Exhibit 13.4
IVANHOE MINES
THIRD QUARTER REPORT
SEPTEMBER 30, 2002
.
.
.
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 2002
(unaudited) and December 31, 2001
Unaudited Consolidated Statements of Operations and
Deficit for the Three and Nine Month Periods ended
September 30, 2002 and 2001
Unaudited Consolidated Statements of Cash Flows for
the Three and Nine Month Period ended September 30, 2002
and 2001
Notes to the Unaudited Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
IVANHOE MINES LTD.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(STATED IN U.S. $000'S) 2002 2001
- ---------------------- ------------- ------------
(UNAUDITED)
ASSETS
CURRENT
Cash $34,692 $25,805
Accounts receivable 7,660 2,423
Inventories 23,806 22,529
Prepaid expenses 2,442 1,333
Future income taxes - 4,635
-------- --------
68,600 56,725
INVESTMENTS 12,187 4,823
MINING PROPERTY, PLANT AND EQUIPMENT 167,658 181,670
OTHER MINERAL PROPERTY INTERESTS 5,000 -
OTHER CAPITAL ASSETS 1,846 524
FUTURE INCOME TAXES 2,817 2,440
OTHER ASSETS 1,469 1,420
-------- --------
$259,577 $247,602
======== ========
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $24,005 $15,407
Accrued loss on foreign exchange contract (Note 2) - 15,450
Current portion of long-term debt (Note 4) 23,726 20,133
-------- --------
47,731 50,990
LOAN PAYABLE TO RELATED PARTY 5,292 4,696
LONG-TERM DEBT (NOTE 4) 5,295 41,837
FUTURE INCOME TAXES 11,831 13,731
OTHER LIABILITIES 4,475 6,177
-------- --------
74,624 117,431
======== ========
SHAREHOLDERS' EQUITY
SHARE CAPITAL
Authorized
Unlimited number of preferred shares without par value
Unlimited number of common shares without par value
Issued and outstanding
201,914,213 (2001-171,158,484) Common Shares 516,092 460,389
ADDITIONAL PAID-IN CAPITAL 1,530 1,697
CONTRIBUTED SURPLUS (ARISING FROM STOCK-BASED COMPENSATION) 3,261 -
DEFICIT (335,930) (331,915)
-------- --------
184,953 130,171
-------- --------
$259,577 $247,602
======== ========
APPROVED BY THE BOARD:
/s/ John Weatherall /s/ Kjeld Thyegsen
- ------------------------- -------------------------
Director Director
IVANHOE MINES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------------
(STATED IN U.S. $000'S) 2002 2001 2002 2001
- ----------------------- --------- --------- ------------ ------------
(UNAUDITED) (Note 1(b)) (Note 1(c))
REVENUE $ 19,269 $ 15,873 $ 65,848 $ 55,821
COST OF OPERATIONS (13,925) (10,635) (46,315) (37,309)
DEPRECIATION AND DEPLETION (3,213) (3,171) (7,362) (9,571)
--------- --------- --------- ---------
OPERATING PROFIT 2,131 2,067 12,171 8,941
OTHER EXPENSES
General and administrative (3,175) (1,264) (7,999) (4,294)
Interest on long-term debt (1,185) (2,643) (3,622) (7,175)
Exploration expenses (9,994) (2,035) (18,307) (4,308)
Depreciation (105) (26) (218) (92)
--------- --------- --------- ---------
LOSS BEFORE THE FOLLOWING (12,328) (3,901) (17,975) (6,928)
--------- --------- --------- ---------
OTHER INCOME (EXPENSES)
Mining property shut-down costs (752) (553) (1,699) (2,559)
Interest income 310 212 880 1,063
Foreign exchange gain (loss) (530) (2,888) 2,378 (10,669)
Gain on settlement of debt (Note 2) 32,466 - 32,466 -
Other (108) 149 3,015 264
Write-down of carrying values of assets (Note 2) (18,000) - (18,000) -
--------- --------- --------- ---------
13,386 (3,080) 19,040 (11,901)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME AND CAPITAL TAXES 1,058 (6,981) 1,065 (18,829)
(Provision for) recovery of income and capital taxes (559) 1,005 (2,708) 2,607
--------- --------- --------- ---------
NET INCOME (LOSS) 499 (5,976) (1,643) (16,222)
DEFICIT, BEGINNING OF PERIOD (336,429) (257,163) (331,915) (246,917)
EFFECT OF ACCOUNTING CHANGE (NOTE 1 (b)) - - (2,372) -
--------- --------- --------- ---------
DEFICIT, END OF PERIOD $(335,930) $(263,139) $(335,930) $(263,139)
========= ========= ========= =========
INCOME (LOSS) PER SHARE
Basic $0.00 $(0.05) $(0.01) $(0.13)
Diluted $0.00 $(0.05) $(0.01) $(0.13)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING (IN 000'S)
Basic 201,816 128,136 191,190 126,040
Diluted 208,241 128,136 198,235 126,040
========= ========= ========= =========
IVANHOE MINES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
(STATED IN U.S. $000'S) 2002 2001 2002 2001
- ----------------------- -------- ------- ------- --------
(UNAUDITED) (Note 1(c)) (Note 1(c))
OPERATING ACTIVITIES
Net income (loss) $ 499 $(5,976) $ (1,643) $(16,222)
Items not involving use of cash
Depreciation and depletion 3,318 3,197 7,580 9,663
Write-down of carrying value of assets 18,000 - 18,000 -
Non-cash interest expense 273 971 1,668 3,176
Unrealized foreign exchange (gain) loss (1,200) 4,296 (8,654) (390)
Provision for future waste mining costs
and mine reclamation obligation 318 (609) 1,094 497
Gain on sale of investments - (24) (508) (148)
Gain on settlement of debt (32,466) - (32,466) -
Non-cash recovery of bad debt - - (1,248) -
Non-cash stock-based compensation 524 - 1,179 -
Future income taxes 464 857 2,358 (759)
Other - - (205) -
-------- ------- -------- --------
(10,270) 2,712 (12,845) (4,183)
Net change in non-cash operating working capital items
(Note 7(c)) (908) (7,454) (3,009) (5,180)
-------- ------- -------- --------
(11,178) (4,742) (15,854) (9,363)
-------- ------- -------- --------
INVESTING ACTIVITIES
Expenditures on investments (38) - (5,019) -
Proceeds from sale of investments - 84 10 362
Expenditures on mining property, plant and equipment (4,339) (4,283) (14,770) (12,703)
Expenditures on other mineral property interests - (225) (1,000) (82)
Expenditures on other capital assets (640) - (1,540) -
Other (15) 84 (49) 5
-------- ------- -------- --------
(5,032) (4,340) (22,368) (12,418)
-------- ------- -------- --------
FINANCING ACTIVITIES
Share capital issued 130 9,917 54,622 10,106
Proceeds from long-term debt 925 - 9,387 -
Repayment of long-term debt (12,589) (3,016) (16,900) (5,521)
-------- ------- -------- --------
(11,534) 6,901 47,109 4,585
-------- ------- -------- --------
NET CASH (OUTFLOW) INFLOW (27,744) (2,181) 8,887 (17,196)
CASH, BEGINNING OF PERIOD 62,436 25,358 25,805 40,373
-------- ------- -------- --------
CASH, END OF PERIOD $ 34,692 $23,177 $ 34,692 $ 23,177
======== ======= ======== ========
CASH IS COMPRISED OF:
Cash on hand and demand deposits $ 13,051 $ 13,644
Time deposits
Restricted 2,160 5,058
Short-term money market instruments
Restricted 6,000 2,444
Unrestricted 13,481 2,031
------- --------
$34,692 $ 23,177
======= ========
Supplementary information (Notes 2 and 7)
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. dollars)
(Unaudited)
1) BASIS OF PRESENTATION
a) These interim financial statements do not contain all the information
required by Canadian generally accepted accounting principles ("GAAP")
for annual financial statements and therefore should be read in
conjunction with the most recent annual financial statements of the
Company for the year ended December 31, 2001 (the "Annual Financial
Statements").
b) The Company has adopted the recommendations of the new CICA Handbook
Section 3870, Stock-based Compensation and Other Stock-based Payments,
effective January 1, 2002. This section establishes standards for the
recognition, measurement and disclosure of stock-based compensation
and other stock-based payments made in exchange for goods and
services. The standard requires that all stock-based awards made to
non-employees be measured and recognized using a fair value based
method. The standard encourages a fair value based method for all
awards granted to employees, but only requires the use of a fair value
based method for direct awards of stock, stock appreciation rights,
and awards that call for settlement in cash or other assets. Awards
that an entity has the ability to settle in stock are recorded as
equity, whereas awards that the entity is required to or has a
practice of settling in cash are recorded as liabilities. The Company
has adopted, on a retroactive basis without restatement of prior
periods, the fair value method of accounting for stock options granted
to employees and directors.
This accounting change with respect to stock-based compensation
resulted in an increase in the net loss for the three and nine months
ended September 30, 2002 by $524,000 ($ nil per share) and $1,179,000
($nil per share), respectively, and an increase in the deficit as at
January 1, 2002 by $2,372,000.
In all other respects, these financial statements follow the same
accounting policies and methods of their application as the Annual
Financial Statements.
c) The comparative figures in these interim financial statements have
been restated to give retroactive effect to the accounting change with
respect to foreign currency translation as described in Note 3 (b) to
the Annual Financial Statements. This change has resulted in a
decrease of $445,000 ($ Nil per share) in the net loss for the three
months ended September 30, 2001 and a decrease of $2,181,000 ($0.02
per share) in the net loss for the nine months ended September 30,
2001.
2) ABM MINING LIMITED ("ABM")
During 2001, a global slow down in the steel industry resulted in reduced
demand for iron ore pellets. Management therefore commenced a restructuring
of the mine plan and negotiated additional bank loans aggregating
Australian ("A") A$21 million (U.S. $14 million) to June 30, 2002. In
September 2002, the Company completed the debt restructuring negotiations
with the major stakeholders in the Savage River project. As a result, the
Company acquired outstanding third-party project debt and foreign currency
exchange contract obligations totaling $41 million (A$75 million) at a cash
cost of $8.1 million (A$15 million). This transaction has resulted in a
non-cash $32.5 million gain on settlement of debt, and a provision for
future income taxes of $2.1 million.
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. dollars)
(Unaudited)
2) ABM MINING LIMITED ("ABM") (CONTINUED)
As a result of the debt restructuring, the Company has revised its mine
plan at the Savage River project and completed a review of the carrying
values of the Savage River mining property, plant and equipment. This
review has resulted in an impairment provision of $18 million being made at
September 30, 2002 for the estimated other than temporary decline in value
and a recovery of future income taxes of $2.1 million.
The Company will continue to review the carrying value of the Savage River
capital assets on a regular basis for indications of further impairment.
The economics of the Savage River Mine Project are particularly sensitive
to changes in selling prices and operating costs. As a consequence, any
adverse changes in those selling prices and/or operating costs would result
in further impairment provisions and those provisions may be material. As
at September 30, 2002, the carrying value of the Savage River capital
assets was $36.7 million.
3) MYANMAR IVANHOE COPPER COMPANY LIMITED ("JVCO")
The Annual Financial Statements disclosed that it was likely that JVCo
would not be in compliance with the minimum working capital requirement in
its credit agreement during 2002. JVCo is currently in discussions with its
lenders regarding clarification of the definition of this requirement.
However, JVCo has not received a waiver from its lenders with respect to
this requirement at September 30, 2002 and also with respect to the
non-compliance with certain other financial covenants in the credit
agreement. Accordingly, as required by Canadian GAAP, the entire amount of
the Company's share of JVCo's loan payable aggregating $22.5 million at
September 30, 2002 has been included in current liabilities.
Notwithstanding the foregoing, JVCo has met all principal and interest
payment obligations to date, which include aggregate principal payments of
$45 million since the inception of the loan, of which $15 million was paid
during the nine months ended September 30, 2002.
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. dollars)
(Unaudited)
4) LONG-TERM DEBT
September 30, December 31,
US$(000) 2002 2001
- -------- ------------- ------------
(Unaudited)
JVCo:
Share of loan payable $ 22,500 $ 30,000
ABM:
Bank term loan - 22,292
Deferred purchase obligation 4,673 3,933
Equipment purchase loans 1,848 5,205
Unsecured loan - 540
-------- --------
29,021 61,970
Less: Amount included in current liabilities (Note 3) (23,726) (20,133)
-------- --------
$ 5,295 $ 41,837
======== ========
All of the long-term debt is non-recourse to Ivanhoe Mines Ltd.
5) SHARE CAPITAL
Since December 31, 2001, the Company has issued the following share
capital:
Number of
US$(000) Shares Amount
- -------- ----------- ---------
(Unaudited)
Balance, December 31, 2001 171,158,484 $460,389
Shares issued for:
Private placements 29,385,164 53,758
Exercise of stock options 1,048,475 1,285
Share purchase plan 34,412 61
Acquisition of investment 287,678 599
----------- --------
Balance, September 30, 2002 201,914,213 $516,092
=========== ========
In the nine-month period ended September 30, 2002, the Company granted a
total of 1,620,000 stock options, 1,048,475 options were exercised, and
995,875 options were cancelled.
Stock options outstanding at November 15, 2002 totalled 12,032,594 with
exercise prices and expiry dates ranging from Cdn $0.95 to Cdn $6.74 and
November 8, 2003 to May 10, 2008, respectively. At November 15, 2002, a
total of 205,147,382 Common Shares of the Company were outstanding.
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. dollars)
(Unaudited)
6) SEGMENTED INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 2002
- ------------------------------------------------------------------------------------------------------------
(Stated in 000's) COPPER IRON EXPLORATION CORPORATE TOTAL
- ----------------- ------- ------- ----------- --------- -------
REVENUE $ 5,123 $ 14,146 $ - $ - $ 19,269
COST OF OPERATIONS (2,746) (11,179) - - (13,925)
DEPRECIATION AND DEPLETION (893) (2,320) - - (3,213)
------- -------- -------- ------- --------
OPERATING PROFIT 1,484 647 - - 2,131
------- -------- -------- ------- --------
General and administrative (98) (22) - (3,055) (3,175)
Interest on long-term debt (389) (796) - - (1,185)
Exploration expenses (1) - (9,998) 5 (9,994)
Depreciation - - (105) - (105)
------- -------- -------- ------- --------
INCOME (LOSS) BEFORE THE FOLLOWING 996 (171) (10,103) (3,050) (12,328)
------- -------- -------- ------- --------
Mining property shut-down costs - - - (752) (752)
Interest income 17 11 8 274 310
Foreign exchange gain (loss) (4) 891 (1) 1 (1,418) (530)
Gain on settlement of debt - 32,466 - - 32,466
Other income 14 (115) (4) (3) (108)
Write-down of carrying values of assets - (18,000) - - (18,000)
------- -------- -------- ------- --------
INCOME (LOSS) BEFORE INCOME AND CAPITAL
TAXES 1,023 15,082 (10,098) (4,949) 1,058
------- -------- -------- ------- --------
(Provision for) recovery of income
and capital taxes 16 172 (237) (510) (559)
------- -------- -------- ------- --------
NET INCOME (LOSS) $ 1,039 $ 15,254 $(10,335) $(5,459) $ 499
======= ======== ======== ======= ========
(1) This foreign exchange gain includes a $500,000 loss on the mark to market
accrual of a foreign exchange contract and it excludes $300,000 of realized
foreign exchange losses arising from the foreign exchange contract which
became due during the period, as these losses had been previously accrued
by the Company at December 31, 2001.
THREE MONTHS ENDED SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------------------------------------
(Stated in 000's) COPPER IRON EXPLORATION CORPORATE TOTAL
- ----------------- ------- -------- ----------- --------- --------
REVENUE $ 4,004 $ 11,869 $ - $ - $ 15,873
COST OF OPERATIONS (2,078) (8,557) - - (10,635)
DEPRECIATION AND DEPLETION (1,207) (1,964) - - (3,171)
------- -------- ------- ------- --------
OPERATING PROFIT 719 1,348 - - 2,067
------- -------- ------- ------- --------
General and administrative 116 (19) - (1,361) (1,264)
Interest on long-term debt (1,364) (758) - (521) (2,643)
Exploration expenses - - (2,035) - (2,035)
Depreciation - - (26) - (26)
------- -------- ------- ------- --------
(LOSS) INCOME BEFORE THE FOLLOWING (529) 571 (2,061) (1,882) (3,901)
------- -------- ------- ------- --------
Mining property shut-down costs - - - (553) (553)
Interest income 62 15 (1) 136 212
Foreign exchange gain (loss) - (3,288) 12 388 (2,888)
Other income - 126 (3) 26 149
------- -------- ------- ------- --------
(LOSS) INCOME BEFORE INCOME AND
CAPITAL TAXES (467) (2,576) (2,053) (1,885) (6,981)
------- -------- ------- ------- --------
(Provision for) recovery of income
and capital taxes - 1,217 (1) (211) 1,005
------- -------- ------- ------- --------
NET (LOSS) $ (467) $ (1,359) $(2,054) $(2,096) $ (5,976)
======= ======== ======= ======= ========
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. dollars)
(Unaudited)
6) SEGMENTED INFORMATION (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(Stated in 000's) COPPER IRON EXPLORATION CORPORATE TOTAL
- ----------------- -------- -------- ----------- --------- --------
REVENUE $15,210 $ 50,638 $ - $ - $ 65,848
COST OF OPERATIONS (7,839) (38,476) - - (46,315)
DEPRECIATION AND DEPLETION (2,963) (4,399) - - (7,362)
------- -------- -------- ------- --------
OPERATING PROFIT 4,408 7,763 - - 12,171
------- -------- -------- ------- --------
General and administrative (381) (58) - (7,560) (7,999)
Interest on long-term debt (1,287) (2,335) - - (3,622)
Exploration expenses (1) - (18,311) 5 (18,307)
Depreciation - - (211) (7) (218)
------- -------- -------- ------- --------
INCOME (LOSS) BEFORE THE FOLLOWING 2,739 5,370 (18,522) (7,562) (17,975)
------- -------- -------- ------- --------
Mining property shut-down costs - - - (1,699) (1,699)
Interest income 71 64 20 725 880
Foreign exchange gain (loss) (27) 1,936(2) 65 404 2,378
Gain on settlement of debt - 32,466 - - 32,466
Other income (expense) 20 (83) 5 3,073 3,015
Write-down of carrying values of assets - (18,000) - - (18,000)
------- -------- -------- ------- --------
INCOME (LOSS) BEFORE INCOME AND CAPITAL TAXES 2,803 21,753 (18,432) (5,059) 1,065
------- -------- -------- ------- --------
(Provision for) recovery of income and capital taxes (107) (3,482) 408 473 (2,708)
------- -------- -------- ------- --------
NET INCOME (LOSS) $ 2,696 $ 18,271 $(18,024) $(4,586) $ (1,643)
======= ======== ======== ======== ========
(2) This foreign exchange gain includes a $3.7 million gain on the mark to
market accrual of a foreign exchange contract and it excludes $7.3 million
of realized foreign exchange losses arising from the foreign exchange
contract which became due during the period, as these losses had been
previously accrued by the Company at December 31, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001
- -------------------------------------------------------------------------------------------------------------------------------
(Stated in 000's) COPPER IRON EXPLORATION CORPORATE TOTAL
- ----------------- -------- -------- ----------- --------- --------
REVENUE $ 15,334 $ 40,487 $ - $ - $ 55,821
COST OF OPERATIONS (6,112) (31,197) - - (37,309)
DEPRECIATION AND DEPLETION (3,196) (6,375) - - (9,571)
------- -------- ------- ------- --------
OPERATING PROFIT 6,026 2,915 - - 8,941
------- -------- ------- ------- --------
General and administrative (292) (66) - (3,936) (4,294)
Interest on long-term debt (3,205) (3,207) - (763) (7,175)
Exploration expenses - - (4,308) - (4,308)
Depreciation - - (92) - (92)
------- -------- ------- ------- --------
INCOME (LOSS) BEFORE THE FOLLOWING 2,529 (358) (4,400) (4,699) (6,928)
------- -------- ------- ------- --------
Mining property shut-down costs - - - (2,559) (2,559)
Interest income 256 112 5 690 1,063
Foreign exchange gain (loss) - (10,812) (43) 186 (10,669)
Other income - 119 (5) 150 264
------- -------- ------- ------ -------
INCOME (LOSS) BEFORE INCOME AND CAPITAL TAXES 2,785 (10,939) (4,443) (6,232) (18,829)
------- -------- ------- ------ -------
(Provision for) recovery of income and capital taxes 30 3,139 (14) (548) 2,607
------- -------- ------- ------ -------
NET INCOME (LOSS) $ 2,815 $ (7,800) $(4,457) $(6,780) $(16,222)
======= ======== ======= ======= ========
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. dollars)
(Unaudited)
- -------------------------------------------------------------------------------
7) SUPPLEMENTARY CASH FLOW INFORMATION
a) During the three months ended June 30, 2002, the Company issued
287,678 Common Shares at a deemed value of $599,000 in respect of the
purchase of 7.4 million common shares of Intec Ltd.
During the three months ended June 30, 2002, the Company divested
itself of its iron ore project in Norway and extinguished the related
outstanding debt of $3.5 million.
During the three months ended March 31, 2002, the Company exchanged
its investment in GTL Resources Plc, which had a carrying value of
$1.4 million, for an equity interest in Resource Investment Trust with
a fair value of $1.9 million.
Also during the three months ended March 31, 2002, the Company
completed the earn-in of a 100% interest in the Oyu Tolgoi project in
Mongolia by paying cash of $1 million and by incurring an obligation
to make a $4 million payment within one year.
b)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
$ (000) 2002 2001 2002 2001
- ------- ----- ------- ------ -------
Interest paid $ 912 $1,501 $1,954 $4,128
Income and capital taxes paid (recovered) 94 1 350 (148)
c) Net change in non-cash working capital items:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
$ (000) 2002 2001 2002 2001
- ------- ------- ------- ------- -------
Accounts receivable $(3,312) $ 614 $(5,232) $(1,153)
Inventories 786 (6,473) (1,277) (7,492)
Prepaid expenses (174) 328 (1,163) (289)
Accounts payable and accrued liabilities 1,792 (1,923) 4,663 3,754
------- ------- ------- -------
$ (908) $(7,454) $(3,009) $(5,180)
------- -------- ------- -------
8) SUBSEQUENT EVENT
Subsequent to September 30, 2002, the Company acquired 2 million Units of
Pacific Minerals Inc. ("Pacific") for cash of $1,256,000 (Cdn. $2,000,000).
Each Unit consists of one common share and one share purchase warrant of
Pacific which is exercisable for a period of two years at an exercise price
of Cdn. $1.10. In addition, the Company acquired from former shareholders
of Pacific an additional 6.6 million common shares of Pacific in exchange
for 2,374,960 Common Shares of the Company with a deemed value of
$4,818,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Net income for the quarter was $0.5 million or $0.0 per share, compared with a
loss of $6.0 million or $0.05 per share in 2001.
The Company spent a total of $ 10.0 million on exploration activities in the
quarter, the majority of which was spent on the Company's Mongolian properties.
In Mongolia, as a result of its exploration and drilling efforts, the Company
has identified several zones of mineralization.
Drilling on the Far North zone of Oyu Tolgoi, has discovered an
extensive zone of high grade copper-rich mineralization.
Drilling on the Southwest, South and Central zones of Oyu Tolgoi has
discovered thick intercepts of gold and copper mineralization.
Drilling on the Kharmagtai project located 120 kilometers north of Oyu
Tolgoi, intercepted near-surface high grade gold and copper porphyry
mineralization similar to mineralization encountered on some
mineralized zones at Oyu Tolgoi.
In the third quarter of 2002, the copper division's operating profit after
depreciation and depletion totaled $1.5 million, representing an increase of
$0.8 million over the same period in 2001.
In the third quarter of 2002, the iron division's operating profit after
depreciation and depletion decreased by $0.7 million over the same period in
2001. Excluded from the 2002 third quarter operating expenses was $4.2 million
(year to date $8.0 million) in capitalized pre-stripping charges.
In the third quarter of 2002, the Company acquired, through a A$15 million cash
payment, approximately A$75 million in the iron division's outstanding bank debt
and currency hedge obligations, resulting in a non-cash US$32.5 million pre-tax
gain on the transaction. As well, the Company wrote-down its investment in
Savage River by US$18 million based on a decrease in estimated recoverable
reserves and the recent strengthening of the Australian dollar resulting in a
decrease in estimated future cash flows.
In the third quarter of 2002, cash out-flow from operations increased from $4.7
million in 2001 to an $11.2 million cash out-flow in 2002.
At September 30, 2002, working capital was $20.9 million, including cash of
$34.7 million compared with working capital of $40.1 million and cash of $62.4
million at the end of June 2002.
OPERATIONS
COPPER OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------
Total operation Company's 50% net share
--------------------------- -----------------------------
PERCENT PERCENT
INCREASE INCREASE
COPPER 2002 2001 (DECREASE) 2002 2001 (DECREASE)
- ------ ----- ----- ---------- ---- ---- ----------
Tonnes of Ore to heap Tonnes (000's) 2,859 1,997 43%
Grade CuCn% 0.46% 0.57% (19%)
Strip ratio Waste/Ore 0.57 0.33 73%
Cathode production Tonnes 7,173 5,924 21% 3,587 2,962 21%
Sales Tonnes 6,869 5,540 24% 3,435 2,770 24%
US$/pound $ 0.72 $ 0.70 3%
US$(000) 5,123 4,004 28%
Cost of operations US$(000) 2,746 2,078 32%
Operating profit US$(000) 1,484 719 106%
NINE MONTHS ENDED SEPTEMBER 30, 2002
- ------------------- -------------------------------------------------------------
Total operation Company's 50% net share
----------------------------- -----------------------------
PERCENT PERCENT
INCREASE INCREASE
COPPER 2002 2001 (DECREASE) 2002 2001 (DECREASE)
- ------ ------ ------ ---------- ---- ---- ----------
Tonnes of Ore to heap Tonnes (000's) 8,903 5,732 55%
Grade CuCn% 0.55% 0.61% (10%)
Strip ratio Waste/Ore 0.41 0.27 52%
Cathode production Tonnes 20,796 19,603 6% 10,398 9,802 6%
Sales Tonnes 20,427 19,528 5% 10,214 9,764 5%
US$/pound $0.71 $0.76 (7%)
US$(000) 15,210 15,334 (1%)
Cost of operations US$(000) 7,839 6,112 28%
Operating profit US$(000) 4,408 6,026 (27%)
During the third quarter of 2002, JVCo increased its cathode production by 21%
over a year ago. JVCo's ability to increase production was the result of the
multi-stages expansion program instigated early in 2002. Current plans call for
an increase in cathode throughput from 28,700 tonnes per year capacity achieved
in September 2002 to a target of 33,000 tonnes per year by April 2003.
In the third quarter of 2002, in order to achieve higher copper production
levels, total ore mined increased by 43% and the ore grade decreased by 19%. As
a result, total cost of operation increased by 32%, representing a 6% increase
in unit operating costs.
The reduction in interest expense is mainly the result of lower interest rates
and a reduction in the total amount of debt. In the first nine months of 2002,
JVCo made debt repayments of $15 million.
IRON OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------
PERCENT
INCREASE
IRON 2002 2001 (DECREASE)
- ---- ------- ------- ----------
Tonnes milled (000's) 1,249 1,189 5%
Concentrate production Tonnes 528,371 509,860 4%
Grade DTR % 42% 43% (2%)
Pellet production Tonnes 513,114 487,777 5%
Pellet sales Tonnes 507,984 405,942 25%
Sales US$/tonne $28 $29 (5%)
US$(000) 14,146 11,869 19%
Cost of operations US$(000) 11,179 8,557 31%
US$/tonne $22 $21 4%
Operating profit US$(000) 647 1,348 (52%)
NINE MONTHS ENDED SEPTEMBER 30, 2002
--------------------------------------------------------------
PERCENT
INCREASE
IRON 2002 2001 (DECREASE)
- ---- --------- --------- ----------
Tonnes milled (000's) 3,623 2,818 29%
Concentrate production Tonnes 1,660,140 1,505,270 10%
Grade DTR % 46% 53% (13%)
Pellet production Tonnes 1,622,873 1,470,184 10%
Pellet sales Tonnes 1,702,444 1,352,593 26%
Sales US$/tonne $30 $30 (1%)
US$(000) 50,638 40,487 25%
Cost of operations US$(000) 38,476 31,197 23%
US$/tonne $23 $23 (2%)
Operating profit US$(000) 7,763 2,915 166%
In the third quarter of 2002 tonnages of pellet sold increased by 25% over a
year ago and as a result of a 5% decrease in the pellet unit sales price, sales
increased by 19%.
During the third quarter of 2002, operating costs increased by 31% over the same
period in 2001 representing a net unit cost increase of 4%. Excluded form the
2002 third quarter operating expenses was $4.2 million (year to date $8.0
million) in capitalized pre-stripping charges.
Total depreciation in the third quarter increased by 18% over the same period
last year due to a lowering in that quarter of estimated recoverable reserves.
This decrease in estimated recoverable reserves and the expected strengthening
of the Australian dollar over the next few years resulted in a $18.0 million
impairment provision against the value of the Savage River assets.
The Australian dollar reached a low point of US$0.5272 per A$ at the beginning
of August, following which it steadily strengthened to a high of US$0.5669
(+7.5%) in early November. The US$18.0 million impairment provision at the end
of September 2002 assumes US$0.57 as the estimated Australian exchange rate in
years subsequent to 2002.
In the fourth quarter of 2002, the Savage River operation is expected to
increase its reliance on the softer ore from the South deposit which will
require blending of stockpiled low-grade material. In order to maintain the same
level of pellet productivity, the Savage River operation expects to offset this
anticipated decrease in grade with improvements in the mill throughput.
GOLD
BAKYRCHIK GOLD MINE -- As a result of additional controls imposed in the second
quarter of 2002 by the government of Kazakhstan on the import of hazardous
material, production at the Bakyrchik gold mine was stopped for most of the
third quarter due to a shortage of cyanide. Gold production in the third quarter
of 2002 totaled 177 ounces. Revenues from the gold sales were netted against the
mining property shut-down costs.
In November 2002, the Company's subsidiary "Bakyrchik Mining Venture" was
notified by the Government of Kazakhstan that its application for an extension
of certain exploration rights under a mining license had been denied. The
Company's position is that "Bakyrchik Mining Venture" is legally entitled to the
extension and that the Government does not have the right to deny granting it.
The Company plans to pursue its legal rights to the extent necessary to protect
its interests in Kazakhstan. It is too early to assess the extent, if any, to
which the failure to obtain the extension sought would adversely affect those
interests.
EUNSAN GOLD MINE -- During the third quarter of 2002, the Eunsan mine continued
its test mining and milling program resulting in the production and sale of
3,248 ounces of gold and 125,039 ounces of silver contained in dore. Production
in the fourth quarter of 2002 will be considerably lower as the feed to the mill
will switch from the high-grade to the low-grade portion of the stockpile.
While the mine operated throughout the third quarter from ore stockpiled on
surface, the Eunsan operations continued its efforts to complete the development
of the underground ramp. Following the completion of the ramp in October of
2002, an infill underground drilling program is scheduled to be completed in the
fourth quarter of 2002. Once the infill program has been completed and an
updated block model and mine plan is completed, underground mining is expected
to re-commence on a commercial basis. As a result, all underground development
costs have been expensed and revenues generated from the processing of
stockpiled ore have been netted against exploration and development costs.
EXPLORATION
Exploration expenses in the third quarter of 2002 totaled $10.0 million compared
to $2.0 million for the same period in 2001. The majority of the $8.0 million
increase is due to increased activities at the Oyu Tolgoi project and other
Mongolian properties.
OYU TOLGOI, MONGOLIA -- During the third quarter of 2002, work at Oyu Tolgoi
tested the high priority targets in the Far North IP anomaly with continued
delineation drilling in the Central, SW Oyu and South Oyu Zones. Several
metallurgical core holes were drilled in Central Oyu to collect large diameter
core for test work on leaching and concentrating.
In-fill drilling will resume in Central when Far North drilling has finished.
During the quarter approximately 20,115 meters of core drilling was completed on
the Oyu Tolgoi property using a total of nine drilling rigs. Four more drilling
rigs are expected to be used in the fourth quarter of 2002.
KHARMAGTAI, MONGOLIA -- During the third quarter of 2002, the Company started
drilling on the Kharmagtai project, located 120 kilometers north of the Oyu
Tolgoi project. Field sampling, mapping and geophysical surveys completed on the
Kharmagtai project during 2002 have delineated a series of porphyry-related
targets which the Company intends to drill in the fourth quarter of 2002.
MONGOLIA RECONNAISSANCE -- The Company has plans to test other targets uncovered
by its field sampling and mapping activities, including Oyut Ulaan , Oyut Ovoo,
Saran Uul, Chandman Yul and Shuteen.
CHINA -- In conjunction with its exploration efforts in Mongolia, the Company is
also pursuing various gold and platinum opportunities in China through a joint
venture with Pacific Minerals Inc. The Company has the right to participate in
the development of Pacific's 217 Gold project in Inner Mongolia, the JBS
Platinum Palladium project in Yunnan Province, and a right of first refusal to
participate in all new mineral projects discovered by Pacific in China.
MODI TAUNG, MYANMAR -- The Modi Taung gold project mainly consists of the
driving of underground exploration adits and surface diamond drilling. Since
inception, 4,200 meters of adits were driven on five separate vein systems.
Total exploration expenditures in third quarter of 2002 were as follows:
Project US$ million
- ------- -----------
Oyu Tolgoi $ 4.4
Kharmagtai 0.8
General reconnaissance and administration
- -- all Mongolia projects 2.0
Modi Taung 0.5
China 0.4
Korea, net of incidental revenues 1.9
-----
$10.0
=====
CORPORATE
General and administrative expenses increased from $1.4 million in the third
quarter of 2001 to $3.1 million in the same period in 2002. The $1.7 million
increase is mainly attributed to higher travel, legal and administrative
expenses related to the Company's expansion programs and activities throughout
the year.
The increase in mining property shut-down costs is mainly attributed to the
lower gold revenues netted against the care and maintenance costs at the
Bakyrchik gold mine.
The majority of the $0.05 million loss on foreign exchange in the third quarter
of 2002 resulted from the weakening of the Canadian dollar as the majority of
the equity raised in
the second quarter of 2002 was invested in money instruments denominated in
Canadian dollars.
In the third quarter of 2002, the Company acquired, through a A$15 million cash
payment, approximately A$75 million in outstanding debt and currency hedge
obligations owed by Savage River to a third party bank. This debt acquisition
resulted in a pre-tax gain on debt settlement of US$32.5 million.
LIQUIDITY
In the third quarter of 2002, the Company's cash balances decreased from $62.4
million at the beginning of the quarter to $34.7 million at the end of the
quarter. The $27.7 million decrease in cash included $4.5 million in debt
repayments, $8.1 million in debt acquisition, $5 million in capital asset
expenditures and $11.2 million in expenditures for operating activities.
In the fourth quarter of 2002, the Company through a $1.3 million (Canadian $2.0
million) private placement acquired 2.0 million shares of Pacific Minerals Inc.
The Company also acquired 6.6 million shares of Pacific Minerals Inc. in
exchange for the issuance of 2.4 million Ivanhoe common shares.
In the third quarter of 2002, the Company negotiated a settlement with the
banker for Savage River whereby it extinguished, by making a cash payment of
A$15 million, outstanding bank debts and all remaining currency hedge
obligations valued at a total of approximately A$75 million.
At September 30, 2002, the $22.5 million long-term debt obligation of the copper
operations in Myanmar has been classified as current liabilities as a result of
non-compliance with certain covenants of the S&K credit agreement. To date, the
S&K operation has met all principal and interest obligations and the Company is
of the opinion that the lenders will not demand repayment of the loan,
notwithstanding the foregoing.
The Company's existing cash resources are sufficient to meet all of its
currently planned expenditures and the Company's ongoing exploration activities
in Mongolia and elsewhere will require ongoing funding in order to continue
development of such properties. Over the long term, the Company still needs to
obtain additional funding for, or third party participation in, its undeveloped
or partially developed projects in order to bring them into full production.
Such projects include the Letpadaung Copper project, the Mongolia properties,
the Bakyrchik Gold Mine and the Eunsan Gold Mine. Since factors beyond the
Company's control may adversely affect its access to funding or its ability to
recruit third party participants, there can be no assurance the Company's
undeveloped or partially developed projects can be fully developed in whole or
in part.