Turquoise Hill Resources Ltd. (TSX: TRQ) (NYSE: TRQ) (“Turquoise
Hill” or the “Company”) today announced its financial results for
the period ended March 31, 2022. All figures are in U.S. dollars
unless otherwise stated.
“Oyu Tolgoi’s first quarter again demonstrated the operational
excellence of the Oyu Tolgoi workforce. The OT team achieved an All
Injury Frequency Rate (AIFR) of 0.09 per 200,000 hours worked, one
of the lowest in recent years while keeping the Company on track to
meet its guidance for the year. First quarter in-line production of
30.3 thousand tonnes of copper and 59 thousand ounces of gold has
allowed us to maintain our 2022 copper production guidance of
110,000 to 150,000 tonnes, and to revise the gold production
guidance range upward from 115,000 – 165,000 ounces to 135,000 –
165,000 ounces, with production trending toward the higher end of
the range.” said Steve Thibeault, Turquoise Hill’s Interim Chief
Executive Officer.
“As COVID-19 cases have trended downward, the size of the onsite
workforce over the quarter increased to approximately 90% of plan.
With the easing of the pandemic, concentrate shipment volumes to
customers also improved and on-site concentrate inventory were
reduced by 30% in the quarter. We have also planned a total of
25,000 metres of drilling in 2022 and 2023 to increase our
knowledge of the orebody and to grow the Mineral Reserve of the
Hugo North Lift 1. After two years of negotiations, we reached a
mutual understanding for a renewed partnership with the Government
of Mongolia which allowed us to start caving operations in January.
Consequently, the underground mine remains on-track for sustainable
production in H1 2023.”
FINANCIAL AND OPERATIONAL HIGHLIGHTS
- Oyu Tolgoi open-pit and underground workforce posted an AIFR of
0.09 per 200,000 hours worked for the three months ended March 31,
2022.
- In Q1’22, Oyu Tolgoi produced 30.3 thousand tonnes of copper in
concentrate and 59 thousand ounces of gold in concentrate.
- Mill throughput of 9.6 million tonnes in Q1’22 was 2% lower
than Q1’21 and 9% lower than Q4’21, in line with expectations due
to planned maintenance.
- Turquoise Hill successfully reached a mutual understanding for
a renewed partnership with the Government of Mongolia and the board
of directors of Oyu Tolgoi LLC (OT LLC) unanimously approved
commencement of the undercut. On January 25, 2022, a ceremony was
held at the mine site to celebrate the commencement of blasting the
undercut that started the Oyu Tolgoi Hugo North underground mine
production phase.
- Turquoise Hill and Rio Tinto International Holdings Ltd. (Rio
Tinto) agreed a comprehensive and binding, amended funding
agreement that provides a pathway forward to address the Company’s
estimated funding requirements.
- Turquoise Hill currently estimates a base case incremental
funding requirement of $3.4 billion (unchanged from Q4’21).
- As at March 31, 2022, Turquoise Hill had $0.6 billion of
available liquidity in the form of cash and cash equivalents, which
under current projections is expected to meet the Company’s
requirements, including funding of underground capital expenditure,
into October 2022, after which
the Company is able to rely on funding available under the amended
funding agreement to provide it with sufficient liquidity and
resources to meet its minimum obligations for a period of at least
12 months from the balance sheet date of March 31,
2022.
- Revenue of $402.7 million in Q1’22 decreased 23.5% from $526.5
million in Q1’21 due to the planned transition of mining to the
next phase of operations, resulting in 33.3% and 59.6% lower
production volumes of copper and gold, respectively, and processing
lower grade stockpile material, partially offset by 17.9% higher
copper and 4.3% gold average prices.
- Income for the period was $394.3 million in Q1’22 versus $332.1
million in Q1’21 reflecting higher tax benefits offset by lower
revenue. Income attributable to owners of Turquoise Hill in Q1’22
was $275.2 million ($1.37 per share) versus $236.7 million ($1.18
per share) in Q1’21.
- Cost of sales in Q1’22 was $2.65 per pound of copper sold1 and
C1 cash costs were $1.66 per pound of copper produced2. All-in
sustaining costs were $2.72 per pound of copper produced2.
- Total operating cash costs3 of $228.9 million in Q1’22
increased 13.8% from $201.2 million in Q1’21 largely due to
inflationary pressures on prices for critical supplies including
fuel, power, explosives and grinding media.
- Expenditures on property, plant and equipment in Q1’22 were
$229.9 million, which included $203.8 million of capital
expenditures on the underground project. Capital expenditures4 on
the underground project included $84.8 million of underground
sustaining capital expenditure4. At March 31, 2022, total capital
expenditure on the underground project since January 1, 2016 was
$5.6 billion, including $0.4 billion of underground sustaining
capital expenditure.
- Net cash generated from operating activities in Q1’22 was
$122.4 million compared to cash used in operating activities of
$133.2 million in Q1’21, primarily due to $356 million in taxes
paid in Q1’21 related to the 2013 to 2015 and 2016 to 2018 Tax
Assessments. Cash generated from operating activities before
interest and tax decreased by $125.6 million compared to Q1’21 due
largely to inflationary pressures on prices for critical supplies
including fuel, power, explosives and grinding media.
- Oyu Tolgoi concentrate
shipment volumes to customers continued to steadily improve with
on-site concentrate inventory levels reducing by 30% during
Q1’22.
- The commissioning of Materials Handling System 1 and the first
on-footprint truck chute were successfully completed during
Q1’22.
- Preliminary outcomes from the 2022 cost and schedule update for
the underground project, which incorporate the known, incremental
COVID-19 cost impact of $195 million through March 31, 2022,
associated taxes and an estimate of further COVID-19 management
costs over the remaining development schedule, indicate an increase
in the total expected development capital from $6.75 billion to
$7.06 billion. The 2022 cost and schedule update is currently under
review by the Company.
- Shaft 3 headframe was commissioned and sinking commenced on
March 31, 2022 from a cumulative depth of 83 metres below ground
level. Shaft 4 sinking re-started on March 25, 2022 after work was
interrupted on February 17, 2022 due to an electrical fault. Shaft
4 advancement is 190 metres below ground level as at March
31,2022.
- A total of 25,000 metres of drilling is planned for 2022 and
into 2023. Most of these drill metres are into potential future
mining areas which are on the Lift 1 horizon and currently excluded
from the Mineral Reserve.
- As previously disclosed, the first drawbells for Panels 1 and 2
were delayed due to a later than planned commencement of the
undercut, lateral development scope changes, impacts of COVID-19 on
development progression and delays to the forecast completion dates
for Shaft 3 and 4. As part of the 2022 cost and schedule update,
schedules for Shafts 3 and 4 are under review, and a programme of
work is underway to maximise the productivity of their development.
The potential impact of any further schedule slippage to Shafts 3
and 4 on the timing of Panels 1 and 2 is under review but is not
expected to result in equivalent delays to Panels 1 and 2 given the
current underground development approach and further mitigation
opportunities under investigation.
- On March 13, 2022, the board of directors of the Company (the
Board) received a non-binding proposal from Rio Tinto, the
Company's majority shareholder, to acquire the approximately 49% of
the outstanding common shares of Turquoise Hill held by the
Company's minority shareholders for cash consideration of C$34.00
per share (the Proposal).
- OT LLC signed an Electricity Supply Agreement (ESA) to provide
Oyu Tolgoi with a long-term source of power from the Mongolian grid
on terms fully agreed with the Government of Mongolia. Power will
be delivered pursuant to the ESA once certain technical conditions
are satisfied.
___________________________________
1 Cost of sales per pound of copper sold
is a supplementary financial measure. Please refer to the Section
titled “Non-GAAP and Other Financial Measures” on page 20 of this
press release for further information.
2 C1 cash costs per pound of copper
produced and all-in sustaining costs per pound of copper produced
are non-GAAP ratios. Please refer to the Section titled “Non-GAAP
and Other Financial Measures” on page 20 of this press release for
further information.
3 Total operating cash costs is a non-GAAP
financial measure. Please refer to the Section titled “Non-GAAP and
Other Financial Measures” on page 20 of this press release for
further information.
4 Capital expenditures on the underground
project and underground sustaining capital expenditure are
supplementary financial measures. Please refer to the Section
titled “Non-GAAP and Other Financial Measures” on page 20 of this
press release for further information.
OPERATIONAL OUTLOOK FOR 2022
Oyu Tolgoi is expected to
produce 110 to 150 thousand tonnes of copper and 135 to 165
thousand ounces of gold in concentrates in 2022 from processing ore
from the open-pit, underground development material and
stockpiles. Gold
production guidance has been revised upward from a previous
forecast range of 115 to 165 thousand ounces and is trending toward
the higher end of the range. Gold and copper production are forecast to be
lower in 2022 compared with 2021 due to the planned transition of
mining to the next phase of operations and the processing of lower
grade stockpile material.
Total operating cash costs5
for 2022 are expected to be $800 million to $875 million, though
inflationary pressures could see these costs trending towards the
higher end of the range.
Expenditures on property,
plant and equipment for 2022 are now expected to be approximately
$155 million to $185 million for open-pit operations due to
schedule changes impacting the timing of spend. This compares to
the original guidance of $170 million to $200 million. Expenditures
on property, plant and equipment for the underground are expected
to remain within the original guidance of $1.2 billion to $1.4
billion.
Open-pit capital is mainly
comprised of deferred stripping, equipment purchases, tailings
storage facility construction and maintenance componentisation.
Underground capital is inclusive of VAT.
2022 C1 cash costs are
expected to be in the range of positive $1.95 to positive $2.35 per
pound of copper produced6, which is higher than 2021 due to lower
gold production in 2022, as mining transitions to the next phase of
operations. Unit cost guidance assumes the midpoint of the expected
2022 copper and gold production ranges and a gold commodity price
assumption of $1,801 per ounce.
Estimates of future production, expenditures on property, plant
and equipment, total operating cash costs and C1 cash costs per
pound of copper produced presented in this press release are based
on mine plans that reflect the expected method by which the Company
will mine reserves at Oyu Tolgoi. Actual gold and copper production
and associated costs may vary from these estimates due to a number
of operational and non-operational risk factors (see the section
“Forward-Looking Statements and Forward-Looking Information” of Q1
2022 MD&A for a description of certain risk factors that could
cause actual results to differ materially from these
estimates).
OUR BUSINESS
Turquoise Hill is an international mining company focused on the
operation and continued development of the Oyu Tolgoi copper-gold
mine in Mongolia, which is the Company’s principal and only
material mineral resource property. The Company’s ownership of the
Oyu Tolgoi mine is held through a 66% interest in OT LLC; the
remaining 34% interest is held by Erdenes Oyu Tolgoi LLC (Erdenes
or EOT), a Mongolian state-owned entity.
The Oyu Tolgoi property is located approximately 550 kilometres
south of Ulaanbaatar, Mongolia’s capital city, and 80 kilometres
north of the Mongolia-China border. The property is cut by the Oyu
Tolgoi trend, a 12 kilometres north-south orientated corridor which
is host to the known deposits, Hugo North, Hugo South, Oyut and
Heruga. Open-pit mining operations commenced at Oyut in 2013. The
Hugo North deposit (Lift 1) is currently being developed as an
underground operation.
The copper concentrator plant, with related facilities and
necessary infrastructure, was originally designed to process
approximately 100,000 tonnes of ore per day from the Oyut open-pit.
However, since 2014, the concentrator has consistently achieved a
throughput of over 105,000 tonnes per day due to improvements in
operating practices. Concentrator throughput for 2022 is targeted
at over 110,000 tonnes per day and expected to be approximately 40
million tonnes for the year due to improvements in concentrator
performance and more favourable ore characteristics.
___________________________________
5 Total operating cash costs is a non-GAAP
measure that is forward-looking information. Please refer to the
Section titled “Non-GAAP and Other Financial Measures” on page 20
of this press release for further information.
6 C1 cash costs per pound of copper
produced is a non-GAAP ratio. Please refer to the Section titled
“Non-GAAP and Other Financial Measures” on page 20 of this press
release for further information.
As at March 31, 2022, Oyu Tolgoi had a total workforce
(employees and contractors), including for underground project
construction, of approximately 16,300 workers, of which over 97%
were Mongolian.
SELECTED FINANCIAL METRICS (1) Three months
ended Year ended ($ in millions, unless otherwise noted)
1Q2022 1Q2021 Change% 12 months2021 Restated (6)
Revenue (6)
402.7
526.5
(23.5%)
2,040.8
Income for the period (6)
394.3
332.1
18.7%
735.9
Income attributable to owners of Turquoise Hill Resources Ltd (6)
275.2
236.7
16.3%
561.1
Basic and diluted earnings per share attributable to owners of
Turquoise Hill Resources Ltd (6)
1.37
1.18
16.1%
2.79
Revenue by metals in concentrates Copper (6)
290.5
333.7
(12.9%)
1,262.5
Gold (6)
108.0
188.2
(42.6%)
759.5
Silver (6)
4.2
4.6
(8.7%)
18.8
Cost of sales (6)
175.0
155.6
12.5%
637.2
Production and delivery costs (6)
135.5
103.4
31.0%
474.2
Depreciation and depletion
39.5
52.2
(24.3%)
163.0
Capital expenditure on cash basis (2)(6)
229.9
250.3
(8.2%)
982.0
Underground-Development (6)
119.0
181.1
(34.3%)
666.0
Underground-Sustaining
84.8
60.9
39.2%
232.4
Open pit
26.1
8.3
214.5%
83.6
Royalty expenses
24.9
22.7
9.7%
105.4
Total operating cash costs (3)(6)
228.9
201.2
13.8%
889.7
Unit costs ($) Cost of sales (per pound of copper sold) (4)(6)
2.65
1.81
46.4%
2.07
C1 (per pound of copper produced) (5)(6)
1.66
0.08
1,975.0%
0.23
All-in sustaining (per pound of copper produced) (5)(6)
2.72
0.49
455.1%
0.89
Mining costs (per tonne of material mined) (5)
2.25
1.97
14.2%
2.24
Milling costs (per tonne of ore treated) (5)
7.10
6.25
13.6%
7.13
G&A costs (per tonne of ore treated) (4)
3.72
3.47
7.2%
3.99
Net cash generated from (used in) operating activities (6)
122.4
(133.2)
191.9%
630.9
Cash generated from operating activities before interest and tax
(6)
122.6
248.2
(50.6%)
1,265.6
Interest paid
0.8
26.5
(97.0%)
276.4
Total assets (6)(7)
14,641
13,694
6.9%
14,200
Total non-current financial liabilities
4,103
4,431
(7.4%)
4,084
(1)All financial information in
this press release should be reviewed in conjunction with the
Company‘s consolidated financial statements for the reporting
periods indicated.
(2)Capital expenditure on cash
basis for underground-development, underground sustaining and for
open-pit are supplementary financial measures, which are not
standardised financial measures and are not intended to replace
measures prepared in accordance with IFRS. Please refer to the
Section titled – “Non-GAAP and Other Financial Measures” on page 20
of this press release for further information.
(3)Total operating cash costs is
a non-GAAP financial measure. Please refer to the Section titled –
“Non-GAAP and Other Financial Measures” on page 20 of this press
release for further information.
(4)Cost of sales (per pound of
copper sold) and General & Administrative (G&A) costs (per
tonne of ore treated) are supplementary financial measures which
are not standardised financial measures and are not intended to
replace measures prepared in accordance with IFRS. Please refer to
the Section titled – “Non-GAAP and Other Financial Measures” on
page 20 of this press release for further information.
(5)C1 cash costs (per pound of
copper produced), all-in sustaining costs (per pound of copper
produced), mining costs (per tonne of material mined), and milling
costs (per tonne of ore treated) are non-GAAP ratios which are not
standardised financial measures and are not intended to replace
measures prepared in accordance with IFRS. Please refer to the
Section titled – “Non-GAAP and Other Financial Measures” on page 20
of this press release for further information.
(6)Prior year comparatives have
been restated for adoption of the IAS16 amendment to Property,
Plant and Equipment: Proceeds before intended use. Please refer to
the Section titled “Recent Accounting Pronouncements” on page 24 of
Q1 2022 MD&A for further information.
(7)Q1 2021 comparative has been
restated for adoption of the IAS16 amendment to Property, Plant and
Equipment: Proceeds before intended use. Please refer to the
Section titled “Recent Accounting Pronouncements” on page 24 of Q1
2022 MD&A for further information.
Q1’22 vs Q1’21
- Revenue of $402.7 million in Q1’22 decreased 23.5% from $526.5
million in Q1’21 due to the planned transition of mining to the
next phase of operations, resulting in 33.3% and 59.6% lower
production volumes of copper and gold, respectively, and processing
of lower grade stockpile material, partially offset by 17.9% higher
copper and 4.3% gold average prices.
- Income for the period was $394.3 million in Q1’22 versus $332.1
million in Q1’21, reflecting higher tax benefits partially offset
by lower revenue. $256.6 million of deferred tax assets were
recognised in Q1’22 compared to $52.3 million in Q1’21. The
recognition in Q1’22 was due to an increase in temporary
differences related primarily to tax depreciation on property,
plant and equipment and an increase in utilisation of 2016 losses
against higher projected 2022 taxable income driven by higher metal
pricing. Income attributable to owners of Turquoise Hill in Q1’22
was $275.2 million ($1.37 per share) versus $236.7 million ($1.18
per share) in Q1’21.
- Cost of sales of $175.0 million in Q1’22 increased 12.5% from
$155.6 million in Q1’21 largely due to the inflationary pressures
on prices for critical supplies, including fuel, power, explosives
and grinding media.
- Expenditures on property, plant and equipment were $229.9
million in Q1’22 versus $250.3 million in Q1’21, comprised of
$203.8 million (Q1’21: $242.0 million) in capital expenditure on
the underground project7, including $84.8 million (Q1’21: $60.9
million) in underground sustaining capital expenditure7 as well as
$26.1 million (Q1’21: $8.3 million) in open-pit sustaining capital
expenditure7.
- Total operating cash costs8 of $228.9 million in Q1’22
increased 13.8% from $201.2 million in Q1’21, largely due to
inflationary pressures on prices for critical supplies, including
fuel, power, explosives and grinding media.
- Unit cost of sales of $2.65 per pound of copper sold9 in Q1’22
increased 46.4% from $1.81 per pound of copper sold in Q1’21,
reflecting higher operating cash costs and an increase in unit
fixed costs from lower metal production.
- Oyu Tolgoi’s C1 cash costs of $1.66 per pound of copper
produced10 in Q1’22 increased from $0.08 per pound of copper
produced in Q1’21 due to higher operating cash costs and lower
copper produced due to the planned transition of mining to the next
phase of operations. Similarly, gold revenue credits also decreased
by $80.2 million.
- All-in sustaining costs of $2.72 per pound of copper produced
10 in Q1’22 increased from $0.49 per pound of copper produced in
Q1’21. All-in sustaining costs were impacted by the same factors as
C1 cash costs as well as a $17.8 million increase in open-pit
sustaining capital expenditure due to higher deferred stripping
from Phase 5 waste removal and commencement of the Gashuun Sukhait
(GSK) road.
- Mining costs of $2.25 per tonne of material mined 10 in Q1’22
increased 14.2% from $1.97 per tonne of material mined in Q1’21.
The increase was mainly driven by higher fuel, blasting and power
costs due to market price increases and an increase in maintenance
costs due to additional manpower availability from an easing in
COVID-19 restrictions.
- Milling costs of $7.10 per tonne of ore treated 10 in Q1’22
increased 13.6% from $6.25 per tonne of ore treated in Q1’21. The
increase was due to higher milling cost as a result of processing
harder ore from Phase 5, higher costs due to a planned maintenance
shutdown and higher power and grinding media costs as a result of
market price increases.
- G&A costs of $3.72 per tonne of ore treated11 in Q1’22
increased 7.2% from $3.47 per tonne of ore treated in Q1’21. The
increase was mainly due to lower tonnes of ore treated, higher
project monitoring and support costs associated with underground
activities offset with reduced COVID-19 related costs and lower ore
treated from planned concentrator maintenance in Q1’22.
- Net cash generated from operating activities in Q1’22 was
$122.4 million versus cash used in operating activities of $133.2
million in Q1’21, primarily due to $356 million in taxes paid in
Q1’21 related to the 2013 to 2015 and 2016 to 2018 Tax Assessments.
Cash generated from operating activities before interest and tax
decreased by $125.6 million due to lower gross margin from lower
revenue and higher operating expenses due to inflationary pressures
on prices for critical supplies including fuel, power, explosives
and grinding media.
_______________________________
7 Capital expenditures on the underground
project, underground sustaining capital expenditure and open-pit
sustaining capital expenditure are supplementary financial
measures. Please refer to the Section titled “Non-GAAP and Other
Financial Measures” on page 20 of this press release for further
information.
8 Total operating cash costs is a non-GAAP
financial measure. Please refer to the Section titled “Non-GAAP and
Other Financial Measures” on page 20 of this press release for
further information.
9 Cost of sales per pound of copper sold
is a supplementary financial measure. Please refer to the Section
titled “Non-GAAP and Other Financial Measures” on page 20 of this
press release for further information.
10 C1 cash costs per pound of copper
produced, all-in sustaining costs per pound of copper produced,
mining costs per tonne of material mined and milling costs per
tonne of ore treated are non-GAAP ratios. Please refer to the
Section titled “Non-GAAP and Other Financial Measures” on page 20
of this press release for further information.
11 G&A costs per tonne of ore treated
is a supplementary financial measure. Please refer to the Section
titled “Non-GAAP and Other Financial Measures” on page 20 of this
press release for further information.
OYU TOLGOI
Operations, Safety Performance and COVID-19 Update
The safety and wellbeing of our workers continues to be our
priority. For the Q1’22 quarter, Oyu Tolgoi achieved an All Injury
Frequency Rate (AIFR) of 0.09 per 200,000 hours worked.
Oyu Tolgoi continues to utilise multiple COVID-19 controls at
site, including maintaining 1.5 metres social distancing, always
wearing masks, regular hand washing, sanitisation and regular
testing to suppress virus prevalence.
During Q1’22, COVID-19 cases identified at Oyu Tolgoi trended
downward. Consequently, onsite workforce numbers over the quarter
increased to approximately 90% of plan with mobilisation of
personnel across multiple work-fronts. COVID-19 related
restrictions for international arrivals to Mongolia have been
lifted and international flights have resumed across the
region.
Concentrate inventory levels on site continued to decrease over
Q1’22; and although we have seen improvements in shipping
cross-border into China, the force majeure declared by OT LLC from
March 30, 2021 will remain in place until there are sufficiently
sustained volumes of convoys to ensure Oyu Tolgoi’s ability to meet
its on-going commitments to customers and to return on-site
concentrate inventory to target levels. The global supply chain
reaction to the Russia-Ukraine conflict has prompted the business
to more closely monitor and hold greater inventory levels of
critical supplies. Supply routes and commodity origins have been
altered to reduce risk to the business and ensure continuous supply
of goods.
In Q1’22, an even time roster was implemented across the site as
required by newly updated Mongolian labour laws resulting in the
need to hire and train additional personnel. Despite these
challenges a safe and productive quarter was achieved.
Selected Operational Metrics
Oyu Tolgoi Production Data All data represents full
production and sales on a 100% basis 1Q 2Q 3Q 4Q
1Q
Full Year
2021
2021
2021
2021
2022
2021
Open pit material mined (‘000 tonnes)
22,588
15,829
22,588
23,979
24,386
84,983
Ore treated (‘000 tonnes)
9,813
9,401
9,336
10,573
9,581
39,124
Average mill head grades: Copper (%)
0.56
0.47
0.53
0.46
0.40
0.50
Gold (g/t)
0.68
0.50
0.63
0.38
0.32
0.54
Silver (g/t)
1.29
1.19
1.29
1.27
1.25
1.26
Concentrates produced (‘000 tonnes)
201.9
173.2
191.9
182.7
144.3
749.6
Average concentrate grade (% Cu)
22.5
21.2
21.9
21.3
21.0
21.7
Production of metals in concentrates: Copper (‘000 tonnes)
45.4
36.7
41.9
38.9
30.3
163.0
Gold (‘000 ounces)
146
113
131
79
59
468
Silver (‘000 ounces)
255
235
249
238
211
977
Concentrate sold (‘000 tonnes)
186.3
92.6
224.4
165.9
148.3
669.2
Sales of metals in concentrates: Copper (‘000 tonnes)
39.0
19.6
46.4
34.4
29.9
139.4
Gold (‘000 ounces)
111
73
149
102
57
435
Silver (‘000 ounces)
207
106
278
192
179
783
Metal recovery* (%) Copper
86.3
79.7
83.9
80.1
78.1
82.8
Gold
72.2
69.3
68.7
59.3
59.0
68.4
Silver
65.3
62.5
64.1
55.1
54.3
61.6
*Metal recovery is a function of head
grade and reflects grades delivered in the quarter.
Oyut Open-Pit Operations and Hugo North Underground
During Q1’22, the combined open-pit and underground operations
produced 30.3 thousand tonnes of copper in concentrate and 59
thousand ounces of gold in concentrate, representing a planned
reduction from Q4’21 due to a planned reduction in mill throughput
from scheduled maintenance activities as well as the planned
transition of mining to the next phase of operations resulting in
lower copper and gold head grades. The mill feed for Q1'22 included
approximately 262 thousand tonnes of underground development
material with 0.52% copper and 0.25g/t gold of headgrades.
The remaining 9.3 million tonnes of mill feed was sourced from
Phases 4B and 5 of the open-pit as well as low grade stockpiles.
Mining in Phase 4B was completed in March 2022. Mill head grades
will remain low through to the end of 2022 as mined-material direct
mill feed will continue to be supplemented by low grade
stockpiles.
As previously disclosed, open-pit optimisation opportunities
that reduce the impact of the previously forecast metal deferral
resulting from the Q4’20 pitwall failure are improving in
definition. Related work is still expected to be incorporated into
an updated mine plan in Q3’22.
During Q1’22, the underground project achieved several
significant milestones, including commencement of the undercut and
commissioning of both Materials Handling System 1 and the first
on-footprint truck chute. The timing of first drawbell remains
aligned with the previously disclosed timing of Q3’22. Despite the
delayed commencement of the undercut, undercut blasting and on
footprint construction work continue to progress well ahead of the
first drawbell blast. Infrastructure to support production ramp-up
also progressed during the quarter, including completion of the
conveyor to surface decline mining and transfer chamber mass
excavation.
Shaft 3 headframe was commissioned and sinking commenced on
March 31, 2022 from a cumulative depth of 83 metres below ground
level. Shaft 4 sinking re-started on March 25, 2022 after work was
interrupted on February 17, 2022 due to an electrical fault and
subsequent repairs. Shaft 4 advancement was 190 metres below ground
level as of March 31, 2022. Although the progress of these shafts
continued during Q1’22, challenges with sinking rates continue, and
a programme of work has been initiated to optimise shaft sinking
progress going forward. The impact of shaft sinking rates and
related optimisation efforts on post-Panel 0 ramp up will be
evaluated at the conclusion of the current schedule review and will
be incorporated in an update expected to be completed in Q2’22.
Following undercut commencement in January 2022, Panels 1 and 2
are expected to be delayed due to changes to mining scope as well
as COVID-19 related work restrictions impacting both Shafts 3 and 4
and underground development progress as previously disclosed.
The table below provides the Company’s updated estimated key
milestone dates compared to the 2020 Oyu Tolgoi Technical Report
(2020 OTTR), including updates to Shaft 3 and 4 milestones. Once
the Shaft 3 and 4 schedule is finalised in Q2’22, an assessment of
the impact on Panel 1 and 2 will be completed. Delays to Shaft 3
and 4 are not expected to result in equivalent delays to Panels 1
and 2 given the current underground development approach and the
further mitigation opportunities under investigation.
The Panel 0 first draw bell remains on track for Q3’22, as does
timing of sustainable production in H1’23, and neither are expected
to be impacted by the updates to the schedule for Shafts 3 and
4.
Milestone
2020 OTTR
Actual or Currently Projected
Dates
Start Undercut blasting
July 2021
January 2022 (Actual)
MHS 1 (including Crusher 1)
commissioning
Q4’21
February 2022 (Actual)
First draw bell blasted
May 2022
Q3’22
Sustainable Production (sustainable cave
propagation)
February 2023
(~30 drawbells active(1))
H1’23
(~ 21 drawbells active(1))
Shaft 3 commissioned
H1’22
H1’24(2)
Shaft 4 commissioned
H1’22
H1’24(2)
First draw bell Panel 2
Q4’24
H1’26(2)
First draw bell Panel 1
H2’26
H1’27(2)
(1) Design refinements identified that a
minor modification to undercut sequence following additional
geotechnical assessment of cave initiation conditions, changed the
estimated number of drawbells to reach critical hydraulic radius,
which is the point at which sustainable production is anticipated
to commence. Critical hydraulic radius is an estimated factor,
based on the best available data but some variability in the exact
number of drawbells needed to reach critical hydraulic radius could
occur with the potential for the requirement to be more or less
than 21 drawbells. (2) Shaft 3 and 4 schedules are under review as
part of the preliminary cost and schedule update. A programme of
work is underway to maximise productivity in the shaft areas. The
impact of schedule slippage to the shafts on the timing of Panels 1
and 2 is yet to be defined, but it is not expected to be
equivalent.
At the end of March 2022, cumulative underground capital
development is 66,920 equivalent metres (eqm) and cumulative
Conveyor to Surface advancement is 16,088 eqm.12
Q1’2022
Total Equivalent metres
Lateral Development metres
Mass Excavation (000’ cubic
metres)13
UDS Development
646
220
10,529
UDS Sustaining
2,856
2,757
2,492
C2S
225
30
4,843
Overall
3,727
3,007
17,864
The total cumulative increase
to the Definitive Estimate14 underground development capital cost
due to the impacts of COVID-19 through the end of Q1’22 increased
by $20 million from $175 million to $195 million excluding taxes.
This increase included the currently known, incremental,
time-related costs of COVID-19 restrictions.
Preliminary outcomes from the 2022 cost and schedule update for
the underground project, which incorporate the known, incremental
COVID-19 cost impact of $195 million through March 31, 2022,
associated taxes and an estimate of further COVID-19 management
costs over the remaining development schedule, indicate an increase
in the total expected development capital of the Definitive
Estimate from $6.75 billion to $7.06 billion. The 2022 cost and
schedule update is currently under review by the Company with some
areas of risk to cost and schedule identified that remain under
assessment.
OT LLC spent $203.8 million on capital expenditures on the
underground project15 during Q1’22, including $84.8 million of
underground sustaining capital expenditure. Total capital
expenditure on the underground project from January 1, 2016, to
December 31, 2021, was approximately $5.6 billion, including $0.4
billion of underground sustaining capital expenditure. Underground
capital expenditure on a cash basis includes VAT and capitalised
management services payments but excludes capitalised interest. In
addition, OT LLC had contractual obligations16 of $0.5 billion as
at March 31, 2022. From the restart of project development in 2016
through March 31, 2022, Oyu Tolgoi has committed over $4.3 billion
to Mongolian vendors and contractors.
______________________________________
12 Totals include sustaining capital
metres.
13 Mass Excavation includes stripping
cubic metres.
14 The confirmatory analysis of the underground project costs and
schedule contained in the 2020 statutory study required pursuant
to, and prepared by OT LLC in accordance with Mongolian laws and
filed with the Mongolian Minerals Council in 2021.
15 Capital expenditure on the underground
project and Underground sustaining capital expenditure are
supplementary financial measures. Please refer to the Section
titled “Non-GAAP and Other Financial Measures” on page 20 of this
press release for further information.
16 Contractual obligations is a non-GAAP
financial measure. Please refer to the Section titled “Non-GAAP and
Other Financial Measures” on page 20 of this press release for
further information.
Incremental Mine Design Refinements
Studies on Hugo North Lift 1 continue with the focus on design
optimisation for Panels 1 and 2 and pillar recovery. To support the
mining studies, additional data is being collected via a surface
and underground drilling programme. Drilling continues at Hugo
North to increase orebody knowledge and extend the current mine
design.
- Lift 1 – A total of 25,000 metres of drilling is planned for
2022 and into 2023. Most of these drill metres are into potential
future mining areas which are on the Lift 1 horizon and currently
excluded from the Mineral Reserve.
- Lift 2 - Over the next 4 years (2022-2025) approximately
100,000 metres of drilling is planned to improve the orebody
knowledge and geotechnical modelling of Lift 2.
During Q1’22, the focus of the drilling programme was the
northern part of Lift 1, Panel 1 and the southern part of Lift 1,
Panel 2. Drilling has ramped up since Q4’21 due to improvements in
the COVID-19 situation on site.
Preliminary results from the ongoing Lift 1, Panel 2 mine design
optimisation are expected before the end of H1’22. The scope of
this study includes a review of the base case, including
optimisation of the extraction drive orientation and the undercut
strategy, reducing exposure to caving-related risks. Risk reduction
efforts could alter the mining sequence within panels, which may
result in changes to the metal profile. The initial focus is on the
northern section of Panel 2, where additional data is already
available and will be expanded to include the southern section in
H2’22.
The Panel 1 and Pillar Recovery studies are scheduled for
completion in early 2023.
FUNDING OF OT LLC BY TURQUOISE HILL
In accordance with the Amended and Restated Shareholders’
Agreement dated June 8, 2011 (ARSHA), Turquoise Hill has funded OT
LLC’s cash requirements beyond internally generated cash flows by a
combination of equity investment and shareholder debt.
For amounts funded by debt, OT LLC must repay such amounts,
including accrued interest, before it can pay common share
dividends. As at March 31, 2022, the aggregate outstanding balance
of shareholder loans extended by subsidiaries of the Company to OT
LLC was $8.4 billion, including accrued interest of $2.3 billion.
These loans bear interest at an effective annual rate of LIBOR plus
6.5%.
In accordance with the ARSHA, a subsidiary of the Company had
previously funded the common share investments in OT LLC on behalf
of state-owned Erdenes. These funded amounts, also referred to as
carry account loans, earned interest at an effective annual rate of
LIBOR plus 6.5% and were expected to be repayable by Erdenes to a
subsidiary of the Company via a pledge over Erdenes’ share of OT
LLC common share dividends. Erdenes also had the right to reduce
the outstanding balance by making cash payments at any time. As
announced on January 24, 2022, the Company waived in full the
cumulative $2.4 billion in non-recourse loans to Erdenes. The loan
comprised the amount of equity invested of $1.4 billion in OT LLC
by the Company on behalf of Erdenes, plus $1.0 billion of
unrecognized interest as at January 25, 2022, the date that the
waiver was formally granted to and acknowledged by Erdenes.
On December 30, 2021 the Parliament of Mongolia passed
Resolution 103 to resolve the outstanding issues among the Company,
Rio Tinto and the Government of Mongolia in relation to the
implementation of Resolution 92 (see the section “Government
Relations - Negotiations with Government of Mongolia” of this press
release). Resolution 103 placed financing debt restrictions that
limit the Company’s ability to fund OT LLC with shareholder debt or
to carry common share investments in OT LLC on behalf of Erdenes
until sustainable production is achieved, which is currently
expected in H1’23.
As at March 31, 2022, Turquoise Hill had $0.6 billion of
available liquidity in the form of cash and cash equivalents,
which, under current projections and together with the various
sources of funding available to the Company under the Amended and
Restated Heads of Agreement (the Amended HoA) dated January 24,
2022 between the Company and Rio Tinto, are expected to provide the
Company with sufficient liquidity and resources to meet its minimum
obligations for a period of at least 12 months from the balance
sheet date of March 31, 2022.
The Amended HoA replaced the prior Heads of Agreement entered
into on April 9, 2021, which itself replaced the non-binding
Memorandum of Understanding that Rio Tinto and Turquoise Hill
entered into on September 9, 2020. The Amended HoA is binding and
delineates a comprehensive funding arrangement (the Funding Plan)
to address the Company’s estimated incremental funding
requirement.
Key elements of the Amended HoA include:
- Pursuing the rescheduling of principal repayments of existing
debt (Re-profiling) to potentially reduce the base case incremental
funding requirement by up to $1.7 billion;
- Seeking to raise up to $500 million of additional senior
supplemental debt (SSD);
- Rio Tinto committing to provide a co-lending facility
(Co-Lending Facility), incremental to the Re-profiling and the SSD,
of up to $750 million to be made available once sustainable
production has been achieved;
- Rio Tinto committing to provide one or more secured advances
directly to the Company of up to a maximum of $300 million (RT
Advance), which would be available during the debt funding
restriction period identified in Resolution 103 and would be
indirectly repaid out of the proceeds of the $750 million
Co-Lending Facility; and
- The Company agreeing to conduct an equity offering in a form of
its choosing of at least $650 million (Initial Equity Offering)
(including a Rio Tinto pro rata participation) by no later than
August 31, 2022.
Under the current base case assumptions, additional equity in
excess of the initial $650 million would not be required if the
Re-profiling, SSD and Co-Lending Facility are fully successful. In
addition, the Amended HoA provides that, if necessary, Turquoise
Hill could be required to raise up to a total of $1.5 billion (less
the amount raised in the Initial Equity Offering) via equity in a
form of its choosing.
The requirement of Rio Tinto to advance funds under the
Co-Lending Facility is subject to a number of conditions precedent
set out in the Amended HoA, including, among others: that certain
undertakings provided by the Company in favour of the Oyu Tolgoi
project finance lenders be amended to cover the Co-Lending
Facility; that terms of the Oyu Tolgoi project finance agreements
with respect to a “Sponsor Senior Loan” not be amended in any
material respect; the absence of new material claims and
proceedings against Turquoise Hill or Rio Tinto that could
adversely impact the funding elements of the Amended HoA; the
absence of a material adverse change and of a “Suspensive Event” as
defined under the Oyu Tolgoi project finance agreements, and
operations at Oyu Tolgoi not having been suspended for certain
defined periods of time; and all relevant third party approvals and
consents having been obtained. The requirement of Rio Tinto to
advance funds under the RT Advance is also subject to a number of
conditions precedent set out in the Amended HoA substantially
similar to those applicable to the Co-Lending Facility. The
foregoing list of conditions does not purport to be exhaustive, and
investors should refer to a copy of the Amended HoA as filed on the
SEDAR and EDGAR profiles of the Company.
In light of the financing debt restrictions in Resolution 103,
until sustainable production is achieved (currently expected in
H1’23), OT LLC's estimated funding requirements are expected to be
addressed by cash on hand at OT LLC, the Re-profiling and a
pre-paid copper concentrate sale arrangement between Turquoise Hill
and OT LLC.
Assuming successful completion of the above elements, the
Company currently estimates it can address its $3.4 billion
incremental funding requirement (December 31, 2021: $3.4 billion)
within the new timing framework of the Amended HoA, which sets a
target date for the Re-profiling of no later than December 31, 2022
and an outside date for the SSD and Co-Lending Facility to the
earlier of the three months following the lifting of the debt
restrictions under Resolution 103 and December 31, 2023.
Successful implementation of the Amended HoA is subject to
achieving alignment with relevant stakeholders in addition to Rio
Tinto (including existing lenders, any potential new lenders and
the Government of Mongolia), market conditions and other factors.
However, non-fulfilment of any of the conditions precedent
identified in the Amended HoA would also adversely affect the
ability of the Company and OT LLC to obtain additional funding or
re-profile existing debt as contemplated within the timeframe set
out in the Amended HoA. The Company is in discussions with Rio
Tinto regarding implementation of the Amended HoA as well as its
residual funding requirements.
The Amended HoA and the timing of the execution of its various
components could also be affected by the unsolicited non-binding
proposal from Rio Tinto, the Company's majority shareholder, to
acquire through a plan of arrangement the approximately 49% of the
outstanding shares of Turquoise Hill held by the Company's minority
shareholders for cash consideration of C$34.00 per share. Rio Tinto
has stated that its Proposal is conditional on, among other things,
Turquoise Hill not raising additional equity capital, including
through a rights offering, bought deal or other share placement,
pending completion of the proposed transaction. The Proposal does
not purport to formally amend the terms of the Amended HoA.
Given the uncertainties outlined above, the Company is currently
assessing alternatives in the event that the timeline as outlined
in the Amended HoA is not achieved.
Turquoise Hill’s liquidity outlook will continue to be impacted,
either positively or negatively, by various factors, many of which
are outside the Company’s control, including:
- Successful implementation of the Amended HoA;
- Changes in commodity prices and other market-based
assumptions;
- Open-pit operating performance as well as the successful
implementation (or otherwise) of ongoing optimisation efforts;
- The underground mine cost and schedule review and update that
is underway and expected to be completed in Q2 2022;
- Further and/or unanticipated impacts on operations and
underground development related to the COVID-19 pandemic as well as
the economic, commercial and financial consequences thereof;
- The Proposal from Rio Tinto to acquire through a plan of
arrangement the outstanding shares of the Company; and
- The outcomes of Turquoise Hill’s and Rio Tinto’s ongoing
engagement with various Mongolian governmental bodies as the
Mongolian Government implements Resolution 103, as discussed in the
“Negotiations with the Government of Mongolia” section of this
press release below.
Turquoise Hill continues to monitor its liquidity outlook and
will provide updates as and when circumstances require.
As noted above, Turquoise Hill currently estimates its base case
incremental funding requirement to be $3.4 billion (December 31,
2021: $3.4 billion), taking into consideration:
- Metal price assumptions for copper and gold over the
incremental funding period, as delineated in the table below;
- Preliminary outcomes from the 2022 cost and schedule update for
the underground project, which incorporate the known, incremental
COVID-19 cost impact of $195 million through March 31, 2022,
associated taxes and an estimate of further COVID-19 management
costs over the remaining development schedule, indicate an increase
in the total expected development capital from $6.75 billion to
$7.06 billion. The 2022 cost and schedule update is currently under
review by the Company, with some areas of risk to cost and schedule
identified that remain under assessment;
- The current forecast of sustainable production for Panel 0,
which is H1’23;
- The current forecast of delays to Shafts 3 and 4 (for further
information, see the “Oyut Open-Pit Operations and Hugo North
Underground” section of this press release above); and
- Any updates or changes to the mine plan of either the open-pit
or underground mines (for further information, see the “Oyut
Open-Pit Operations and Hugo North Underground” section of this
press release above).
The specific metal price assumptions used in determining the
base case incremental funding gap are as follows:
Year
Copper ($ / pound)
Gold ($ / troy ounce)
2022
4.48
1,900
2023
4.06
1,789
2024
3.91
1,716
Within the base case funding requirement are $1.8 billion of
scheduled principal repayments, which the Company is attempting to
re-profile.
Turquoise Hill currently estimates its base case incremental
funding will continue to be influenced, either positively or
negatively, by various factors over the incremental funding period,
many of which are outside the Company’s control, including:
- Any potential further revisions to the amount of underground
development capital required or revisions to schedule;
- The timing of sustainable production and ramp-up profile and
their impact on cash flows including any further COVID-19-related
delays (for further information, see the “Oyut Open-Pit Operations
and Hugo North Underground” section of this press release
above);
- The outcomes of Turquoise Hill’s and Rio Tinto’s ongoing
engagement with various Mongolian governmental bodies to resolve
remaining outstanding items relating to the Government of
Mongolia’s implementation of Resolution 103 as discussed in the
“Negotiations with the Government of Mongolia” section of this
press release below;
- Changes to the amount of cash flow expected to be generated
from open-pit operations, net of underground and open-pit
sustaining capital requirements;
- Further and/or unanticipated impacts on operations and
underground development related to the COVID-19 pandemic as well as
the economic, commercial and financial consequences thereof;
and
- Changes in expected commodity prices and other market-based
assumptions (upside and downside pricing sensitivities would have,
respectively, a favourable or unfavourable impact on the base case
incremental funding requirement).
More generally, any changes in the above factors may impact the
incremental funding requirement and, as a result, the actual
quantum of incremental funding required may be greater or less than
the $3.4 billion base case estimate, and such variance may be
significant. See the sections “Risks and Uncertainties” and
“Forward-Looking Statements and Forward-Looking Information” in Q1
2022 MD&A.
PRIVATISATION PROPOSAL RECEIVED FROM RIO TINTO
On March 13, 2022, the Board received a non-binding proposal
from Rio Tinto, the Company's majority shareholder, to acquire the
approximately 49% of the outstanding common shares of Turquoise
Hill held by the Company's minority shareholders (approximately 99
million common shares) for cash consideration of C$34.00 per share.
Rio Tinto has stated that the Proposal is conditional on, among
other things, Turquoise Hill not raising additional equity capital,
including through a rights offering, bought deal or other share
placement, pending completion of the proposed transaction. The
Proposal does not amend the terms of the amended and restated Heads
of Agreement entered into by Turquoise Hill and Rio Tinto on
January 24, 2022 which establishes a binding funding plan for the
completion of the Oyu Tolgoi underground mine.
In response to the Proposal, the Board formed a Special
Committee of independent directors comprised of Maryse
Saint-Laurent (Chair), George Burns, Peter Gillin and Russel
Robertson (the Special Committee). The Special Committee has
retained BMO Nesbitt Burns Inc. as its financial advisor and Blake,
Cassels & Graydon LLP as its legal counsel. In addition, the
Special Committee has retained TD Securities as an independent
valuator to prepare a formal valuation of the common shares of the
Company in accordance with Multilateral Instrument 61-101–
Protection of Minority Shareholders in Special Transactions.
In addition to responsibility for reviewing and considering the
Proposal, the Special Committee's mandate includes responsibility
for considering the Company's liquidity needs and financing options
pending the Company's consideration of the Proposal, including
consideration of whether the Company should proceed with an equity
offering to meet its liquidity requirements or consider other
financing options, including potential financing from Rio Tinto
pending the Special Committee's consideration of the Proposal. The
Proposal is non-binding on Turquoise Hill. There can be no
assurance that a transaction will result from the Proposal, and if
a transaction does result, whether such transaction will be
completed or on what terms.
Turquoise Hill does not intend to comment on or disclose further
developments regarding the Special Committee's evaluation of the
Proposal unless and until it deems further disclosure is
appropriate or required.
GOVERNMENT RELATIONS
Turquoise Hill’s ownership of the Oyu Tolgoi mine is held
through a 66% interest in OT LLC. The remaining 34% interest in OT
LLC is held by Erdenes. Turquoise Hill was obliged to fund Erdenes’
share of Oyu Tolgoi’s funding requirements until September 2016,
and Erdenes’ share of the capital costs and operating costs of the
underground mine until September 2021 under the ARSHA and the Oyu
Tolgoi Underground Mine Development and Financing Plan (UDP)
entered into on May 18, 2015 between, among others, the Company,
the Government of Mongolia, Erdenes and OT LLC.
Underground construction recommenced in May 2016 when OT LLC
received the final requirement for the restart of underground
development: formal notice to proceed approval by the Board, Rio
Tinto (as project manager) and OT LLC. Approval followed the
signing of the UDP in May 2015 and the signing of a $4.4 billion
project finance facility in December 2015. Development had been
suspended in August 2013 pending resolution of matters with the
Government of Mongolia.
Turquoise Hill’s investment in the Oyu Tolgoi mine is governed
by the 2009 Investment Agreement among Turquoise Hill, the
Government of Mongolia, OT LLC and an affiliate of Rio Tinto
(Investment Agreement or IA). The Investment Agreement framework
was authorised by the Mongolian Parliament and was concluded after
16 months of negotiations. It was reviewed by numerous
constituencies within the Government. Turquoise Hill has been
operating in good faith under the terms of the Investment Agreement
since 2009, and we believe not only that it is a valid and binding
agreement, but that it has proven to be beneficial for all
parties.
Adherence to the principles of the Investment Agreement, the
ARSHA and the UDP has allowed for the development of the Oyu Tolgoi
mine in a manner that has given rise to significant long-term
benefits to Mongolia. Benefits from the Oyu Tolgoi mine open-pit
operations and underground development include, but are not limited
to, employment, royalties and taxes, local procurement, economic
development and sustainability investments.
Renewed Partnership with Government of Mongolia
On January 24, 2022, the Company announced that it had
successfully reached a mutual understanding for a renewed
partnership with the Government of Mongolia and that the OT LLC
Board had unanimously approved the commencement of the undercut,
namely the commencement of blasting on January 25, 2022 that
started the Oyu Tolgoi underground mine production and the full
Definitive Estimate underground development budget.
The decision to approve the undercut represented a reset of the
relationship with the Government of Mongolia with a view to
delivering economic benefits to all stakeholders including the
people of Mongolia and followed resolution of many of the
conditions required in Resolution 103 including:
- Turquoise Hill agreeing to waive in full the US$2.4 billion
carry account loan of Erdenes. See the section “Funding of OT LLC
by Turquoise Hill” in this press release;
- Improved cooperation with Erdenes in monitoring the Oyu Tolgoi
underground development and enhancing environment, social and
governance (ESG) matters;
- The approval of the ESA; and
- The establishment of a funding structure at OT LLC that does
not incur additional loan financing prior to sustainable production
for Panel 0 (expected in the first half of 2023).
The Company continues to work with the Government of Mongolia
and Rio Tinto to finalise the remaining outstanding measures of
Resolution 103, namely the formal termination of the UDP and
resolution of the outstanding OT LLC tax arbitration.
Oyu Tolgoi Mine Power Supply
OT LLC currently sources power for the Oyu Tolgoi mine from
China’s Inner Mongolian Western Grid, via overhead power line,
pursuant to back-to-back power purchase arrangements with
Mongolia’s National Power Transmission Grid (NPTG), the relevant
Mongolian power authority, and Inner Mongolia Power International
Cooperation Co., Ltd (IMPIC), the subsidiary of Inner Mongolia’s
power grid company expiring in July 2023.
OT LLC is obliged under the Investment Agreement to secure a
long-term domestic source of power for the Oyu Tolgoi mine. The
Power Source Framework Agreement (PSFA) entered into between OT LLC
and the Government of Mongolia in December 2018 (and as amended in
June 2020) provides a binding framework and pathway for long-term
power supply to the Oyu Tolgoi mine.
OT LLC entered into the ESA on January 26, 2022, with, amongst
others, Southern Region Electricity Distribution Network to provide
OT LLC with power from the Mongolian grid. Power will be delivered
under the ESA once certain technical conditions are satisfied, and
the Mongolian grid becomes capable of providing electricity to meet
OT LLC’s total power requirements on a long-term basis.
The ESA has a term of 20 years from the date on which supply
commences and provides a pathway to meeting OT LLC’s long-term
power requirements from domestic power sources.
While the Mongolian grid undergoes an upgrade to be in a
position to provide stable and reliable power to the Oyu Tolgoi
mine, OT LLC will continue to import its power from Inner Mongolia,
China. An agreement in-principle has been reached between NPTG and
IMPIC for a three-year fixed term extension to 2026, followed by an
extension to up to 2030, if required. Some outstanding commercial
terms are in the process of being finalised with IMPIC by a
dedicated working group established by the Ministry of Energy,
which also includes representatives from Oyu Tolgoi LLC and
NPTG.
Oyu Tolgoi Tax Assessments
On January 16, 2018, Turquoise Hill announced that OT LLC had
received and was evaluating a tax assessment for approximately $155
million (which was converted from Mongolian Tugrik to U.S. dollars
at the exchange rate on that date) from the Mongolian Tax Authority
(MTA) relating to an audit on taxes imposed and paid by OT LLC
between 2013 and 2015 (the 2013 to 2015 Tax Assessment). In January
2018, OT LLC paid an amount of approximately $4.8 million to settle
unpaid taxes, fines and penalties for accepted items.
On February 20, 2020, the Company announced that OT LLC would be
proceeding with the initiation of a formal international
arbitration proceeding in accordance with dispute resolution
provisions within Chapter 14 of the Investment Agreement and
Chapter 8 of the UDP. The dispute resolution provisions call for
arbitration under the United Nations Commission on International
Trade Law (UNCITRAL) seated in London before a panel of three
arbitrators. By agreeing to resolve certain matters within the 2013
to 2015 Tax Assessment dispute under UNCITRAL Arbitration Rules,
both parties have agreed that the arbitral award shall be final and
binding on both parties and the parties shall carry out the award
without delay.
On December 23, 2020, Turquoise Hill announced that OT LLC had
received and was evaluating a tax assessment for approximately $228
million (which was converted from Mongolian Tugrik to U.S. dollars
at the exchange rate on that date) from the MTA relating to an
audit on taxes imposed and paid by OT LLC between 2016 and 2018
(the 2016 to 2018 Tax Assessment). Most of the matters raised in
respect of the 2016 to 2018 Tax Assessment are of a similar nature
to the matters that were raised in the 2013 to 2015 Tax Assessment.
The MTA also proposed a $1.4 billion adjustment to the balance of
OT LLC’s carried forward tax losses. The adjustments are to
disallow or defer certain tax deductions claimed in the 2016 to
2018 years.
On January 11, 2021, Turquoise Hill announced that OT LLC had
completed its evaluation of the 2016 to 2018 Tax Assessment claim
and confirmed that OT LLC had given notice of its intention to
apply to the UNCITRAL tribunal to amend its statement of claim to
include certain matters raised in the 2016 to 2018 Tax Assessment.
OT LLC’s application to include these matters in the pending
arbitration for the 2013 to 2015 Tax Assessment was accepted. In
addition to those matters included within the statement of claim,
there are certain limited tax matters included in the 2013 to 2015
and 2016 to 2018 Tax Assessments, which were addressed in local
Mongolian tax courts. As there was less certainty with respect to
the resolution of these matters, the Company accrued for certain
amounts and has also adjusted its loss carry forwards.
In February 2021, OT LLC received notices of payment totalling
approximately $228 million (which were converted from Mongolian
Tugrik to U.S. dollars at the exchange rate on those dates)
relating to amounts disputed under the 2016 to 2018 Tax Assessment,
and in March 2021, OT LLC received notices of payment totalling
$126 million (which were converted from Mongolian Tugrik to U.S.
dollars at the exchange rate on those dates) relating to amounts
disputed under the 2013 to 2015 Tax Assessment. Under the Mongolian
General Tax Law, the amounts were due and paid by OT LLC within 10
business days from the dates of the notices of payment. Under the
same legislation, OT LLC would be entitled to recover the amounts,
including via offset against future tax liabilities, in the event
of a favourable decision from the relevant dispute resolution
authorities.
On May 3, 2021, the Company announced that the Government of
Mongolia filed its statement of defence together with a
counterclaim (GoM Defence and Counterclaim) in relation to the tax
arbitration proceeding. Turquoise Hill was not a party to the
arbitration, but the GoM Defence and Counterclaim requested that
the arbitral tribunal add both the Company and a member of the Rio
Tinto Group as parties to the tax arbitration. The principal thrust
of the GoM Defence and Counterclaim is to seek the rejection of OT
LLC’s tax claims in their entirety. As part of the counterclaim,
the Government of Mongolia also makes assertions surrounding
previously reported allegations of historical improper payments
made to Government of Mongolia officials and seeks unquantified
damages. Also, in the event OT LLC’s tax claims are not dismissed
in their entirety, the Government of Mongolia is seeking in the
counterclaim an alternative declaration that the Investment
Agreement is void.
Turquoise Hill denied the allegations relating to the Company in
the GoM Defence and Counterclaim and filed submissions to the
arbitral tribunal to oppose the Government of Mongolia’s request
that it be added to the tax arbitration. As announced by the
Company on January 17, 2022, the arbitral tribunal issued a ruling
deciding that Turquoise Hill not be added as a party to the
arbitration. As described above, Resolution 103 authorised certain
measures to be completed by the Government of Mongolia in order for
Resolution 92 to be considered formally implemented.
Regarding previously disclosed tax assessments of OT LLC, on
February 11, 2022, at the request of the parties to the tax
arbitration, the arbitral tribunal issued an order suspending the
tax arbitration for six months or until 21 days from when the
tribunal receives notice from OT LLC or the Government of Mongolia
to terminate the suspension. The Company remains committed to
continue to work with the Government of Mongolia and Rio Tinto to
finalise the outstanding tax matters whether through arbitration or
negotiation.
The Company remains of the opinion that the tax positions
adopted by OT LLC in its tax filings were correct and that OT LLC
has paid all taxes and charges required under the Investment
Agreement, the ARSHA, the UDP and Mongolian law.
Anti-Corruption Authority Information requests
On March 1, 2022, OT LLC notified the Company that it received a
letter from the Mongolian Anti-Corruption Authority requesting
certain documents and information relating to an investigation
regarding the underground construction work. The Company has no
further details at this time and will update the market as
appropriate.
CLASS ACTION COMPLAINTS
In October 2020, a class action complaint was filed in the U.S.
District Court, Southern District of New York against the Company,
certain of its current and former officers as well as Rio Tinto and
certain of its officers. The complaint alleges that the defendants
made material misstatements and material omissions with respect to,
among other things, the schedule, cost and progress to completion
of the development of Oyu Tolgoi in violation of Section 10(b) of
the U.S. Securities Exchange Act of 1934, as amended (the Exchange
Act) and Rule 10b-5 thereunder. Under the schedule established by
the court, a first amended complaint was filed on March 16, 2021,
and a second amended complaint was filed on September 16, 2021. The
defendants moved to dismiss the operative amended complaint on
October 19, 2021, under Rule 12(b)(6) of the Federal Rules of Civil
Procedure and the Private Securities Litigation Reform Act of 1995,
for failure to state a claim. As of December 17, 2021, the motion
was fully briefed and pending before the Court. The Company
believes that the complaint against it is without merit.
In January 2021, a proposed class action was initiated in the
Superior Court in the District of Montreal against the Company and
certain of its current and former officers. An amended complaint
was filed on July 27, 2021 which did not substantially alter the
claim. The claim alleges that the Company and its current and
former officers named therein as defendants made material
misstatements and material omissions with respect to, among other
things, the schedule, cost and progress to completion of Oyu
Tolgoi, in violation of, among other things, sections 225.8, 225.9
and 225.11 of the Securities Act (Quebec). On January 7, 2022 the
plaintiff re-amended its claim to include allegations relating to
developments arising since the previous amended complaint was
filed. No hearing has been scheduled yet. The Company believes that
the complaint against it is without merit and is preparing to
defend the application for leave and certification of the
proceeding.
See the risk factor titled “The Company may be subject to public
allegations, regulatory investigations or litigation that could
materially and adversely affect the Company’s business” in the
“RISKS AND UNCERTAINTIES” section of the Company’s MD&A for the
year ended December 31, 2021.
CORPORATE ACTIVITIES
Exploration
Turquoise Hill, through its wholly owned subsidiaries, Asia Gold
Mongolia LLC, Heruga Exploration LLC and SGLS LLC, operates an
exploration programme in Mongolia on licences that are not part of
Oyu Tolgoi. Turquoise Hill owns three exploration licences: Bag and
Od-2 in the Umnugobi province and Khatavch in the Dornogovi
province. During Q1’22 the Bag and Od-2 licences were renewed for
another three years to 2025.
During Q1’22, the main exploration activities completed were
administrative in nature. The work included, but was not limited
to, due diligence of potential contractors and updating the project
risk registry. In addition, the 2021 government reports and 2022
exploration plans were approved for all three licenses.
As part of Turquoise Hill’s exploration growth strategy, the
team continues to pursue other land opportunities. During Q1’22,
the exploration team reviewed a total of 2 tenders with 30 parcels
of land areas that were made available for tender by the Mineral
Resources and Petroleum Authority of Mongolia. In addition, the
team prepared for upcoming tenders by reviewing prime terrane
areas.
NON-GAAP AND OTHER FINANCIAL MEASURES
The Company presents and refers to the following non-GAAP
financial measures, non-GAAP ratios and supplementary financial
measures, which are not defined in IFRS. A description and
calculation of each measure is given below and may differ from
similarly named measures provided by other issuers. These measures
are presented in order to provide investors and other stakeholders
with additional understanding of performance and operations at the
Oyu Tolgoi mine and are not intended to be used in isolation from,
or as a replacement for, measures prepared in accordance with IFRS.
These measures and ratios are not standard and therefore may not be
comparable to other issuers.
Non-GAAP financial measures
Non-GAAP financial measures are defined in National Instrument
52-112 – Non-GAAP and Other Financial Measures Disclosure (NI
52-112) as a financial measure disclosed that (a) depicts the
historical or expected future financial performance, financial
position or cash flow of an entity, (b) with respect to its
composition, excludes an amount that is included in, or includes an
amount that is excluded from, the composition of the most directly
comparable financial measure disclosed in the primary financial
statements of the entity, (c) is not disclosed in the financial
statements of the entity, and (d) is not a ratio, fraction,
percentage or similar representation.
Total operating cash costs
The measure of total operating cash costs excludes: depreciation
and depletion; exploration and evaluation; charges for asset
write-down (including write-down of materials and supplies
inventory) and includes management services payments to Rio Tinto
and management services payments to Turquoise Hill, which are
eliminated in the consolidated financial statements of the Company.
Total operating cash costs is used internally by management to
assess the performance of the business in effectively allocating
and managing costs and is provided in order to provide investors
and other stakeholders with additional information about the
underlying cash costs of OT LLC. Total operating cash costs are
relevant to the understanding of the Company’s operating
profitability and ability to generate cash flows. The most
comparable financial measure that is disclosed in the primary
financial statements for total operating costs is “Cost of sales”.
A reconciliation operating cash costs for its current and
comparative period is presented under “Non-GAAP Ratios” herein
below.
Consolidated working capital
Consolidated working capital comprises those components of
current assets and liabilities which support and result from the
Company’s ongoing running of its current operations. It is provided
in order to give a quantifiable indication of the Company’s
short-term cash generation ability and business efficiency. As a
measure linked to current operations and the sustainability of the
business, the Company’s definition of consolidated working capital
excludes: non-trade receivables and payables; financing items; cash
and cash equivalents; deferred revenue and non-current inventory.
Management and investors consider movements in consolidated working
capital to understand the Company’s cash flow generated from
operating activities before interest and tax.
A reconciliation of consolidated working capital to the
financial statements and notes is provided below.
Consolidated working capital
March 31,
December 31,
(Stated in $000's of dollars)
2022
2021
Inventories (current)
314,423
290,017
Trade and other receivables
33,918
16,119
Trade and other payables: - trade payables and accrued liabilities
(301,916)
(320,791)
- payable to related parties
(72,429)
(54,153)
(26,004)
(68,808)
Contractual obligations
The following section of this press release discloses
contractual obligations in relation to the Company’s project
finance, lease, purchase, power and asset retirement obligations.
Amounts relating to these obligations are calculated on the
assumptions of the Company carrying out its future business
activities and operations as planned at the period end. As such,
contractual obligations presented in this press release and in the
Company’s Q1 2022 MD&A will differ from amounts presented in
the financial statements, which are prepared on the basis of
minimum uncancellable commitments to pay in the event of contract
termination. The presentation of contractual obligations here and
in the Company’s Q1 2022 MD&A is provided in order to give an
indication of future expenditure, for the disclosed categories,
arising from the Company’s continuing operations and development
projects.
A reconciliation of contractual obligations as at March 31, 2022
to the relevant line items from among the current assets and
liabilities in the consolidated financial statements and notes is
provided below.
(Stated in $000's of dollars)
Project Finance Facility
Purchase obligations Other Obligations Power
commitments Lease liabilities Decommissioning
obligations Commitments (MD&A)
4,282,140
504,250
387,839
161,503
26,967
363,856
Cancellable obligations
-
(444,865)
-
(97,289)
-
-
(net of exit costs) Accrued capital expenditure
-
(33,921)
33,921
-
-
-
Discounting and other adjustments
(120,870)
-
-
-
(4,599)
(203,354)
Financial statement amount
4,161,270
25,464
421,760
64,214
22,368
160,502
Contractual obligations is used to present contractual and other
obligations that are both cancellable or non-cancellable.
Non-GAAP ratios
A non-GAAP ratio is defined by NI 52-112 as a financial measure
disclosed that (a) is in the form of a ratio, fraction, percentage
or similar representation, (b) has a non-GAAP financial measure as
one or more of its components, and (c) is not disclosed in the
financial statements. The non-GAAP financial measures used to
calculate the non-GAAP ratios below are C1 cash costs, all-in
sustaining costs, mining costs and milling costs.
C1 cash costs per pound of copper
produced
C1 cash costs is a metric representing the cash cost per unit of
extracting and processing the Company’s principal metal product,
copper, to a condition in which it may be delivered to customers
net of gold and silver credits from concentrates sold. This metric
is provided in order to support peer group comparability and to
provide investors and other stakeholders with additional
information about the underlying cash costs of OT LLC and the
impact of gold and silver credits on the operations’ cost
structure. C1 cash costs are relevant to understanding the
Company’s operating profitability and ability to generate cash
flow. When calculating costs associated with producing a pound of
copper, the Company deducts gold and silver revenue credits as the
production cost is reduced by selling these products.
All-in sustaining costs per pound of
copper produced
All-in sustaining costs (AISC) is an extended cash-based cost
metric providing further information on the aggregate cash, capital
and overhead outlay per unit and is intended to reflect the costs
of producing the Company’s principal metal product, copper, in both
the short term and over the life-cycle of its operations. As a
result, sustaining capital expenditure on a cash basis is included
rather than depreciation. As the measure seeks to present a full
cost of copper production associated with sustaining current
operations, development project capital is not included. AISC
allows Turquoise Hill to assess the ability of OT LLC to support
sustaining capital expenditures for future production from the
generation of operating cash flows.
A reconciliation of total operating cash costs, C1 cash costs
and AISC is provided below.
(Three Months Ended)
(Year Ended)
C1 costs (Stated in $000's of
dollars)
March 31, 2022
December 31, 2021
March 31, 2021
December 31, 2021
(Restated)(1)
(Restated)(2)
Cost of sales(1)(2)
175,011
185,466
155,644
637,229
Cost of sales: $/lb of copper sold(1)(2)
2.65
2.45
1.81
2.07
Depreciation and depletion
(39,485)
(39,459)
(52,194)
(163,007)
Change in inventory
21,932
28,405
30,297
109,212
Other operating expenses
65,006
68,181
56,488
275,487
Less:
- Inventory (write-down) reversal
(304)
(133)
5,126
3,465
- Depreciation
(544)
(584)
(602)
(2,359)
Management services payment to Turquoise Hill
7,253
9,125
6,478
29,706
Total operating cash costs(1)(2)
228,868
251,001
201,237
889,734
Total operating cash costs: $/lb of copper produced(1)(2)
3.43
2.93
2.01
2.48
Adjustments to total operating cash costs(1)(2)(3)
(5,694)
(2,809)
(208)
(27,451)
Less: Gold and silver revenues(1)(2)
(112,206)
(186,235)
(192,879)
(778,265)
C1 costs ($'000)(1)(2)
110,968
61,958
8,150
84,018
C1 costs: $/lb of copper produced(1)(2)
1.66
0.72
0.08
0.23
All-in sustaining costs (Stated in $000's
of dollars)
Corporate administration
15,620
10,876
13,043
37,699
Asset retirement expense
2,432
2,042
1,595
7,482
Royalty expenses
24,937
22,605
22,740
105,399
Ore stockpile and stores write-down (reversal)
304
133
(5,126)
(3,465)
Other expenses
1,174
3,884
254
5,598
Sustaining cash capital including deferred stripping
26,095
40,263
8,296
83,648
All-in sustaining costs ($'000)(1)(2)
181,530
141,761
48,952
320,379
All-in sustaining costs: $/lb of copper produced(1)(2)
2.72
1.65
0.49
0.89
(1) Q4 2021 comparatives have been
restated for adoption of the IAS16 amendment to Property, Plant and
Equipment: Proceeds before intended Use. Please refer to the
Section titled “Recent Accounting Pronouncements” on page 24 of Q1
2022 MD&A for further information. (2) Prior year comparatives
have been restated for adoption of the IAS16 amendment to Property,
Plant and Equipment: Proceeds before intended Use. Please refer to
the Section titled “Recent Accounting Pronouncements” on page 24 of
Q1 2022 MD&A for further information. (3) Adjustments to total
operating cash costs include: treatment, refining and freight
differential charges less the 5% Government of Mongolia royalty and
other expenses not applicable to the definition of C1 cash
cost.
Mining costs per tonne of material
mined
Mining costs per tonne of material mined for the three months
ended March 31, 2022 are calculated by reference to total mining
costs of $54.9 million (Q1’21: $44.4 million) and total material
mined of 24.4 million tonnes (Q1’21: 22.6 million tonnes).
Cost of sales is the most comparable measure for mining and
milling costs. Mining and milling costs represent total operating
cash costs of Oyu Tolgoi’s open-pit mining and concentrator
operations.
Mining, milling and G&A costs per tonne ratios are used
internally by management and investors to assess the performance of
the business by providing information on cost efficiency across the
important components of Oyu Tolgoi’s operations - its open-pit
mine, concentrator and support functions.
Milling costs per tonne of ore
treated
Milling costs per tonne of ore treated for the three months
ended March 31, 2022 are calculated by reference to total milling
costs of $68.0 million (Q1’21: $61.3 million) and total ore treated
of 9.6 million tonnes (Q1’21: 9.8 million tonnes).
Supplementary financial measures
Supplementary financial measures are defined under NI 52-112 as
financial measures (a) which are neither non-GAAP financial
measures nor non-GAAP ratios, (b) that are not presented in the
financial statements and (c) that are, or are intended to be,
disclosed periodically to depict the historical or expected future
financial performance, financial position or cash flow. The below
are supplementary financial measures that the Company uses to
depict its financial performance, financial position or cash
flows.
Cost of sales per pound of copper
sold
Cost of sales is reported in the consolidated income statement.
Cost of sales per pound of copper sold supports management’s
objective of efficient cost allocation and is used by management
and investors to understand operating profitability.
Capital expenditure on a cash basis for
underground-development/underground-sustaining/open-pit
Capital expenditure comprises sustaining and development
expenditure on property, plant and equipment, and on intangible
assets. This is equivalent to "Expenditures on property, plant and
equipment" in the cash flow statement. Capital expenditures have
been further disaggregated to reflect the open-pit operations,
underground and tailings storage.
This measure is used to support management's objective of
effective and efficient capital allocation as the Company needs to
invest in existing assets across our operations in order to
maintain and improve productive capacity, and to deliver growth
through completion of the underground project.
Total underground spend is not an annual measure but represents
total underground capital expenditure on the underground project
since January 1, 2016.
G&A costs per tonne of ore
treated
G&A costs per tonne of ore treated for the three months
ended March, 2022 are calculated by reference to total general
& administrative costs. General & administrative costs are
equivalent to Oyu Tolgoi administrative expenses of $35.6 million
(Q1’21: $34.1 million). Total ore treated for those periods was 9.6
million tonnes (Q1’21: 9.8 million tonnes). G&A is used to
promote cost effectiveness through measurement of the overhead
required to support the business.
INTERNAL CONTROL OVER FINANCIAL REPORTING AND DISCLOSURE
CONTROLS AND PROCEDURES
There were no changes in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the three
months ended March 31, 2022 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed by
the Company under applicable securities legislation is gathered and
reported to senior management, including the Company’s CEO and CFO,
on a timely basis so that appropriate decisions can be made
regarding public disclosures. There were no changes in the
Company’s disclosure controls and procedures during the three
months ended March 31, 2022.
QUALIFIED PERSON
Disclosure of information of a scientific or technical nature in
the Company’s Q1 2022 MD&A in respect of the Oyu Tolgoi mine
was approved by Jo-Anne Dudley (FAusIMM(CP)), Chief Operating
Officer of the Company. Jo-Anne Dudley is a “qualified person”
within the meaning of National Instrument 43-01 - Standards of
Disclosure for Mineral Projects (NI 43-101).
SELECTED QUARTERLY DATA
The Company’s interim financial statements are reported under
IFRS applicable to interim financial statements, including IAS 34
Interim Financial Reporting.
($ in millions, except per share information) Quarter Ended
Mar-31
Dec-31
Sep-30
Jun-30
2022
2021
2021
2021
Restated (b)
Restated (b)
Restated (b)
Revenue
402.7
522.3
662.1
329.8
Income for the period
394.3
221.6
54.4
127.8
Income attributable to owners of Turquoise Hill Resources
Ltd
275.2
165.8
55.7
102.9
Basic and diluted earnings per share attributable to owners
of Turquoise Hill Resources Ltd (a)
1.37
0.82
0.28
0.51
Quarter Ended
Mar-31
Dec-31
Sep-30
Jun-30
2021
2020
2020
2020
Restated (b)
Restated (b)
Revenue
526.5
405.1
283.0
285.6
Income for the period
332.1
241.6
177.8
76.9
Income attributable to owners of Turquoise Hill Resources
Ltd
236.7
159.9
139.2
75.6
Basic and diluted earnings per share attributable to owners
of Turquoise Hill Resources Ltd (a)
1.18
0.79
0.69
0.38
(a) Basic and diluted earnings
per share has been recalculated pursuant to the share consolidation
completed on October 23, 2020 for all periods presented.
(b) Comparatives have been
restated for adoption of the IAS16 amendment to Property, Plant and
Equipment: Proceeds before intended Use. Please refer to the
Section titled “Recent Accounting Pronouncements” on page 24 of Q1
2022 MD&A for further information.
(c) During 2020, the Company
determined that it had incorrectly accounted for the impact of
capitalised intragroup borrowings in the calculation of
non-controlling interests, thereby understating the income
attributable to the non-controlling interest in the periods ended
June 30, 2020. As a result of these adjustments, income
attributable to owners of Turquoise Hill decreased by $12.3 million
in the three-month periods ended June 30, 2020.
Consolidated Statements of Income (Stated in thousands of
U.S. dollars, except share and per share amounts)
(Unaudited) Three Months Ended March 31, Note
2022
2021
Revenue
4
$ 402,651
$ 526,546
Cost of sales
5
(175,011)
(155,644)
Gross margin
227,640
370,902
Operating expenses
6
(65,006)
(56,488)
Corporate administration expenses
(15,620)
(13,043)
Other income (expenses)
19
1,676
(13,177)
Income before finance items and taxes
148,690
288,194
Finance items ` Finance income
7
722
1,290
Finance costs
7
(2,731)
(1,635)
(2,009)
(345)
Income from operations before taxes
$ 146,681
$ 287,849
Income and other taxes
247,619
44,300
Income for the year
$ 394,300
$ 332,149
Attributable to owners of Turquoise Hill Resources Ltd.
275,218
236,715
Attributable to owner of non-controlling interest
119,082
95,434
Income for the year
$ 394,300
$ 332,149
Basic and diluted earnings per share attributable
to owners of Turquoise Hill Resources Ltd.
$ 1.37
$ 1.18
Basic weighted average number of shares outstanding (000's)
201,231
201,231
The
notes to the Company’s financial statements, which are available on
the Company’s website, are part of its consolidated financial
statements.
Consolidated Statements of Comprehensive Income (Stated
in thousands of U.S. dollars) (Unaudited) Three Months
Ended March 31,
2022
2021
Income for the year
$ 394,300
$ 332,149
Other comprehensive income: Items that will not be
reclassified to income: # Changes in the fair value of marketable
securities at FVOCI
3,757
2,256
Other comprehensive income for the year (a)
$ 3,757
#
$ 2,256
Total comprehensive income for the year
$ 398,057
$ 334,405
Attributable to owners of Turquoise Hill
278,975
238,971
Attributable to owner of non-controlling interest
119,082
95,434
Total comprehensive income for the year
$ 398,057
#
$ 334,405
(a) No tax charges and credits arose on items recognized as other
comprehensive income in 2022 (2021 - nil).
The
notes to the Company’s financial statements, which are available on
the Company’s website, are part of its consolidated financial
statements.
Consolidated Statements of Cash Flows (Stated in
thousands of U.S. dollars) (Unaudited) Three Months
Ended March 31, Note
2022
2021
Cash generated from operating activities before interest
and tax
16
$ 122,634
$ 248,236
Interest received
549
1,175
Interest paid
(809)
(26,511)
Income and other taxes paid
18
(16)
(356,123)
Net cash generated from (used in) operating activities
$ 122,358
$ (133,223)
Cash flows from investing activities Expenditures on
property, plant and equipment
(229,866)
(250,287)
Purchase of put options
-
(29,907)
Cash used in investing activities
$ (229,866)
$ (280,194)
Cash flows from financing activities Proceeds from
bank overdraft
-
8,500
Payment of lease liability
(2,412)
(129)
Cash (used in) generated from financing activities
$ (2,412)
$ 8,371
Effects of exchange rates on cash and cash equivalents
586
(42)
Net decrease in cash and cash equivalents
$ (109,334)
$ (405,088)
Cash and cash equivalents - beginning of period
$ 694,296
$ 1,123,621
Cash and cash equivalents - end of period
584,962
718,533
Cash and cash equivalents as presented in the consolidated
balance sheets
$ 584,962
$ 718,533
The
notes to the Company’s financial statements, which are available on
the Company’s website, are part of its consolidated financial
statements.
Consolidated Balance Sheets (Stated in thousands of U.S.
dollars) (Unaudited) March 31, December 31, Note
2022
2021
(Restated - Note 2 (c)(i))
Current assets Cash and cash
equivalents
8
$ 584,962
$ 694,296
Inventories
9
314,423
290,017
Trade and other receivables
33,918
16,119
Prepaid expenses and other assets
104,514
120,715
1,037,817
1,121,147
Non-current assets Property, plant and equipment
10
12,323,437
12,049,958
Inventories
9
50,573
60,711
Prepaid expenses
18
348,671
348,671
Deferred income tax assets
13
859,460
602,862
Other financial assets
20,746
16,818
13,602,887
13,079,020
Total assets
$14,640,704
$14,200,167
Current liabilities Borrowings and other financial
liabilities
11
$ 395,996
$ 397,421
Trade and other payables
12
421,760
384,488
Deferred revenue
137,938
149,368
955,694
931,277
Non-current liabilities Borrowings and other financial
liabilities
11
3,787,642
3,785,358
Deferred income tax liabilities
13
154,373
145,434
Decommissioning obligations
14
160,502
153,662
4,102,517
4,084,454
Total liabilities
$ 5,058,211
$ 5,015,731
Equity Share capital
$11,432,122
$11,432,122
Contributed surplus
1,555,774
1,555,774
Accumulated other comprehensive income
8,120
4,363
Deficit
(3,964,440)
(2,840,896)
Equity attributable to owners of Turquoise Hill
9,031,576
10,151,363
Attributable to non-controlling interest
15
550,917
(966,927)
Total equity
$ 9,582,493
$ 9,184,436
Total liabilities and equity
$14,640,704
$14,200,167
The
notes to the Company’s financial statements, which are available on
the Company’s website, are part of its consolidated financial
statements.
Consolidated Statements of Equity (Stated in thousands of
U.S. dollars) (Unaudited) Three Months Ended
March 31, 2022
Attributable to owners of
Turquoise Hill
Accumulated
other
Non-controlling
Contributed
comprehensive
Interest
Share capital
surplus
income
Deficit
Total
(Note 15)
Total equity
Opening balance
$11,432,122
$ 1,555,774
$ 4,363
$ (2,840,896)
$10,151,363
$ (966,927)
$ 9,184,436
Income for the year
-
-
-
275,218
275,218
119,082
394,300
Other comprehensive income for the year
-
-
3,757
-
3,757
-
3,757
Waiver of non-recourse loans (Note 15)
-
-
-
(1,398,762)
(1,398,762)
1,398,762
-
Closing balance
$11,432,122
$ 1,555,774
$ 8,120
$ (3,964,440)
$ 9,031,576
$ 550,917
$ 9,582,493
Three Months Ended March 31, 2021
Attributable to owners of
Turquoise Hill
Accumulated
other
Non-controlling
Contributed
comprehensive
Interest
Share capital
surplus
income
Deficit
Total
(Note 15)
Total equity
Opening balance
$11,432,122
$ 1,558,834
$ 1,418
$ (3,415,601)
$ 9,576,773
$ (1,148,820)
$ 8,427,953
Impacts of change in accounting policy Note 2(c)(i)
-
-
-
13,630
13,630
7,022
20,652
Opening balance (Restated)
$11,432,122
$ 1,558,834
$ 1,418
$ (3,401,971)
$ 9,590,403
$ (1,141,798)
$ 8,448,605
Income for the year
-
-
-
236,715
236,715
95,434
332,149
Other comprehensive income for the year
-
-
2,256
-
2,256
-
2,256
Employee share plans
-
(53)
-
-
(53)
-
(53)
Closing balance (Restated)
$11,432,122
$ 1,558,781
$ 3,674
$ (3,165,256)
$ 9,829,321
$ (1,046,364)
$ 8,782,957
The notes to the Company’s financial
statements, which are available on the Company’s website, are part
of its consolidated financial statements.
About Turquoise Hill Resources
Turquoise Hill is an international mining company focused on the
operation and continued development of the Oyu Tolgoi copper-gold
mine in Mongolia, which is the Company’s principal and only
material mineral resource property. Turquoise Hill’s ownership of
the Oyu Tolgoi mine is held through a 66% interest in Oyu Tolgoi
LLC (Oyu Tolgoi); Erdenes Oyu Tolgoi LLC (Erdenes), a Mongolian
state-owned entity, holds the remaining 34% interest.
Forward-looking statements and forward-looking
information
Certain statements made herein, including statements relating to
matters that are not historical facts and statements of the
Company’s 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 harbour” provisions of
the United States Private Securities Litigation Reform Act of 1995.
Forward-looking statements and information relate to future events
or future performance, reflect current expectations or beliefs
regarding future events and are typically identified by words such
as “anticipate”, “believe”, “could”, “estimate”, “expect”,
“intend”, “likely”, “may”, “plan”, “seek”, “should”, “will” and
similar expressions suggesting future outcomes or statements
regarding an outlook. These include, but are not limited to,
statements and information regarding: the nature of the Company’s
ongoing relationship and interaction with the Government of
Mongolia with respect to the continued operation and development of
Oyu Tolgoi as and when the key agreements entered into with the
Government of Mongolia announced on January 24, 2022 (the GoM
Agreements), are implemented along with the implementation of
Resolution 103; the continuation of undercutting in accordance with
the mine plan and design; the actual timing of first sustainable
production as well as the lifting of restrictions by the Government
of Mongolia on the ability of OT LLC to incur any additional
indebtedness; the terms and conditions of the Proposal, and its
review and evaluation by the Special Committee; the implementation
and successful execution of the updated funding plan that is the
subject of the Amended HoA, as such agreement may be further
amended or restated, and the amount of any additional future
funding gap to complete the Oyu Tolgoi project and the availability
and amount of potential sources of additional funding required
therefor, all as contemplated by the Amended HoA, as well as
potential delays in the ability of the Company and OT LLC to
proceed with the funding elements contemplated by the Amended HoA;
liquidity, funding sources and funding requirements in general, in
particular until sustainable first production is achieved,
including the Company’s ability to reach agreement with project
finance lenders on the re-profiling of existing debt payments in
line with current cash flow projections, as well as the Company (or
a wholly-owned subsidiary) and OT LLC entering into a pre-paid
copper concentrate sale arrangement; the availability and amount of
potential sources of additional funding, including the short-term
secured advance to be provided by Rio Tinto to the Company under
the Amended HoA; the amount by which a successful re-profiling of
the Company’s existing debt would reduce the Company’s currently
projected funding requirements; the Company’s ability to conduct
one or more equity offerings as contemplated by the Amended HoA in
light of future and then prevailing market conditions; the
expectations set out in the 2020 OTTR; the timing and amount of
future production and potential production delays; statements in
respect of the impacts of any delays on achieving first sustainable
production and on the Company’s cash flows; expected copper and
gold grades; the merits of the class action complaints filed
against the Company in October 2020 and January 2021, respectively;
the merits of the defence and counterclaim filed by the Government
of Mongolia in the international tax arbitration brought by OT LLC
and the likelihood of the parties being able to amicably resolve
the ongoing tax issues; the timing of studies, announcements and
analyses; the status of underground development, including any
slowdown of work; the causes of the increase in costs and schedule
extension of the underground development; the mine design for Panel
0 of Hugo North Lift 1 and the related cost and production schedule
implications; the re-design studies for Panels 1 and 2 of Hugo
North Lift 1 and the possible outcomes, content and timing thereof;
the timing of the sinking of Shafts 3 and 4 and any delays in that
regard in addition to previously announced delays; expectations
regarding the possible recovery of ore in the two structural
pillars, to the north and south of Panel 0; the possible
progression of a state-owned power plant (SOPP) and related
amendments to the PSFA, as amended, as well as power purchase
agreements and extensions thereto; finalisation of an agreement
with IMPIC on extension of the current power import arrangements;
the timing of construction and commissioning of the potential SOPP;
sources of interim power; the continuing impact of COVID-19,
including any restrictions imposed by health or governmental
authorities relating thereto on the Company’s business, operations
and financial condition, as well as delays and the development cost
impacts of delays caused by the COVID-19 pandemic; the Company’s
ability to operate sustainably, its community relations and its
social licence to operate in Mongolia; capital and operating cost
estimates, including inflationary pressures thereon resulting in
cost escalation; the content of the Definitive Estimate; mill and
concentrator throughput; anticipated business activities, planned
expenditures, corporate strategies; supply disruptions of oil and
gas to the Oyu Tolgoi project caused by the ongoing Russia-Ukraine
conflict, and other statements that are not historical facts.
Forward-looking statements and information are made based upon
certain assumptions and other important factors that, if untrue,
could cause the actual results, performance or achievements of the
Company to be materially different from future results, performance
or achievements expressed or implied by such statements or
information. There can be no assurance that such statements or
information will prove to be accurate. Such statements and
information are based on numerous assumptions regarding present and
future business strategies, local and global economic conditions,
and the environment in which the Company will operate in the
future, including: the price of copper, gold and silver; projected
gold, copper and silver grades; anticipated capital and operating
costs; anticipated future production and cash flows; the
anticipated location of certain infrastructure in Hugo North Lift 1
and sequence of mining within and across panel boundaries; the
nature of the Company’s ongoing relationship and interaction with
the Government of Mongolia with respect to the continued operation
and development of Oyu Tolgoi as and when the GoM Agreements are
implemented along with the implementation of Resolution 103; the
continuation of undercutting in accordance with the mine plan and
design; the actual timing of first sustainable production as well
as the lifting of restrictions by the Government of Mongolia on the
ability of OT LLC to incur any additional indebtedness; the
possibility that the Company and Rio Tinto are unable to come to an
agreement on the terms and conditions of a going private
transaction or that the terms and conditions of a definitive
agreement between the Company and Rio Tinto in respect of a going
private transaction will differ from those that are currently
contemplated by the Proposal; the availability and timing of
required governmental and other approvals for the construction of
the SOPP; the ability of the Government of Mongolia to finance and
procure the SOPP within the timeframes anticipated in the PSFA, as
amended, subject to ongoing discussions relating to a standstill
period; finalisation of an agreement with IMPIC on an extension of
the current power import arrangements; the eventual pre-payment
arrangement between the Company (or a wholly-owned subsidiary) and
OT LLC; the implementation and successful execution of the updated
funding plan that is the subject of the Amended HoA, as such
agreement may be further amended and restated; the Company’s
ability to operate sustainably, its community relations and its
social licence to operate in Mongolia; and the amount of any
additional future funding gap to complete the Oyu Tolgoi project
and the availability and amount of potential sources of additional
funding required therefor.
Certain important factors that could cause actual results,
performance or achievements to differ materially from those in the
forward-looking statements and information include, among others:
copper, gold and silver price volatility; discrepancies between
actual and estimated production; mineral reserves and resources and
metallurgical recoveries; development plans for processing
resources; the accuracy of the Definitive Estimate; public health
crises such as COVID-19; matters relating to proposed exploration
or expansion; mining operational and development risks, including
geotechnical risks and ground conditions; litigation risks,
including the outcome of the class action complaints filed against
the Company; the outcome of the international arbitration
proceedings, including the likelihood of the parties being able to
amicably resolve the ongoing tax issues; regulatory restrictions
(including environmental regulatory restrictions and liability); OT
LLC or the Government of Mongolia’s ability to deliver a domestic
power source for the Oyu Tolgoi project within the required
contractual time frame; the Company’s ability to operate
sustainably, its community relations, and its social licence to
operate in Mongolia; activities, actions or assessments, including
tax assessments, by governmental authorities; events or
circumstances (including public health crises strikes, blockades or
similar events outside of the Company’s control) that may affect
the Company’s ability to deliver its products in a timely manner;
currency fluctuations; the speculative nature of mineral
exploration; the global economic climate; global climate change;
dilution; share price volatility; competition; loss of key
employees; cyber security incidents; additional funding
requirements, including in respect of the development or
construction of a long-term domestic power supply for the Oyu
Tolgoi project; capital and operating costs, including with respect
to the development of additional deposits and processing
facilities; inflationary pressures on prices for critical supplies
for Oyu Tolgoi including fuel, power, explosives and grinding media
resulting in cost escalation; defective title to mineral claims or
property; human rights requirements; international conflicts such
as the ongoing Russia-Ukraine conflict; and new tax measures, such
as a minimum corporate tax rate, that might be implemented as a
result of evolving global initiatives. Although the Company has
attempted to identify important factors that could cause actual
actions, events or results to differ materially from those
described in forward-looking statements and information, there may
be other factors that cause actions, events or results not to be as
anticipated, estimated or intended. All such forward-looking
statements and information are based on certain assumptions and
analyses made by the Company’s 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 reasonable and 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 statements or information.
With respect to specific forward-looking information concerning
the continued operation and development of the Oyu Tolgoi project,
the Company has based its assumptions and analyses on certain
factors which are inherently uncertain. Uncertainties and
assumptions include, among others: the nature of the Company’s
ongoing relationship and interaction with the Government of
Mongolia with respect to the continued operation and development of
Oyu Tolgoi as and when the GoM Agreements are implemented along
with the implementation of Resolution 103; the continuation of
undercutting in accordance with the mine plan and design; the
approval or non-approval by the OT LLC Board of any future
necessary additional investment, and the likely consequences on the
timing and overall economic value of the Oyu Tolgoi project,
including slowdown on the underground development and significant
delays to first sustainable production; the timing and cost of the
construction and expansion of mining and processing facilities; the
timing and availability of a long-term domestic power source (or
the availability of financing for the Company or the Government of
Mongolia to construct such a source) for Oyu Tolgoi; the
implementation and successful execution of the updated funding plan
that is the subject of the Amended HoA, as such agreement may be
further amended or restated, and the amount of any additional
future funding gap to complete the Oyu Tolgoi project and the
availability and amount of potential sources of additional funding
required therefor the eventual pre-payment arrangement between the
Company (or a wholly-owned subsidiary) and OT LLC; the potential
impact of COVID-19, including any restrictions imposed by health
and governmental authorities relating thereto, as well as the
development cost impacts of delays caused by the COVID-19 pandemic;
the Company’s ability to operate sustainably, its community
relations and its social licence to operate in Mongolia; the impact
of changes in, changes in interpretation to or changes in
enforcement of, laws, regulations and government practices in
Mongolia; the availability and cost of skilled labour and
transportation; the obtaining of (and the terms and timing of
obtaining) necessary environmental and other government approvals,
consents and permits; delays and the costs which would result from
delays, including delays caused by COVID-19 restrictions and
impacts and related factors, in the development of the underground
mine (which could significantly exceed the costs projected in the
2020 OTTR); projected copper, gold and silver prices and their
market demand; production estimates and the anticipated yearly
production of copper, gold and silver at Oyu Tolgoi; inflationary
pressures on prices for critical supplies for Oyu Tolgoi, including
fuel, power, explosives and grinding media resulting in cost
escalation; and the potential impact of the ongoing Russia-Ukraine
conflict, including supply disruptions of oil and gas to the Oyu
Tolgoi project caused thereby.
The cost, timing and complexities of mine construction and
development are increased by the remote location of a property such
as Oyu Tolgoi. It is common in mining operations and in the
development or expansion of existing facilities to experience
unexpected problems and delays during development, construction and
mine start-up. Additionally, although Oyu Tolgoi has achieved
commercial production, there is no assurance that future
development activities will result in profitable mining
operations.
Readers are cautioned not to place undue reliance on
forward-looking information or statements. By their nature,
forward-looking statements involve numerous assumptions, inherent
risks and uncertainties, both general and specific, which
contribute to the possibility that the predicted outcomes will not
occur. Events or circumstances could cause the Company’s actual
results to differ materially from those estimated or projected and
expressed in, or implied by, these forward-looking statements.
Important factors that could cause actual results to differ from
these forward-looking statements are included in the “Risk Factors”
section in the AIF, as supplemented by the “Risks and
Uncertainties” section in the Q1 2022 MD&A.
Readers are further cautioned that the list of factors
enumerated in the “Risk Factors” section in the AIF and the “Risks
and Uncertainties” section of the Q1 2022 MD&A that may affect
future results is not exhaustive. When relying on the Company’s
forward-looking statements and information to make decisions with
respect to the Company, investors and others should carefully
consider the foregoing factors and other uncertainties and
potential events. Furthermore, the forward-looking statements and
information contained herein are made as of the date of this
document and the Company does not undertake any obligation to
update or to revise any of the included forward-looking statements
or information, whether as a result of new information, future
events or otherwise, except as required by applicable law. The
forward-looking statements and information contained herein are
expressly qualified by this cautionary statement.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20220510005070/en/
Investors and Media Roy McDowall
roy.mcdowall@turquoisehill.com Follow us on Twitter
@TurquoiseHillRe
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