Exhibit 99.1
Turquoise Hill Resources Ltd.
Condensed Interim Consolidated Financial Statements
June 30, 2020
(Unaudited)
TURQUOISE HILL RESOURCES LTD.
Consolidated Statements of Income (Loss)
(Stated in thousands of U.S. dollars)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
Note | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||
Revenue | 4 | $ | 277,967 | $ | 382,748 | $ | 408,626 | $ | 735,428 | |||||||||||
Cost of sales | 5 | (181,956 | ) | (224,656 | ) | (327,880 | ) | (393,790 | ) | |||||||||||
Gross margin | 96,011 | 158,092 | 80,746 | 341,638 | ||||||||||||||||
Operating expenses | 6 | (49,893 | ) | (57,897 | ) | (94,804 | ) | (128,243 | ) | |||||||||||
Corporate administration expenses | (9,855 | ) | (5,759 | ) | (14,572 | ) | (10,303 | ) | ||||||||||||
Other income (expenses) | (1,418 | ) | 1,279 | 1,800 | 2,522 | |||||||||||||||
Impairment charges | 10 | - | (596,906 | ) | - | (596,906 | ) | |||||||||||||
Income (loss) before finance items and taxes | 34,845 | (501,191 | ) | (26,830 | ) | (391,292 | ) | |||||||||||||
Finance items | ||||||||||||||||||||
Finance income | 7 | 3,212 | 29,062 | 14,624 | 61,891 | |||||||||||||||
Finance costs | 7 | (1,516 | ) | (1,709 | ) | (3,325 | ) | (3,727 | ) | |||||||||||
1,696 | 27,353 | 11,299 | 58,164 | |||||||||||||||||
Income (loss) from operations before taxes | $ | 36,541 | $ | (473,838 | ) | $ | (15,531 | ) | $ | (333,128 | ) | |||||||||
Income and other taxes | 35,777 | (262,844 | ) | 106,805 | (298,354 | ) | ||||||||||||||
Income (loss) for the period | $ | 72,318 | $ | (736,682 | ) | $ | 91,274 | $ | (631,482 | ) | ||||||||||
Attributable to owners of Turquoise Hill Resources Ltd. | 84,849 | (446,515 | ) | 140,254 | (335,278 | ) | ||||||||||||||
Attributable to owner of non-controlling interest | (12,531 | ) | (290,167 | ) | (48,980 | ) | (296,204 | ) | ||||||||||||
Income (loss) for the period | $ | 72,318 | $ | (736,682 | ) | $ | 91,274 | $ | (631,482 | ) | ||||||||||
Basic and diluted earnings (loss) per share attributable to Turquoise Hill Resources Ltd. | $ | 0.04 | $ | (0.22 | ) | $ | 0.07 | $ | (0.17 | ) | ||||||||||
Basic weighted average number of shares outstanding (000’s) | 2,012,314 | 2,012,314 | 2,012,314 | 2,012,314 |
The accompanying notes are an integral part of these consolidated financial statements.
2
TURQUOISE HILL RESOURCES LTD.
Consolidated Statements of Comprehensive Income (Loss)
(Stated in thousands of U.S. dollars)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Income (loss) for the period | $ | 72,318 | $ | (736,682) | $ | 91,274 | $ | (631,482) | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Items that will not be reclassified to income: | ||||||||||||||||
Changes in the fair value of marketable securities at FVOCI | 1,502 | (74) | 127 | (609) | ||||||||||||
Other comprehensive income (loss) for the period (a) | $ | 1,502 | $ | (74) | $ | 127 | $ | (609) | ||||||||
Total comprehensive income (loss) for the period | $ | 73,820 | $ | (736,756) | $ | 91,401 | $ | (632,091) | ||||||||
Attributable to owners of Turquoise Hill | 86,351 | (446,589) | 140,381 | (335,887) | ||||||||||||
Attributable to owner of non-controlling interest | (12,531) | (290,167) | (48,980) | (296,204) | ||||||||||||
Total comprehensive income (loss) for the period | $ | 73,820 | $ | (736,756) | $ | 91,401 | $ | (632,091) |
(a) No tax charges and credits arose on items recognized as other comprehensive income or loss in 2020 (2019: nil).
The accompanying notes are an integral part of these consolidated financial statements.
3
TURQUOISE HILL RESOURCES LTD.
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
Note | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||
Cash generated from operating activities before interest and tax | 16 | $ | 34,698 | $ | 262,568 | $ | 36,193 | $ | 312,406 | |||||||||||
Interest received | 5,367 | 22,353 | 17,198 | 46,110 | ||||||||||||||||
Interest paid | (118,696 | ) | (139,751 | ) | (145,518 | ) | (218,325 | ) | ||||||||||||
Income and other taxes paid | (3,198 | ) | (3,643 | ) | (14,149 | ) | (4,353 | ) | ||||||||||||
Net cash generated from (used in) operating activities | $ | (81,829 | ) | $ | 141,527 | $ | (106,276 | ) | $ | 135,838 | ||||||||||
Cash flows from investing activities | ||||||||||||||||||||
Receivable from related party: amounts withdrawn | 17 | 204,284 | 255,000 | 511,284 | 530,000 | |||||||||||||||
Expenditures on property, plant and equipment | (254,341 | ) | (334,989 | ) | (555,437 | ) | (660,283 | ) | ||||||||||||
Other investing cash flows | 184 | - | 247 | - | ||||||||||||||||
Cash used in investing activities | $ | (49,873 | ) | $ | (79,989 | ) | $ | (43,906 | ) | $ | (130,283 | ) | ||||||||
Cash flows from financing activities | ||||||||||||||||||||
Net proceeds from project finance facility | - | 1,511 | - | 1,511 | ||||||||||||||||
Repayment of project finance facility | (1,545 | ) | - | (1,545 | ) | - | ||||||||||||||
Payment of project finance fees | - | (107 | ) | - | (107 | ) | ||||||||||||||
Payment of lease liability | (1,992 | ) | (1,405 | ) | (3,899 | ) | (3,813 | ) | ||||||||||||
Cash used in financing activities | $ | (3,537 | ) | $ | (1 | ) | $ | (5,444 | ) | $ | (2,409 | ) | ||||||||
Effects of exchange rates on cash and cash equivalents | 420 | (111 | ) | 436 | 8 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | (134,819 | ) | $ | 61,426 | $ | (155,190 | ) | $ | 3,154 | ||||||||||
Cash and cash equivalents - beginning of period | $ | 1,631,614 | $ | 1,544,795 | $ | 1,651,985 | $ | 1,603,067 | ||||||||||||
Cash and cash equivalents - end of period | 1,496,795 | 1,606,221 | 1,496,795 | 1,606,221 | ||||||||||||||||
Cash and cash equivalents as presented on the balance sheets | $ | 1,496,795 | $ | 1,606,221 | $ | 1,496,795 | $ | 1,606,221 |
The accompanying notes are an integral part of these consolidated financial statements.
4
TURQUOISE HILL RESOURCES LTD.
Consolidated Balance Sheets
(Stated in thousands of U.S. dollars)
(Unaudited)
Note | June 30, 2020 | December 31, 2019 | ||||||||
Current assets | ||||||||||
Cash and cash equivalents | 8 | $ | 1,496,795 | $ | 1,651,985 | |||||
Inventories | 9 | 166,355 | 175,719 | |||||||
Trade and other receivables | 53,339 | 27,047 | ||||||||
Prepaid expenses and other assets | 85,533 | 99,671 | ||||||||
Receivable from related party | 17 | - | 511,284 | |||||||
1,802,022 | 2,465,706 | |||||||||
Non-current assets | ||||||||||
Property, plant and equipment | 10 | 10,356,666 | 9,782,647 | |||||||
Inventories | 9 | 61,271 | 28,985 | |||||||
Deferred income tax assets | 13 | 663,479 | 534,078 | |||||||
Other financial assets | 11,642 | 10,978 | ||||||||
11,093,058 | 10,356,688 | |||||||||
Total assets | $ | 12,895,080 | $ | 12,822,394 | ||||||
Current liabilities | ||||||||||
Borrowings and other financial liabilities | 12 | $ | 44,164 | $ | 26,547 | |||||
Trade and other payables | 11 | 416,766 | 466,206 | |||||||
Deferred revenue | 37,511 | 27,896 | ||||||||
498,441 | 520,649 | |||||||||
Non-current liabilities | ||||||||||
Borrowings and other financial liabilities | 12 | 4,171,842 | 4,187,270 | |||||||
Deferred income tax liabilities | 13 | 96,184 | 79,180 | |||||||
Decommissioning obligations | 14 | 105,838 | 104,238 | |||||||
4,373,864 | 4,370,688 | |||||||||
Total liabilities | $ | 4,872,305 | $ | 4,891,337 | ||||||
Equity | ||||||||||
Share capital | $ | 11,432,122 | $ | 11,432,122 | ||||||
Contributed surplus | 1,559,128 | 1,558,811 | ||||||||
Accumulated other comprehensive income (loss) | (686) | (813) | ||||||||
Deficit | (3,681,635) | (3,821,889) | ||||||||
Equity attributable to owners of Turquoise Hill | 9,308,929 | 9,168,231 | ||||||||
Attributable to non-controlling interest | 15 | (1,286,154) | (1,237,174) | |||||||
Total equity | $ | 8,022,775 | $ | 7,931,057 | ||||||
Total liabilities and equity | $ | 12,895,080 | $ | 12,822,394 |
The accompanying notes are an integral part of these consolidated financial statements. |
The financial statements were approved by the directors on July 28, 2020 and signed on their behalf by: |
/s/ P. Gillin | /s/ R. Robertson | |
P. Gillin, Director | R. Robertson, Director |
5
TURQUOISE HILL RESOURCES LTD.
Consolidated Statements of Equity
(Stated in thousands of U.S. dollars)
(Unaudited)
Six Months Ended June 30, 2020 | Attributable to owners of Turquoise Hill | |||||||||||||||||||||||||||||
Share capital | Contributed surplus | Accumulated other comprehensive income (loss) | Deficit | Total | Non-controlling (Note 15) | Total equity | ||||||||||||||||||||||||
Opening balance | $ | 11,432,122 | $ | 1,558,811 | $ | (813) | $ | (3,821,889) | $ | 9,168,231 | $ | (1,237,174) | $ | 7,931,057 | ||||||||||||||||
Income for the period | - | - | - | 140,254 | 140,254 | (48,980) | 91,274 | |||||||||||||||||||||||
Other comprehensive income for the period | - | - | 127 | - | 127 | - | 127 | |||||||||||||||||||||||
Employee share plans | - | 317 | - | - | 317 | - | 317 | |||||||||||||||||||||||
Closing balance | $ | 11,432,122 | $ | 1,559,128 | $ | (686) | $ | (3,681,635) | $ | 9,308,929 | $ | (1,286,154) | $ | 8,022,775 | ||||||||||||||||
Six Months Ended June 30, 2019 | Attributable to owners of Turquoise Hill | |||||||||||||||||||||||||||||
Share capital | Contributed surplus | Accumulated comprehensive income (loss) | Deficit | Total | Non-controlling interest (Note 15) | Total equity | ||||||||||||||||||||||||
Opening balance | $ | 11,432,122 | $ | 1,558,264 | $ | 844 | $ | (3,670,310) | $ | 9,320,920 | $ | (910,135) | $ | 8,410,785 | ||||||||||||||||
Impact of change in accounting policy | - | - | - | (1,122) | (1,122) | (579) | (1,701) | |||||||||||||||||||||||
Restated opening balance | $ | 11,432,122 | $ | 1,558,264 | $ | 844 | $ | (3,671,432) | $ | 9,319,798 | $ | (910,714) | $ | 8,409,084 | ||||||||||||||||
Loss for the period | - | - | - | (335,278) | (335,278) | (296,204) | (631,482) | |||||||||||||||||||||||
Other comprehensive loss for the period | - | - | (609) | - | (609) | - | (609) | |||||||||||||||||||||||
Employee share plans | - | (13) | - | - | (13) | - | (13) | |||||||||||||||||||||||
Closing balance | $ | 11,432,122 | $ | 1,558,251 | $ | 235 | $ | (4,006,710) | $ | 8,983,898 | $ | (1,206,918) | $ | 7,776,980 |
The accompanying notes are an integral part of these consolidated financial statements.
6
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
1. | Nature of operations and liquidity risk |
Rio Tinto plc is the ultimate parent company and indirectly owned a 50.8% majority interest in Turquoise Hill as at June 30, 2020.
Turquoise Hill Resources Ltd. (“Turquoise Hill”), together with its subsidiaries (collectively referred to as “the Company”), is an international mining company focused principally on the operation and further development of the Oyu Tolgoi copper-gold mine in Southern Mongolia. Turquoise Hill’s head office is located at 1 Place Ville Marie, Suite 3680, Montreal, Quebec, Canada, H3B 3P2. Turquoise Hill’s registered office is located at 300-204 Black Street, Whitehorse, Yukon, Canada, Y1A 2M9.
Turquoise Hill has its primary listing in Canada on the Toronto Stock Exchange and a secondary listing in the U.S. on the New York Stock Exchange.
The condensed interim consolidated financial statements of Turquoise Hill were authorized for issue in accordance with a directors’ resolution on July 28, 2020.
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due.
As at June 30, 2020, the Company had $1.5 billion of available liquidity, consisting of consolidated cash and cash equivalents. The Company’s current assets exceeded current liabilities by $1.3 billion at June 30, 2020. Furthermore, in the next 12 months, the Company has non-cancellable obligations related to power commitments of $0.2 billion. The Company expects to fund its current liabilities and current commitments through its liquidity position and from cash flow generated at its existing open pit operations. The Company continues to review its near term operating plans and continues to take steps to reduce costs and maximize cash generated from its existing open pit operations.
The Company manages liquidity risk by the preparation of internally generated short-term cash flow forecasts and taking measures in response to the review of forecasts. These short-term cash flow forecasts consider estimation of future operating costs, financing costs, development capital and cash receipts from sales revenue. In addition, the possible impact of COVID-19 has been incorporated into these short-term cash flow forecasts. Sensitivity analyses are performed over these estimates including the impact of estimated commodity prices on cash receipts.
The Company believes that it has enough liquidity to meet its minimum obligations for a period of at least 12 months from the balance sheet date, to meet requirements of the Company, including its operations and underground development. Taking into consideration the estimated impacts of increases to underground development capital, as well as delays to first sustainable production, the Company expects to need significant incremental financing to sustain its operations and underground development beyond this timeframe.
7
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
2. | Summary of significant accounting policies |
(a) | Statement of compliance |
These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. These condensed interim consolidated financial statements are compliant with IAS 34 and do not include all of the information required for full annual financial statements.
These condensed interim consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements for the year ended December 31, 2019.
(b) | New standards and interpretations adopted |
A number of new standards, and amendments to standards and interpretations, are effective as of January 1, 2020, and have been applied in preparing these consolidated financial statements. None of these standards and amendments to standards and interpretations had a significant effect on the consolidated financial statements of the Company.
(c) | New standards and interpretations not yet adopted |
Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16): The amendments prohibit an entity from deducting from the cost of an item of property, plant, and equipment any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. This amendment is effective for the Company’s annual reporting period beginning January 1, 2022, with early adoption permitted. The Company is in the process of assessing the impact of the adoption of this amendment.
None of the remaining standards and amendments to standards and interpretations which have been issued but are not yet effective are expected to have a significant effect on the consolidated financial statements of the Company.
8
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
3. | Operating segment |
Three Months Ended June 30, 2020 | ||||||||||||
Corporate | ||||||||||||
and other | ||||||||||||
Oyu Tolgoi | eliminations | Consolidated | ||||||||||
Revenue | $ | 277,967 | $ | - | $ | 277,967 | ||||||
Cost of sales | (181,956 | ) | - | (181,956 | ) | |||||||
Gross margin | 96,011 | - | 96,011 | |||||||||
Operating expenses | (60,156 | ) | 10,263 | (49,893 | ) | |||||||
Corporate administration expenses | - | (9,855 | ) | (9,855 | ) | |||||||
Other income (expenses) | 1,152 | (2,570 | ) | (1,418 | ) | |||||||
Income (loss) before finance items and taxes | 37,007 | (2,162 | ) | 34,845 | ||||||||
Finance items | ||||||||||||
Finance income | 72 | 3,140 | 3,212 | |||||||||
Finance costs |
| (121,881
| )
| 120,365 | (1,516 | ) | ||||||
Income (loss) from operations before taxes | $ | (84,802 | ) | $ | 121,343 | $ | 36,541 | |||||
Income and other taxes
|
| 47,949
|
|
| (12,172
| )
|
| 35,777
|
| |||
Income (loss) for the period | $ | (36,853 | ) | $ | 109,171 | $ | 72,318 | |||||
Depreciation and depletion | 53,074 | 29 | 53,103 | |||||||||
Capital additions | 319,710 | - | 319,710 | |||||||||
Total assets | 11,431,142 | 1,463,938 | 12,895,080 | |||||||||
Revenue by geographic destination is based on the ultimate country of destination, if known. If the destination of the concentrate sold through traders is not known, then revenue is allocated to the location of the concentrate at the time when revenue is recognized. During the three months ended June 30, 2020, principally all of Oyu Tolgoi’s revenue arose from concentrate sales to customers in China and revenue from individual customers in excess of 10% of Oyu Tolgoi’s revenue was $68.6 million, $48.5 million, $43.0 million, $23.1 million, and $31.1 million (June 30, 2019—$67.4 million, $63.3 million, and $42.1 million).
All long-lived assets of the Oyu Tolgoi segment, other than financial instruments and deferred tax assets, are located in Mongolia.
9
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
3. | Operating segment (continued) |
Three Months Ended June 30, 2019 | ||||||||||||
Corporate | ||||||||||||
and other | ||||||||||||
Oyu Tolgoi | ��eliminations | Consolidated | ||||||||||
Revenue | $ | 382,748 | $ | - | $ | 382,748 | ||||||
Cost of sales | (224,656 | ) | - | (224,656 | ) | |||||||
Gross margin | 158,092 | - | 158,092 | |||||||||
Operating income | (69,932 | ) | 12,035 | (57,897 | ) | |||||||
Corporate administration expenses | - | (5,759 | ) | (5,759 | ) | |||||||
Other income | 1,101 | 178 | 1,279 | |||||||||
Impairment charges | (596,906 | ) | - | (596,906 | ) | |||||||
Income (loss) before finance items and taxes | (507,645 | ) | 6,454 | (501,191 | ) | |||||||
Finance items | ||||||||||||
Finance income | 7,295 | 21,767 | 29,062 | |||||||||
Finance costs | (111,229 | ) | 109,520 | (1,709 | ) | |||||||
Income (loss) from operations before taxes | $ | (611,579 | ) | $ | 137,741 | $ | (473,838 | ) | ||||
Income and other taxes | (241,856 | ) | (20,988 | ) | (262,844 | ) | ||||||
Income (loss) for the period | $ | (853,435 | ) | $ | 116,753 | $ | (736,682 | ) | ||||
Depreciation and depletion | 57,867 | - | 57,867 | |||||||||
Capital additions | 438,090 | - | 438,090 | |||||||||
Total assets | 9,751,788 | 2,953,231 | 12,705,019 | |||||||||
10
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
3. | Operating segment (continued) |
Six Months Ended June 30, 2020 | ||||||||||||
Corporate and other | ||||||||||||
Oyu Tolgoi | eliminations | Consolidated | ||||||||||
Revenue | $ | 408,626 | $ | - | $ | 408,626 | ||||||
Cost of sales | (327,880 | ) | - | (327,880 | ) | |||||||
Gross margin | 80,746 | - | 80,746 | |||||||||
Operating (expenses) income | (115,887 | ) | 21,083 | (94,804 | ) | |||||||
Corporate administration expenses | - | (14,572 | ) | (14,572 | ) | |||||||
Other income (expenses) | 3,605 | (1,805 | ) | 1,800 | ||||||||
Impairment charges | - | - | - | |||||||||
Income (loss) before finance items and taxes | (31,536 | ) | 4,706 | (26,830 | ) | |||||||
Finance items | ||||||||||||
Finance income | 3,159 | 11,465 | 14,624 | |||||||||
Finance costs
|
| (246,712
| )
|
| 243,387
|
|
| (3,325
| )
| |||
Income (loss) from operations before taxes | $ | (275,089 | ) | $ | 259,558 | $ | (15,531 | ) | ||||
Income and other taxes
|
| 131,029
|
|
| (24,224
| )
|
| 106,805
|
| |||
Income (loss) for the period | $ | (144,060 | ) | $ | 235,334 | $ | 91,274 | |||||
Depreciation and depletion | 89,993 | 29 | 90,022 | |||||||||
Capital additions | 674,706 | - | 674,706 | |||||||||
Total assets | 11,431,142 | 1,463,938 | 12,895,080 |
Revenue by geographic destination is based on the ultimate country of destination, if known. If the destination of the concentrate sold through traders is not known, then revenue is allocated to the location of the concentrate at the time when revenue is recognized. During the six months ended June 30, 2020, principally all of Oyu Tolgoi’s revenue arose from concentrate sales to customers in China and revenue from individual customers in excess of 10% of Oyu Tolgoi’s revenue was $98.7 million, $80.8 million, $54.2 million, $43.0 million, and $42.4 million (June 30, 2019—$146.1 million, $89.5 million, $82.7 million, $77.5 million, and $71.8 million).
All long-lived assets of the Oyu Tolgoi segment, other than financial instruments and deferred tax assets, are located in Mongolia.
11
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
3. | Operating segment (continued) |
Six Months Ended June 30, 2019 | ||||||||||||
Corporate and other | ||||||||||||
Oyu Tolgoi | eliminations | Consolidated | ||||||||||
Revenue | $ | 735,428 | $ | - | $ | 735,428 | ||||||
Cost of sales | (393,790) | - | (393,790) | |||||||||
Gross margin | 341,638 | - | 341,638 | |||||||||
Operating (expenses) income | (153,261) | 25,018 | (128,243) | |||||||||
Corporate administration expenses | - | (10,303) | (10,303) | |||||||||
Other income (expenses) | 1,899 | 623 | 2,522 | |||||||||
Impairment charges | (596,906) | - | (596,906) | |||||||||
Income (loss) before finance items and taxes | (406,630) | 15,338 | (391,292) | |||||||||
Finance items | ||||||||||||
Finance income | 15,347 | 46,544 | 61,891 | |||||||||
Finance costs
|
| (219,433)
|
|
| 215,706
|
|
| (3,727)
|
| |||
Income (loss) from operations before taxes | $ | (610,716) | $ | 277,588 | $ | (333,128) | ||||||
Income and other taxes
|
| (260,473)
|
|
| (37,881)
|
|
| (298,354)
|
| |||
Income (loss) for the period
| $
| (871,189)
|
| $
| 239,707
|
| $
| (631,482)
|
| |||
Depreciation and depletion | 102,806 | - | 102,806 | |||||||||
Capital additions | 880,709 | - | 880,709 | |||||||||
Total assets | 9,751,788 | 2,953,231 | 12,705,019 |
12
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
4. | Revenue |
Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | |||||||||||||||||||||||
Revenue from contracts with customers | Other revenue (a) | Total revenue | Revenue from contracts with customers | Other revenue (a) | Total revenue | |||||||||||||||||||
Total revenue: | ||||||||||||||||||||||||
Copper | $ | 186,282 | $ | 35,420 | $ | 221,702 | $ | 311,633 | $ | 6,903 | $ | 318,536 | ||||||||||||
Gold | 50,197 | 2,418 | 52,615 | 79,989 | 4,215 | 84,204 | ||||||||||||||||||
Silver | 3,312 | 338 | 3,650 | 5,573 | 313 | 5,886 | ||||||||||||||||||
$ | 239,791 | $ | 38,176 | $ | 277,967 | $ | 397,195 | $ | 11,431 | $ | 408,626 |
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||||||||||||||||||
Revenue from contracts with customers | Other revenue (a) | Total revenue | Revenue from contracts with customers | Other revenue (a) | Total revenue | |||||||||||||||||||
Total revenue: | ||||||||||||||||||||||||
Copper | $ | 251,999 | $ | (19,629) | $ | 232,370 | $ | 462,878 | $ | (6,574) | $ | 456,304 | ||||||||||||
Gold | 146,223 | 578 | 146,801 | 268,725 | 3,755 | 272,480 | ||||||||||||||||||
Silver | 3,466 | 111 | 3,577 | 6,390 | 254 | 6,644 | ||||||||||||||||||
$ | 401,688 | $ | (18,940) | $ | 382,748 | $ | 737,993 | $ | (2,565) | $ | 735,428 |
(a) Other revenue relates to gains (losses) on the revaluation of trade receivables.
5. | Cost of sales |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Production and delivery | $ | 137,104 | $ | 170,196 | $ | 241,808 | $ | 296,148 | ||||||||
Depreciation and depletion | 51,106 | 54,546 | 86,072 | 99,175 | ||||||||||||
Reversal of provision against carrying value of inventories (Note 9) | (6,254) | (86) | - | (1,533) | ||||||||||||
$ | 181,956 | $ | 224,656 | $ | 327,880 | $ | 393,790 |
13
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
6. | Operating expenses |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Oyu Tolgoi administration expenses | $ | 31,338 | $ | 34,743 | $ | 63,415 | $ | 65,927 | ||||||||
Royalty expenses | 14,216 | 20,722 | 24,455 | 40,461 | ||||||||||||
Inventory write downs (reversals) (a) | (1,195 | ) | (8,126 | ) | (2,359 | ) | 4,432 | |||||||||
Selling expenses | 3,192 | 7,088 | 5,061 | 13,643 | ||||||||||||
Depreciation | 1,997 | 3,321 | 3,950 | 3,631 | ||||||||||||
Other | 345 | 149 | 282 | 149 | ||||||||||||
$ | 49,893 | $ | 57,897 | $ | 94,804 | $ | 128,243 |
(a) | Inventory write downs (reversals) include net adjustments to the carrying value of ore stockpile inventories and materials and supplies; refer to Note 9. |
7. | Finance items |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Finance income: | ||||||||||||||||
Interest income (a) | $ | 3,212 | $ | 29,062 | $ | 14,624 | $ | 61,891 | ||||||||
$ | 3,212 | $ | 29,062 | $ | 14,624 | $ | 61,891 | |||||||||
Finance costs: | ||||||||||||||||
Interest expense and similar charges | $ | (90,343 | ) | $ | (102,256 | ) | $ | (183,395 | ) | $ | (204,529 | ) | ||||
Amounts capitalized to property, plant and equipment (b) | 89,885 | 101,882 | 182,185 | 203,472 | ||||||||||||
Accretion of decommissioning obligations (Note 14) | (1,058 | ) | (1,335 | ) | (2,115 | ) | (2,670 | ) | ||||||||
$ | (1,516 | ) | $ | (1,709 | ) | $ | (3,325 | ) | $ | (3,727 | ) |
(a) | Finance income for the three and six months ended June 30, 2020 includes $0.5 million and $4.4 million (June 30, 2019—$18.7 million and $41.0 million) on the related party receivable, which was placed with Rio Tinto under an agreement for cash management services in connection with net proceeds from the project finance facility (refer to Note 17). |
(b) | The majority of the finance costs capitalized to property, plant and equipment were capitalized at the weighted average rate of the Company’s general borrowings of 8.5% (refer to Note 10). |
14
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
8. | Cash and cash equivalents |
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Cash at bank and on hand | $ | 107,298 | $ | 112,572 | ||||
Money market funds and other cash equivalents (a) | 1,389,497 | 1,539,413 | ||||||
$ | 1,496,795 | $ | 1,651,985 |
(a) | At June 30, 2020, short-term liquid investments of $210.0 million (December 31, 2019 – $210.0 million) have been placed with Rio Tinto (refer to Note 17). |
9. | Inventories |
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Current | ||||||||
Concentrate | $ | 34,953 | $ | 26,801 | ||||
Ore stockpiles | 23,131 | 45,713 | ||||||
Provision against carrying value of ore stockpiles | - | (908 | ) | |||||
Materials and supplies | 183,789 | 179,795 | ||||||
Provision against carrying value of materials and supplies | (75,518 | ) | (75,682 | ) | ||||
$ | 166,355 | $ | 175,719 | |||||
Non-current | ||||||||
Ore stockpiles | $ | 61,523 | $ | 30,640 | ||||
Provision against carrying value of ore stockpiles | (252 | ) | (1,655 | ) | ||||
$ | 61,271 | $ | 28,985 |
During the three and six months ended June 30, 2020, $182.0 million (2019 – $224.7 million) and $327.9 million (2019 – $393.8 million) of inventory was charged to cost of sales (Note 5).
During the three and six months ended June 30, 2020, net reversals of $7.4 million (2019 – net write down charges of $8.3 million) and net reversals of $2.4 million (2019 – net write down charges of $2.8 million) were recognized in the consolidated statement of income relating to inventory write off and movement in provisions against carrying value. During the three and six months ended June 30, 2020, inventory on which there was a provision against carrying value of nil (2019 – $9.5 million) and $0.1 million (2019 - $12.3 million) was sold and recognized in cost of sales for the period.
15
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
10. | Property, plant and equipment |
Oyu Tolgoi |
| |||||||||||||||||||||||
Mineral | Capital | Other | ||||||||||||||||||||||
Six Months Ended | property | Plant and | works in | capital | ||||||||||||||||||||
June 30, 2020 | interests | equipment | progress | assets | Total | |||||||||||||||||||
Net book value: | ||||||||||||||||||||||||
January 1, 2020 | $ | 723,516 | $ | 3,126,331 | $ | 5,931,750 | $ | 1,050 | $ | 9,782,647 | ||||||||||||||
Additions | 468 | (50 | ) | 492,103 | - | 492,521 | ||||||||||||||||||
Interest capitalized (Note 7) | - | - | 182,185 | - | 182,185 | |||||||||||||||||||
Depreciation for the period | (27,930 | ) | (72,199 | ) | - | (29 | ) | (100,158 | ) | |||||||||||||||
Disposals and write offs | - | - | (529 | ) | - | (529 | ) | |||||||||||||||||
Transfers and other movements | (515 | ) | 17,242 | (16,727 | ) | - | - | |||||||||||||||||
June 30, 2020 | $ | 695,539 | $ | 3,071,324 | $ | 6,588,782 | $ | 1,021 | $ | 10,356,666 | ||||||||||||||
Cost | 1,270,593 | 4,855,742 | 6,953,489 | 1,131 | 13,080,955 | |||||||||||||||||||
Accumulated depreciation / impairment | (575,054 | ) | (1,784,418 | ) | (364,707 | ) | (110 | ) | (2,724,289 | ) | ||||||||||||||
June 30, 2020 | $ | 695,539 | $ | 3,071,324 | $ | 6,588,782 | $ | 1,021 | $ | 10,356,666 | ||||||||||||||
Oyu Tolgoi |
| |||||||||||||||||||||||
Mineral | Capital | Other | ||||||||||||||||||||||
Six Months Ended | property | Plant and | works in | capital | ||||||||||||||||||||
June 30, 2019 | interests | equipment | progress | assets | Total | |||||||||||||||||||
Net book value: | ||||||||||||||||||||||||
January 1, 2019 as previously reported | $ | 799,113 | $ | 3,263,447 | $ | 4,775,745 | $ | - | $ | 8,838,305 | ||||||||||||||
Impact of change in accounting policy | - | 14,429 | - | - | 14,429 | |||||||||||||||||||
January 1, 2019 restated | $ | 799,113 | $ | 3,277,876 | $ | 4,775,745 | $ | - | $ | 8,852,734 | ||||||||||||||
Additions | 26,241 | 1,561 | 649,435 | - | 677,237 | |||||||||||||||||||
Interest capitalized (Note 7) | - | - | 203,472 | - | 203,472 | |||||||||||||||||||
Depreciation for the period | (26,035 | ) | (69,977 | ) | - | - | (96,012 | ) | ||||||||||||||||
Impairment charges (a) | (52,007 | ) | (180,192 | ) | (364,707 | ) | - | (596,906 | ) | |||||||||||||||
Disposals and write offs | - | - | (148 | ) | - | (148 | ) | |||||||||||||||||
Transfers and other movements | (581 | ) | 27,821 | (27,240 | ) | - | - | |||||||||||||||||
June 30, 2019 | $ | 746,731 | $ | 3,057,089 | $ | 5,236,557 | $ | - | $ | 9,040,377 | ||||||||||||||
Cost | 1,272,906 | 4,766,150 | 5,601,264 | - | 11,640,320 | |||||||||||||||||||
Accumulated depreciation / impairment | (526,175 | ) | (1,709,061 | ) | (364,707 | ) | - | (2,599,943 | ) | |||||||||||||||
June 30, 2019 | $ | 746,731 | $ | 3,057,089 | $ | 5,236,557 | $ | - | $ | 9,040,377 |
16
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
10. | Property, plant and equipment (continued) |
(a) | Impairment charges at June 30, 2019 |
On July 15, 2019, the Company provided an update on the Oyu Tolgoi underground project summarizing preliminary estimates for increased capital expenditure for project development and a schedule delay to first sustainable production. These preliminary estimates indicated that first sustainable production could be delayed by 16 to 30 months compared to the original feasibility study guidance in 2016 and that development capital expenditure for the project may increase by $1.2 billion to $1.9 billion over the $5.3 billion previously disclosed. Together, these matters were identified as an indicator of impairment at the Oyu Tolgoi cash generating unit level at June 30, 2019.
The Company’s assessment of FVLCD resulted in a recoverable amount of $8.7 billion compared to a carrying value of $9.3 billion at June 30, 2019, resulting in a $0.6 billion impairment charge in the three month period ended June 30, 2019.
11. | Trade and other payables |
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Trade payables and accrued liabilities | $ | 322,924 | $ | 389,476 | ||||
Interest payable on long-term borrowings | 7,180 | 9,814 | ||||||
Payable to related parties (Note 17) | 85,153 | 65,903 | ||||||
Other | 1,509 | 1,013 | ||||||
$ | 416,766 | $ | 466,206 |
12. | Borrowings and other financial liabilities |
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Current liabilities: | ||||||||
Project finance facility (a) | $ | 43,057 | $ | 22,177 | ||||
Lease liabilities (b) | 1,107 | 4,370 | ||||||
$ | 44,164 | $ | 26,547 | |||||
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Non-current liabilities: | ||||||||
Project finance facility (a) | $ | 4,155,573 | $ | 4,170,058 | ||||
Lease liabilities (b) | 16,269 | 17,212 | ||||||
$ | 4,171,842 | $ | 4,187,270 |
17
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
12. | Borrowings and other financial liabilities (continued) |
(a) Project finance facility
On December 14, 2015, Oyu Tolgoi signed a $4.4 billion project finance facility. The facility is provided by a syndicate of international financial institutions and export credit agencies representing the governments of Canada, the United States and Australia, along with 15 commercial banks. The project finance lenders have agreed to a debt cap of $6.0 billion. In addition to the funding drawn down to date there is an additional $0.1 billion available, subject to certain conditions, under the Company’s facility with the Export-Import Bank of the United States, and the potential for an additional $1.6 billion of supplemental debt in the future. Under the terms of the project finance facility held by Oyu Tolgoi, there are certain restrictions on the ability of Oyu Tolgoi to make shareholder distributions.
At June 30, 2020, Oyu Tolgoi has drawn down $4.3 billion of the project finance facility:
June 30, 2020 | Original | Annual interest rate | ||||||||||||||
Facility | Carrying Value (i) | Fair Value (i) | Term | Pre-completion | Post-completion | |||||||||||
International Financial Institutions – A Loan | $ | 778,276 | $ | 859,612 | 15 years | LIBOR + 3.78% | LIBOR + 4.78% | |||||||||
Export Credit Agencies Loan | 875,389 | 964,235 | 14 years | LIBOR + 3.65% | LIBOR + 4.65% | |||||||||||
276,691 | 335,818 | 13 years | 2.3% | 2.3% | ||||||||||||
MIGA Insured Loan | 679,937 | 745,244 | 12 years | LIBOR + 2.65% | LIBOR + 3.65% | |||||||||||
Commercial Banks - B Loan | 1,588,337 | 1,749,871 | 12 years | LIBOR + 3.4% Includes $50 million | LIBOR + 4.4% 15-year loan at A Loan rate | |||||||||||
$ | 4,198,630 | $ | 4,654,780 |
(i) | The carrying value of borrowings under the project finance facility differs from fair value due to amortized transaction costs, and changes in the estimate of fair value between the initial recognition date and the balance sheet date. Project finance borrowings were initially recognized at fair value less transaction costs on the relevant draw down dates, with aggregate initial fair value being $4,348.9 million before transaction costs. At June 30, 2020, these borrowings are stated net of $148.7 million amortized transaction costs. |
Oyu Tolgoi has notified its project lenders that the COVID-19 pandemic constitutes a force majeure event under its project finance facilities, which will have the effect of extending the June 30, 2028 project longstop date under those facilities for the duration of the force majeure.
18
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
12. | Borrowings and other financial liabilities (continued) |
(a) Project finance facility (continued)
(ii) | The project finance facility provides for interest only payments for the first five years followed by minimum repayments according to a stepped amortization schedule for the remaining life of the facility. |
(iii) | The Multilateral Investment Guarantee Agency (“MIGA”) provides political risk insurance for commercial banks. The Company is required to pay an annual insurance premium of 1.4% of the MIGA Insured Loan for the remaining life of the facility. |
(b) Lease liabilities are discounted at the weighted average incremental borrowing rate of 7.2%
13. | Deferred income taxes |
June 30, 2020 | December 31, 2019 | |||||||
Deferred tax assets | ||||||||
Non-capital losses | $ | 264,633 | $ | 208,921 | ||||
Other temporary differences including accrued interest | 398,846 | 325,157 | ||||||
$ | 663,479 | $ | 534,078 | |||||
Deferred tax liabilities | ||||||||
Withholding tax | (96,184 | ) | (79,180 | ) | ||||
$ | (96,184 | ) | $ | (79,180 | ) |
19
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
14. | Decommissioning obligations |
Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Opening carrying amount | $ | 104,238 | $ | 131,565 | ||||
Changes in estimates and new estimated cash flows | (515 | ) | (579 | ) | ||||
Accretion of present value discount | 2,115 | 2,670 | ||||||
$ | 105,838 | $ | 133,656 |
All decommissioning obligations relate to Oyu Tolgoi. Reclamation and closure costs have been estimated based on the Company’s interpretation of current regulatory requirements and other commitments made to stakeholders, and are measured as the net present value of future cash expenditures upon reclamation and closure.
Estimated future cash expenditures of $213.8 million (December 31, 2019 - $212.6 million) have been discounted from an anticipated closure date of 2055 to their present value at a real rate of 2.0% (December 31, 2019 - 2.0%).
15. | Non-controlling interest |
Non-controlling Interest: Oyu Tolgoi (a) Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Balance, January 1 | $ | (1,237,174 | ) | $ | (910,135 | ) | ||
Impact of change in accounting policy | - | (579 | ) | |||||
Restated balance, January 1 | $ | (1,237,174 | ) | $ | (910,714 | ) | ||
Non-controlling interest’s share of loss | (48,980 | ) | (296,204 | ) | ||||
Common share investments funded on behalf of non-controlling interest (a) | 86,700 | 102,000 | ||||||
Funded amounts repayable to the Company (a) | (86,700 | ) | (102,000 | ) | ||||
Balance, June 30 | $ | (1,286,154 | ) | $ | (1,206,918 | ) |
(a) | Since 2011, the Company has funded common share investments in Oyu Tolgoi on behalf of Erdenes Oyu Tolgoi LLC (“Erdenes”). In accordance with the Amended and Restated Shareholders Agreement dated June 8, 2011, such funded amounts earn interest at an effective annual rate of LIBOR plus 6.5% and are repayable to the Company via a pledge over Erdenes’ share of future Oyu Tolgoi common share dividends. Erdenes also has the right to reduce the outstanding balance by making payments directly to the Company. |
Common share investments funded on behalf of Erdenes are recorded as a reduction to the net carrying value of non-controlling interest. As at June 30, 2020, the cumulative amount of such funding was $1,327.4 million (December 31, 2019—$1,240.7 million). Interest of $733.5 million (December 31, 2019—$654.9 million) relating to this funding, has not been recognized in these condensed interim consolidated financial statements, as payment will be triggered on common share dividend distribution by Oyu Tolgoi, the certainty of which cannot currently be reliably determined.
20
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
16. | Cash flow information |
(a) | Reconciliation of net income to net cash flow generated from operating activities before interest and tax |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Income (loss) for the period | $ | 72,318 | $ | (736,682 | ) | $ | 91,274 | $ | (631,482 | ) | ||||||
Adjustments for: | ||||||||||||||||
Depreciation and amortization | 53,103 | 57,867 | 90,022 | 102,806 | ||||||||||||
Impairment charges | - | 596,906 | - | 596,906 | ||||||||||||
Finance items: | ||||||||||||||||
Interest income | (3,212 | ) | (29,062 | ) | (14,624 | ) | (61,891 | ) | ||||||||
Interest and accretion expense | 1,516 | 1,709 | 3,325 | 3,727 | ||||||||||||
Unrealized foreign exchange losses (gains) | (1,103 | ) | 111 | (4,753 | ) | (8 | ) | |||||||||
Inventory write downs (reversals) | (7,449 | ) | (8,212 | ) | (2,359 | ) | 2,899 | |||||||||
Write off of property, plant and equipment | 345 | 149 | 282 | 149 | ||||||||||||
Income and other taxes | (35,777 | ) | 262,844 | (106,805 | ) | 298,354 | ||||||||||
Other items | 1,010 | 925 | 666 | 847 | ||||||||||||
Net change in non-cash operating working capital items: | ||||||||||||||||
(Increase) decrease in: | ||||||||||||||||
Inventories | 12,265 | 34,275 | (19,884 | ) | 27,843 | |||||||||||
Trade, other receivables and prepaid expenses | (43,896 | ) | 10,891 | (32,810 | ) | (10,563 | ) | |||||||||
(Decrease) increase in: | ||||||||||||||||
Trade and other payables | (17,451 | ) | 46,722 | 22,244 | 20,729 | |||||||||||
Deferred revenue | 3,029 | 24,125 | 9,615 | (37,910 | ) | |||||||||||
Cash generated from operating activities before interest and tax | $ | 34,698 | $ | 262,568 | $ | 36,193 | $ | 312,406 |
(b) | Supplementary information regarding other non-cash transactions |
The non-cash investing and financing activities not already disclosed in the consolidated statements of cash flows were as follows:
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Investing activities | ||||||||||||||||
Change in accounts payable and accrued liabilities related to purchase of property, plant and equipment | $ | (31,303 | ) | $ | (10,246 | ) | $ | (58,614 | ) | $ | 1,623 |
21
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
17. | Related parties |
As at June 30, 2020, Rio Tinto plc’s indirect equity ownership in the Company was 50.8% (December 31, 2019: 50.8%). The following tables present the condensed interim consolidated financial statements line items within which transactions with a Rio Tinto entity or entities (“Rio Tinto”) are reported. Rio Tinto entities comprise Rio Tinto plc, Rio Tinto Limited and their respective subsidiaries other than Turquoise Hill and its subsidiaries.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Statements of Income | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Operating and corporate administration expenses: | ||||||||||||||||
Cost recoveries - Turquoise Hill | $ | 2,222 | $ | 2 | $ | 2,280 | $ | 69 | ||||||||
Management services payment (i) | (6,872 | ) | (8,105 | ) | (13,954 | ) | (16,295 | ) | ||||||||
Cost recoveries - Rio Tinto (ii) | (8,915 | ) | (11,793 | ) | (17,073 | ) | (20,776 | ) | ||||||||
Finance income: | ||||||||||||||||
Cash and cash equivalents (iii) | 935 | 5,069 | 1,932 | 10,935 | ||||||||||||
Receivable from Rio Tinto (iv) | 527 | 18,722 | 4,391 | 40,994 | ||||||||||||
Finance costs: | ||||||||||||||||
Completion support fee (v) | (27,177 | ) | (27,170 | ) | (54,358 | ) | (54,340 | ) | ||||||||
$ | (39,280 | ) | $ | (23,275 | ) | $ | (76,782 | ) | $ | (39,413 | ) | |||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Statements of Cash Flows | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Cash generated from operating activities | ||||||||||||||||
Interest received (iii, iv) | $ | 2,742 | $ | 17,002 | $ | 8,293 | $ | 35,495 | ||||||||
Interest paid (v) | - | - | (25,972 | ) | (78,395 | ) | ||||||||||
Cash flows from investing activities | ||||||||||||||||
Receivable from related party: amounts withdrawn (iv) | 204,284 | 255,000 | 511,284 | 530,000 | ||||||||||||
Expenditures on property, plant and equipment: | ||||||||||||||||
Management services payment and cost recoveries - Rio Tinto (i), (ii) | (29,624 | ) | (13,743 | ) | (40,579 | ) | (30,335 | ) |
22
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
17. | Related parties (continued) |
June 30, | December 31, | |||||||
Balance Sheets | 2020 | 2019 | ||||||
Cash and cash equivalents (iii) | $ | 210,000 | $ | 210,000 | ||||
Trade and other receivables | 2,655 | 5,763 | ||||||
Prepaid expenses and other assets | 56,690 | 82,808 | ||||||
Receivable from related party and other non-current financial assets (iv) | - | 511,284 | ||||||
Trade and other payables (Note 11) | ||||||||
Management services payment - Rio Tinto (i) | (12,669 | ) | (14,156 | ) | ||||
Cost recoveries - Rio Tinto (ii) | (72,483 | ) | (51,747 | ) | ||||
| ||||||||
$ | 184,193 | $ | 743,952 | |||||
|
(i) | In accordance with the Amended and Restated Shareholders’ Agreement, which was signed on June 8, 2011, and other related agreements, Turquoise Hill is required to make a management services payment 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 the Underground Mine Development and Financing Plan on May 18, 2015, the management services payment to Rio Tinto is calculated as 1.5% applied to underground development capital costs, and 3% applied to operating costs and capital related to current operations. |
(ii) | 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 Oyu Tolgoi. |
(iii) | In addition to placing cash and cash equivalents on deposit with banks or investing funds with other financial institutions, Turquoise Hill may deposit cash and cash equivalents with Rio Tinto in accordance with an agreed upon policy and strategy for the management of liquid resources. At June 30, 2020, cash equivalents deposited with wholly owned subsidiaries of Rio Tinto totalled $210.0 million (December 31, 2019 - $210.0 million), earning interest at rates equivalent to those offered by financial institutions or short-term corporate debt. |
(iv) | As part of project finance (Note 12), Turquoise Hill appointed 9539549 Canada Inc., a wholly owned subsidiary of Rio Tinto, as service provider to provide post-drawdown cash management services in connection with net proceeds from the project finance facility, which were placed with 9539549 Canada Inc. and shall be returned to Turquoise Hill as required for purposes of Oyu Tolgoi underground mine development and funding. Rio Tinto International Holdings Limited, a wholly owned subsidiary of Rio Tinto, agreed to guarantee the obligations of the service provider under this agreement. At June 30, 2020, there were no amounts due from 9539549 Canada Inc. (December 31, 2019 - $511.3 million). Amounts due had been earning interest at an effective annual rate of LIBOR plus 2.45%. The interest rate reflected: interest receivable at LIBOR minus 0.05%; plus a benefit of 2.5% arising on amounts receivable from 9539549 Canada Inc. under the Cash Management Services Agreement, which are net settled with the 2.5% completion support fee described in (v) below. |
23
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
17. | Related parties (continued) |
(v) | As part of the project finance agreements (Note 12), Rio Tinto agreed to provide a guarantee, known as the completion support undertaking (“CSU”) in favour of the Commercial Banks and the Export Credit Agencies. In consideration for providing the CSU, the Company is required to pay Rio Tinto a fee equal to 2.5% of the amounts drawn under the facility. The annual completion support fee of 2.5% on amounts drawn under the facility is accounted for as a borrowing cost and included within interest expense and similar charges (refer to Note 7). The fee is settled net of a benefit arising on amounts receivable from 9539549 Canada Inc. under the Cash Management Services Agreement described in (iv) above. The fee payment obligation will terminate on the date Rio Tinto’s CSU obligations to the project lenders terminate. |
The above noted transactions were carried out in the normal course of operations and were measured at the transaction amount, which is the amount of consideration established and agreed to by the related parties.
18. | Commitments and contingencies |
(a) | Capital commitments |
At June 30, 2020, the Company had capital expenditure commitments of $39.6 million. These commitments represent minimum non-cancellable obligations and exit costs for cancellable obligations.
During 2018, Oyu Tolgoi signed a new power purchase agreement with the National Power Transmission Grid (“NPTG”) of Mongolia. The power purchase agreement was executed in connection with the power import arrangement between NPTG and the Inner Mongolia Power International Corporation (“IMPIC”).
The new arrangement took effect on July 4, 2018, subsequent to the expiry of the previous IMPIC agreement, for a term of up to six years, with possibility of early cancelation after the fourth year, if a domestic power plant is commissioned earlier.
At June 30, 2020, the Company had power purchase commitments of $179.0 million. These commitments represent minimum non-cancellable obligations.
(b) | Mongolian Tax Assessment |
On January 16, 2018, the Company announced that Oyu Tolgoi received 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 (the “MTA”) as a result of a general tax audit for the period covering 2013 through 2015. In January 2018 Oyu Tolgoi paid an amount of $4.8 million to settle unpaid taxes, fines and penalties for accepted items.
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TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
18. | Commitments and contingencies (continued) |
(b) | Mongolian Tax Assessment (continued) |
The Company was of the opinion that Oyu Tolgoi had paid all taxes and charges required under the 2009 Oyu Tolgoi Investment Agreement (“Investment Agreement”), the Amended and Restated Shareholder Agreement (“ARSHA”), the Underground Mine Development and Financing Plan and Mongolian Law. Following engagement with the MTA, Oyu Tolgoi was advised that the MTA could not resolve Oyu Tolgoi’s objections to the tax assessment.
On February 20, 2020, the Company announced that Oyu Tolgoi will be proceeding with the initiation of a formal international arbitration proceeding in accordance with the dispute resolution provisions within Chapter 14 of the Investment Agreement, entered into with the Government of Mongolia in 2009 and Chapter 8 of the Oyu Tolgoi Underground Mine Development and Financing Plan, entered into with the Government of Mongolia in 2015. 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 the 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.
Management remains of the opinion that Oyu Tolgoi has paid all taxes and charges as required under the Investment Agreement, ARSHA, the Underground Mine Development and Financing Plan and Mongolian law; and in the opinion of the Company, at June 30, 2020, a provision is not required for the amount of approximately $150 million, disputed by the Company relating to the years 2013 through 2015 or any additional amounts related to 2016 through June 30, 2020. The amounts that could arise related to 2016 through June 30, 2020 would be material. The final amount of taxes to be paid depends on a number of factors including the outcome of discussions with the government and the outcome of the international arbitration proceedings. Changes in management’s assessment of the outcome of this matter could result in material adjustments to the Company’s statements of income and financial position.
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TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
18. | Commitments and contingencies (continued) |
(c) | Power Source Framework Agreement |
Oyu Tolgoi is obliged under the 2009 Oyu Tolgoi 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 Oyu Tolgoi and the Government of Mongolia on December 31, 2018 provides a binding framework and pathway for long-term power supply to the Oyu Tolgoi mine. The PSFA originally contemplated the construction of a power plant at Tavan Tolgoi (TTPP), which would be majority-owned by Oyu Tolgoi and situated close to the Tavan Tolgoi coal mining district located approximately 150 kilometres from the Oyu Tolgoi mine. In April 2020, the Government of Mongolia advised that it was unwilling to support Oyu Tolgoi’s proposal to develop TTPP and announced its intention to fund and construct a State Owned Power Plant (SOPP) at Tavan Tolgoi.
On June 26, 2020, Oyu Tolgoi and the Government of Mongolia amended the PSFA (PSFA Amendment) to reflect their agreement to jointly prioritise and progress SOPP, in accordance with and subject to agreed milestones, as the domestic source of power for the Oyu Tolgoi mine. The milestones include: signing a Power Purchase Agreement for the supply of power to the Oyu Tolgoi mine by March 31, 2021, commencing construction of SOPP by no later than July 1, 2021, commissioning SOPP within four years thereafter, and reaching agreement with the Inner Mongolia Power Investment Corp on an extension to the existing power import arrangements by March 1, 2021 in order to ensure there is no disruption to the power supply required to safeguard the Oyu Tolgoi mine’s ongoing operations and development. The PSFA Amendment provides that if certain agreed milestones are not met in a timely manner (subject to extension for Delay Events as defined) then Oyu Tolgoi will be entitled to select from, and implement, the alternative power solutions specified in the PSFA (as amended), including an Oyu Tolgoi-led coal fired power plant and a primary renewables solution, and the Government of Mongolia would be obliged to support such decision.
As at June 30, 2020, the Company has no capital commitments related to the PSFA, TTPP, or SOPP.
Due to the size, complexity and nature of Turquoise Hill’s operations, various legal and tax matters arise in the ordinary course of business. Turquoise Hill recognizes a liability with respect to such matters when an outflow of economic resources is assessed as probable and the amount can be reliably estimated. In the opinion of management, these matters will not have a material effect on the condensed interim consolidated financial statements of the Company.
26
TURQUOISE HILL RESOURCES LTD.
Notes to the condensed interim consolidated financial statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)
(Unaudited)
19. | Financial instruments and fair value measurements |
Certain of the Company’s financial assets and liabilities are measured at fair value on a recurring basis and classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Certain non-financial assets and liabilities may also be measured at fair value on a non-recurring basis.
The fair value of financial assets and financial liabilities measured at amortized cost is determined in accordance with accepted pricing models based on discounted cash flow analysis or using prices from observable current market transactions. Except as otherwise specified, the Company considers that the carrying amount of other receivables, trade payables and other financial assets measured at amortized cost approximates their fair value because of the demand nature or short-term maturity of these instruments.
The following tables provide an analysis of the Company’s financial assets that are measured subsequent to initial recognition at fair value on a recurring basis, grouped into Level 1 to 3 based on the degree to which the significant inputs used to determine the fair value are observable.
• | Level 1 fair value measurements are those derived from quoted prices in active markets for identical assets or liabilities. |
• | Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1, that are observable either directly or indirectly. |
• | Level 3 fair value measurements are those derived from valuation techniques that include significant inputs that are not based on observable market data. |
Fair Value at June 30, 2020 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Money market funds (a) | $ | 721,638 | $ | 721,638 | $ | - | $ | - | ||||||||
Marketable securities (a) | 4,036 | 4,036 | - | - | ||||||||||||
Trade receivables (b) | 46,606 | - | 46,606 | - | ||||||||||||
$ | 772,280 | $ | 725,674 | $ | 46,606 | $ | - | |||||||||
Fair Value at December 31, 2019 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Money market funds (a) | $ | 876,126 | $ | 876,126 | $ | - | $ | - | ||||||||
Marketable securities (a) | 3,909 | 3,909 | - | - | ||||||||||||
Trade receivables (b) | 16,881 | - | 16,881 | - | ||||||||||||
$ | 896,916 | $ | 880,035 | $ | 16,881 | $ | - |
(a) | The Company’s money market funds and marketable securities are classified within level 1 of the fair value hierarchy as they are valued using quoted market prices in active markets. |
(b) | Trade receivables from provisionally priced concentrate sales are included in level 2 of the fair value hierarchy as the basis of valuation uses quoted commodity prices. |
27