study for the Mount Dore cathode copper project was
completed and released in September 2011. The study indicated that
the project is expected to provide robust, long-term cash flows for
a moderate capital outlay. The project pre-feasibility study, which
began during Q3'11, is expected to be completed in late March or
early April 2012.
Mount Elliott copper-gold project
The Mount Elliott Project hosts three principal zones of
copper-gold mineralization: Mount Elliott, the South-West Anomaly
(SWAN) and South-West Elliot (SWELL).
In 2011, Ivanhoe Australia commenced work on the Mount Elliott
Scoping Study that will evaluate mining and processing options for
the large-tonnage deposit and identify its future development path,
including additional resource drilling, metallurgical test work and
infrastructure requirements. All technical work for the study was
largely completed by the end of 2011. The results indicate that
there is potential for development of an open pit to recover the
remaining pillars from the previous Mount Elliott underground mine
and either sub-level open-stoping, or large block-caving, of the
SWAN mineralization. The open-pit ore could be trucked to Osborne
for processing or used as initial feed for the Mount Elliott
processing plant. The study is expected to be completed in late
March or early April 2012.
Regional exploration
Ivanhoe Australia holds 40 Exploration Permits for Minerals
(EPMs) covering a total of 4,487 square kilometres and 17 Mining
Leases covering a total of 104.8 square kilometres. Ivanhoe
Australia also has 17 EPM applications in process, covering 2,331
square kilometres, and three ML applications in process, covering
10.6 square kilometres. Exco joint venture EPMs total 541 square
kilometres and the Goldminco/Ivanhoe (Osborne) joint venture EPM
covers 16 square kilometres.
Exploration in 2011 included 34,076 metres of diamond drilling,
compared to 23,296 metres in 2010, and 12,971 metres of
reverse-circulation drilling, compared to 15,115 metres in 2010.
Exploration in 2011 focussed on increasing resources available for
the Osborne Copper-Gold Project, exploring for
iron-oxide-copper-gold deposits and targeting Merlin-style
molybdenum-rhenium deposits.
Investment bank UBS appointed to advise on ongoing strategic
partnership process
In January 2012, Ivanhoe Australia appointed UBS Investment Bank
to assist with inviting and evaluating proposals from potential
strategic partners to participate in the development of its
Cloncurry project portfolio. Ivanhoe Australia has been actively
pursuing a range of alternatives and strategic partnerships to
secure the long-term funding required to advance the development of
its Cloncurry projects and extend its aggressive exploration
program. A number of corporate entities are engaged in the process
and these discussions are continuing.
KAZAKHSTAN
Kyzyl Gold Project (50% owned)
Altynalmas Gold, a private company, 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.
In February 2012, Altynalmas released the results of an
independent feasibility study for its Kyzyl Gold Project in
northeastern Kazakhstan. International mining consultant Roscoe
Postle Associates has completed an independent NI 43-101-compliant
technical report on the Kyzyl Gold Project based on a
feasibility-study-level report completed by Fluor Canada and
subsequent optimization studies undertaken by Hatch Mining and
Metals Canada. The project encompasses the re-development of the
Bakyrchik underground mine, the construction of a new processing
plant incorporating fluidized-bed ore-roasting technology, and
supporting mine infrastructure. The technical report is expected to
be filed by the end of March 2012 on www.sedar.com.
Additional highlights from the work in 2011 included:
-- the successful completion of performance testing of a metallurgical
process that recovers at least 88% of contained gold; and
-- the development of an innovative and proprietary ore treatment process
that produces an environmentally stable, iron arsenate mineral by-
product that meets international environmental standards.
Exploration continuing; 40,000 metres of drilling planned for
2012
Altynalmas Gold is continuing its drilling program at the Kyzyl
Gold Project. Total exploration drilling for 2011 amounted to
84,552 metres, of which 62,562 metres were drilled on the Bakyrchik
Mining Licence #737. During Q2'11, drilling began on the satellite
deposits within the Kyzyl Gold Project's Exploration Licence #27,
resulting in the drilling of 21,990 metres. Assay results from the
2011 drilling on the Exploration Licence are pending. Exploration
drilling in 2012 is budgeted to be 40,000 metres.
REVIEW OF OPERATIONS
In 2011, Ivanhoe Mines recorded a net loss of $570.4 million
($0.83 per share), compared to a net loss of $211.5 million ($0.42
per share) in 2010, which was an increase of $358.9 million.
Results for 2011 mainly were affected by $282.6 million in
exploration expenses; $168.2 million in cost of sales; $100.8
million in general and administrative expenses; $16.8 million in
foreign exchange losses; a $432.5 million change in fair value of a
derivative relating to the rights offering; a $9.1 million loss
from discontinued operations and $11.0 million in interest expense.
These amounts were offset by $179.0 million in coal revenue; a
$106.5 million change in the fair value of SouthGobi's embedded
derivatives; a $103.0 million gain on settlement of a long-term
note receivable; a $17.2 million share of income of significantly
influenced investees; and $22.1 million in interest income.
Exploration expenses of $282.6 million in 2011 increased $64.0
million from $218.6 million in 2010. Exploration expenses included
$106.5 million spent in Mongolia ($134.5 million in 2010),
primarily for Oyu Tolgoi and SouthGobi's Ovoot Tolgoi and Soumber
deposits, and $166.5 million incurred by Ivanhoe Australia ($73.8
million in 2010). 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
December 31, 2011, was $998.1 million. As at March 19, 2012,
Ivanhoe Mines' consolidated cash position was $917.7 million.
Qualified Person
Disclosure of a scientific or technical nature in this release
and the Company's MD&A in respect of the Oyu Tolgoi Project was
prepared under the supervision of Stephen Torr, P. Geo, an employee
of Ivanhoe Mines and a "qualified person" as that term is defined
in NI 43-101.
SELECTED ANNUAL FINANCIAL INFORMATION
This selected financial information is in accordance with U.S.
GAAP as presented in the annual consolidated financial
statements.
($ in millions of U.S. dollars, except per share information)
Years ended December 31,
2011 2010 2009
----------------------------------------------------------------------------
Revenue $ 179.0 $ 79.8 $ 36.0
Cost of sales (168.2) (94.8) (29.4)
Exploration expenses (282.6) (218.6) (177.1)
General and administrative (100.8) (84.4) (45.8)
Foreign exchange (losses) gains (16.8) 8.7 34.1
Change in fair value of derivative (432.5) 135.7 -
Change in fair value of embedded
derivatives 106.5 100.6 (45.0)
Loss on conversion of convertible credit
facility - (154.3) -
Write-down of carrying value of long-term
investments (9.6) (0.5) -
Gain on sale of long-term investment 10.6 - 1.4
Gain on settlement of note receivable 103.0 - -
Net loss from continuing operations $ (561.3) $ (218.1) $ (276.6)
Net (loss) income from discontinued
operations (9.1) 6.6 (3.6)
----------------------------------------------------------------------------
Net loss $ (570.4) $ (211.5) $ (280.2)
----------------------------------------------------------------------------
Net loss per share from continuing
operations $ (0.82) $ (0.43) $ (0.68)
Net income (loss) per share from
discontinued operations (0.01) 0.01 (0.01)
----------------------------------------------------------------------------
Net loss per share $ (0.83) $ (0.42) $ (0.69)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 6,136.8 $ 3,218.5 $ 1,534.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total long-term financial liabilities $ 599.3 $ 302.4 $ 583.0
----------------------------------------------------------------------------
Ivanhoe Mines' results for the year ended December 31, 2011, are
contained in the audited 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.
Copies of Ivanhoe Mines' 2011 Annual Report containing the
audited financial statements, and Management's Discussion and
Analysis of Financial Condition and Results of Operations
(MD&A), will be available on March 20, 2012, at
www.ivanhoemines.com on the Financial and Technical Reports page
under the Investors section.
Shareholders also may request a hard copy of the Annual Report
free of charge by contacting our investor relations department by
phone at +1-604-688-5755 or by email at info@ivanhoemines.com.
Ivanhoe Mines shares are listed on the Toronto, New York and
NASDAQ stock exchanges under the symbol IVN.
FORWARD-LOOKING STATEMENTS
Certain statements made herein, including statements relating to
matters that are not historical facts and statements of Ivanhoe
Mines' 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 initial
production from the Oyu Tolgoi Project is projected to begin in
Q3'12, with commercial production to follow in the first half of
2013; the statements concerning the expected timing of initial
production from the Hugo North block-cave mine; statements related
to the expansion of throughput capacity of the concentrator;
statements regarding the timing of completion and commissioning of
Lines #1 and #2 of the concentrator; statement concerning the
timing of pre-commissioning of the primary crusher, overland
conveyor and coarse-ore stockpile circuits; 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 and that imported power is
expected to be available at the Oyu Tolgoi site in Q3'12; 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
authorities 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 Government of Mongolia; the statements concerning
the construction of a power plant at Oyu Tolgoi; 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 revised expectations of the total phase-one budget to bring the
Oyu Tolgoi Project into commercial production; 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 Government of Mongolia;
initial production estimates; the Oyu Tolgoi Project's
anticipated yearly production of copper and gold; statements
concerning the timing of definitive agreements with Chinese
smelters for concentrate produced at Oyu Tolgoi; statement
regarding the ability of Ivanhoe Mines to arrange acceptable
financing commitments for the Oyu Tolgoi Project and the timing of
such commitments; statements regarding the expectation that the
lenders for Oyu Tolgoi Project financing will finalize their due
diligence later this year; statements related to the Company's
objective of having executed Oyu Tolgoi Project financing loan
documentation in place in Q3'12; statements concerning the
structure and amount of the conditional comprehensive financing
plan with Rio Tinto; statements concerning the utilization of the
interim funding facility provided by Rio Tinto and the repayment of
the same from project financing; statements concerning other
possible financing options for Ivanhoe Mines, including a rights
offering; implementation of the Oyu Tolgoi Project's training,
activities and development strategy; 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 planned upgrade
of the Ovoot Tolgoi coal-handling facility during 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 Q1'12 and related statements
about border access; statements concerning the expected timing of
commencement of the agreement between SouthGobi and Ejin 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 statements concerning the sufficiency of Ivanhoe Australia's
existing funds to develop the Cloncurry project portfolio;
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; statements concerning expected production throughput at the
Osborne processing plant; planned drilling on the Bakyrchik Mining
Lease and the surrounding exploration licence; 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.
The 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.
Contacts: Ivanhoe Mines Ltd. - Investors Bill Trenaman
+1.604.688.5755 Ivanhoe Mines Ltd. - Media Bob Williamson
+1.604.331.9830 www.ivanhoemines.com
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