Exhibit 99.2
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 2015
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
INTRODUCTION
This management discussion and analysis of the financial condition and results of operations (MD&A) of Turquoise Hill Resources Ltd. should be read in conjunction with the unaudited condensed interim consolidated financial statements of Turquoise Hill Resources Ltd. and the notes thereto for the nine month period ended September 30, 2015. These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board applicable to the preparation of interim financial statements. In this MD&A, unless the context otherwise dictates, a reference to the Company refers to Turquoise Hill Resources Ltd. and a reference to Turquoise Hill refers to Turquoise Hill Resources Ltd. together with its subsidiaries. Additional information about the Company, including its Annual Information Form, is available under the Company’s profile on SEDAR atwww.sedar.com.
References to “C$” refer to Canadian dollars and “$” to United States dollars.
This MD&A contains certain forward-looking statements and certain forward-looking information. Please refer to the cautionary language commencing on page 20.
All readers of this MD&A are advised to review and consider the risk factors discussed under the heading “Risk and Uncertainties” in this MD&A commencing on page 16.
The effective date of this MD&A is November 5, 2015.
September 30, 2015 | Page | 2 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
TABLE OF CONTENTS
Page | ||||||
1. | Overview | 4 | ||||
2. | Selected Quarterly Data | 5 | ||||
3. | Review of Operations | 6 | ||||
A. Oyu Tolgoi | 6 | |||||
B. Other Assets | 10 | |||||
C. Corporate Activities | 11 | |||||
D. Corporate Administrative Expenses and Other | 11 | |||||
4. | Liquidity and Capital Resources | 11 | ||||
5. | Share Capital | 13 | ||||
6. | Outlook | 13 | ||||
7. | Off-Balance Sheet Arrangements | 14 | ||||
8. | Contractual Obligations | 14 | ||||
9. | Critical Accounting Estimates | 14 | ||||
10. | Recent Accounting Pronouncements | 14 | ||||
11. | International Financial Reporting Standards | 14 | ||||
12. | Risks and Uncertainties | 16 | ||||
13. | Related-Party Transactions | 17 | ||||
14. | Non-GAAP Measures | 18 | ||||
15. | Changes in Internal Control over Financial Reporting | 19 | ||||
16. | Qualified Person | 20 | ||||
17. | Cautionary Statements | 20 | ||||
18. | Forward-Looking Statements and Forward-Looking Information | 21 |
September 30, 2015 | Page | 3 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
1. | OVERVIEW |
Financial Results and Review of Operations for the Third Quarter of 2015
● | Oyu Tolgoi achieved a strong safety performance with an All Injury Frequency Rate of 0.31 per 200,000 hours worked for the nine months ended September 30, 2015. |
● | Oyu Tolgoi recorded revenue of $431.7 million in Q3’15 on sales of 226,000 tonnes of concentrate, a 2.5% increase over Q2’15, reflecting higher sales volumes partially offset by lower copper prices. |
● | Turquoise Hill reported income from continuing operations attributable to shareholders of $44.0 million. |
● | In Q3’15, a non-cash charge of $76.4 million was recorded within operating expenses for provision against non-current ore stockpile inventory. |
● | Turquoise Hill generated operating cash flow before interest and taxes of $171.7 million during Q3’15. |
● | Oyu Tolgoi’s Q3’15 mine production was at record levels while concentrate produced and contained copper were on par with Q2’15 even considering the planned concentrator shutdown in July 2015. |
● | During Q3’15, mined production increased 8.5% over Q2’15 due to shorter hauling routes and ongoing productivity initiatives. |
● | Copper in concentrates for Q3’15 increased 1.3% due to higher head grades while gold in concentrates decreased 48.3% over Q2’15 due to slower than anticipated access to gold-rich ore. |
● | Increased copper and gold production is expected in Q4’15 compared to Q3’15 as higher-grade ore is accessed in the open pit. |
● | Turquoise Hill continues to expect Oyu Tolgoi to produce 175,000 to 195,000 tonnes of copper and 600,000 to 700,000 ounces of gold in concentrates in 2015. |
● | In August 2015, Oyu Tolgoi filed revised schedules for the 2015 Oyu Tolgoi Feasibility Study with the Mongolian Minerals Council. |
● | Underground pre-start activities are underway in parallel with an update to the feasibility study capital estimate, which is expected to be completed in Q1’16. |
● | Turquoise Hill continues to expect signing of project financing by the end of 2015 and the decision for underground construction in early Q2’16. |
● | Capital expenditure for 2015 is now expected to be approximately $120 million, of which approximately $115 million relates to sustaining capital, due to operational efficiencies, changes to the mine plan during the year and capital optimization. |
● | Operating cash costs for 2015 are now expected to be approximately $900 million reflecting operational improvements throughout the year and excluding one-time costs related to the May 2015 underground agreement as well as pre-start costs for underground development. |
● | Sales contracts have been signed for more than 80% of Oyu Tolgoi’s expected 2016 concentrate production. |
● | In September 2015, Oyu Tolgoi surpassed 1.5 million tonnes of concentrate shipped. |
● | Turquoise Hill’s cash and cash equivalents at September 30, 2015 were $1.3 billion. |
September 30, 2015 | Page | 4 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
2. | SELECTED QUARTERLY DATA |
The following table sets forth selected unaudited quarterly financial information for each of the eight most recent quarters.
($ in millions of dollars, except per share information) | Quarter Ended | |||||||||||||||||
Sep-30 2015 | Jun-30 2015 | Mar-31 2015 | Dec-31 2014 | |||||||||||||||
Revenue | ||||||||||||||||||
Copper-gold concentrate | $ | 431.7 | $ | 421.3 | $ | 426.2 | $ | 670.6 | ||||||||||
Total revenue | $ | 431.7 | $ | 421.3 | $ | 426.2 | $ | 670.6 | ||||||||||
Net income (loss) from continuing operations attributable to the Company | $ | 44.0 | $ | 49.9 | $ | 67.1 | $ | 143.2 | ||||||||||
Income (loss) from discontinued operations attributable to the Company | (22.8 | ) | (25.0 | ) | 29.1 | (9.6 | ) | |||||||||||
Net income (loss) attributable to the Company | $ | 21.2 | $ | 24.9 | $ | 96.2 | $ | 133.6 | ||||||||||
Basic income (loss) per share attributable to the Company | ||||||||||||||||||
Continuing operations | $ | 0.02 | $ | 0.02 | $ | 0.03 | $ | 0.07 | ||||||||||
Discontinued operations | (0.01 | ) | (0.01 | ) | 0.01 | - | ||||||||||||
Total | $ | 0.01 | $ | 0.01 | $ | 0.04 | $ | 0.07 | ||||||||||
Diluted income (loss) per share attributable to the Company | ||||||||||||||||||
Continuing operations | $ | 0.02 | $ | 0.02 | $ | 0.03 | $ | 0.07 | ||||||||||
Discontinued operations | (0.01 | ) | (0.01 | ) | 0.01 | - | ||||||||||||
Total | $ | 0.01 | $ | 0.01 | $ | 0.04 | $ | 0.07 | ||||||||||
Sep-30 2014 | Jun-30 2014 | Mar-31 2014 | Dec-31 2013(a) | |||||||||||||||
Revenue | ||||||||||||||||||
Copper-gold concentrate | $ | 491.6 | $ | 459.5 | $ | 113.9 | $ | 51.5 | ||||||||||
Total revenue | $ | 491.6 | $ | 459.5 | $ | 113.9 | $ | 51.5 | ||||||||||
Net income (loss) from continuing operations attributable to the Company | $ | 43.9 | $ | 20.1 | $ | (9.4 | ) | $ | 242.2 | |||||||||
Loss from discontinued operations attributable to the Company | (137.9 | ) | (12.2 | ) | (12.2 | ) | (103.8 | ) | ||||||||||
Net income (loss) attributable to the Company | $ | (94.0 | ) | $ | 7.9 | $ | (21.6 | ) | $ | 138.4 | ||||||||
Basic income (loss) per share attributable to the Company | ||||||||||||||||||
Continuing operations | $ | 0.02 | 0.01 | $ | (0.01 | ) | $ | 0.19 | ||||||||||
Discontinued operations | (0.07 | ) | (0.01 | ) | (0.01 | ) | (0.08 | ) | ||||||||||
Total | $ | (0.05 | ) | $ | - | $ | (0.02 | ) | $ | 0.11 | ||||||||
Diluted income (loss) per share attributable to the Company | ||||||||||||||||||
Continuing operations | $ | 0.02 | $ | 0.01 | $ | (0.01 | ) | $ | 0.19 | |||||||||
Discontinued operations | (0.07 | ) | (0.01 | ) | (0.01 | ) | (0.08 | ) | ||||||||||
Total | $ | (0.05 | ) | $ | - | $ | (0.02 | ) | $ | 0.11 |
(a) Financial information for 2015 and 2014 has been prepared under IFRS; financial information for 2013 was prepared under U.S. GAAP and has not been restated in the above table. Please refer to Section 11 – INTERNATIONAL FINANCIAL REPORTING STANDARDS – on page 14 on this MD&A.
September 30, 2015 | Page | 5 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
3. | REVIEW OF OPERATIONS |
Turquoise Hill is an international mining company focused on the operation and further development of the Oyu Tolgoi copper-gold mine in southern Mongolia, which is the Company’s principal and only material mineral resource property. The Oyu Tolgoi mine is held through a 66% interest in Oyu Tolgoi LLC (Oyu Tolgoi); the remaining 34% interest is held by Erdenes Oyu Tolgoi LLC (Erdenes).
As at September 30, 2015, Turquoise Hill held a 21.3% interest in SouthGobi Resources Ltd. (SouthGobi), which owns the Ovoot Tolgoi coal mine in southern Mongolia.
In Q3’15, the Company recorded net income attributable to owners of Turquoise Hill of $21.2 million or $0.01 per share compared with net loss of $94.0 million or ($0.05) per share in Q3’14, an increase of $115.2 million. The increase is mainly attributable to a $227.3 million non-cash impairment charge recorded in Q3’14 on reclassification of SouthGobi to assets held for sale.
Operating cash flows before interest and taxes in Q3’15 were $171.7 million compared with $256.3 million in Q3’14, reflecting continued production and delivery cost improvements and effective working capital management, offset by the impact of lower commodity prices on sales revenue.
Additions to property, plant and equipment, excluding adjustments relating to asset retirement obligations ($9.7 million), were $31.1 million in Q3’15 all of which related to sustaining capital activities including the tailing storage facility.
Turquoise Hill’s cash and cash equivalents at September 30, 2015 were $1.3 billion.
A. | OYU TOLGOI |
The Oyu Tolgoi mine is approximately 550 kilometres south of Ulaanbaatar, Mongolia’s capital city, and 80 kilometres north of the Mongolia-China border. Mineralization on the property consists of porphyry-style copper, gold, silver and molybdenum contained in a linear structural trend (the Oyu Tolgoi Trend) that has a strike length extending over 26 kilometres. Mineral resources have been identified in a series of deposits throughout this trend. They include, from south to north, the Heruga Deposit, the Southern Oyu deposits (Southwest Oyu, South Oyu, Wedge and Central Oyu) and the Hugo Dummett deposits (Hugo South, Hugo North and Hugo North Extension). Mining of ore commenced in May 2012 and first concentrate was produced in January 2013.
The Oyu Tolgoi mine has initially been developed as an open-pit operation. A copper concentrator plant, with related facilities and necessary infrastructure to support a nominal throughput of 100,000 tonnes of ore per day, has been constructed to process ore mined from the Southern Oyu open pit. Long term development plans for Oyu Tolgoi are based on a 95,000-tonne-per-day underground block-cave mine. In August 2013, development of the underground mine was delayed pending resolution of matters with the Government of Mongolia. On May 18, 2015, Turquoise Hill, the Government of Mongolia and Rio Tinto announced the signing of the Oyu Tolgoi Underground Mine Development and Financing Plan, which addressed key outstanding shareholder matters and set out an agreed basis for the funding of the project.
Preparation for underground development
Following the filing of revised schedules for the 2015 Oyu Tolgoi Feasibility Study with the Mongolian Minerals Council in August 2015, pre-start activities are underway in parallel with an update to the capital estimate, which is expected to be completed in Q1’16. Pre-start activities include ramp-up of the owners and EPCM team, re-estimate activities, detailed engineering and early procurement for equipment and materials required for necessary critical works that are key enablers for recommencement of underground lateral development mining activity. Care and maintenance activities have continued for Shaft #1, facilities and mobile equipment. Turquoise Hill expects the decision for underground construction in early Q2’16.
September 30, 2015 | Page | 6 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
The Company continues to expect signing of project financing by the end of 2015. In September 2015, the Government of Mongolia signed the request of the Multilateral Investment Guarantee Agency (MIGA) for host country approval (HCA) with respect to guarantees to be issued by MIGA in connection with the Oyu Tolgoi project financing. The signing of the HCA was a significant milestone in the project financing timeline. In October 2015, the project financing information circular was provided to the banking syndicate allowing for each institution’s respective internal consideration and approval.
Prior to the suspension in August 2013, underground lateral development at Hugo North had advanced approximately 16 kilometres off Shaft #1. Sinking of Shaft #2, the primary operations access and initial production hoisting shaft, had reached a depth of 1,168 metres below surface, 91% of its final depth of 1,284 metres. The 96 metre-high Shaft #2 concrete headframe has been constructed. Sinking of Shaft #5, a dedicated exhaust ventilation shaft, had reached a depth of 208 metres, 17% of its final depth of 1,174 metres. Surface facilities, including offices, mine dry, and workshop, are in place to support initial pre-production development and construction.
Q3’15 performance
Safety continues to be a major focus throughout Oyu Tolgoi’s operations and the mine’s management is committed to reducing risk and injury. Oyu Tolgoi achieved a solid safety performance with an All Injury Frequency Rate of 0.31 per 200,000 hours worked for the nine months ended September 30, 2015.
Key financial metrics for Q3’15 are as follows:
Oyu Tolgoi Key Financial Metrics*
|
| 3Q 2014 | 4Q 2014 | 1Q 2015 | 2Q 2015 | 3Q 2015 | 9 Months 2014 | 9 Months 2015 | Full Year 2014 | |||||||||||||||||||||||||
Revenue ($’000,000) | 491.6 | 670.6 | 426.2 | 421.3 | 431.7 | 1,065.0 | 1,279.2 | 1,735.6 | ||||||||||||||||||||||||||
Concentrates sold (‘000 tonnes) | 220.3 | 262.7 | 167.7 | 189.8 | 226.0 | 471.0 | 583.5 | 733.7 | ||||||||||||||||||||||||||
Revenue by metals in concentrates ($’000,000) | ||||||||||||||||||||||||||||||||||
Copper | 319.1 | 368.5 | 190.2 | 220.3 | 224.5 | 698.5 | 635.0 | 1,066.9 | ||||||||||||||||||||||||||
Gold | 167.2 | 296.4 | 232.3 | 197.4 | 202.8 | 354.1 | 632.5 | 650.5 | ||||||||||||||||||||||||||
Silver | 5.3 | 5.7 | 3.6 | 3.6 | 4.4 | 12.4 | 11.6 | 18.2 | ||||||||||||||||||||||||||
Cost of sales ($’000,000) | 363.8 | 402.8 | 257.9 | 225.7 | 252.2 | 832.3 | 735.8 | 1,235.1 | ||||||||||||||||||||||||||
Production and delivery costs | 243.6 | 279.5 | 173.9 | 147.4 | 159.4 | 570.3 | 480.7 | 849.8 | ||||||||||||||||||||||||||
Depreciation and depletion | 120.2 | 123.3 | 83.9 | 78.2 | 92.8 | 262.0 | 254.9 | 385.3 | ||||||||||||||||||||||||||
Capitalized property, plant and equipment ($’000,000)1 | 38.3 | 25.7 | 30.4 | 36.4 | 31.1 | 133.0 | 97.9 | 158.7 | ||||||||||||||||||||||||||
Royalties | 25.4 | 36.6 | 21.9 | 49.8 | 24.1 | 54.8 | 95.8 | 91.5 | ||||||||||||||||||||||||||
Unit costs ($ per pound of copper)** | ||||||||||||||||||||||||||||||||||
C1 | 0.09 | 0.73 | 0.40 | 0.45 | 1.14 | |||||||||||||||||||||||||||||
All-in sustaining | 0.96 | 1.26 | 1.52 | 1.29 | 1.95 |
* Beginning on January 1, 2015, Turquoise Hill began preparing its financial statements in accordance with IFRS; all financial metrics included in the above table are prepared on the newly adopted IFRS basis. Any financial information in this MD&A should be reviewed in consultation with the Company‘s condensed interim consolidated financial statements.
** Please refer to Section 14 – NON-GAAP MEASURES – on page 18 of this MD&A for reconciliation of these metrics, including total cash operating costs, to the financial statements.
1. | Total additions for Q3’15 include an adjustment of $4.0 million, which reduced the carrying amount of underground evaluation costs capitalized in previous quarters to be in accordance with the Company’s accounting policy on the recognition of exploration and evaluation costs. |
Revenue in Q3’15 increased 2.5% over Q2’15. Higher revenues reflect higher volumes of copper-gold concentrate sales, partially offset by a fall in copper prices. The Q3’15 mix of revenue by metals is the result of inventory with higher contained copper and gold drawn down during the quarter from concentrate produced in Q2’15. Gross margin at 41.6% for the quarter reduced from 46.4% in Q2’15 due to the effect of lower copper prices.
September 30, 2015 | Page | 7 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Production and delivery costs include primarily the cash costs in inventory sold as well as allocated mine administration costs. Depreciation and depletion includes the depreciation and depletion in inventory sold as well as any depreciation of assets used in the selling and delivery process, including the depreciation of capitalized production phase stripping costs. A non-cash charge of $76.4 million was recorded in Q3’15, within operating expenses, for additional provision against non-current ore stockpiles, following re-estimation of realizable value to reflect lower copper and gold prices and updated assumptions for timing of processing.
Total additions capitalized to property, plant and equipment, on an accruals basis, for Q3’15 were $31.1 million (Q3’14: $38.3 million) all attributed to sustaining activities, including the tailings storage facility and deferred stripping. Total additions for Q3’15 include an adjustment of $4.0 million, which reduced the carrying amount of underground evaluation costs capitalized in previous quarters to be in accordance with the Company’s accounting policy on the recognition of exploration and evaluation costs.
Total cash operating costs at Oyu Tolgoi in Q3’15 were $222.5 million. Following transition to IFRS, the 5% royalty payable to the Government of Mongolia, previously deducted from revenue, is reflected as a cash operating expense, and production phase stripping costs, previously included within cash operating expense, are capitalized and depreciated. Please refer to Section 11 – INTERNATIONAL FINANCIAL REPORTING STANDARDS – on page 14 of this MD&A. During Q3’15, Oyu Tolgoi continued to improve and optimize operations in order to reduce costs across the mine’s operation.
Oyu Tolgoi’s C1 costs in Q3’15 were $0.40 per pound, compared with $0.73 per pound in Q2’15. The decrease was mainly due to a $22.1 million charge in Q2’15 for settlement of amounts not previously paid or provided for in relation to Mongolian Tax assessments, following signature of the underground agreement on May 18, 2015, and a net reduction in inventory (excluding non-cash write-down) as sales volumes exceeded production. Oyu Tolgoi’s open-pit mine has a high-grade zone containing a large proportion of gold in addition to copper; Turquoise Hill anticipates quarterly fluctuation of C1 costs as the quantity of gold in concentrates sold varies after ore from this zone is fed through the mill.
All-in sustaining costs in Q3’15 were $1.52 per pound, compared with $1.26 per pound in Q2’15. The increase was mainly due to a non-cash charge for additional provision against non-current ore stockpile partially offset by royalty expenses returning to regular operational levels following the Q2’15 adjustment upon signing of the underground agreement.
September 30, 2015 | Page | 8 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Key operational metrics for Q3’15 are as follows:
Oyu Tolgoi Production Data
All data represents full production and sales on a 100% basis
|
| 3Q 2014 | 4Q 2014 | 1Q 2015 | 2Q 2015 | 3Q 2015 | 9 months 2014 | 9 months 2015 | Full Year 2014 | |||||||||||||||||||||||||
Open pit material mined (‘000 tonnes) | 19,493 | 18,944 | 21,999 | 22,094 | 23,969 | 57,975 | 68,063 | 76,919 | ||||||||||||||||||||||||||
Ore treated (‘000 tonnes) | 7,029 | 7,505 | 7,512 | 9,025 | 8,632 | 20,367 | 25,168 | 27,872 | ||||||||||||||||||||||||||
Average mill head grades: | ||||||||||||||||||||||||||||||||||
Copper (%) | 0.59 | 0.74 | 0.52 | 0.69 | 0.75 | 0.55 | 0.66 | 0.60 | ||||||||||||||||||||||||||
Gold (g/t) | 0.80 | 1.46 | 0.48 | 1.09 | 0.56 | 0.64 | 0.73 | 0.86 | ||||||||||||||||||||||||||
Silver (g/t) | 1.64 | 1.65 | 1.16 | 1.46 | 1.90 | 1.58 | 1.52 | 1.60 | ||||||||||||||||||||||||||
Concentrates produced (‘000 tonnes) | 134.1 | 186.7 | 130.9 | 215.5 | 210.3 | 377.0 | 556.7 | 563.6 | ||||||||||||||||||||||||||
Average concentrate grade (% Cu) | 27.3 | 26.9 | 25.7 | 25.6 | 26.6 | 26.0 | 26.0 | 26.3 | ||||||||||||||||||||||||||
Production of metals in concentrates: | ||||||||||||||||||||||||||||||||||
Copper (‘000 tonnes) | 36.6 | 50.3 | 33.6 | 55.3 | 56.0 | 98.2 | 144.9 | 148.4 | ||||||||||||||||||||||||||
Gold (‘000 ounces) | 132 | 278 | 86 | 238 | 123 | 311 | 446 | 589 | ||||||||||||||||||||||||||
Silver (‘000 ounces) | 216 | 286 | 184 | 297 | 388 | 608 | 869 | 893 | ||||||||||||||||||||||||||
Sales of metals in concentrates: | ||||||||||||||||||||||||||||||||||
Copper (‘000 tonnes) | 53.6 | 67.6 | 42.1 | 46.3 | 58.2 | 118.3 | 146.5 | 185.8 | ||||||||||||||||||||||||||
Gold (‘000 ounces) | 144 | 263 | 200 | 177 | 200 | 298 | 577 | 561 | ||||||||||||||||||||||||||
Silver (‘000 ounces) | 323 | 383 | 219 | 250 | 334 | 710 | 798 | 1,093 | ||||||||||||||||||||||||||
Metal recovery (%) | ||||||||||||||||||||||||||||||||||
Copper | 89.3 | 90.7 | 86.8 | 88.6 | 86.4 | 88.4 | 87.3 | 89.1 | ||||||||||||||||||||||||||
Gold | 74.8 | 78.6 | 71.6 | 75.6 | 76.4 | 75.0 | 74.4 | 76.6 | ||||||||||||||||||||||||||
Silver | 58.6 | 71.6 | 65.4 | 70.6 | 73.0 | 58.8 | 69.6 | 62.3 |
Oyu Tolgoi’s Q3’15 mine production was at record levels while concentrate produced and contained copper was on par with Q2’15 even considering the planned concentrator shutdown in July. During Q3’15, mined production increased 8.5% over Q2’15 due to shorter hauling routes and ongoing productivity initiatives. Copper in concentrates for Q3’15 increased 1.3% due to higher head grades. Gold in concentrates for the quarter decreased 48.3% over Q2’15 due to slower than anticipated access to gold-rich ore.
Funding of Oyu Tolgoi by Turquoise Hill
In accordance with the ARSHA dated June 8, 2011, Turquoise Hill has funded Oyu Tolgoi’s cash requirements beyond internally generated cash flows by a combination of equity investment and shareholder debt.
For amounts funded by debt, Oyu Tolgoi must repay such amounts, including accrued interest, before it can pay common share dividends. At September 30, 2015, the aggregate outstanding balance of shareholder loans extended by subsidiaries of the Company to Oyu Tolgoi was $6.8 billion, including accrued interest of $1.4 billion. These loans bear interest at an effective annual rate of LIBOR plus 6.5%. In Q3’15, Oyu Tolgoi repaid a total amount of $180.0 million with respect to these loans, including accrued interest of $57.9 million.
In accordance with the ARSHA, a subsidiary of the Company has funded the common share investments in Oyu Tolgoi on behalf of Erdenes. These funded amounts earn interest at an effective annual rate of LIBOR plus 6.5% and are repayable, by Erdenes to a subsidiary of the Company, via a pledge over Erdenes’ share of Oyu Tolgoi common share dividends. Erdenes also has the right to reduce the outstanding balance by making cash payments at any time. As at September 30, 2015, the cumulative amount of such funding was $751.1 million, representing approximately 34% of invested common share equity; unrecognized interest on the funding amounted to $214.9 million.
September 30, 2015 | Page | 9 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Operational outlook
Increased copper and gold production is expected in Q4’15 when compared to Q3’15 as higher-grade ore is anticipated to be accessed in the open pit.
Turquoise Hill continues to expect Oyu Tolgoi to produce 175,000 to 195,000 tonnes of copper and 600,000 to 700,000 ounces of gold in concentrates in 2015. The Company expects copper production to be at the top of the range while gold production is expected to be in the middle of the range.
Capital expenditure for 2015 is now expected to be approximately $120 million, of which approximately $115 million relates to sustaining capital. The Company previously expected capital expenditure of approximately $230 million, of which approximately $185 million related to sustaining capital. The reduction is the result of operational efficiencies, changes to the mine plan during the year and capital optimization.
Operating cash costs for 2015 are now expected to be approximately $900 million. The Company previously expected operating cash costs of approximately $1 billion. The reduction reflects changes from operational improvements throughout the year and excludes one-time costs related to the May 2015 underground agreement as well as pre-start costs for underground development.
Sales contracts have been signed for more than 80% of Oyu Tolgoi’s expected 2016 concentrate production.
Q3’15 exploration
Oyu Tolgoi’s exploration strategy is focused on developing a project pipeline prioritized in areas that can impact the current development of the Oyu Tolgoi orebodies, seeking low-cost development options; in particular looking for shallower targets. Historical datasets are added to and reinterpreted to enable future discovery.
B. | OTHER ASSETS |
SouthGobi
On April 23, 2015, the Company completed sale of 48.7 million shares in SouthGobi to Novel Sunrise Investments Limited (NSI) at a price of C$0.35 per common share payable in cash, and on June 3, 2015 a further 1.7 million shares were sold to NSI at a price of C$0.35 per share. Half of the aggregate cash proceeds, representing C$8.5 million in total, were received at closing; the balance of approximately C$8.5 million was received on August 4, 2015.
At September 30, 2015, Turquoise Hill owned 52.4 million SouthGobi common shares, representing approximately 21.3% of the issued and outstanding SouthGobi shares at that date. The carrying value of this interest at September 30, 2015 was $14.6 million based on the quoted share price.
At September 30, 2015, SouthGobi is classified as an investment in associate within assets held for sale in the Company’s financial statements.
Other exploration
Desk top studies, data compilation and detailed satellite imagery interpretation are in progress for an orbit area approximately surrounding Oyu Tolgoi. An induced polarization and magnetotellurics survey on Turquoise Hill’s Teregt licence (bordering the south of the Oyu Tolgoi licences) was conducted. The results have been analyzed and the interpretation downgraded the previous induced polarization targets. Additional soil and rock geochemical sampling has been done to test for shallow exploration targets. A service agreement is in place with Rio Tinto Holdings (Exploration), under which they provide exploration services to the Company. This agreement benefits Turquoise Hill by allowing access to Rio Tinto’s global expertise, knowledge base and skills.
September 30, 2015 | Page | 10 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
C. | CORPORATE ACTIVITIES |
Management change
In September 2015, Turquoise Hill announced the resignation of Stewart Beckman, Senior Vice President, Operations and Technical Development, effective October 1, 2015 due to Mr. Beckman having accepted a new position within Rio Tinto. The Company is conducting a search for Mr. Beckman’s replacement, which will be announced in due course. Mr. Beckman will provide support in the interim to ensure a smooth transition.
D. | CORPORATE ADMINISTRATIVE EXPENSES |
Corporate administrative expenses.Corporate administrative costs in Q3’15 were $2.9 million, a decrease of $3.0 million from Q3’14 ($5.9 million), mainly due to lower employee and consulting costs as the Company continued to focus on core operations.
4. | LIQUIDITY AND CAPITAL RESOURCES |
As at September 30, 2015, Turquoise Hill held consolidated cash and cash equivalents of $1.3 billion, consolidated working capital (inclusive of cash and cash equivalents) of $1.4 billion and an accumulated deficit of $4.6 billion.
Cash flow
Operating activities.A total of $171.7 million of cash was generated from operating activities in Q3’15, reflecting: cost improvements as Oyu Tolgoi continued to optimize operations and working capital efficiencies.
Investing activities.Cash used in investing activities totalled $21.8 million in Q3’15. Property, plant and equipment purchases of $29.2 million related mainly to Oyu Tolgoi sustaining activities (including deferred stripping and construction of tailings storage facility). Capital expenditure was partly offset by proceeds from divestment of shares in SouthGobi and Ivanhoe Mines Ltd.
Financing activities. There was no significant financing activity during Q3’15.
Liquidity and capital resources
On March 19, 2015, Oyu Tolgoi signed a secured $200.0 million revolving credit facility with five banks, replacing an unsecured $200.0 million revolving facility signed on February 24, 2014, which matured on February 24, 2015. Amounts drawn under the facility are required to be used by Oyu Tolgoi for working capital purposes. The credit facility bears interest at a fixed margin over LIBOR on any drawn amounts together with a utilization fee which varies according to the utilized portion of the facility, and a commitment fee on undrawn amounts. The revolving credit facility matures on March 19, 2016. At September 30, 2015, no amounts had been drawn down on the facility.
Turquoise Hill believes that, based on its current cash position, cash generated from operation of the Oyu Tolgoi mine, and the $200.0 million revolving credit facility, it will have sufficient funds to meet its minimum obligations, including general corporate activities, for at least the next 12 months. Carrying out the underground development and further exploration of the Oyu Tolgoi mine and other mineral properties depends upon the Company’s ability to obtain financing.
September 30, 2015 | Page | 11 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
In late February 2013, the boards of the European Bank of Reconstruction and Development (EBRD) and the International Finance Corporation (IFC) approved their respective participation in project financing of the Underground Development. On April 17, 2013, Rio Tinto signed commitment letters with 15 global commercial banks that locked in pricing and terms. In addition to the approval of the EBRD and the IFC, the Oyu Tolgoi project financing has been conditionally approved by the boards of Export Development Canada, Australian Export Finance and Insurance Corporation, and Export-Import Bank of the United States. Following agreement reached on the Underground Mine Development and Financing Plan on May 18, 2015, progress has been made on re-engaging members of the original syndicate for arrangement of project financing. The Company continues to expect signing of project financing by the end of 2015. In September 2015, the Government of Mongolia signed the request of the Multilateral Investment Guarantee Agency (MIGA) for host country approval (HCA) with respect to guarantees to be issued by MIGA in connection with the Oyu Tolgoi project financing. The signing of the HCA was a significant milestone in the project financing timeline. In October 2015, the project financing information circular was provided to the banking syndicate allowing for each institution’s respective internal consideration and approval.
Project financing is subject to the unanimous approval of the Oyu Tolgoi Board of Directors, which includes representatives from the Government of Mongolia.
Financial instruments
The carrying value of Turquoise Hill’s financial instruments was as follows:
(Stated in $000’s of dollars) | September 30, 2015 | December 31, 2014 | ||||||
Financial Assets | ||||||||
Cash and cash equivalents | $ | 1,310,360 | $ | 862,755 | ||||
Available-for-sale: | ||||||||
Long-term investments | 8,388 | 34,325 | ||||||
Cost method: | ||||||||
Long-term investments | 115 | 115 | ||||||
Loans and receivables: | ||||||||
Trade and other receivables | 10,562 | 14,519 | ||||||
Due from related parties | 9,717 | 7,864 | ||||||
Financial Liabilities | ||||||||
Trade and other payables | 177,136 | 185,852 | ||||||
Payable to related parties | 41,788 | 53,784 |
Certain of the above financial instruments are carried at fair value. Their fair values were determined as follows:
● | Long-term investments – Fair values of freely tradable long-term investments were determined by reference to published market quotations, which may not be reflective of future values. Fair values of long-term investments with trading restrictions have been determined by applying a liquidity discount to published market quotations, which may not be reflective of future values. |
Turquoise Hill is exposed to credit risk with respect to its accounts receivable, other long-term investments and cash and cash equivalents. The significant concentrations of credit risk are with counterparties situated in Mongolia, China, Canada and Europe.
Turquoise Hill is exposed to United States interest-rate risk with respect to the variable rates of interest receivable on cash and cash equivalents.
September 30, 2015 | Page | 12 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
5. | SHARE CAPITAL |
As at November 5, 2015, the Company had a total of:
● | 2,012,309,019 common shares outstanding; |
● | 2,409,847 incentive stock options outstanding, with a weighted average exercise price of C$12.16 per share. Each option is exercisable to purchase a common share of the Company at prices ranging from C$2.41 to C$23.75 per share. |
6. | OUTLOOK |
The information below is in addition to disclosures already contained in this report regarding the Company’s operations and activities.
Turquoise Hill’s financial performance and its ability to advance its future operations and development plans are heavily dependent on the availability of funding, base and precious metal prices and foreign-exchange rates. Volatility in these markets continues to be high.
For further details on the Company’s financing plans, please refer to Section 4 – LIQUIDITY AND CAPITAL RESOURCES – on page 11 of this MD&A.
Copper market
Commodity prices are a key driver of Turquoise Hill’s future earnings. Copper prices climbed to $2.41 per pound during mid-October supported by a weak dollar and news of proposed production cuts from Zambia this year as well as expansion delays at Collahuasi. However, worries on slowing Chinese demand pushed prices down to approximately $2.35 per pound due to the release of lower-than-expected economic data. Analysts expect the supply-demand balance to become increasingly tight in the medium term in response to mine cutbacks, even with conservative demand assumptions.
During October, gold prices jumped to $1,190 per ounce, their highest level of in four months, then slipped to approximately $1,159 per ounce in line with US dollar fluctuation and timing expectations of a US interest rate increase.
The spot concentrate market was quiet in October. Treatment charges remained flat at $95-$105 with annual negotiations kicking off during London Metal Exchange Week. Chinese smelters are still seeking benchmark treatment charges of more than $100 for 2016, although market expectation is around $90-$100.
It is difficult to reliably forecast commodity prices and customer demand for Turquoise Hill’s products; however, Iong-term sales contracts based on international terms have been signed on a substantial portion of the Oyu Tolgoi mine’s concentrate production.
Exchange Rates
Oyu Tolgoi’s sales are settled in U.S. dollars, and a portion of its expenses are incurred in local currencies. Foreign exchange fluctuations could have an effect on Turquoise Hill’s operating margins; however in view of the proportion of locally incurred expenditures, such fluctuations are not expected to have a significant impact.
September 30, 2015 | Page | 13 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
7. | OFF-BALANCE SHEET ARRANGEMENTS |
During the nine months ended September 30, 2015, Turquoise Hill was not a party to any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources of the Company.
8. | CONTRACTUAL OBLIGATIONS |
As at September 30, 2015, there were no significant changes in Turquoise Hill’s contractual obligations and commercial commitments from those disclosed in its MD&A for the year ended December 31, 2014.
9. | CRITICAL ACCOUNTING ESTIMATES |
The preparation of financial statements in conformity with International Financial Reporting Standards (IFRS) requires Turquoise Hill to establish accounting policies and to make estimates that affect both the amount and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.
A detailed summary of all of the Company’s significant accounting policies and the estimates derived therefrom is included in Note 2 to the condensed interim consolidated financial statements for the three months ended March 31, 2015. The Company’s significant accounting policies and the estimates derived therefrom identified as being critical under IFRS are substantially unchanged from those identified as being critical under U.S. GAAP and disclosed in the Company’s MD&A for the year ended December 31, 2014, and elaborated upon in Section 9 of the MD&A for the three months ended March 31, 2015.
10. | RECENT ACCOUNTING PRONOUNCEMENTS |
A number of new standards, amendments to standards and interpretations are not yet effective, or are not mandatory for adoption, for the year ending December 31, 2015 and have therefore not been applied in preparing the condensed interim consolidated financial statements.
11. | INTERNATIONAL FINANCIAL REPORTING STANDARDS |
The condensed interim consolidated financial statements for the three months ended March 31, 2015 were the Company’s first consolidated interim financial statements prepared in accordance with IFRS. Due to the requirement to present comparative financial information, the effective transition date is January 1, 2014 (Transition Date).
The following outlines the key IFRS transitional impacts on the Company’s financial statements and the impact of the IFRS transition on systems, process, business activities and controls.
Note 26 to the condensed interim consolidated financial statements for the nine months ended September 30, 2015 provides more detail on the key U.S. GAAP to IFRS differences, the accounting policy decisions and the application of IFRS 1 –First Time Adoption of International Financial Reporting Standards.
Transitional financial impact
On adoption of IFRS, the Company has adjusted amounts reported previously in financial statements prepared in accordance with U.S. GAAP.
September 30, 2015 | Page | 14 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
The impact of the transition to IFRS on total equity is outlined in the table below for the comparative period end dates presented:
Reconciliation of equity | December 31, 2014 | September 30, 2014 | January 1, 2014 | |||||||||||||
Equity under U.S. GAAP | $ | 7,576,725 | $ | 7,508,913 | $ | 4,578,086 | ||||||||||
IFRS adjustments to equity: | ||||||||||||||||
Non-current inventories | (110,330 | ) | (129,505 | ) | (103,892 | ) | ||||||||||
Deferred stripping costs (Oyu Tolgoi) | 42,395 | 32,469 | 9,442 | |||||||||||||
Deferred stripping costs (SouthGobi) | - | (1,674 | ) | 96,063 | ||||||||||||
Available for sale equity investments | 873 | 2,423 | 14,331 | |||||||||||||
Loans receivable | 4,509 | 4,911 | 13,024 | |||||||||||||
Decommissioning obligations | (1,703 | ) | (2,237 | ) | (1,614 | ) | ||||||||||
Income taxes | - | 269 | 4,547 | |||||||||||||
Rights offering | - | - | 928,280 | |||||||||||||
Consolidation and classification of SouthGobi | 55,986 | - | - | |||||||||||||
Other | 10 | (915 | ) | 735 | ||||||||||||
Total IFRS adjustments to equity | $ | (8,260 | ) | $ | (94,259 | ) | $ | 960,916 | ||||||||
Total equity under IFRS | $ | 7,568,465 | $ | 7,414,654 | $ | 5,539,002 |
The impact of the transition on comprehensive income is outlined in the table below for the comparative periods presented:
Reconciliation of total comprehensive income (loss) | Nine months ended September 30, 2014 | Three months ended September 30, 2014 | ||||||||
Comprehensive loss under U.S. GAAP | $ | (316,806 | ) | $ | (142,872 | ) | ||||
IFRS adjustments to income (loss): | ||||||||||
Non-current inventories | (25,613 | ) | (11,344 | ) | ||||||
Deferred stripping costs | (74,711 | ) | (86,651 | ) | ||||||
Decommissioning obligations | (623 | ) | (247 | ) | ||||||
Loans receivable | - | - | ||||||||
Income taxes | (10,013 | ) | (1,337 | ) | ||||||
Rights offering | 34,034 | - | ||||||||
Other | 142 | (201 | ) | |||||||
IFRS adjustments to comprehensive income (loss) | ||||||||||
Investments in securities available for sale | (11,909 | ) | (3,030 | ) | ||||||
Loans receivable | (8,113 | ) | (1,630 | ) | ||||||
Income taxes | 5,734 | 141 | ||||||||
Total IFRS adjustments to comprehensive loss | $ | (91,072 | ) | $ | (104,299 | ) | ||||
Comprehensive loss under IFRS | $ | (407,878 | ) | $ | (247,171 | ) |
As there has been no change in the net cash flows, no reconciliations have been prepared. The changes made to the consolidated statements of income (loss), comprehensive income (loss) and the consolidated statements of financial position have resulted in reclassification of various amounts on the statements of cash flows.
Financial statement presentation changes
The Company has also changed the presentation of certain items in its condensed interim consolidated financial statements for September 30, 2015 as compared to its financial statements previously published in accordance with U.S. GAAP.
• | Mining royalties are now included within operating expenses where previously they were netted against revenues. |
• | Accretion expense for decommissioning obligations is included within finance costs where previously it was shown separately on the face of the statement of operations; and |
September 30, 2015 | Page | 15 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
• | Deferred income tax liabilities for withholding taxes on intercompany interest payments is now classified as non-current deferred income taxes where previously they were included in accounts payable and accrued liabilities as withholding tax payable. |
Systems, processes and business activities
The Company has assessed the impact of the IFRS transition on systems and processes, including an assessment on information technology systems and internal controls and implemented changes required as a result. These changes were not significant.
The Company applied its existing control framework to the IFRS changeover process. All accounting policy changes and transitional financial position impacts were subject to review by senior management and the Company’s Audit Committee.
Post-implementation
During post-implementation, the Company will continue to monitor the changes to IFRS in future periods. The Company notes that the standard-setting bodies that determine IFRS have significant ongoing projects that could impact the IFRS accounting policies that Turquoise Hill has selected. The Company has processes in place to ensure that potential changes are monitored and evaluated. The impact of any new IFRSs and IFRIC Interpretations will be evaluated as they are drafted and published.
12. | RISK AND UNCERTAINTIES |
Turquoise Hill is subject to a number of risks due to the nature of the industry in which it operates and the present state of development of its business and the foreign jurisdictions in which it carries on business. The material risks and uncertainties affecting Turquoise Hill, their potential impact, and the Company’s principal risk-management strategies are substantially unchanged, other than that which is described below, from those disclosed in its MD&A for the year ended December 31, 2014 (2014 MD&A) and in its Annual Information Form (AIF) dated March 20, 2015 in respect of such period.
Following partial divestment of SouthGobi to NSI on April 23, 2015, the Company no longer consolidates its interest, which is recorded as an investment in an associated company within assets held for sale in the financial statements. The Company’s exposures in relation to its investment in SouthGobi now relate mainly to factors having an impact on fair value, and ability to complete the divestment of its remaining interest in the future.
At September 30, 2015 the Company recorded its investment in SouthGobi at a carrying value of $14.6 million, being the lower of cost and Fair Value less Cost to Sell (FVLCS) in accordance with the measurement requirements of IFRS 5,Non-current Assets Held for Sale and Discontinued Operations, and IAS 39,Financial Instruments: Recognition and Measurement, and based upon a quoted share price of C$0.40. As the quoted price per share fluctuates, the Company will record charges or credits in its income statement for the future reporting periods in which it continues to classify SouthGobi as an associated company within assets held for sale. The Company may also be required in the future to record further income statement adjustments with respect to its remaining holding in SouthGobi.
September 30, 2015 | Page | 16 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
13. | RELATED-PARTY TRANSACTIONS |
Transactions with Rio Tinto
As at September 30, 2015, Rio Tinto’s equity ownership in the Company was 50.8% (December 31, 2014: 50.8%).
The following table presents the consolidated balance sheet line items which include amounts due from or payable to Rio Tinto:
(Stated in $000’s of dollars) | September 30 2015 | December 31, 2014 | January 1, 2014 | |||||||||||||
Cash and cash equivalents (i) | $ | 739,850 | $ | 711,468 | $ | - | ||||||||||
Due from related parties | 3,356 | 7,864 | 5,070 | |||||||||||||
Payable to related parties: | ||||||||||||||||
Management services payment (ii) | (7,572 | ) | (7,729 | ) | (100,569 | ) | ||||||||||
Cost recoveries (iii) | (34,216 | ) | (46,055 | ) | (75,237 | ) | ||||||||||
Standy purchaser fee (iv) | - | - | (71,886 | ) | ||||||||||||
Interest payable on long-term debt (v) | - | - | (13,530 | ) | ||||||||||||
Interim funding facility (v) | - | - | (1,789,787 | ) | ||||||||||||
New bridge facility (v) | - | - | (339,475 | ) | ||||||||||||
701,418 | 665,548 | (2,385,414 | ) |
The following table summarizes transactions with Rio Tinto by their nature:
(Stated in $000’s of dollars) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||
Interest income on demand deposits (i) | $ | 554 | $ | - | $ | 1,109 | $ | - | ||||||||||||||
Costs recoveries - Turquoise Hill | 536 | 659 | 2,917 | 1,541 | ||||||||||||||||||
Financing costs: | ||||||||||||||||||||||
Commitment fees | - | - | - | (224 | ) | |||||||||||||||||
Interest expense (vi) | - | - | - | (4,903 | ) | |||||||||||||||||
Management services payment (ii) | (7,572 | ) | (6,508 | ) | (18,727 | ) | (20,016 | ) | ||||||||||||||
Costs recoveries - Rio Tinto (iii) | (13,755 | ) | (12,848 | ) | (38,482 | ) | (53,389 | ) | ||||||||||||||
$ | (20,237 | ) | $ | (18,697 | ) | $ | (53,183 | ) | $ | (76,991 | ) |
(i) | In addition to placing cash and cash equivalents on deposit with banks or investing funds with other financial institutions, Turquoise Hill may, from time to time, deposit cash and cash equivalents or invest funds with Rio Tinto in accordance with an agreed upon policy and strategy for the management of liquid resources. Cash and cash equivalents at September 30, 2015 included short term deposits, net of withdrawals, made between December 2014 and September 2015 with wholly owned subsidiaries of Rio Tinto totalling $739.9 million. During the nine months ended September 30, 2015, these deposits earned interest at rates equivalent to those offered by financial institutions. |
(ii) | In accordance with the ARSHA, which was signed on June 8, 2011, and other related agreements, Turquoise Hill is required to pay a management services payment (MSP) to Rio Tinto equal to a percentage of all capital costs and operating costs incurred by Oyu Tolgoi from March 31, 2010 onwards. After signing of the Underground Mine Development and Financing Plan on May 18, 2015, the percentage applied to capital costs of the underground development is 1.5%, and the percentage applied to operating costs and capital related to current operations is 3%. Adjustments for the impact of these percentages to MSPs made in previous periods are included in the amount for the nine months ended September 30. |
September 30, 2015 | Page | 17 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
(iii) | Rio Tinto recovers the costs of providing general corporate support services and mine management services to Turquoise Hill. Mine management services are provided by Rio Tinto in its capacity as the manager of the Oyu Tolgoi mine. |
(iv) | In Q1’14, the Company recognized a derivative gain of $1.1 million associated with re-measuring the standby purchaser fee liability. |
(v) | In Q1’14, the Company used $2.2 billion of the net proceeds from the rights offering that closed in January 2014 to repay all amounts outstanding on the Interim Funding Facility ($1.8 billion) and the New Bridge Facility ($402.6 million). |
(vi) | The terms of the Rio Tinto credit facilities include gross-up provisions for withholding taxes. Accordingly, commitment fees and interest expense include gross-ups for withholding taxes where applicable. |
Transactions with SouthGobi
As at September 30, 2015, Turquoise Hill’s equity ownership in South Gobi was 21.3%. Prior to the sale of 48.7 million shares on April 23, 2015, SouthGobi was classified as a consolidated subsidiary, and transactions between the Company and SouthGobi were eliminated on consolidation and were therefore not reported as related party transactions. At September 30, 2015, $6.4 million was due from SouthGobi.
There were no amounts payable to companies related to Turquoise Hill by way of directors, officers or shareholders in common.
The above noted transaction was in the normal course of operations and was measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
14. | NON-GAAP MEASURES |
The Company’s financial results are prepared in accordance with IFRS. In addition, the Company presents and refers to the following measures (non-GAAP measures) which are not defined in IFRS. A description and calculation of these measures is given below, and may differ in some aspects from equivalent measures provided by other issuers.
Cash operating costs
This measure comprises Oyu Tolgoi cash operating costs, and is presented in order to provide investors and other stakeholders in the Company with a greater understanding of performance and operations at Oyu Tolgoi. The measure of cash operating 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.
C1 cash costs
C1 cash costs is a metric representing the cash cost per unit of extracting and processing the Company’s principal metal product to a condition in which it may be delivered to customers, net of by-product credits. It is provided in order to support peer group comparability and to provide investors and other stakeholders useful information about the underlying cash costs of Oyu Tolgoi and the impact of by-product 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 includes gold and silver revenue credits as the production cost is reduced as a result of selling these by-products.
September 30, 2015 | Page | 18 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Turquoise Hill’s principal metal product is copper, and C1 cash costs are reported for Oyu Tolgoi only.
All-in sustaining costs
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 over the life-cycle of its operations. The measure seeks to reflect the full cost of copper production from current operations and as a result development project capital is not included. AISC allows Turquoise Hill to assess the ability of Oyu Tolgoi to support sustaining capital expenditures for future production from the generation of operating cash flows
A reconciliation of total cash operating costs, C1 cash costs and all-in sustaining costs, is provided below.
Operating and unit costs | ||||||||
September 30, 2015 | June 30, 2015 | March 31, 2015 | September 30, 2015 | |||||
C1 costs (US$‘000) | (Three months) | (Three months)1. | (Three months) | (Nine months) | ||||
Production and delivery | 159,375 | 147,446 | 173,944 | 480,765 | ||||
Change in inventory | (17,075) | 17,276 | (36,827) | (36,626) | ||||
Other operating expenses | 151,721 | 94,066 | 93,543 | 339,330 | ||||
Less: | ||||||||
- Impairment / write-down of inventory | (76,448) | 25,625 | (16,381) | (67,203) | ||||
- Depreciation | (2,610) | (3,766) | (2,542) | (8,918) | ||||
Management services payment to Turquoise Hill | 7,572 | 3,964 | 7,191 | 18,727 | ||||
|
|
|
| |||||
Cash operating costs | 222,535 | 284,612 | 218,928 | 726,075 | ||||
Cash operating costs: $/lb of copper produced | 1.80 | 2.33 | 2.96 | 2.27 | ||||
Adjustments to cash operating costs2. | 33,736 | 5,120 | 23,760 | 62,616 | ||||
Less: Gold and silver revenues | (207,199) | (200,994) | (235,920) | (644,113) | ||||
|
|
| ||||||
C1 costs (US$‘000) | 49,072 | 88,738 | 6,768 | 144,578 | ||||
|
|
| ||||||
C1 costs: $/lb of copper produced | 0.40 | 0.73 | 0.09 | 0.45 | ||||
All-in sustaining costs (US$‘000) | ||||||||
Corporate administration | 2,899 | 5,797 | 3,502 | 12,198 | ||||
Asset retirement expense | 1,395 | 513 | 1,943 | 3,852 | ||||
Royalty expenses | 24,126 | 49,775 | 21,880 | 95,781 | ||||
Non-current stockpile and stores write-down reversal | 76,448 | (25,625) | 16,381 | 67,203 | ||||
Other expenses | 1,116 | 2,300 | 588 | 4,003 | ||||
Sustaining cash capital including deferred stripping | 32,792 | 32,498 | 20,283 | 85,573 | ||||
|
|
| ||||||
All-in sustaining costs (US$000) | 187,847 | 153,995 | 71,345 | 413,188 | ||||
|
|
| ||||||
All-in sustaining costs: $/lb of copper produced | 1.52 | 1.26 | 0.96 | 1.29 |
1.C1 costs for the three months ended June 30, 2015 include applicable one-time charges and adjustments of $16.7 million, as a result of signing the Underground Mine Development and Financing Plan on May 18, 2015. Before recording these items, C1 costs were $72.0 million for the three month period ended June 30 and $0.59 per lb. of copper produced.
2. Adjustments to cash operating 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 cost.
15. | CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING |
During the nine months ended September 30, 2015, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s CEO and CFO assessed the effectiveness of the Company’s internal controls over financial reporting as at December 31, 2014 in accordance with Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s CEO and CFO plan to assess the effectiveness of internal controls over financial reporting at December 31, 2015 in accordance with the revised framework issued by the COSO in 2013.
September 30, 2015 | Page | 19 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
16. | QUALIFIED PERSON |
Disclosure of a scientific or technical nature in this MD&A in respect of the Oyu Tolgoi mine was prepared under the supervision of Bernard Peters (responsibility for overall preparation and mineral reserves), B. Eng. (Mining), FAusIMM (201743), employed by OreWin as Technical Director – Mining and Kendall Cole-Rae (responsibility for mineral resources, geology and exploration), B.Sc. (Geology), SME (4138633), employed by Rio Tinto as Chief Adviser, Geology and Resource Estimation. Each of these individuals is a “qualified person” as that term is defined in NI 43-101.
17. | CAUTIONARY STATEMENTS |
Language Regarding Reserves and Resources
Readers are advised that NI 43-101 requires that each category of mineral reserves and mineral resources be reported separately. For detailed information related to Company resources and reserves, readers should refer to the Annual Information Form of the Company for the year ended December 31, 2014, and other continuous disclosure documents filed by the Company since January 1, 2014 under Turquoise Hill’s profile on SEDAR atwww.sedar.com.
Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources
This document has been prepared in accordance with the requirements of Canadian securities laws, which differ from the requirements of United States (U.S.) securities laws. Unless otherwise indicated, all reserve and resource estimates included in this document have been prepared in accordance with 43-101, and the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) Definition Standards for mineral resources and mineral reserves (CIM Standards). NI 43-101 is a rule developed by the Canadian Securities Authorities that establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects.
Canadian standards, including NI 43-101, differ significantly from the requirements of the U.S. Securities and Exchange Commission (the SEC), and reserve and resource information contained in this document may not be comparable to similar information disclosed by U.S. companies. In particular, and without limiting the generality of the foregoing, the term “resource” does not equate to the term “reserve”. Under U.S. standards, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. Among other things, all necessary permits would be required to be in hand or issuance imminent in order to classify mineralized material as reserves under the SEC standards. Mineral reserves estimates included herein may not qualify as “reserves” under SEC standards. The SEC’s disclosure standards normally do not permit the inclusion of information concerning “Measured mineral resources”, “Indicated mineral resources” or “Inferred mineral resources” or other descriptions of the amount of mineralization in mineral deposits that do not constitute “reserves” by U.S. standards in documents filed with the SEC. U.S. investors should also understand that “Inferred mineral resources” have an even greater amount of uncertainty as to their existence and an even greater uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an “Inferred mineral resource” will ever be upgraded to a higher category. Under NI 43-101, estimated “Inferred mineral resources” generally may not form the basis of feasibility or pre-feasibility studies except in rare cases. Investors are cautioned not to assume that all or any part of an “Inferred mineral resource” exists or is economically or legally mineable. Disclosure of “contained pounds” or “contained ounces” of metal in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC standards as in-place tonnage and grade without reference to unit measures. The requirements of NI 43-101 for identification of “reserves” are also not the same as those of the SEC, and reserves reported by the Company in compliance with NI 43-101 may not qualify as “reserves” under SEC standards. Accordingly, information concerning mineral deposits set forth herein may not be comparable with information made public by companies that report in accordance with U.S. standards.
September 30, 2015 | Page | 20 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
18. | 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 harbor” provisions of the U.S.Private Securities Litigation Reform Act of 1995. Forward-looking information and statements relate to future events or future performance, reflect current expectations or beliefs regarding future events and are typically identified by words such as “anticipate”, “could”, “should”, “expect”, “seek”, “may”, “intend”, “likely”, “plan”, “estimate”, “will”, “believe” and similar expressions suggesting future outcomes or statements regarding an outlook. These include, but are not limited to, statements respecting anticipated business activities; planned expenditures; corporate strategies; discussions with the Government of Mongolia; 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. Such statements and information are based on numerous assumptions regarding present and future business strategies and the environment in which the Company will operate in the future, including the price of copper, gold and silver, anticipated capital and operating costs, anticipated future production and cash flows, the ability to complete the disposition of certain of its non-core assets, the completion of the Tavan Tolgoi power plant project and the availability of a long-term power source at a reasonable cost, the ability and timing to complete project financing and/or secure other financing on acceptable terms, and the adherence to and implementation of the terms of the Underground Plan. 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, mining operational and development risks, litigation risks, regulatory restrictions (including environmental regulatory restrictions and liability), activities or assessments by governmental authorities, currency fluctuations, the speculative nature of mineral exploration, the global economic climate, dilution, share price volatility, competition, loss of key employees, additional funding requirements, capital and operating costs for the construction and operation of the Oyu Tolgoi mine and defective title to mineral claims or property. 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 information and statements 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 appropriate in the circumstances. These statements, however, are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information or statements.
With respect to specific forward-looking information concerning the construction and development of the Oyu Tolgoi mine, the Company has based its assumptions and analyses on certain factors which are inherently uncertain. Uncertainties and assumptions include, among others: the timing and cost of the construction and expansion of mining and processing facilities; the impact of the delay in the funding and development of the Oyu Tolgoi underground mine pending resolution of outstanding matters with the Government of Mongolia associated with the development and operation of the Oyu Tolgoi mine; adherence to and implementation of the terms of the Underground Plan; the approval of the underground feasibility study by Oyu Tolgoi LLC’s shareholders, the impact of 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 availability and cost of appropriate smelting and refining arrangements; the obtaining of (and the terms and timing of obtaining) necessary environmental and other government approvals, consents and permits; the availability of funding on reasonable terms; the timing and availability of a long-term power source for the Oyu Tolgoi mine; delays, and the costs which result from delays, in the development of the underground mine (which could significantly exceed the costs projected in the underground feasibility study and in the 2014 Oyu Tolgoi Technical Report); projected copper, gold and silver prices and demand; and production estimates and the anticipated yearly production of copper, gold and silver at the Oyu Tolgoi mine.
September 30, 2015 | Page | 21 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
The cost, timing and complexities of mine construction and development are increased by the remote location of a property such as the Oyu Tolgoi mine. It is common in new 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 the Oyu Tolgoi mine has achieved commercial production, there is no assurance that future development activities will result in profitable mining operations. In addition, funding and development of the underground component of the Oyu Tolgoi mine have been delayed to allow matters with the Government of Mongolia to be resolved and a new timetable agreed. These delays can impact project economics.
This MD&A also contains references to estimates of mineral reserves and mineral resources. The estimation of reserves and resources is inherently uncertain and involves subjective judgments about many relevant factors. The mineral resource estimates contained in this MD&A are inclusive of mineral reserves. Further, mineral resources that are not mineral reserves do not have demonstrated economic viability. The accuracy of any such estimates is a function of the quantity and quality of available data, and of the assumptions made and judgments used in engineering and geological interpretation (including future production from the Oyu Tolgoi mine, the anticipated tonnages and grades that will be achieved or the indicated level of recovery that will be realized), which may prove to be unreliable. There can be no assurance that these estimates will be accurate or that such mineral reserves and mineral resources can be mined or processed profitably. See the discussion under the headings “Language Regarding Reserves and Resources” and “Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources” in Section 17 of this MD&A. Such estimates and statements are, in large part, based on the following:
• | Interpretations of geological data obtained from drill holes and other sampling techniques. Large scale continuity and character of the deposits will only be determined once significant additional drilling and sampling has been completed and analyzed. Actual mineralization or formations may be different from those predicted. It may also take many years from the initial phase of drilling before production is possible, and during that time the economic feasibility of exploiting a deposit may change. Reserve and resource estimates are materially dependent on prevailing metal prices and the cost of recovering and processing minerals at the individual mine sites. Market fluctuations in the price of metals or increases in the costs to recover metals from the Company’s mining projects may render mining of ore reserves uneconomic and affect the Company’s operations in a materially adverse manner. Moreover, various short-term operating factors may cause a mining operation to be unprofitable in any particular accounting period; |
• | Assumptions relating to commodity prices and exchange rates during the expected life of production, mineralization of the area to be mined, the projected cost of mining, and the results of additional planned development work. Actual future production rates and amounts, revenues, taxes, operating expenses, environmental and regulatory compliance expenditures, development expenditures, and recovery rates may vary substantially from those assumed in the estimates. Any significant change in these assumptions, including changes that result from variances between projected and actual results, could result in material downward revision to current estimates; |
• | Assumptions relating to projected future metal prices. The prices used reflect organizational consensus pricing views and opinions in the financial modeling for the Oyu Tolgoi Mine and are subjective in nature. It should be expected that actual prices will be different than the prices used for such modeling (either higher or lower), and the differences could be significant; and |
September 30, 2015 | Page | 22 |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
• | Assumptions relating to the costs and availability of treatment and refining services for the metals mined from the Oyu Tolgoi Mine, which require arrangements with third parties and involve the potential for fluctuating costs to transport the metals and fluctuating costs and availability of refining services. These costs can be significantly impacted by a variety of industry-specific and also regional and global economic factors (including, among others, those which affect commodity prices). Many of these factors are beyond the Company’s control. |
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 of the AIF.
Readers are further cautioned that the list of factors enumerated in the “Risk Factors” section of the AIF that may affect future results is not exhaustive. When relying on the Company’s forward-looking information and statements 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 information and statements contained in this MD&A 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 information or statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The forward-looking information and statements contained in this MD&A are expressly qualified by this cautionary statement.
September 30, 2015 | Page | 23 |