Exhibit 13.5
(IVANHOE LOGO)
IVANHOE
MINES
www.ivanhoemines.com
IVANHOE MINES LTD.
FINANCIAL STATEMENTS
December 31, 2001 and 2000
(IVANHOE LOGO)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Stated in U.S. dollars)
OVERVIEW
Between May 2000 and December 2001, the Company drilled in excess of 25,000
meters on its Oyu Tolgoi property. In 2001 the Company spent a total of $3.8
million in Mongolia, including $3.4 million on its Oyu Tolgoi property. On the
strength of exploration results to date on its Mongolian properties, the Company
raised a total of $72.7 million through the issue of 44.6 million common shares
of the Company during the second half of 2001 and through the 2002 year to date.
These financings will enable the Company to further advance the exploration of
the properties.
The net loss for the year was $85.0 million, or $0.66 per share, compared with
$17.9 million or $0.24 per share in 2000. Included in the 2001 loss is:
- A profit of $2.5 million from the S&K Mine copper operations in
Myanmar.
- A loss of $66.2 million from the Savage River Mine operation in
Australia, including a $53.8 million write-down of the Savage River
Mine assets and a foreign exchange loss of $7.9 million. The
revaluation of the mine assets was necessitated by the effects of
the softening of world iron ore markets in 2001 on the economics of
the mine.
- Exploration division expenses, net after tax, of $6.3 million
including total expenditures of $3.8 million in Mongolia.
- Corporate expenses of $15.0 million, including $3.7 million of
mining property care and maintenance costs in Kazakhstan and Norway,
a $5.4 million write-down of Norway assets and $5.7 million of
general and administrative expenses.
In the fourth quarter of 2001, the Company initiated the construction of a 150
tonne a day gold and silver operation at its Eunsan project in South Korea. The
Eunsan Gold and Silver Mine, which is being developed at an estimated cost of
$3.3 million, started its milling operation in the first quarter of 2002 and is
scheduled to reach full commercial production during the second quarter of 2002.
In the third quarter of 2001, the Company reinstated gold production at its
Bakyrchik property in Kazakhstan. The economics of the project are being tested
on oxidized ore material stockpiled on surface from previous operations. If
successful, the Company plans, beginning in the middle of 2002, to start
contract mining 500 tonnes a day of oxidized ore from shallow satellite
deposits.
The Company is continuing to hold project financing negotiations on its
Letpadaung Copper project in 2002.
The Company plans to abandon its interest in its Norway project in 2002.
1
(IVANHOE LOGO)
RESULTS OF OPERATIONS
FINANCIAL DATA
Year ended December 31,
---------------------------------
($ in millions, except per share data) 2001 2000
-------- -------
Earnings and cash flow
Revenue 75.3 22.5
Mine operation income (after depreciation and depletion, but
before inventory allowances) 10.0 10.0
Net loss 85.0 17.9
Cash used for operations (13.2) (3.5)
Loss per share 0.66 0.24
Capital Expenditures and Investments
Capital expenditures 11.5 2.7
Acquisitions of subsidiary and investments - (0.2)
Cash acquired on acquisition of subsidiary - 1.6
Balance Sheet
Cash 25.8 40.4
Working capital 3.7 29.0
Total assets 247.6 316.4
Long-term debt, less current portion 46.5 75.7
Shareholders' equity 130.2 177.9
Debt to equity ratio 0.52 TO 1.00 0.49 to 1.00
Common shares outstanding (millions) 171.2 124.8
2
(IVANHOE LOGO)
CRITICAL ACCOUNTING POLICIES
Management is required to make assumptions and estimates that affect the
valuation of its mineral assets. Significant estimates used in the valuation of
mineral assets include quantities of mineral in heaps and in circuit, proven and
probable ore reserves, the estimated recoverable tonnes of ore, the expected
economic life of and the estimated future operating results and net cash flows
from mining property, plant and equipment, and the anticipated reclamation costs
of mine sites.
Following generally accepted accounting principles, decreases in the valuation
of mineral assets must be recorded in the Company's consolidated financial
statements, while increases in the valuation of mineral assets are not
permitted. The most likely changes in estimates used in the valuation of mineral
assets are the changes in estimates based on noticeable changes in trends of
operating costs and commodity prices. A small percentage change in costs or
revenues, when spread over the remaining life of a mining project ,that can
exceed twenty years, can have a significant impact on the valuation calculation,
resulting in a material reduction in the valuation of the Company's mineral
assets.
Based on Company's evaluation of the events of 2001 and the negative outlook for
iron ore and pellet prices, the Savage River Mine assets were written-down by
$53.8 million. See discussion on the Iron operation.
OPERATIONS
COPPER OPERATION
The production and sales for 2001 and 2000 are shown in the table below:
COPPER
S&K MINE, MYANMAR
Year ended December 31, 2001
Total Operation Company's 50% net share
---------------------------------------------- -------------------------------
Percent Percent
Increase Increase
2001 2000 (decrease) 2001 2000 (decrease)
------ ------ --------- ------ ------ ----------
Tonnes of ore to heap........... Tonnes (000's) 7,781 6,880 13%
Grade .......................... CuCn% 0.58% 0.67% (13%)
Strip ratio .................... Waste/Ore 0.32 0.52 (38%)
Cathode production ............. Tonnes 25,806 26,409 (2%) 12,903 13,205 (2%)
Sales........................... Tonnes 25,865 26,560 (3%) 12,933 13,280 (3%)
US$/pound $0.73 $0.81 (10%)
US$(000) 19,556 22,470 (13%)
Cost of operations ............. US$(000) 9,246 8,188 13%
The net income in 2001 was $2.5 million compared to $3.4 million in 2000. This
decrease was primarily the result of a 13% percent decrease in copper sales
which resulted from a 2% reduction in copper production combined with a 10%
decrease in copper prices. Copper production was negatively affected during the
first three quarters of 2001 by slow leaching of clay-bearing ore material.
Copper production dropped from an annualized production rate of 28,000 tonnes
per annum in the first quarter of 2001 to a low of 21,000 tonnes per annum at
the end of September 2001.
In the last quarter of 2001, improvements instigated by mine management,
including tighter ore control in the pit, construction of a fines screening and
washing plant to remove clay fines from the ore, re-mining of poorly leached
cells and increased leaching of run of mine material, increased the annualized
copper cathode production rate. Total copper production gradually increased from
September 2001 onward and reached an average annualized rate in excess of 30,000
tonnes per year during the month of March 2002.
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(IVANHOE LOGO)
The bulk of the $1.1 million increase in operating costs is attributable to the
increase in the following expenses:
Annual
Increase Percent
$(000) increase
-------- --------
Wages 145 11%
Fuel 144 27%
Power 111 5%
Mill consumables 273 10%
IRON OPERATION
Production and sales of iron products during 2001 are shown in the table below.
The acquisition of the iron operation was completed effective December 31, 2000.
The year 2000 comparative operating results are presented on a pro forma basis
as if the iron operation had been acquired at the beginning of 2000.
IRON
SAVAGE RIVER MINE, TASMANIA
Year ended December 31, 2001
Percent
Pro Forma Increase
2001 2000 (decrease)
--------- --------- ---------
Tonnes milled (000's) 4,865 4,536 7%
Concentrate production (000's) 2,064 2,171 (5%)
Grade DTR % 44.7% 50.4% (11%)
Pellet production Tonnes 2,024,285 2,065,529 (2%)
Pellet sales Tonnes 1,820,699 2,121,790 (14%)
Sales US$/tonne $31 $29 7%
US$(000) 55,778 60,823 (8%)
Total pellet production in 2001 was 2% below 2000 production, however, total
pellet tonnage sold in 2001 was 14% below the amount sold during the previous
year. The approximate 300,000 tonne decrease can be attributed to the following:
(a) a 200,000 tonne increase in pellet inventory at December 2001 over the
previous year end and, (b) a 100,000 tonne decrease in pellet shipments in
December 2001 caused by customers deferring December shipments into January
2002. As a result, January 2002 pellet sales totalled 275,000 tonnes compared to
75,000 tonnes in December 2001.
Unusually hard ore encountered during mining in the second quarter of 2001
required management to almost double the mine's low-grade run of mine inventory,
from 1.2 million tonnes at the end of 2000 to 2.0 million tonnes at December
2001, in order to increase the mill's ability to successfully blend feed
material as needed.
Operating and maintenance costs in 2001 were about 7% higher than in the
previous year. Maintenance costs in 2001 were approximately 30% higher, mainly
as a result of an overall increase in mechanical repairs necessitated by the
processing of the unusually hard ore.
Operating profit totalled $3.7 million for the 2001 year compared to $2.9
million for the nine months ended September 31, 2001. The net operating income
before non-cash expenses, including depreciation and depletion, write-down of
capital assets, loss on foreign exchange and income taxes, totalled $6.2 million
at the end of September 2001 and $5.1 million for the 2001 year. A $2.6 million
write-down of run of mine inventory at the end of 2001 contributed to the $1.1
million decrease in profit over the previous quarter.
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(IVANHOE LOGO)
Capital expenditures during 2001 totalled $ 8.1 million. The Savage River mine
received a total of $10.4 million in funding during 2001 from the Company.
The Savage River operations were acquired in December 31, 2000 based on the
assumption that the operation would experience increases in pellet prices of 14%
over the 2000 prices over the first three years following the acquisition. As a
result, during the same three-year period, an expansion of the plant facilities
was envisaged, with a resulting 27% increase in tonnage sold by the end of 2003.
In the second quarter of 2001, the global steel industry experienced a sharp
slowdown which resulted in a reduced demand for iron ore pellets. The first
indication of softening of iron ore markets came in mid-2001 when the increase
in pellet prices for the 2001 year was negotiated at 1.75% rather than the
expected 5%. This softening in demand was followed in August by the cancellation
of several pellet shipments from ABM customers.
Tariffs, in some cases up to 30 percent, imposed during the first quarter of
2002 on steel exported to the United States are negatively affecting ongoing
2002 price negotiations. Current market expectations are that these
negotiations, which should conclude in the second quarter of 2002, will result
in a decrease in pellet prices of between 5% and 8%.
In view of this downturn and continuing negative trend in world iron markets,
the Company is shelving its original plans to incrementally increase, over a
period of two years, total iron production from the current 2.0 million tonnes
per annum to 2.9 million tonnes per annum.
Based on Company's evaluation of the events of 2001 and the negative outlook for
iron ore and pellet prices, the Savage River Mine assets were written-down by
$53.8 million, and future income tax assets associated with the mine's
cumulative net operating losses at September 30, 2001 were also written off.
OTHER PROJECTS
LETPADAUNG COPPER PROJECT, MYANMAR
During the first half of 2001, the Company completed a major power study for the
Letpadaung project to identify viable sources of power in order to support
ongoing project financing negotiations with potential lenders. During the last
quarter of 2001, various parties interested in the financing and development of
the Letpadaung project were approached with a request for a formal financing
proposal. The Company may sell a portion of its interest in the project in
connection with a project financing transaction. No major expenditures are
expected on the project pending the successful conclusion of project financing
negotiations.
EUNSAN GOLD AND SILVER MINE, SOUTH KOREA
During the first quarter of 2002, the Company completed the construction of a
150 tonne per day gold and silver plant at its Eunsan project in the
south-western region of South Korea. During this period, a 100,000 tonne open
pit was also excavated to provide portal access for underground development and
production as well as the establishment of a stockpile of approximately 26,000
tonnes of high-grade gold and silver ore. The mill became operational at the end
of March 2002 and is scheduled to start full commercial production in May 2002.
A seven-month, $2.0 million underground development program began in March 2002.
During 2002, the total cost of the project, including construction, open pit
pre-production and underground development costs, is estimated at approximately
$3.3 million. During the underground development program, the Eunsan mine is
expected to produce up to 8,500 ounces of gold and up to 350,000 ounces of
silver from ore previously stockpiled on surface. Reserve and resources
estimates will be prepared at the end of 2002, following completion of the
underground development program.
5
(IVANHOE LOGO)
BAKYRCHIK GOLD MINE, KAZAKHSTAN
Gold production at the Bakyrchik property in Kazakhstan was reactivated in the
last quarter of 2001 and the Company poured its first gold dore bars from
Bakyrchik at the end of October 2001. Processing inventories of oxidized gold
bearing ore stockpiled during previous operations, the Company produced a total
of 910 ounces of gold from Bakyrchik during the fourth quarter of 2001. The main
purpose in reactivating the Bakyrchik operation is to evaluate the ability of
the existing plant facilities to produce gold on an economic basis. Revenues
generated in the fourth quarter of 2001 from mine activities were netted against
the mine's care and maintenance costs. The process plant experienced
difficulties in its recovery of gold pregnant carbon solutions and management is
presently working on rectifying and improving the plant's gold circuit
recoveries.
As a result of well-executed care and maintenance efforts in prior years, total
capital costs required to restart the small scale oxide operation were less than
$300,000. These costs have been expensed and added to the total care and
maintenance costs for 2001, which were $2.6 million compared to $2.5 million in
2000.
If satisfactory gold recoveries can be established during the first half of
2002, the Company intends to start mining, using a contract miner, small scale
open pit satellite deposits in order to feed oxidized ore to the plant at a rate
of 15,000 tonnes per month at an estimated average gold grade of 3.23 grams per
tonne and an anticipated recovery rate of up to eighty percent gold. The plan
also calls for more selective mining to increase to 4 grams per tonne the target
head grade from the pit.
BJ0RNEVATN IRON ORE MINE, NORWAY
The Bj0rnevatn mine in Norway remained on care and maintenance throughout 2001.
The company's objective when this asset was acquired was to secure equity
financing from a third party for the development of this asset.
To date, the Company has been unsuccessful in securing the additional third
party financing necessary to refurbish the mine and recommence operations. In
early 2002, the Company tried unsuccessfully to negotiate with the mine's
existing Norway lenders for a further deferral of the mine's loan repayment
obligations.
The Company intends to exit from the project and return the mine and related
assets to the lenders in exchange for cancellation of the existing project
debts, all of which are non-recourse to the Company. The Company expects to
conclude these negotiations in the second quarter of 2002.
The Company spent a total of $1.1 million in care and maintenance costs on the
property during 2001.
EXPLORATION
The Exploration Division operating expenses increased from $7.2 million in 2000
to $7.3 million in 2001. Most of the 2001 exploration expenses were concentrated
on the Mongolia properties. In 2001, the Company completed the initial $3
million exploration phase on its Oyu Tolgoi property. At the end of January
2002, the Company exercised an earn-in right to acquire a 100% interest in the
Oyu Tolgoi property from BHP Minerals International Exploration Inc. ("BHP") by
committing to make a $5 million property payment to BHP and to complete a $3
million second phase of exploration expenditures.
In April 2002, the Company gave notice to BHP that it had completed the $3
million expenditure requirement for the second phase exploration program.
During the second half of 2001 and through early 2002, the Company increased its
Mongolian mineral property holdings to approximately 50,000 square kilometres.
The Company plans to spend between $11 million to $15 million in exploration
activities during 2002 on its Oyu Tolgoi property and on various reconnaissance
work on the balance of its Mongolian property holdings. During the second half
of 2001 and through the 2002 year to date, the Company raised a total of $72.7
million primarily to finance its planned Mongolian exploration activities over
the next few years.
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(IVANHOE LOGO)
During 2001 and 2000, exploration expenditures were geographically allocated as
follows:
2001 2000
---- ----
Indonesia & Thailand 9% 42%
Korea 23% 37%
Myanmar 16% 7%
Mongolia 52% 14%
---- ----
100% 100%
==== ====
GENERAL
Interest expense increased from $4.5 million in 2000 to $9.9 million in 2001,
most of which is attributable to the additional debt acquired as part of the
Company's acquisition of ABM at the end of 2000.
A weakening of the Australian dollar in 2001 and its impact on the ABM foreign
currency commitment accounted for the majority of the $7.7 million foreign
exchange loss. At December 31, 2001 ABM has a $70.7 million commitment to sell
$5 million each month in exchange for Australian $7.3 million. This commitment
will expire at the end of February 2003.
Except for the U.S. dollar foreign currency commitment mentioned above, the
Company had no other currency or commodity hedge positions at the end of 2001.
CASH RESOURCES AND LIQUIDITY
At December 31, 2001 consolidated working capital was $3.7 million including
cash of $25.8 million compared with working capital of $29.0 million and cash of
$40.4 million at the end of 2000.
The $25.3 million decrease in working capital is mainly attributable to a $14.6
million decrease in cash, a $3.6 million increase in accounts payable, a $4.7
million increase in the mark to market of the U.S.$ hedge commitment, and a $7.9
million increase in the current portion of the Company's long-term debt, less a
$3.6 million net increase in combined accounts receivable and inventory balances
and a $1.4 million increase in future income tax assets. Included in the current
portion of long-term debt is an amount of $2.9 million obligation of the
Company's Norway subsidiary related to the Bj0rnevatn iron ore mine. This
obligation is non-recourse, and is expected to be eliminated in the second
quarter of 2002 from the Company's consolidated accounts, once the property is
transferred to its original owner in exchange for the extinguishment of the
debt.
The restrictions on the Company's cash balances at December 31, 2001 totaled
$10.5 million, consisting of the Company's share of the S&K Mine's $14.8 million
cash balance (net $7.4 million), the Savage River cash balance of $1.1 million,
and $2.0 million restricted by letters of credit issued by the Company to secure
obligations with respect to one of its Mongolia properties.
Since the third quarter of 2001, the Savage River operation has been successful
in deferring, on a monthly basis, its foreign currency commitments to its
lenders. At the end of March 2002, a total of A$17.8 million in additional funds
had been advanced to the Savage River operation by its lenders through deferrals
of the foreign currency commitment, resulting in an equivalent increase in the
outstanding principal amount of the existing Savage River loan facility. In
August 2001, the Company ceased to advance funds to its Savage River operations
and ABM commenced negotiations with the existing project lenders with a view to
restructuring the project's finances. Pending a satisfactory restructuring of
the project's finances, the Company does not intend to advance any further funds
to the operation.
During the second half of 2001 through the 2002 year to date, the Company has
raised a total of $72.7 million through the sale of a total of 44.6 million
common shares and equity securities exchangeable for common shares of
7
(IVANHOE LOGO)
the Company. The proceeds will be used for working capital and to fund the
Mongolia exploration and property acquisition activities over the next few
years. Total expenditures in 2002, including all exploration, mine care and
maintenance costs and corporate administrative costs, are estimated to range
between $22 million to $30 million.
OUTLOOK
For fiscal 2002, annual copper production at the S&K Mine is expected to
increase to 29,500 tonnes while annual pellet and iron concentrate production at
the Savage River Mine is expected to remain at approximately 2.0 million tonnes.
Apart from variations in production volumes, the Company's earnings and cash
flows are directly affected by metal prices, variations in the exchange rate
between the U.S. dollar and the Australian dollar and variations in interest
rates. The sensitivity of the Company's earnings to metal prices, exchange rates
and interest rates is summarized in the table below.
Earnings Sensitivity
(Based on 2002 plan)
Impact on Before-Tax Earnings
Change ($ in thousands)
----------- -----------------------------
Copper UScents1/lb $ 300
Iron Pellet US$1/tonne $ 1,600
US$/AUD$ AUD $0.01 $ 1,150
US prime 1% $ 650
Various risks, including fluctuations in commodity prices, foreign exchange,
customer demand, financing and political uncertainties, can adversely affect the
Company's future profitability and its ability to realize anticipated increases
in production capacity.
At December 31, 2001 the Company's had no copper hedging contracts outstanding.
ABM has an obligation expiring in February 2003, nominally totalling $70.7
million, to sell $5 million per month of U.S. currency at $0.6817 per Australian
dollar. At April 30, 2002 the Australian exchange rate was $ 0.5382 Australian
dollar to 1 U.S.$ dollar.
Unlike copper, iron ore is not a fungible commodity and it is therefore more
affected by direct customer and producer relationships. With only a few
customers, the Savage River Mine's operations could be adversely affected, in
the short and medium term, by the loss of a key customer. A limited customer
base is also a risk to the S&K Mine as a substantial part of its copper
production is sold, under a take or pay contract, to a single Japanese buyer.
The buyer resells the cathode to customers through out Asia. The S&K Mine's
profitability could be negatively affected if economic sanctions or boycotts
against trade with Myanmar were enacted in the future by major Asian countries.
The Company's existing cash resources are sufficient to meet all of its planned
capital expenditures during 2002. However, 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 and the Bakyrchik 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.
Since the majority of the Company's indebtedness is not at fixed interest rates,
future fluctuations in interest rates will have a significant impact on the
profitability of both the S&K Mine and the Savage River Mine as well as the
Company's ability to successfully finance its other undeveloped or partially
developed projects.
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(IVANHOE LOGO)
QUARTERLY DATA
($ in millions except per share information)
2001 2000
----------------------------- --------------------------
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
---- ---- ---- ---- ---- ---- --- ---
Revenue 19.5 15.9 21.9 18.0 5.7 5.3 6.2 5.3
Operating profit 1.0 2.3 1.1 5.6 2.2 2.3 2.9 2.6
Net Loss 66.6 5.6 1.6 11.2 9.3 6.5 0.7 1.4
Cash provided (used) by operations (3.8) (7.2) 4.5 (6.7) (1.0) (1.9) (0.6) 0.1
Loss per share $0.51 $0.05 $0.01 $0.09 $0.12 $0.09 $0.01 $0.02
COMPARATIVE FIGURES
($ in million except per share information)
Years ended December 31, 1999
-------------------------------------------------------------
2001 2000 1999 1998 1997 1996 1995 1994
----- ----- ----- ----- ----- ----- ---- ----
Balance sheet
Cash 25.8 40.4 50.8 55.2 44.5 125.9 22.2 10.9
Working capital 3.7 29.0 49.1 30.0 34.0 130.7 17.1 10.1
Total assets 247.6 316.4 206.2 238.5 268.6 282.1 57.0 23.2
Long term debt, less current portion 46.5 75.7 37.5 40.0 - - - -
Shareholders' equity 130.2 177.9 154.3 160.4 223.3 277.6 50.4 22.1
Earnings and cash flow
Revenue 75.3 22.5 20.6 - - - - -
Operating profit 10.0 10.0 7.2 - - - - -
Exploration 7.2 5.3 6.0 9.7 12.4 9.0 15.8 0.9
Depreciation and amortization 12.7 4.5 3.9 0.3 0.6 0.6 0.1 -
Interest expense 9.9 4.5 4.2 - 0.2 0.3 0.1 -
General and administrative 6.2 5.9 6.6 7.0 12.3 11.2 5.6 2.8
Mining property shut-down costs 3.7 2.5 3.2 13.5 - - - -
Asset write downs 59.2 11.0 0.5 43.4 90.3 - - -
Net loss 85.0 17.9 7.6 63.1 116.9 17.3 20.8 3.3
Cash provided (used) by operations (13.2) (3.5) (5.8) (21.2) (44.6) (17.2) (20.8) (3.3)
Investment, including acquisition of subsidiary, net (0.4) (1.8) 0.6 6.4 73.0 72.2 17.8 11.4
Investment in capital assets 11.5 2.7 3.7 27.5 38.9 42.1 3.5 0.3
Per share
Net loss $0.66 $0.24 $0.10 $0.88 $1.68 $0.32 $0.58 $0.32
9
[IVANHOE LOGO]
AUDITORS' REPORT
To the Shareholders of
Ivanhoe Mines Ltd.
We have audited the consolidated balance sheets of Ivanhoe Mines Ltd. as at
December 31, 2001 and 2000 and the consolidated statements of operations and
deficit and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
years then ended in accordance with Canadian generally accepted accounting
principles.
[DELOITTE & TOUCHE LLP SIGNATURE]
Deloitte & Touche LLP (signed) Chartered Accountants
Vancouver, British Columbia
April 18, 2002 (except as to Note 25 (f)
which is as of April 22, 2002)
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[IVANHOE LOGO]
Consolidated Balance Sheets
(Stated in thousands of U.S. dollars)
DECEMBER 31, December 31,
2001 2000
------------ ------------
(Note 2 (q))
ASSETS
CURRENT
Cash (Note 7) $25,805 $40,373
Accounts receivable (Note 8) 2,423 5,521
Inventories (Note 9) 22,529 15,788
Prepaid expenses 1,333 991
Future income taxes (Note 16) 4,635 3,240
-------- --------
56,725 65,913
OTHER INVESTMENTS (Note 10) 4,823 5,067
MINING PROPERTY, PLANT AND EQUIPMENT (Note 11) 181,670 238,531
OTHER MINERAL PROPERTY INTERESTS (Note 12) - 687
OTHER CAPITAL ASSETS 524 409
FUTURE INCOME TAXES (Note 16) 2,440 4,348
OTHER ASSETS (Note 13) 1,420 1,404
-------- --------
$247,602 $316,359
======== ========
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $15,407 $12,316
Accrued loss on foreign exchange contract (Note 23 (f)) 15,450 10,800
Current portion of long-term debt (Note 15) 20,133 12,265
-------- --------
50,990 35,381
LOANS PAYABLE TO RELATED PARTIES (Note 14) 4,696 21,588
LONG-TERM DEBT (Note 15) 41,837 54,138
FUTURE INCOME TAXES (Note 16) 13,731 12,376
OTHER LIABILITIES (Notes 17) 6,177 14,929
-------- --------
117,431 138,412
======== ========
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 18)
Authorized
Unlimited number of preferred shares without par value
Unlimited number of common shares without par value
Issued and outstanding
171,158,484 (2000 - 124,849,053) common shares 460,389 414,489
ADDITIONAL PAID-IN CAPITAL (Note 4) 1,697 10,375
DEFICIT (331,915) (246,917)
-------- --------
130,171 177,947
-------- --------
$247,602 $316,359
======== ========
COMMITMENTS (Note 23)
APPROVED BY THE BOARD:
/s/ John Weatherall /s/ R. Edward Flood
- --------------------------------- ---------------------------------
John Weatherall (signed) Director R. Edward Flood (signed) Director
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[IVANHOE LOGO]
Consolidated Statements of Operations and Deficit
(Stated in thousands of U.S. dollars)
Years ended December 31,
----------------------------
2001 2000
--------- ---------
REVENUE $ 75,334 $ 22,470
COST OF OPERATIONS (52,836) (8,188)
DEPRECIATION AND DEPLETION (12,545) (4,318)
--------- ---------
OPERATING PROFIT 9,953 9,964
OTHER EXPENSES
General and administrative (6,163) (5,912)
Interest on long-term debt (9,929) (4,534)
Exploration expenses (7,192) (5,339)
Depreciation (145) (182)
Write-down of inventories (Note 9) (2,584) (2,209)
--------- ---------
LOSS BEFORE THE FOLLOWING (16,060) (8,212)
========= =========
OTHER INCOME (EXPENSES)
Interest income 1,220 2,639
Foreign exchange loss (7,669) (726)
Mining property shut-down costs (Note 11) (3,744) (2,531)
Write-down of carrying values of other assets (Note 19) (59,192) (11,011)
Other 520 1,218
--------- ---------
(68,865) (10,411)
========= =========
LOSS BEFORE INCOME AND CAPITAL TAXES (84,925) (18,623)
(Provision for) recovery of income and capital taxes (Note 16) (73) 763
--------- ---------
NET LOSS (84,998) (17,860)
DEFICIT, BEGINNING OF YEAR (246,917) (229,057)
--------- ---------
DEFICIT, END OF YEAR $(331,915) $(246,917)
========= =========
BASIC AND FULLY DILUTED LOSS PER SHARE $ (0.66) $ (0.24)
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
(000's) 128,866 74,491
========= =========
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Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
Years ended December 31,
-------------------------
2001 2000
-------- ---------
OPERATING ACTIVITIES
Net loss $(84,998) $(17,860)
Items not involving use of cash
Depreciation and depletion 12,690 4,500
Write-down of inventories 2,584 2,209
Write-down of carrying values of other assets 59,192 11,011
Non-cash interest expense 5,803 --
Unrealized foreign exchange losses 3,107 --
Provision for future waste mining costs and mine reclamation
obligation 107 (336)
Deferred gain recognized as other income -- (614)
Increase in non-current portion of royalty payable 413 445
Gain on sale of other investments (171) (394)
Future income taxes 168 (836)
-------- --------
(1,105) (1,875)
Net change in non-cash operating working capital items (Note 21) (12,140) (1,614)
-------- --------
(13,245) (3,489)
-------- --------
INVESTING ACTIVITIES
Expenditures on mining property, plant and equipment (11,487) (2,160)
Expenditures on other mineral property interests -- (556)
Cash acquired on acquisition of subsidiary
(net of transaction costs) (Note 4) -- 1,575
Proceeds from sale of other investments 429 471
Purchase of other investments -- (277)
Other (285) 1,473
-------- --------
(11,343) 526
-------- --------
FINANCING ACTIVITIES
Share capital issued 16,687 76
Proceeds from long-term debt 3,671 --
Repayment of long-term debt (10,338) (7,500)
-------- --------
10,020 (7,424)
-------- --------
NET CASH OUTFLOW (14,568) (10,387)
CASH, BEGINNING OF YEAR 40,373 50,760
-------- --------
CASH, END OF YEAR $ 25,805 $ 40,373
======== ========
CASH IS COMPRISED OF:
Cash on hand and demand deposits $ 17,700 $ 8,928
Time deposits
Restricted (Note 7) 4,850 6,139
Short-term money market instruments
Restricted (Note 23 (a)) 2,000 3,000
Unrestricted 1,255 22,306
-------- --------
$ 25,805 $ 40,373
======== ========
SUPPLEMENTARY INFORMATION (Note 21)
13
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Notes to the Consolidated Financial Statements
(Stated in U.S. dollars; tabular dollar amounts in thousands)
1. NATURE OF OPERATIONS
Ivanhoe Mines Ltd. (the "Company"), together with its subsidiaries and
joint venture (collectively referred to as "Ivanhoe Mines"), is an
international mineral exploration and development company holding
interests in mineral resource projects principally in Southeast and
Central Asia, Australia and Norway.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP"). The significant accounting policies used in these
consolidated financial statements are as follows:
(a) Principles of consolidation
These consolidated financial statements include the accounts
of the Company and all of its subsidiaries. The principal
subsidiaries of the Company are ABM Mining Limited (Yukon,
Canada), Ivanhoe Mines Mongolia Inc. (B.V.I.), Korea Gold
Mines Limited (Malta) and their respective subsidiaries,
Ivanhoe Myanmar Holdings Limited (Myanmar) and Bakyrchik
Mining Venture ("BMV") (Kazakhstan) (70% owned). ABM Mining
Limited and its subsidiaries are individually and collectively
referred to in these financial statements as "ABM".
Ivanhoe Mines' investment in Myanmar Ivanhoe Copper Company
Limited ("JVCo") (Myanmar) (50% owned), which is subject to
joint control, is consolidated on a proportionate basis
whereby the Company includes in these consolidated financial
statements its proportionate share of the assets, liabilities,
revenues and expenses of JVCo.
All intercompany transactions and balances have been
eliminated.
(b) Accounting estimates
Generally accepted accounting principles require management to
make assumptions and estimates that affect the reported
amounts and other disclosures in these consolidated financial
statements. Actual results may differ from those estimates.
Significant estimates used in the preparation of these
consolidated financial statements include, amongst other
things, the recoverability of accounts receivable, notes
receivable and investments, the quantities of copper in heap
and circuit, the proven and probable ore reserves, the
estimated recoverable tonnes of ore, the estimated net
realizable value of metals inventories, the expected economic
lives of and the estimated future operating results and net
cash flows from mining property, plant and equipment, and the
anticipated reclamation costs of mine sites.
(c) Foreign currencies
The Company considers the U.S. dollar to be its functional
currency as it is the currency of the primary economic
environment in which the Company and its foreign subsidiaries
operate. Accordingly, monetary assets and liabilities
denominated in foreign currencies are translated into U.S.
dollars at the exchange rate in effect at the balance sheet
date and non-monetary assets and liabilities at the exchange
rates in effect at the time of acquisition or issue. Revenues
and expenses are translated at rates approximating the
exchange rates in effect at the time of the transactions. All
exchange gains or losses are included in operations.
(d) Cash
Cash includes short-term money market instruments with terms
to maturity, at the date of acquisition, not exceeding ninety
days.
14
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2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Inventories
Metals inventories are valued at the lower of the weighted
average cost of production and net realizable value.
Mine stores and supplies are valued at the lower of the
weighted average cost, less allowances for obsolescence, and
replacement cost.
(f) Other investments
Investments in companies 20% to 50% owned, where Ivanhoe Mines
has the ability to exercise significant influence, are
accounted for using the equity method. Under this method,
Ivanhoe Mines' share of their earnings and losses is included
in operations and its investments therein are adjusted by a
like amount. Dividends received are credited to the investment
accounts.
The remaining investments are accounted for using the cost
method, whereby income is included in operations when received
or receivable.
Provisions for impairment of investments are made, where
necessary, to recognize other than temporary declines in
value.
(g) Mining property, plant and equipment
Mining property, plant and equipment are carried at cost
(including development and preproduction costs, capitalized
interest, other financing costs and all direct administrative
support costs incurred during the construction period, net of
cost recoveries and incidental revenues) less accumulated
depletion and depreciation including write-downs. Following
the construction period, interest, other financing costs and
administrative costs are expensed as incurred.
On the commencement of commercial production, depletion of
each mining property is provided on the unit-of-production
basis using estimated proven and probable reserves as the
depletion basis. The mining plant and equipment are
depreciated, following the commencement of commercial
production, over their expected economic lives using either
the unit-of-production method or the straight-line method
(over three to fifteen years), as appropriate.
Capital projects in progress are not depreciated until the
capital asset has been put into operation.
Mining costs associated with waste rock removal are deferred
or accrued, as appropriate, and charged to operations on the
basis of the average stripping ratio for each mine area. The
average stripping ratio is calculated as the ratio of the
tonnes of waste material estimated to be mined to the
estimated recoverable tonnes of metals from that mine area.
Ivanhoe Mines reviews the carrying values of its mining
property, plant and equipment on a regular basis, primarily by
reference to estimated future operating results and
undiscounted net cash flows. When the carrying values of these
assets exceed their estimated net recoverable amounts, an
impairment provision is made for the other than temporary
decline in value.
(h) Other mineral property interests
All direct costs related to the acquisition of other mineral
property interests are capitalized by property. Exploration
costs are charged to operations in the period incurred until
such time as it has been determined that a property has
economically recoverable reserves, in which case subsequent
exploration costs and the costs incurred to develop a property
are capitalized.
15
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2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Other mineral property interests (continued)
Gains or losses are recognized on property dispositions when
the value of the consideration received exceeds or is less
than, respectively, the carrying value of the property.
Partial dispositions or option proceeds with respect to
undeveloped properties are credited against the cost of the
related property except that, when the proceeds exceed the
cost, the excess is credited to operations. The aggregate
costs related to abandoned properties are charged to
operations.
Ivanhoe Mines reviews the carrying values of its other mineral
property interests on a regular basis by reference to the
project economics, including the timing of the exploration
and/or development work, the work programs and exploration
results experienced by Ivanhoe Mines and others. When the
carrying value of a property exceeds its estimated net
recoverable amount, an impairment provision is made for the
other than temporary decline in value.
Certain of Ivanhoe Mines' exploration activities are conducted
jointly with others. These consolidated financial statements
reflect only Ivanhoe Mines' interests in such activities.
(i) Environmental protection practices
Ivanhoe Mines is subject to the laws and regulations relating
to environmental matters in the jurisdictions in which it
operates, including provisions relating to property
reclamation, discharge of hazardous material and other
matters.
Environmental obligations for the mining activities of ABM at
Savage River have been specifically addressed in the Goldamere
Act passed by the Tasmanian Parliament. Under this Act, the
Tasmanian Government covenants to indemnify Ivanhoe Mines from
any environmental claims arising out of operations of the
Savage River Project prior to acquisition by ABM.
(j) Future mine reclamation costs
Ivanhoe Mines reviews, from time to time, the anticipated
costs associated with the reclamation of mine sites. These
costs are accrued and charged to operations over the estimated
life of each mine using the unit-of-production method based on
proven and probable reserves.
(k) Revenue recognition
Revenue from the sale of metals is recognized, net of related
royalties and sales commissions, when: (i) the risks and
rewards of ownership pass to the purchaser including delivery
of the product; (ii) the selling price is fixed or
determinable, and (iii) collectibility is reasonably assured.
Settlement adjustments, if any, are reflected in revenue when
the amounts are known.
(l) Equity incentive plan
The Company has an Employees' and Directors' Equity Incentive
Plan which is disclosed in Note 18 (b). No compensation
expense is recognized for this plan when share options are
issued to employees and directors. The Company recognizes
compensation expense for the fair value of shares issued,
pursuant to the share bonus plan and the share purchase plan,
in excess of any contributions by employees. Any consideration
paid by employees and directors on exercise of share options
or purchase of shares is credited to share capital.
16
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2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) Commodity contracts
Ivanhoe Mines uses, from time to time, forward sales and
option contracts to effectively provide a minimum sales price
for a portion of metals inventories and future production.
Gains or losses on these contracts are recognized in revenues
when the related product is sold.
(n) Foreign exchange contracts
ABM has entered into a forward currency contract that the
Company has not designated as a hedge. Unrealized gains or
losses on this forward currency contract are included in
operations.
(o) Income taxes
Future income tax assets and liabilities are computed based on
differences between the carrying amount of assets and
liabilities on the balance sheet and their corresponding tax
values, generally using the enacted income tax rates at each
balance sheet date. Future income tax assets also result from
unused loss carry-forwards and other deductions. The valuation
of future income tax assets is reviewed quarterly and
adjusted, if necessary, by use of a valuation allowance to
reflect the estimated realizable amount.
(p) Loss per share
The basic loss per share is computed by dividing the net loss
by the weighted average number of common shares outstanding
during the year. The fully diluted loss per share reflects the
potential dilution of common share equivalents, such as shares
issuable on conversion of convertible debt, outstanding stock
options and outstanding warrants, in the weighted average
number of common shares outstanding during the year, if
dilutive. For this purpose, the "if-converted" method is used
for the assumed conversion of convertible debt at the
beginning of the year. In addition, the "treasury stock
method" is used for the assumed proceeds upon the exercise of
stock options and warrants that are used to purchase common
shares at the average market price during the year.
(q) Comparative figures
Certain of the comparative figures have been reclassified to
conform with the presentation as at and for the year ended
December 31, 2001. In particular, the Company has reclassified
to current assets $3,240,000 of future income tax assets at
December 31, 2000 previously included in noncurrent assets.
3. ACCOUNTING CHANGES
(a) In 2001, the Company adopted the new accounting
recommendations of The Canadian Institute of Chartered
Accountants (the "CICA") with respect to the loss per share,
as described in Note 2 (p). In prior years, the computation of
the fully diluted loss per share used the imputed earnings
approach for determining the common share equivalents with
respect to outstanding stock options and warrants to be
included in the weighted average number of common shares
outstanding. This change has been applied retroactively;
however, there was no change to the prior year's previously
reported basic and fully diluted loss per share.
(b) In 2001, the Company also adopted the new accounting
recommendations of the CICA with respect to foreign currency
translation, as described in Note 2 (c). Prior to 2001, the
unrealized exchange gains or losses relating to term debt
denominated in foreign currencies were deferred and amortized
over the remaining term of the underlying debt. These exchange
gains or losses are
17
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3. ACCOUNTING CHANGES (CONTINUED)
now included in operations. This change has resulted in a
decrease of $2,150,000 ($0.02 per share) in the net loss for
the year ended December 31, 2001. There were no such
unrealized exchange gains or losses as at December 31, 2000
and accordingly, this change did not have any effect on the
net loss for the year ended December 31, 2000.
4. BUSINESS ACQUISITION
On December 31, 2000, the Company acquired all of the outstanding
shares of ABM Mining Limited ("ABM") by the issue of 50,322,533 common
shares with a fair value, based on the closing price of the Company's
common shares for a period before and after the acquisition date,
aggregating $31,064,000. The Company also acquired all of the
outstanding stock options of ABM by the grant of an aggregate of
4,455,344 stock options of the Company with a fair value, based on a
Black-Scholes Model, aggregating $1,750,000. In addition, the Company
also granted the holders of amounts due to related parties an option to
convert their outstanding debt into a maximum of 30,625,000 common
shares. The fair value of this option, based on a Black-Scholes Model,
aggregated $8,625,000. ABM, through its subsidiaries, is engaged in the
operation of an iron ore mine in Tasmania, Australia, and in the
development of an open pit mine leading to the production and sale of
iron ore pellets in Kirkenes, Norway. ABM was previously controlled by
a director and officer of the Company.
This acquisition has been accounted for using the purchase method of
accounting. The fair value of the net assets acquired was as follows:
Current assets (including cash of $3,209,000) $ 16,874
Mining property, plant and equipment 104,779
Future income tax assets 6,900
Current liabilities (25,977)
Due to related parties (21,588)
Long-term debt (24,138)
Other liabilities (12,200)
Future income tax liabilities (1,577)
----------------
$ 43,073
================
Consideration comprised of:
50,322,533 common shares of the Company with a fair value of $0.62 per share $ 31,064
Conversion option to acquire 30,625,000 common shares with a fair value of
$0.28 per share 8,625
4,455,344 stock options with a fair value of $0.39 per option 1,750
Transaction costs 1,634
----------------
$ 43,073
================
In 2001, the Company revised its accounting for the acquisition of ABM as a
result of new information becoming available. This revision was accounted for in
2001 by increasing the cost of operations and the recovery of income and capital
taxes by $1,700,000 with no effect on the net loss for the year.
The fair values of the conversion option and the stock options, aggregating
$10,375,000 at December 31, 2000, were credited to additional paid-in capital.
In 2001, an amount of $8,625,000 was transferred to share capital on exercise of
the conversion option (Note 13) and $53,000 was transferred to share capital on
exercise of certain of the stock options (Note 18(a)).
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4. BUSINESS ACQUISITION (CONTINUED)
ABM's operating results are included in the operating results of
Ivanhoe Mines from January 1, 2001. ABM had, for the year ended
December 31, 2000, net income of $714,000 (including a gain of
$11,539,000 resulting from the forgiveness of interest by related
parties) with revenue from iron ore sales of $60,823,000. The pro forma
operating results of Ivanhoe Mines for the year ended December 31,
2000, assuming that the Company had acquired ABM on January 1, 2000,
are as follows:
Revenue:
Copper sales $ 22,470
Iron ore sales 60,823
----------
$ 83,293
==========
Net loss (including a provision of $14,000,000 for an unrealized loss on forward
currency contract (Note 23 (f)) and net of a gain of $11,539,000 resulting from
the forgiveness of interest by related parties) $ 29,715
----------
Basic and fully diluted loss per share $ 0.24
----------
Weighted average number of shares outstanding (in 000's) 124,814
==========
5. INVESTMENT IN ABM
The global slow down during 2001 in the steel industry has resulted in
reduced demand for iron ore pellets. As there were no immediate
prospects for an early recovery in the iron ore market, the Savage
River operation of ABM commenced, in the third quarter of 2001,
negotiations for a restructuring of its financing package with its
major lenders and other stakeholders. The Savage River operation is
continuing with these negotiations, but there can be no assurance that
the desired additional suitable concessions will be obtained from those
stakeholders.
If suitable concessions from the major stakeholders are not obtained,
or if the Savage River operations deteriorate, ABM may not be able to
continue as a going concern and accordingly, adjustments may be
required to the carrying values and classifications of its assets and
liabilities, and those adjustments may be material.
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5. INVESTMENT IN ABM (CONTINUED)
The following is a summary of the carrying values of the Savage River
operation's assets and liabilities as at December 31, 2001, which are
included in these financial statements:
ASSETS
CURRENT
Cash $ 1,077
Accounts receivable 1,285
Inventories 15,396
Prepaid expenses 397
Future income taxes 4,635
-------------
22,790
MINING PROPERTY, PLANT AND EQUIPMENT (Note 11) 45,295
FUTURE INCOME TAXES 775
-------------
68,860
-------------
LIABILITIES
Accounts payable and accrued liabilities 26,397
Current portion of long-term debt 10,794
-------------
37,191
LOAN PAYABLE TO RELATED PARTIES (non-recourse to the Company) 4,696
LONG-TERM DEBT (non-recourse to the Company) 17,757
FUTURE INCOME TAXES 2,917
OTHER LIABILITIES 2,582
-------------
65,143
-------------
CARRYING VALUE OF NET ASSETS $ 3,717
=============
6. INVESTMENT IN JOINT VENTURE
Ivanhoe Mines has a 50% interest in JVCo, a joint venture formed to
develop open-pit coppermining operations at Monywa in the Union of
Myanmar. JVCo has a term, with respect to each deposit, of twenty years
from the date of commercial production, which is renewable in certain
circumstances for an additional five years.
JVCo completed construction of a mining complex in 1998 to develop the
Sabetaung and Kyisintaung ("S&K") deposits within the Monywa Copper
Project. Commercial production from these deposits commenced during the
first quarter of 1999.
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6. INVESTMENT IN JOINT VENTURE (CONTINUED)
These consolidated financial statements include Ivanhoe Mines'
proportionate share of JVCo's assets, liabilities, revenues, expenses,
net income and cash flows as follows:
December 31,
----------------------------------------
2001 2000
------------- ------------
Current assets $ 14,998 $ 16,439
Capital assets 133,597 133,752
Current liabilities (12,080) (12,412)
Other liabilities (12,507) (12,006)
Long-term debt (22,500) (30,000)
Retained earnings (9,093) (6,580)
------------- ------------
Investment in JVCo eliminated on consolidation $ 92,415 $ 89,193
============= ============
Years ended December 31,
-----------------------------------------
2001 2000
------------- ------------
Revenues $ 19,556 $ 22,394
Expenses (17,043) (19,157)
------------- ------------
Net income $ 2,513 $ 3,237
------------- ------------
Cash flows
From operating activities $ 8,183 $ 9,367
For investing activities (3,335) (1,494)
For financing activities (7,500) (7,500)
------------- ------------
$ (2,652) $ 373
------------- ------------
Ivanhoe Mines investment in JVCo includes costs incurred with respect
to JVCo's Monywa Copper Project in Myanmar in excess of its equity
contribution of $28,001,000 to JVCo. These costs have been allocated to
capital assets.
JVCo has been granted certain exemptions and relief from income taxes
payable under the laws of Myanmar including, amongst other things, an
exemption from income taxes for a period of four consecutive years
commencing on January 1, 1999, the date of commencement of commercial
production. JVCo may also apply to the appropriate authority in Myanmar
for certain other exemptions following the four-year tax holiday period.
7. CASH
Cash at December 31, 2001 and 2000 included Ivanhoe Mines' share of
JVCo's cash balances of approximately $7,396,000 and $10,048,000,
respectively, which were not available for Ivanhoe Mines' general
corporate purposes. Cash at December 31, 2001 and 2000 was also
restricted to the extent of support for outstanding letters of credit
discussed in Note 23 (a).
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8. ACCOUNTS RECEIVABLE
December 31,
--------------------------
2001 2000
------ ------
Trade $ 960 $3,341
Refundable taxes 600 545
Accrued interest -- 620
Other 863 1,015
------ ------
$2,423 $5,521
9. INVENTORIES
December 31,
------------------------
2001 2000
------- -------
Metals
Finished goods $ 6,701 $ 3,100
Work in progress 10,065 6,622
Mine stores, supplies and other 5,763 6,066
------- -------
$22,529 $15,788
======= =======
During 2000, JVCo experienced some unfavourable copper solution
recoveries due to the stacking of clay bearing material on the heaps.
As the ultimate recovery of copper from the various heap cells
containing these clay bearing materials was uncertain, the Company made
a one-time non-recurring write down to the work in progress heap
inventory of approximately $2,209,000. Management of the Company
believes that, with the change that has been made to JVCo's mining
plan, the clay issue is under control and that future inventory
write-downs related to this issue are unlikely.
During 2001, ABM wrote down its run-of-mine work in progress iron ore
inventory by $2,584,000 as a result of declining grades.
10. OTHER INVESTMENTS
December 31,
-------------------
2001 2000
------ ------
GTL Resources Plc ("GTL")(a) $1,400 $1,644
Emperor Mines Limited ("Emperor")(b) 2,084 2,084
Olympus Pacific Minerals Inc. ("Olympus")(c) 1,339 1,339
------ ------
$4,823 $5,067
====== ======
(a) The quoted market value of the Company's equity interest in GTL
at December 31, 2001 was $1,978,000 (December 31, 2000 -
$4,237,000). This equity interest was subsequently exchanged for
another investment (Note 25(c)).
(b) The equity market conditions for Emperor deteriorated during the
second half of 2000 with the result that the quoted market value
of Ivanhoe Mines' investment in Emperor decreased significantly
below its carrying value. Accordingly, the Company made an
impairment provision of $4,645,000 in 2000 against this
investment.
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10. OTHER INVESTMENTS (CONTINUED)
At December 31, 2001 and 2000, Ivanhoe Mines held
approximately 18% of the outstanding common shares of Emperor
which, through its subsidiaries, operates the Emperor Gold
Mine located at Vatukoula, Fiji. The quoted market value of
its investment at those dates was $2,665,000 and $2,926,000,
respectively.
(c) The investment currently consists of 5,065,867 common shares
of Olympus, representing approximately 11% of the issued and
outstanding common shares of Olympus. The estimated market
value of the Company's investment in Olympus at December 31,
2001 was $2,449,000 (December 31, 2000 - $2,465,000). The
Company's equity interest in Olympus was subsequently
increased as discussed in Note 25(b)).
11. MINING PROPERTY, PLANT AND EQUIPMENT
December 31,
------------------------------------------------------------
2001 2000
------------------------------------------ ----------------
Accumulated
Depletion and
Depreciation,
Including Net Book Net Book
Cost Write-downs Value Value
----------- -------------- ------------ --------------
Mining properties, including development
and preproduction costs $ 150,466 $ (44,732) $ 105,734 $ 106,364
Mine buildings 20,258 (12,164) 8,094 14,798
Plant and equipment 145,427 (77,792) 67,635 117,157
Other 353 (146) 207 212
---------- ----------- ---------- ----------
$ 316,504 $ (134,834) $ 181,670 $ 238,531
========== =========== ========== ==========
Capital projects in progress at December 31, 2001 amounted to $3,636,000.
In view of the operating results of the Savage River iron ore mine in Tasmania
during 2001, Ivanhoe Mines has completed a review of the carrying values of its
Savage River mining property, plant and equipment with the result that an
impairment provision of $53,812,000 has been made at December 31, 2001 for the
estimated other than temporary decline in value. The Company will continue to
review the carrying value of the Savage River mining property, plant and
equipment 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.
Ivanhoe Mines iron ore mine in Norway remains on a care-and-maintenance basis.
In 2001, management of the Company concluded that this mine is a non-core asset
and that no further expenditures of a material nature should be made in respect
of that operation. As a consequence, Ivanhoe Mines has made an impairment
provision of $5,380,000 for the estimated other than temporary decline in value.
During 2002, Ivanhoe Mines intends to abandon the Norway Mine Project, which is
carried at $3,366,000 at December 31, 2001.
Ivanhoe Mines placed the BMV on a care and maintenance basis in prior years,
pending a sustained recovery in the price of gold, at which time the Company
intends to seek project financing in order to complete development of the
Bakyrchik Mine Project. The Bakyrchik Mine Project, which has a cost of
$90,814,000 as at December 31, 2001 and 2000, is carried at a nominal value.
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12. OTHER MINERAL PROPERTY INTERESTS
December 31,
-----------------------------------------
2001 2000
-------------- -------------
Mongolia(a) $ -- $ --
South Korea(b) -- 687
Myanmar(c) -- --
Vietnam(d) -- --
-------- -------
$ -- $ 687
======== =======
The foregoing table reflects the application of Ivanhoe Mines'
accounting policy discussed in Note 2(h).
(a) Mongolia - Ivanhoe Mines has acquired from BHP Minerals
International Exploration Inc. ("BHP") the right to earn a 100%
interest in the Turquoise Hill (Oyu Tolgoi) copper/gold project
in Mongolia. Ivanhoe Mines is required to incur a minimum of
$3,000,000 in exploration expenditures during the first three
years of the agreement (which amount has been spent). To complete
its earn-in, Ivanhoe Mines is required to pay BHP a total of
$5,000,000 after the initial three-year period and to incur an
additional $3,000,000 of exploration expenditures over a further
four year period (which amounts have been paid or spent
subsequent to December 31, 2001). BHP has limited back-in rights
which, if not exercised, will result in BHP retaining a 2% net
smelter returns royalty.
Subsequent to December 31, 2001, the Company acquired additional
mineral exploration licenses in the same geological province as
the Turquoise Hill project in Mongolia. Mineral exploration
licenses are valid for a period of three years and, through
renewals, can be extended to a maximum of seven years. These
rights are maintained in good standing through the payment of an
annual license fee.
(b) South Korea - Ivanhoe Mines has a 90% interest in an exploration
project in the Cholla-namdo Province of South Korea. Ivanhoe
Mines is required to fund all of the exploration costs and land
rents, both of which are reimbursable to Ivanhoe Mines from the
revenues from the project. Construction of the mine and mine
facilities commenced in January 2002, and it is currently
anticipated that commercial production will commence during the
second quarter of 2002. Accordingly, accumulated costs of
acquisition and development of $926,000 to December 31, 2001 have
been reclassified to Mining Property, Plant and Equipment.
Ivanhoe Mines has also acquired the mining rights to certain
other mining prospects.
(c) Myanmar Exploration Projects - Ivanhoe Mines has entered into
agreements with the Myanmar Department of Geological Survey and
Mineral Exploration ("DGSE"), whereby Ivanhoe Mines has been
granted the exclusive right to undertake gold and copper
prospecting and exploration activities on certain exploration
blocks located in the Union of Myanmar. These agreements provide
that, upon the determination of economically recoverable reserves
in any of these exploration blocks, Ivanhoe Mines and the
appropriate state mining entity nominated by the government of
Myanmar will each hold an 83% and 17% equity interest,
respectively, in any joint venture company formed to develop the
project.
(d) Vietnam - Ivanhoe Mines owns a 32.6% interest in a joint venture
with Olympus and Zedex Limited to explore and develop two
exploration licences in the Phuoc Son area of Vietnam. Olympus is
the operator of the joint venture.
24
[IVANHOE LOGO]
12. OTHER MINERAL PROPERTY INTERESTS (CONTINUED)
During 2000, Ivanhoe Mines determined that no further exploration work
would be conducted on its mineral property interests in Indonesia and
Thailand and accordingly, acquisition costs of $6,134,000 and
$232,000, respectively, were written off.
13. OTHER ASSETS
December 31,
--------------------------
2001 2000
--------- ----------
Due from joint venture partner $ 1,420 $ 1,404
The amount due from the joint venture partner is unsecured with no
fixed terms of repayment and bears interest at LIBOR plus 2%. Ivanhoe
Mines charged net interest of $78,000 in 2001 and $102,000 in 2000,
which is included in the balance receivable.
14. LOANS PAYABLE TO RELATED PARTIES
December 31,
---------------------
2001 2000
------- -------
Companies with directors in common
11.50% loan payable of $2,874,000 $ -- $ 2,336
Loan payable of $7,222,000 with interest at Citibank
U.S. prime rate plus 3% -- 6,170
Director, officer and controlling shareholder of the
Company
Loan payable of $5,470,000 with interest at Bank of
Montreal U.S. prime rate plus 2.5% -- 4,559
Company under common control
Loan payable of $5,088,000 at December 31, 2001 and
$9,977,000 at December 31, 2000 with interest at Bank of
Montreal U.S. prime rate plus 3% 4,696 8,523
------- -------
$ 4,696 $21,588
======= =======
These loans are all unsecured and repayable in U.S. dollars. Certain
of these loans with outstanding principal and accrued interest
aggregating $23,075,000 were converted into 30,625,000 common shares
of the Company on December 31, 2001.
These related parties have, amongst other things, postponed the
repayment of their loans and accrued interest until ABM and its
subsidiaries begin to generate positive cash flow, as defined in an
agreement entered into on November 6, 2000 (the "Amending Agreement").
These loans are carried at their fair value as determined in Ivanhoe
Mines' accounting for the acquisition of ABM's net assets (Note 4).
The carrying value of these loans will be accreted to their face value
over the period to December 31, 2005 as an adjustment to interest
expense. For those loans converted into common shares on December 31,
2001, the unamortized loan discount balance has been charged to share
capital.
25
[IVANHOE LOGO]
14. LOANS PAYABLE TO RELATED PARTIES (CONTINUED)
It is unlikely that ABM and its subsidiaries will achieve positive
cash flow (as defined in the Amending Agreement) prior to January 1,
2003. These loans, including accrued interest, were therefore
classified as non-current liabilities.
These loans are subordinated to ABM's bank term loan discussed in Note
15 and are non-recourse to the Company.
15. LONG-TERM DEBT
December 31,
------------------------
2001 2000
-------- --------
JVCo:
Share of loan payable (a) $ 30,000 $ 37,500
ABM:
Bank term loan (b) 22,292 19,876
Deferred purchase obligation (c) 3,933 4,037
Equipment purchase loans (d) 2,325 --
Equipment purchase loan (e) 2,880 4,439
Unsecured loan (f) 540 551
-------- --------
61,970 66,403
Less: Amount included in current liabilities (20,133) (12,265)
-------- --------
$ 41,837 $ 54,138
======== ========
All of the long-term debt is non-recourse to the Company.
The future principal repayments required on the debt outstanding at
December 31, 2001 is as follows:
2002 $ 20,133
2003 14,326
2004 14,770
2005 7,528
2006 1,280
Deferred purchase obligation to be settled through future remediation work to
be performed (Note 23 (d)) 3,933
--------------
$ 61,970
==============
(a) JVCo's loan of $60,000,000 bears interest at a rate equal to
LIBOR plus 2.5%, subject to certain adjustments, and is repayable
in minimum semi-annual instalments of $7,500,000 (of which
$3,750,000 is attributable to Ivanhoe Mines), which commenced in
February 2000, until maturity in August 2005. JVCo will also be
required to make additional principal repayments in certain
circumstances based on certain financial ratios and the level of
cash flow above specified levels. The credit agreement requires
that JVCo maintain working capital of not less than $5,000,000.
In addition, the credit agreement contains certain restrictions
regarding, amongst other things, the ability of JVCo to incur
additional indebtedness and the payment of cash dividends in
certain circumstances. The loan facility is secured by, amongst
other things, a fixed charge on the Monywa Copper Mine Project
assets, an assignment of JVCo's operating and restricted cash
balances, and a floating charge on all other assets of JVCo.
26
[IVANHOE LOGO]
15. LONG-TERM DEBT (CONTINUED)
At December 31, 2001, JVCo is in compliance with the minimum
working capital requirement discussed above. However, it is
likely that JVCo will not be in compliance with this requirement
during 2002. In such event, management of the Company believes
that JVCo will request and obtain a waiver from the lenders.
However, there can be no assurance that such a waiver will be
obtained, in which case the loan plus all accrued and unpaid
interest would be payable on demand.
JVCo is required to pay a non-refundable management fee of 0.75%
per annum on the amounts drawn-down. This amount is included in
interest on long-term debt.
The effective interest rate on the loan facility was 7.82% at
December 31, 2001 and 10.08% at December 31, 2000.
Ivanhoe Mines' share of the interest incurred on this loan during
the year ended December 31, 2001 and 2000 amounted to $4,032,000
and $4,534,000, respectively, of which $422,000 and $Nil,
respectively, was capitalized to mining property, plant and
equipment.
(b) ABM's bank term loan is part of a senior secured credit facility
aggregating Australian ("A")$43,891,000, including a project
financing facility of A$39,891,000, an environmental letter of
credit facility of A$1,500,000 and a working capital facility of
A$2,500,000. This credit facility matures on December 31, 2004.
Included in the project financing facility is an aggregate of
A$7,141,000 resulting from the conversion, during 2001, of
foreign exchange losses attributable to the foreign exchange
contract discussed in Note 23 (f).
The project financing facility bears interest at a rate equal to
the rate displayed on the Reuter's screen BBSY page on the first
day of each funding period (4.29% at December 31, 2001 and 5.98%
at December 31, 2000) plus 2% to 2.5% and is repayable in
semi-annual instalments of varying amounts until maturity in
December 2004. The senior credit facility contains certain
restrictive covenants regarding, amongst other things: (i) the
creation of liens, (ii) dispositions of assets, (iii) the
incurrence of additional indebtedness, (iv) transactions with
affiliates, (v) sale and leaseback transactions, and (vi)
dividends and other payments.
The facility is secured by a first lien over ABM's Australian
assets, including the mining lease over the mineral rights to the
Savage River Project.
ABM also has an outstanding A$1,500,000 obligation secured by a
bond issued pursuant to the environmental letter of credit
facility to partially pay for implementation of an environmental
rehabilitation plan in the event of cessation of operations at
the Savage River Project.
(c) A subsidiary of ABM has an agreement with the Tasmanian
Parliament to defer the payment for the purchase of the assets of
the Savage River Project. This deferred obligation, which
amounted to A$13,869,000 at December 31, 2001 and A$13,719,000 at
December 31, 2000, is secured by an A$13,000,000 second mortgage
on the assets of one of ABM's subsidiaries and is repayable by
December 24, 2014, primarily by carrying out remediation work for
the purpose of rehabilitating areas disturbed by operations prior
to ABM's acquisition of an interest in the site (Note 22 (d)).
The obligation amounted to $7,065,000 at December 31, 2001 and
$7,672,000 at December 31, 2000, and bears interest on a basis
agreed to with the Tasmanian government, payable on specified
dates. Thereafter, the obligation will not bear interest, but the
balance will increase annually by the change in the Australian
All Groups Consumer Price Index. For accounting purposes, this
obligation has been discounted using an interest rate of 10% to
its present value of $3,933,000 at December 31, 2001 and
$4,037,000 at December 31, 2000.
27
[IVANHOE LOGO]
15. LONG-TERM DEBT (CONTINUED)
(d) These equipment purchase loans of A$4,566,000 bear interest at
rates between 5.64% and 6.60% and are repayable in monthly
instalments of $155,000, including interest, until maturity in
June 2004. These loans are secured by the related equipment.
(e) This equipment purchase loan of Norwegian Kroner ("NOK")
25,799,000 bears interest at 6% and is repayable in quarterly
instalments of NOK 2,639,000, including interest, until maturity
in April 2003. The loan is secured by a charge against certain
accounts receivable and capital assets of ABM's Norwegian
subsidiary. This loan has been classified as a current liability
at December 31, 2001, as ABM has ceased payments of principal and
interest (Note 11).
(f) This loan of NOK 4,840,000 is unsecured and bears interest at a
variable rate, which at December 31, 2001 was 9.9%. The loan is
repayable in semi-annual instalments of NOK 484,000, commencing
in January 2002, until maturity in July 2006.
16. INCOME TAXES
Ivanhoe Mines' provision for (recovery of) income and capital taxes
consists of the following:
Years ended December 31,
-------------------------
2001 2000
----- -----
Future income taxes $ 168 $(836)
Capital taxes (95) 73
----- -----
$ 73 $(763)
===== =====
28
[IVANHOE LOGO]
16. INCOME TAXES (CONTINUED)
Future income tax assets and liabilities at December 31, 2001 and 2000
arise from the following:
2001 2000
-------- --------
Future income tax assets
Investments $ 11,050 $ 14,049
Mining property, plant and equipment 1,537 11,797
Accrued loss on a foreign currency contract 5,410 6,900
Loss carry-forwards 29,303 24,922
-------- --------
47,300 57,668
Valuation allowance (40,225) (32,380)
-------- --------
Net future income tax assets 7,075 25,288
-------- --------
Future income tax liabilities
Mining property, plant and equipment 12,751 27,799
Long-term debt 980 2,277
-------- --------
13,731 30,076
-------- --------
Future income tax liabilities, net $ 6,656 $ 4,788
======== ========
Disclosed on the Consolidated Balance Sheets as:
Future income tax assets (including current portion of
$4,635,000 in 2001 and $3,240,000 in 2000 arising from
the current portion of the accrued loss on a foreign
currency contract) $ 7,075 $ 7,588
Future income tax liabilities 13,731 12,376
-------- --------
Future income tax liabilities, net $ 6,656 $ 4,788
======== ========
A reconciliation of the (provision for) recovery of income and capital taxes is
as follows:
Years ended December 31,
-----------------------
2001 2000
-------- -------
Provision for recovery of income taxes based on combined
Canadian federal and provincial statutory rates
of 44.6% in 2001 and 45.6% in 2000 $ 37,908 $ 8,144
Add (deduct)
Capital taxes 95 (74)
Lower foreign tax rates (12,169) (1,569)
JVCo's relief from income taxes 391 388
Adjustment arising from revision to the accounting for the
acquisition of ABM (Note 4) 1,700 --
Tax effect of losses not recognized (10,119) (6,814)
Tax benefits recognized on prior year losses 1,112 --
Change in valuation allowance for future income tax
assets (16,161) 688
Other (2,830) --
-------- -------
(Provision for) recovery of income and capital taxes $ (73) $ 763
======== =======
29
[IVANHOE LOGO]
16. INCOME TAXES (CONTINUED)
At December 31, 2001, Ivanhoe Mines had deductible temporary
differences aggregating approximately $6,035,000 and the following
unused tax losses, for which no future income tax assets had been
recognized:
LOCAL U.S. DOLLAR EXPIRY
CURRENCY EQUIVALENT DATE
----------------- ----------- ------------
Canada Cdn $ 21,919 $ 13,760 2003 to 2008
Australia A 130,975 66,719 (a)
Mongolia Mnt 3,943,500 3,585 (b)
(a) These losses can be carried forward indefinitely, subject to
continuity of ownership and business tests.
(b) These losses are carried forward indefinitely until such time as
production from a mine commences; thereafter, they can be
amortized on a straight-line basis over a period of five years.
Ivanhoe Mines also has unused tax losses in certain other foreign
jurisdictions that are not disclosed above, as it is currently highly
unlikely that these losses will be utilized.
17. OTHER LIABILITIES
December 31,
-------------------
2001 2000
------- -------
Royalty payable $ 1,281 $ 868
Provision for future waste mining costs and mine
reclamation obligations 1,130 1,023
Accrued loss on foreign exchange contract (Note 23 (f)) 2,582 12,200
Employee entitlements 1,184 838
------- -------
$ 6,177 $14,929
======= =======
JVCo is required to pay a royalty to the Ministry of Mines of the
Union of Myanmar on the value of Copper Cathode sold. However, during
the first five years following the commencement of sales of Copper
Cathode, payment of one-half of the royalty is deferred and is payable
in equal instalments over the next five years.
Accounts payable and accrued liabilities at December 31, 2001 and 2000
include Ivanhoe Mines' share of the current amount of the royalty
payable.
30
[IVANHOE LOGO]
18. SHARE CAPITAL
(a) Since December 31, 1999, the Company has issued the following
Common Shares:
Number
of Shares Amount
------------ --------
Balance, December 31, 1999 74,411,194 $383,349
Shares issued for:
Share purchase plan 115,326 76
Acquisition of ABM (Note 4) 50,322,533 31,064
------------ --------
Balance, December 31, 2000 124,849,053 414,489
Shares issued for:
Private placement 15,227,139 16,349
Exercise of stock options 371,500 325
Share purchase plan 85,792 66
Conversion of loans payable to related parties
(Note 14) 30,625,000 29,160
------------ --------
171,158,484 $460,389
============ ========
(b) The Company has an Employees' and Directors' Equity Incentive
Plan (the "Equity Incentive Plan "), which includes three
components: (i) a Share Option Plan; (ii) a Share Bonus Plan; and
(iii) a Share Purchase Plan.
The Share Option Plan authorizes the Board of Directors of the
Company to grant options, which vest over a period of years, to
directors, executive officers and employees of Ivanhoe Mines to
acquire Common Shares of the Company at a price based on the
weighted average trading price of the Common Shares for the five
days preceding the date of the grant.
The Share Bonus Plan permits the Board of Directors of the
Company to authorize the issuance, from time to time, of Common
Shares of the Company to employees of the Company and its
affiliates.
The Share Purchase Plan entitles each eligible employee of
Ivanhoe Mines to contribute a percentage of his or her annual
basic salary in semi-monthly instalments. Each participant is, at
the end of each calendar quarter during which he or she
participates in the Share Purchase Plan, issued Common Shares of
the Company equal to 1.5 times the aggregate amount contributed
by the participant, based on the weighted average trading price
of the Common Shares during the preceding three months.
31
[IVANHOE LOGO]
18. SHARE CAPITAL (CONTINUED)
(c) A summary of share option activity and information concerning
outstanding and exercisable options at December 31, 2001 is as
follows:
Options Outstanding
--------------------------------
Options Number of Weighted
Available Common Average
for Grant Shares Exercise Price
---------- ---------- --------------
(Expressed in
Canadian dollars)
Balances, December 31,
1999 3,040,209 4,352,233 $ 4.41
Options authorized 7,000,000 -- --
Options granted on
exchange of ABM's
outstanding options (4,455,344) 4,455,344 1.20
Options cancelled 2,608,500 (2,608,500) 5.23
Shares issued under share
purchase plan (115,326) -- --
---------- ---------- -------------
Balances, December 31,
2000 8,078,039 6,199,077 1.76
Options granted (8,747,167) 8,747,167 1.31
Options exercised -- (371,500) 1.13
Options cancelled 980,500 (980,500) 4.02
Shares issued under share
purchase plan (85,792) -- --
Shares issued under share
bonus plan (6,250) -- --
---------- ---------- -------------
Balances, December 31,
2001 219,330 13,594,244 $ 1.40
========== ========== =============
32
[IVANHOE LOGO]
18. SHARE CAPITAL (CONTINUED)
(d) The following table summarizes information concerning outstanding
and exercisable options at December 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------------- -----------------------------
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Price Number Exercise Price
Outstanding Life (in years) Per Share Exercisable Per Share
----------- -------------- --------------- ----------- --------------
(Expressed in (Expressed in
Canadian Canadian
dollars) dollars)
321,900 1.86 $ 0.95 165,300 $ 0.95
190,833 3.79 1.08 130,833 1.08
9,118,511 4.11 1.20 3,510,977 1.20
1,100,000 4.73 1.60 330,000 1.60
70,000 4.25 1.61 21,000 1.61
1,990,000 4.08 1.70 15,000 1.70
350,000 4.81 2.12 315,000 2.12
190,000 4.89 2.31 57,000 2.31
200,000 4.86 2.50 60,000 2.50
35,000 5.77 6.74 35,000 6.74
28,000 0.37 12.05 28,000 12.05
---------- ---- ---------- --------- ---------
13,594,244 4.16 $ 1.40 4,668,110 $ 1.40
========== ==== ========== ========= =========
19. WRITE-DOWN OF CARRYING VALUES OF OTHER ASSETS
Years ended December 31,
-----------------------
2001 2000
------- -------
Investment in Emperor (Note 10) $ -- $ 4,645
Savage River Mine Project (Note 11) 53,812 --
Norway Mine Project (Note 11) 5,380 --
Other mineral property interests (Note 12) -- 6,366
------- -------
$59,192 $11,011
======= =======
33
[IVANHOE LOGO]
20. OTHER RELATED PARTY TRANSACTIONS
(a) Ivanhoe Mines incurred the following expenses with companies
related by way of directors or shareholders in common:
Years ended December 31,
-----------------------
2001 2000
------ ------
Consulting $ 39 $ 40
Interest 3,643 --
Office and administrative 641 583
Salaries and benefits 1,560 822
Travel 837 523
------ ------
$6,720 $1,968
====== ======
(b) Accounts receivable and accounts payable at December 31, 2001
included $206,000 and $480,000, respectively, (December 31, 2000
- $109,000 and $534,000, respectively) which were due from/to
directors of the Company or its subsidiaries, a company under
common control or companies related by way of directors in
common.
21. CASH FLOW INFORMATION
(a) Net change in non-cash operating working capital items
Years ended December 31,
-------------------------
2001 2000
-------- -------
(Increase) decrease in:
Accounts receivable $ 3,098 $ 1,506
Inventories (7,625) (1,940)
Prepaid expenses (342) 598
Increase (decrease) in:
Accounts payable and accrued liabilities (7,617) (2,616)
Increase in employee entitlements 346 838
-------- -------
$(12,140) $(1,614)
======== =======
34
[IVANHOE LOGO]
21. CASH FLOW INFORMATION (CONTINUED)
(b) Supplementary information regarding other non-cash transactions
Years ended December 31,
-----------------------
2001 2000
-------- --------
INVESTING ACTIVITIES:
Acquisition of ABM (Note 4) $ -- $(41,439)
Note receivable -- 613
Other investments -- (613)
Expenditures on mining property, plant and
equipment (2,704) --
-------- --------
FINANCING ACTIVITIES:
Conversion of long-term debt $(20,535) $ --
(Transfers from) additional paid-in capital (8,678) 10,375
Share capital issued 29,213 31,064
Proceeds from long-term debt 2,704 --
-------- --------
(c) Other supplementary information
Years ended December 31,
---------------------------
2001 2000
------ ------
Interest received $1,840 $3,050
------ ------
Interest paid $4,127 $2,141
------ ------
35
[IVANHOE LOGO]
22. SEGMENT DISCLOSURES
Throughout 2000, Ivanhoe Mines had two operating segments, its copper
division (Note 6) and its exploration division (Note 12). On December
31, 2000, Ivanhoe Mines acquired its third operating segment, the iron
ore division (Note 4).
Operating Segments
----------------------------
Year ended Copper Iron Ore Exploration
December 31, 2001 Division Division Division Corporate Consolidated
---------- --------- ----------- --------- ------------
Revenue $ 19,556 $ 55,778 $ -- $ -- $ 75,334
Cost of operations (9,246) (43,590) -- -- (52,836)
Depreciation and depletion (4,021) (8,524) -- -- (12,545)
---------- --------- -------- --------- --------
Operating profit (loss) 6,289 3,664 -- -- 9,953
Other expenses
General and administrative (385) (79) -- (5,699) (6,163)
Interest (3,779) (4,843) -- (1,307) (9,929)
Exploration -- -- (7,192) -- (7,192)
Depreciation -- -- (131) (14) (145)
Write-down of inventories -- (2,584) -- -- (2,584)
---------- --------- -------- --------- --------
Profit (loss) before the following 2,125 (3,842) (7,323) (7,020) (16,060)
---------- --------- -------- --------- --------
Other income (expenses)
Mining property shut-down
costs -- -- -- (3,744) (3,744)
Interest income 368 110 4 738 1,220
Foreign exchange loss -- (7,873) (52) 256 (7,669)
Write-down of carrying values
of other assets -- (53,812) -- (5,380) (59,192)
Other -- 312 (3) 211 520
---------- --------- -------- --------- --------
368 (61,263) (51) (7,919) (68,865)
---------- --------- -------- --------- --------
Income and capital taxes 20 (1,130) 1,096 (59) (73)
---------- --------- -------- --------- --------
Net income (loss) $ 2,513 $ (66,235) $ (6,278) $ (14,998) $(84,998)
========== ========= ======== ========= ========
36
[IVANHOE LOGO]
22. SEGMENT DISCLOSURES (CONTINUED)
Operating Segments
----------------------------------------
Year ended Copper Iron Ore Exploration
December 31, 2000 Division Division Division Corporate Consolidated
-------- -------- ----------- --------- ------------
Revenue $ 22,470 $ -- $ -- $ -- $ 22,470
Cost of operations (8,188) -- -- -- (8,188)
Depreciation and depletion (4,318) -- -- -- (4,318)
-------- -------- -------- -------- --------
Operating profit (loss) 9,964 -- -- -- 9,964
Other expenses
General and administrative (528) -- (1,660) (3,724) (5,912)
Interest (4,534) -- -- -- (4,534)
Exploration -- -- (5,339) -- (5,339)
Depreciation -- -- (173) (9) (182)
Write-down of inventories (2,209) -- -- -- (2,209)
-------- -------- -------- -------- --------
Profit (loss) before the following 2,693 -- (7,172) (3,733) (8,212)
-------- -------- -------- -------- --------
Other income (expenses)
Mining property shut-down
costs -- -- -- (2,531) (2,531)
Interest income 547 -- 31 2,061 2,639
Foreign exchange loss -- -- -- (726) (726)
Write-down of carrying values
of other assets -- -- (6,366) (4,645) (11,011)
Other 19 -- -- 1,199 1,218
-------- -------- -------- -------- --------
566 -- (6,335) (4,642) (10,411)
-------- -------- -------- -------- --------
Income and capital taxes 148 -- (14) 629 763
-------- -------- -------- -------- --------
Net income (loss) $ 3,407 $ -- $(13,521) $ (7,746) $(17,860)
-------- -------- -------- -------- --------
Total assets
2001 $147,027 $ 68,860 $ 4,025 $ 27,690 $247,602
2000 150,191 128,554* 2,208 35,406 316,359
======== ======== ======== ======== ========
* ABM's assets acquired on December 31, 2000 (Note 4).
December 31,
---------------------
2001 2000
-------- --------
Capital assets at the end of the year
Australia $ 45,295 $ 95,933
Mongolia 256 --
Myanmar 132,125 133,812
Norway 3,420 8,846
South Korea 951 717
Other 147 319
-------- --------
$182,194 $239,627
======== ========
Capital assets consist of mining property, plant and equipment, other
mineral property interests and other capital assets.
37
[IVANHOE LOGO]
23. COMMITMENTS
(a) Ivanhoe Mines has exploration commitments in the ordinary course
of business to expend funds towards retaining its interests in
mineral properties (Note 12). In that regard, Ivanhoe Mines has
lodged letters of credit aggregating $2,000,000 at December 31,
2001 and $3,000,000 at December 31, 2000 in support of certain of
these commitments.
(b) JVCo has entered into an agreement for the sale of a guaranteed
quantity of Grade A Product (as defined in the agreement) from
the Monywa Copper Mine Project to a company (the "Major
Customer") affiliated with one of the lenders of the project
financing. This agreement terminates no later than December 31,
2005, but may terminate earlier if certain events occur.
During the years ended December 31, 2001 and 2000, substantially
all of the Copper Division sales were made to the Major Customer.
(c) ABM has, in the normal course of its business, entered into
various long-term contracts which include commitments for future
payments under contracts for capital expenditures, power, port
operations, equipment rentals and other arrangements as follows:
(i) Capital expenditure commitments
2002 $ 1,362
--------------
(ii) Operating expenditure commitments
2002 $ 8,060
2003 4,784
2004 3,700
2005 3,195
2006 1,930
Thereafter 429
--------------
$ 22,098
==============
(d) ABM is committed, pursuant to the deferred purchase obligation
(Note 15), to co-manage with the Tasmanian Government the
remediation of environmental exposures created by prior
operations on the Savage River site. The cost of the remediation
work will be offset against the face value of the deferred
purchase obligation over the term of the agreement, with the
balance to be paid in cash over the remaining 13 year term of the
deferred purchase obligation. The remediation work may be carried
out by ABM in conjunction with normal mining operations.
(e) ABM has entered into contracts with two of its major customers
for the sale of a guaranteed quantity of iron ore. The sales
price of iron ore specified in these agreements is renegotiated
annually.
(f) ABM has agreed to deliver U.S.$5,000,000 of currency each month
until February 2003 at an exchange rate of U.S.$0.6817 per 1A$.
The remaining obligation under this contract was U.S.$70,700,000
at December 31, 2001 and U.S.$130,000,000 at December 31, 2000.
This commitment has been marked to market for accounting
purposes. The accrued loss at December 31, 2001 and 2000 amounted
to $18,032,000 and $23,000,000, respectively, of which $2,582,000
and $12,200,000, respectively, was included in other liabilities
and the balance of $15,450,000 and $10,800,000, respectively, in
accounts payable and accrued liabilities.
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[IVANHOE LOGO]
23. COMMITMENTS (CONTINUED)
(g) Ivanhoe Mines has commitments aggregating $470,000 for the
construction of a mine and mine facilities in Korea. Total costs
to develop the mine are estimated at approximately $3.3 million.
24. DISCLOSURES REGARDING FINANCIAL INSTRUMENTS
(a) The estimated fair value of Ivanhoe Mines' financial instruments
was as follows:
December 31,
--------------------------------------------
2001 2000
-------------------- -------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------- ------- -------- -------
Cash $25,805 $25,805 $40,373 $40,373
Accounts receivable 2,423 2,423 5,521 5,521
Investments 4,823 7,092 5,067 9,628
Due from joint venture
partner 1,420 1,420 1,404 1,404
Accounts payable and
accrued liabilities 30,857 30,857 23,116 23,116
Loans payable to related
parties 4,696 4,696 21,588 21,588
Royalty payable 1,281 -- 868 --
Long-term debt 61,970 61,970 66,403 66,403
Accrued loss on foreign
exchange contract 2,582 2,582 12,200 12,200
The fair value of Ivanhoe Mines' other investments and accrued
loss on a foreign exchange contract were determined by reference
to published market quotations or by use of a discounted present
value calculation, all of which may not be reflective of future
values.
Ivanhoe Mines' loans due from joint venture partner, loans
payable to related parties and long-term debt bear effective
interest rates principally at current market rates and
accordingly, their fair value approximates their carrying value.
The fair value of the royalty payable is not readily
determinable.
The fair value of Ivanhoe Mines' remaining financial instruments
was estimated to approximate their carrying value due primarily
to the immediate or short-term maturity of these financial
instruments.
(b) Ivanhoe Mines is exposed to credit risk with respect to its
accounts receivable. The significant concentrations of credit
risk are situated in Australia and Myanmar. ABM mitigates this
risk by obtaining letters of credit in advance of the shipment of
iron ore. Historically, Ivanhoe Mines has not experienced any
significant credit losses, other than a provision for losses made
in 1998, and this is not expected to change.
(c) The credit agreement discussed in Note 15 provides that JVCo
shall, at the request of the lenders, from time to time maintain
one or more swaps, caps, collars or similar hedge products
commonly used to hedge against interest rate fluctuations, to
protect itself against the LIBOR interest rate rising more than
2% per annum above that in effect on January 13, 1998 and as to a
notional principal amount equal to 75% of the principal amount
outstanding from time to time. JVCo will, however, be subject to
interest rate risk on the remaining unhedged amount.
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[IVANHOE LOGO]
24. DISCLOSURES REGARDING FINANCIAL INSTRUMENTS (CONTINUED)
(d) Ivanhoe Mines is subject to interest rate cash flow risk on its
loans payable to related parties and its long-term debt since a
significant portion of these liabilities bear interest at
floating rates.
(e) Ivanhoe Mines is subject to market risk arising from revenues
from the sale of metals, which are subject to price fluctuations
beyond its control. Management of Ivanhoe Mines attempts to
reduce its exposure to this market risk through the use of sale
contracts designed to fix the sales prices of metals on a monthly
or annual basis.
(f) Ivanhoe Mines earns its revenues in U.S. dollars, but incurs
certain of its expenses in currencies other than the U.S. dollar.
As such, Ivanhoe Mines is subject to foreign exchange risk as a
result of fluctuations in exchange rates. ABM enters into forward
foreign currency contracts to mitigate some of its exposure to
foreign currency risk.
25. SUBSEQUENT EVENTS
(a) In January 2002, the Company issued 6,452,800 Special Warrants at
a price of $1.55 and 2,932,364 Special Warrants at a price of
$1.71 for aggregate proceeds of $15 million. Each Special Warrant
was converted into one Common Share in March 2002.
(b) In January 2002, the Company received $1,320,000 in cash,
3,780,000 common shares of Olympus with a fair value of
$1,248,000 and a credit of $1,430,000 against the Company's
future obligations with respect to its interest in an exploration
joint venture in Vietnam, in payment of a note receivable that
had been written off in prior years. As a result, the Company's
equity interest in Olympus (Note 10) increased to 19.4%.
(c) In January 2002, the Company exchanged its equity interest in GTL
(Note 10) for an equity interest in Resource Investment Trust
with a fair value of $1.9 million.
(d) In February 2002, the Company completed its earn-in of a 100%
interest in the Oyu Tolgoi project in Mongolia (Note 12 (a)) by
paying to BHP the sum of $1 million cash and by issuing a letter
of credit in the amount of $4 million. In addition, a second
letter of credit in the amount of $3 million was issued to BHP as
security for the second exploration commitment of $3 million
required under the earn-in agreement.
(e) In April 2002, the Company issued 17,450,000 Common Shares at a
price of Cdn.$3.25 (U.S.$2.05) per share for total proceeds of
Cdn.$56.7 million (U.S.$35.7 million).
(f) In April 2002, the Company agreed to issue 2,550,000 Special
Warrants for total proceeds of approximately Cdn.$8.3 million
(U.S.$5.2 million). Each Special Warrant will entitle the holder
to acquire, at no additional cost, one Common Share at any time
until the close of business on the fifth business day after the
earlier of: (i) the date upon which the applicable Canadian
provincial securities commissions issue receipts for the
Company's final prospectus, and (ii) 120 days after the closing
of the financing.
40