EXHIBIT 19.8
IVANHOE MINES LTD.
Incorporated in Yukon Territories, Canada
ARBN : 075 217 097
APPENDIX 4D (LISTING RULE 4.2A)
HALF YEAR REPORT FOR THE SIX MONTHS ENDED JUNE 30, 2003
PREVIOUS CORRESPOND ING PERIOD: SIX MONTHS ENDED JUNE 30, 2002
This report should be read in conjunction with the most recent annual financial
statements of Ivanhoe Mines Ltd. for the year ended December 31, 2002.
APPENDIX SUMMARY
HIGHLIGHTS OF RESULTS
- Results for Announcement to the Market
DIRECTOR DETAILS
DIRECTOR'S DECLARATION
FINANCIAL STATEMENTS
- Consolidated Balance Sheet
- Consolidated Statements of Operations
- Consolidated Statement of Shareholder's Equity
- Consolidated Statements of Cash Flows
- Notes to the Consolidated Financial Statements
MANAGEMENT ANALYSIS AND DISCUSSION
OTHER APPENDIX 4D INFORMATION
HIGHLIGHTS OF RESULTS
RESULTS FOR ANNOUNCEMENT TO THE MARKET
AMOUNT FOR HALF YEAR ENDED
JUNE 30, 2003 (US$000'S) AND %
CHANGE UP OR DOWN FROM HALF
YEAR ENDED JUNE 30, 2002.
------------------------------
Revenue from ordinary activities down 6.5% to $43,566
(Loss) from ordinary activities after tax attributable to members up 1271% to ($27,722)
Net (loss) for the period attributable to members up 1271% to ($27,722)
DIVIDENDS (DISTRIBUTIONS)* - HALF YEARS ENDED US cents per Franked US cents
JUNE 30, 2003 AND 2002 security per security
Final dividend Nil cents Nil cents
Interim dividend N/A cents N/A cents
* It is not proposed to pay dividends
DIRECTOR DETAILS
The names of the directors of the company during or since the end of the half
year are:
NAME
Markus Faber
R. Edward Flood
Robert M. Friedland
Daniel Kunz
Robert Hanson
Gordon L. Toll
Kjeld Thygesen
John Weatherall
The above named directors held office during and since the end of the half-year
except for:
- - Daniel Kunz - resigned 1 March 2003
DIRECTORS' DECLARATION
The directors declare that:
a) the attached financial statements and notes thereto comply with the
Accounting Standards;
b) the attached financial statements and notes thereto give a true and fair
view; and
c) in the directors' opinion, there are reasonable grounds to believe that
Ivanhoe Mines Ltd. will be able to pay its debts as and when they become due and
payable.
Signed in accordance with a resolution of the directors.
On behalf of the Directors
- -s- R. Edward Flood
R. Edward Flood
Director
VANCOUVER, 28 August 2003
IVANHOE MINES LTD.
SECOND QUARTER REPORT
JUNE 30, 2003
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 2003 (unaudited) and December
31, 2002
Unaudited Consolidated Statements of Operations for the Three and Six
Month Periods ended June 30, 2003 and 2002
Unaudited Consolidated Statement of Shareholders' Equity for the Six
Month Period ended June 30, 2003
Unaudited Consolidated Statements of Cash Flows for the Three and Six
Month Periods ended June 30, 2003 and 2002
Notes to the Unaudited Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
IVANHOE MINES LTD.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
---------- ------------
(STATED IN U.S. $000'S) 2003 2002
- --------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT
Cash $ 76,192 $ 46,912
Accounts receivable 6,618 3,425
Inventories 18,446 22,935
Prepaid expenses 3,969 1,971
- -------------------------------------------------------------------------------------------
105,225 75,243
INVESTMENTS 12,839 15,537
MINING PROPERTY, PLANT AND EQUIPMENT 172,028 168,022
OTHER MINERAL PROPERTY INTERESTS 6,893 6,748
OTHER CAPITAL ASSETS 3,403 3,481
FUTURE INCOME TAXES - 1,041
OTHER ASSETS 1,802 1,482
- -------------------------------------------------------------------------------------------
$ 302,190 $ 271,554
- -------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 26,922 $ 29,174
Current portion of long-term debt (Note 4) 20,224 23,766
- -------------------------------------------------------------------------------------------
47,146 52,940
LOAN PAYABLE TO RELATED PARTIES 5,088 5,088
LONG-TERM DEBT (NOTE 4) 6,610 5,534
FUTURE INCOME TAXES 12,630 12,642
OTHER LIABILITIES 7,865 6,358
- -------------------------------------------------------------------------------------------
79,339 82,562
- -------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (NOTE 5)
Authorized
Unlimited number of preferred shares without par value
Unlimited number of common shares without par value
Issued and outstanding
248,133,621 (2002-205,163,382) Common Shares 610,556 522,199
SPECIAL WARRANTS - 26,516
ADDITIONAL PAID-IN CAPITAL 1,251 1,508
CONTRIBUTED SURPLUS 3,517 3,520
DEFICIT (392,473) (364,751)
- -------------------------------------------------------------------------------------------
222,851 188,992
- -------------------------------------------------------------------------------------------
$ 302,190 $ 271,554
- -------------------------------------------------------------------------------------------
APPROVED BY THE BOARD:
/s/ John Weatherall /s/ Kjeld Thyegsen
- ---------------------------- --------------------------
Director Director
IVANHOE MINES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
(STATED IN U.S. $000'S) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
REVENUE $ 23,018 $ 24,804 $ 43,566 $ 46,579
COST OF OPERATIONS (21,608) (17,349) (39,669) (32,390)
WRITE-DOWN OF WORK IN PROGRESS INVENTORY (NOTE 7) (4,287) - (4,287) -
DEPRECIATION AND DEPLETION (2,464) (1,888) (4,410) (4,149)
- -------------------------------------------------------------------------------------------------------------------
OPERATING (LOSS) PROFIT (5,341) 5,567 (4,800) 10,040
EXPENSES
General and administrative (3,330) (2,899) (6,312) (4,824)
Interest on long-term debt (447) (1,207) (894) (2,437)
Exploration expenses (15,186) (5,435) (25,993) (8,313)
Depreciation (404) (73) (625) (113)
- -------------------------------------------------------------------------------------------------------------------
LOSS BEFORE THE FOLLOWING (24,708) (4,047) (38,624) (5,647)
OTHER INCOME (EXPENSES)
Mining property shut-down costs (667) (325) (1,524) (947)
Interest income 610 376 941 570
Foreign exchange gain (loss) 5,467 2,603 8,133 2,908
Gain on sale of investments - - 4,625 -
Share of loss of significantly influenced investee (384) - (613) -
Other (Note 8 (a)) 724 154 735 3,123
- -------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME AND CAPITAL TAXES (18,958) (1,239) (26,327) 7
Provision for income and capital taxes (311) (1,348) (1,395) (2,149)
- -------------------------------------------------------------------------------------------------------------------
NET LOSS $ (19,269) $ (2,587) (27,722) (2,142)
- -------------------------------------------------------------------------------------------------------------------
LOSS PER SHARE
Basic $ (0.08) $ (0.01) $ (0.12) $ (0.01)
Diluted $ (0.08) $ (0.01) $ (0.12) $ (0.01)
===================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
(IN 000'S) 246,057 199,284 235,624 185,789
- -------------------------------------------------------------------------------------------------------------------
IVANHOE MINES LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(STATED IN THOUSANDS OF U.S. DOLLARS)
(Unaudited)
Share Capital
------------------------- Additional
Number Special Paid-In
of Shares Amount Warrants Capital
----------- ----------- ----------- -----------
Balances, December 31, 2002 205,163,382 $ 522,199 $ 26,516 $ 1,508
Special warrants issued - - 59,259 -
Shares issued for:
Exercise of stock options 1,472,632 2,152 - (257)
Exercise of special warrants 41,296,080 85,775 (85,775) -
Share purchase plan 31,292 61 - -
Bonus shares 125,000 263 - -
Consulting fees 45,235 106 - -
Stock compensation charged to operations - - - -
Net loss - - - -
- -------------------------------------------------------------------------------------------------
Balances, June 30, 2003 248,133,621 $ 610,556 $ - $ 1,251
=================================================================================================
Contributed
Surplus Deficit Total
----------- ----------- -----------
Balances, December 31, 2002 $ 3,520 $ (364,751) $ 188,992
Special warrants issued - - 59,259
Shares issued for:
Exercise of stock options (604) - 1,291
Exercise of special warrants - - -
Share purchase plan - - 61
Bonus shares - - 263
Consulting fees - - 106
Stock compensation charged to operations 601 - 601
Net loss - (27,722) (27,722)
- ------------------------------------------------------------------------------------
Balances, June 30, 2003 $ 3,517 $ (392,473) $ 222,851
====================================================================================
IVANHOE MINES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30 Six Months Ended June 30
---------------------------- ----------------------------
(STATED IN U.S. $000'S) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss $ (19,269) $ (2,587) $ (27,722) $ (2,142)
Items not involving use of cash
Depreciation and depletion 2,868 1,961 5,035 4,262
Non-cash interest expense 194 711 269 1,395
Unrealized foreign exchange (gain) loss 730 (3,702) 1,074 (7,454)
Share of loss of significantly influenced investee 384 - 613 -
Provision for employee entitlements 405 196 622 225
Provision for mine reclamation obligation 396 170 677 313
Write-down of work in progress inventory 4,287 - 4,287 -
Gain on sale of investments - - (4,625) (508)
Non-cash recovery of bad debt - - - (1,248)
Non-cash recovery of mine shut down costs - (205) - (205)
Non-cash stock-based compensation 344 412 601 655
Future income taxes 149 1,215 1,029 1,894
Increase in non-current portion of royalty payable 113 108 206 203
- -----------------------------------------------------------------------------------------------------------------------------
(9,399) (1,721) (17,934) (2,610)
Net change in non-cash operating working capital items
(Note 8(c)) (734) (2,370) (2,978) (1,895)
- -----------------------------------------------------------------------------------------------------------------------------
(10,133) (4,091) (20,912) (4,505)
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investments (294) (4,981) (294) (4,981)
Proceeds from sale of investments - - 6,709 10
Expenditures on mining property, plant and equipment (4,105) (6,251) (8,416) (11,602)
Expenditures on other mineral property interests (145) - (4,145) -
Expenditures on other capital assets (443) (648) (544) (900)
Other (14) (16) (25) (34)
- -----------------------------------------------------------------------------------------------------------------------------
(5,001) (11,896) (6,715) (17,507)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Share capital and special warrants issued 48,913 39,093 60,717 54,492
Proceeds from long-term debt - 3,516 - 8,462
Repayment of long-term debt (103) (296) (3,810) (4,311)
=============================================================================================================================
48,810 42,313 56,907 58,643
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH INFLOW 33,676 26,326 29,280 36,631
CASH, BEGINNING OF PERIOD 42,516 36,110 46,912 25,805
- -----------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD 76,192 $ 62,436 $ 76,192 $ 62,436
=============================================================================================================================
CASH IS COMPRISED OF:
Cash on hand and demand deposits 10,615 $ 14,068 $ 10,615 $ 14,068
Time deposits
Restricted 4,279 4,456 4,279 4,456
Short-term money market instruments
Restricted 2,000 9,000 2,000 9,000
Unrestricted 59,298 34,912 59,298 34,912
=============================================================================================================================
76,192 $ 62,436 $ 76,192 $ 62,436
=============================================================================================================================
Supplementary information (Note 8)
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
(Unaudited)
1. BASIS OF PRESENTATION
These interim financial statements do not contain all the information required
by Canadian generally accepted accounting principles ("GAAP") for annual
financial statements and therefore should be read in conjunction with the most
recent annual financial statements of Ivanhoe Mines Ltd. ("the Company") for the
year ended December 31, 2002 (the "Annual Financial Statements"). The Company
and its subsidiaries and joint venture are collectively referred to as "Ivanhoe
Mines".
These financial statements follow the same accounting policies and methods of
their application as the Annual Financial Statements.
Certain of the comparative figures have been reclassified to conform with the
presentation in the Annual Financial Statements.
2. ABM MINING LIMITED ("ABM")
In the first quarter of 2003, the management of ABM advised Ivanhoe Mines that
ABM would likely need to supplement anticipated cash flow from project
operations with additional capital in order to cover budgeted operating costs.
The funding shortfall had arisen because of the recent rapid appreciation of the
Australian dollar (A$) against the US dollar. ABM management requested, and
Ivanhoe Mines agreed to make available, an A$8 million working capital credit
facility to enable ABM to meet any such shortfalls that may arise in the
immediate future. ABM management also advised Ivanhoe Mines that it planned to
continue exploring suitable alternatives for obtaining any future credit
facilities it requires from external sources but that there is no assurance that
it would be successful in doing so. In May 2003, Ivanhoe Mines advanced ABM A$5
million from the working capital credit facility and, based on current foreign
currency exchange rates, ABM expects to drawdown the balance of the facility by
September 30, 2003.
As at June 30, 2003, the net carrying value of the Savage River operation's
assets and liabilities which are included in these financial statements is
$30,241,000 (December 31, 2002 -$31,411,000).
3. MYANMAR IVANHOE COPPER COMPANY LIMITED ("JVCo")
The Annual Financial Statements disclosed that at December 31, 2002, JVCo was
not in compliance with the minimum working capital requirement in its credit
agreement, and had not received a waiver from its lenders with respect to this
requirement and also with respect to the non-compliance with certain other
financial covenants in the credit agreement.
During the six-month period ended June 30, 2003, JVCo made a debt repayment of
approximately $8.7 million and contributed approximately $1.4 million into a
debt service account. However, JVCo's contribution into the debt service account
was deficient by approximately $7.3 million, as it should have covered the next
principal and interest payments due at the end of August 2003. Management of the
JVCo is of the opinion that JVCo will make the next semi-annual debt payment due
at the end of August 2003 and that the lenders will not demand repayment of the
loan, notwithstanding the foregoing. There is no assurance, however, that the
lenders will not make such a demand. Accordingly, as required by GAAP, the
entire amount of Ivanhoe Mines' share of JVCo's loan payable aggregating
$18,750,000 at June 30, 2003 and $22,500,000 at December 31, 2002 has been
included in current liabilities.
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
(Unaudited)
4. LONG-TERM DEBT
JUNE 30, December 31,
------------ ------------
2003 2002
------------ ------------
JVCo:
Share of loan payable $ 18,750 $ 22,500
ABM:
Deferred purchase obligation 6,134 5,130
Equipment purchase loans 1,950 1,670
===========================================================================
26,834 29,300
Less: Amount included in current liabilities (20,224) (23,766)
===========================================================================
$ 6,610 $ 5,534
===========================================================================
All of the long-term debt is non-recourse to the Company.
5. SHARE CAPITAL
In the three-month period ended June 30, 2003, 450,000 options were granted,
140,833 options were exercised and 166,667 options were cancelled.
Stock options outstanding at August 28, 2003 totalled 9,909,844 with exercise
prices and expiry dates ranging from Cdn $0.95 to Cdn $6.74 and November 8, 2003
to June 12, 2013, respectively. At August 28, 2003, a total of 248,785,622
Common Shares of the Company were outstanding.
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
(Unaudited)
6. SEGMENTED INFORMATION
- --------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2003
- --------------------------------------------------------------------------------------------------------------------------
(Stated in 000's) COPPER IRON EXPLORATION CORPORATE TOTAL
- --------------------------------------------------------------------------------------------------------------------------
REVENUE $ 5,532 $ 17,486 $ - $ - $ 23,018
COST OF OPERATIONS (2,637) (18,971) - - (21,608)
WRITE-DOWN OF WORK IN PROGRESS INVENTORY (4,287) - - - (4,287)
DEPRECIATION AND DEPLETION (1,289) (1,175) - - (2,464)
==========================================================================================================================
OPERATING LOSS (2,681) (2,660) - - (5,341)
General and administrative (147) (39) - (3,144) (3,330)
Interest on long-term debt (278) (169) - - (447)
Exploration expenses - - (15,186) - (15,186)
Depreciation - - (392) (12) (404)
- --------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE THE FOLLOWING (3,106) (2,868) (15,578) (3,156) (24,708)
Mining property shut-down costs - - - (667) (667)
Interest income 2 17 5 586 610
Foreign exchange gain (loss) (52) (493) (35) 6,047 5,467
Share of loss of significantly influenced - - - (384) (384)
investee
Other income 1 450 - 273 724
- --------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME AND CAPITAL TAXES (3,155) (2,894) (15,608) 2,699 (18,958)
(Provision for) recovery of income and
capital taxes (205) 18 (42) (82) (311)
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (3,360) $ (2,876) $ (15,650) $ 2,617 $ (19,269)
==========================================================================================================================
EXPENDITURES ON CAPITAL ASSETS
Pre-stripping costs $ 352 $ 2,966 $ - $ - $ 3,318
Other 388 160 591 236 1,375
- --------------------------------------------------------------------------------------------------------------------------
$ 740 $ 3,126 $ 591 $ 236 $ 4,693
==========================================================================================================================
TOTAL ASSETS $ 140,823 $ 63,127 $ 15,166 $ 83,074 $ 302,190
==========================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
(Stated in 000's) COPPER IRON EXPLORATION CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
REVENUE 5,434 19,370 - - 24,804
COST OF OPERATIONS (2,719) (14,630) - - (17,349)
DEPRECIATION AND DEPLETION (986) (902) - - (1,888)
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 1,729 3,838 - - 5,567
General and administrative (196) (27) - (2,676) (2,899)
Interest on long-term debt (373) (834) - - (1,207)
Exploration expenses - - (5,435) - (5,435)
Depreciation - - (66) (7) (73)
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE THE FOLLOWING 1,160 2,977 (5,501) (2,683) (4,047)
Mining property shut-down costs - - - (325) (325)
Interest income 18 29 6 323 376
Foreign exchange gain (loss) (23) 843 73 1,710 2,603
Other income (expense) 4 173 (22) (1) 154
============================================================================================================================
INCOME (LOSS) BEFORE INCOME AND CAPITAL TAXES 1,159 4,022 (5,444) (976) (1,239)
(Provision for) recovery of income and capital
taxes 11 (1,933) 173 401 (1,348)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1,170 2,089 (5,271) (575) (2,587)
============================================================================================================================
EXPENDITURES ON CAPITAL ASSETS
Pre-stripping costs $ 68 $ 5,573 $ - $ - $ 5,641
Other 650 (1,136) 1,681 63 1,258
============================================================================================================================
$ 718 $ 4,437 $ 1,681 $ 63 $ 6,899
============================================================================================================================
TOTAL ASSETS $ 146,521 $ 74,285 $ 13,332 $ 69,449 $ 303,587
============================================================================================================================
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars) (Unaudited)
6. SEGMENTED INFORMATION (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2003
- ----------------------------------------------------------------------------------------------------------------------------------
(Stated in 000's) COPPER IRON EXPLORATION CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
REVENUE $ 10,112 $ 33,454 $ - $ - $ 43,566
COST OF OPERATIONS (4,856) (34,813) - - (39,669)
WRITE-DOWN OF WORK IN PROGRESS INVENTORY (4,287) - - - (4,287)
DEPRECIATION AND DEPLETION (2,402) (2,008) - - (4,410)
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (1,433) (3,367) - - (4,800)
General and administrative (287) (66) - (5,959) (6,312)
Interest on long-term debt (582) (312) - - (894)
Exploration expenses - - (25,993) - (25,993)
Depreciation - - (613) (12) (625)
- ----------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE THE FOLLOWING (2,302) (3,745) (26,606) (5,971) (38,624)
Mining property shut-down costs - - - (1,524) (1,524)
Interest income 9 106 5 821 941
Foreign exchange gain (loss) (92) (440) (118) 8,783 8,133
Gain on sale of investments - - - 4,625 4,625
Share of loss of significantly influenced investee - - - (613) (613)
Other income (expense) 3 460 (1) 273 735
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME AND CAPITAL TAXES (2,382) (3,619) (26,720) 6,394 (26,327)
Provision for income and capital taxes (370) (26) (53) (946) (1,395)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (2,752) $ (3,645) $ (26,773) $ 5,448 $ (27,722)
==================================================================================================================================
EXPENDITURES ON CAPITAL ASSETS
Pre-stripping costs $ 826 $ 5,378 $ - $ - 6,204
Other 851 1,313 730 7 2,901
- ----------------------------------------------------------------------------------------------------------------------------------
$ 1,677 $ 6,691 $ 730 $ 7 $ 9,105
==================================================================================================================================
TOTAL ASSETS $ 140,823 $ 63,127 $ 15,166 $ 83,074 $ 302,190
==================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2002
- ------------------------------------------------------------------------------------------------------------------------
(Stated in 000's) COPPER IRON EXPLORATION CORPORATE TOTAL
- ------------------------------------------------------------------------------------------------------------------------
REVENUE 10,087 36,492 - - 46,579
COST OF OPERATIONS (5,093) (27,297) - - (32,390)
DEPRECIATION AND DEPLETION (2,070) (2,079) - - (4,149)
- ------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 2,924 7,116 - - 10,040
General and administrative (283) (36) - (4,505) (4,824)
Interest on long-term debt (898) (1,539) - - (2,437)
Exploration expenses - - (8,313) - (8,313)
Depreciation - - (106) (7) (113)
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE THE FOLLOWING 1,743 5,541 (8,419) (4,512) (5,647)
Mining property shut-down costs - - - (947) (947)
Interest income 54 53 12 451 570
Foreign exchange gain (loss) (23) 1,045 64 1,822 2,908
Other income 6 32 9 3,076 3,123
========================================================================================================================
INCOME (LOSS) BEFORE INCOME AND CAPITAL TAXES 1,780 6,671 (8,334) (110) 7
(Provision for) recovery of income and capital taxes (123) (3,654) 645 983 (2,149)
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1,657 3,017 (7,689) 873 (2,142)
========================================================================================================================
EXPENDITURES ON CAPITAL ASSETS
Pre-stripping costs $ 171 $ 7,129 $ - $ - $ 7,300
Other 1,137 145 7,856 64 9,202
========================================================================================================================
$ 1,308 $ 7,274 $ 7,856 $ 64 $ 16,502
========================================================================================================================
TOTAL ASSETS $ 146,521 $ 74,285 $ 13,332 $ 69,449 $ 303,587
========================================================================================================================
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
(Unaudited)
7. INVENTORY WRITE-DOWN
During the three months ended June 30, 2003, Ivanhoe Mines wrote down its
copper inventory as a result of a downward adjustment in the estimated
recoverable quantities of copper on the heaps. Ivanhoe Mines continues to
review the underlying technical data and accordingly may subsequently
increase or decrease the amount of this write-down. The amount of any
adjustment may be material.
8. SUPPLEMENTARY CASH FLOW INFORMATION
(a) During the three months ended June 30, 2003, 21,290,080 Special Warrants
were exercised resulting in the issue of 21,290,090 common shares of the
Company.
During the three months ended March 31, 2003, 20,000,000 Special Warrants
were exercised resulting in the issue of 20,000,000 common shares of the
Company.
During the three months ended June 30, 2002, the Company issued 287,678
Common Shares at a deemed value of $600,000 in respect of the purchase of
7.4 million common shares of Intec Ltd.
During the three months ended June 30, 2002, the Company divested itself of
its iron ore project in Norway and extinguished the related outstanding
debt of $3.5 million.
During the three months ended March 31, 2002, Ivanhoe Mines exchanged its
investment in GTL Resources Plc, which had a carrying value of $1.4
million, for an equity interest in Resource Investment Trust with a fair
value of $1.9 million.
Also during the three months ended March 31, 2002, Ivanhoe Mines completed
the earn-in of a 100% interest in the Oyu Tolgoi project in Mongolia by
paying cash of $1 million and by incurring an obligation to make a $4
million payment within one year.
Lastly, during the three months ended March 31, 2002, Ivanhoe Mines
realized a gain of $2,568,000 (included in other income), of which
$1,248,000 was non-cash, relating to the payment of a note receivable from
Olympus Pacific Minerals Ltd. that had been written off in prior years.
(b)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ------------------------
$(000) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
Interest paid $ 271 $ 496 $ 625 $1,042
Income and capital taxes paid 162 134 366 256
IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Stated in U.S. Dollars)
(Unaudited)
8. SUPPLEMENTARY CASH FLOW INFORMATION (CONTINUED)
(c) Net change in non-cash working capital items:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
$(000) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
Accounts receivable $(2,144) $ (252) $(3,193) $(1,920)
Inventories 273 $(1,752) 202 (2,063)
Prepaid expenses (758) (417) (1,998) (989)
Accounts payable and accrued liabilities 1,895 51 2,011 3,077
----- -- ----- -----
$ (734) $(2,370) $(2,978) $(1,895)
----- -- ----- -----
9. SUBSEQUENT EVENTS
(a) On July 31, 2003, the Company completed the MX Capital Corp. ("MX")
transaction. The Company and MX have agreed to jointly develop certain
early-stage exploration and mining projects in Mongolia and South
Korea. The Company transferred certain projects to MX in consideration
for 36,781,479 shares of MX, representing approximately 75% of MX's
outstanding share capital. The transfer of these projects will be
accounted for at their carrying value with no gain or loss being
recognized by the Company. At June 30, 2003 the carrying value of these
assets was $2.3 million. Prior to the transfer, MX had a nominal amount
of assets and liabilities other than to the Company.
Also in July 2003, the Company provided MX with the final Cdn$0.6
million of the Cdn$1.0 million convertible non-interest bearing loan
facility. This loan was converted on July 31, 2003 into 5,000,000
shares of MX, increasing the Company's equity to approximately 80% of
MX's outstanding share capital. At June 30, 2003, Cdn$0.4 million
(US$0.3 million) of the convertible loan had been drawn down and is
included in Other Assets.
In August 2003, the Company entered into an agreement to loan MX a
further US$1 million. The loan is interest bearing and matures 90 days
after the date of demand by the Company. The Company has the option to
convert the loan into shares of MX, in whole or part, at Cdn$0.25 per
share.
(b) In August 2003, Intec Ltd ("Intec"), a company in which Ivanhoe Mines
has a 19.9% interest, announced a three for five renounceable
entitlements issue of 87.6 million new shares at A$0.03 per share.
Under the issue Ivanhoe Mines has advised Intec that it intends to take
up its 17.4 million entitlement shares (A$0.5 million or approximately
$0.3 million) as well as to act as priority sub-underwriter for up to
32.6 million shares (A$1.0 million or approximately $0.6 million). If
Ivanhoe Mines receives the maximum possible shortfall of 32.6 million
shares, in addition, to its entitlement of 17.4 million shares, it will
increase its shareholding in Intec to 33.8%. The renounceable
entitlements issue is expected to close in September 2003.
(c) In August 2003, the Company entered into an agreement to acquire a
capital asset for approximately $2.4 million.
(d) In August 2003, the Company entered into an agreement to acquire
certain mineral property interests for approximately $3.9 million.
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
OVERVIEW
Ivanhoe Mines is an international mining company developing a major new
discovery of gold and copper at the Turquoise Hill project (Oyu Tolgoi) in
southern Mongolia. It also has regional exploration programs, targeting gold and
copper principally in Mongolia and China.
Ivanhoe produces copper, gold and iron ore products from various mines in the
Asia Pacific region.
During the second quarter Ivanhoe Mines continued to concentrate the majority of
it's cash resources and management time to the Turquoise Hill project. The
Company spent a total of $15.2 million in exploration during the quarter of
which $12.8 million was spent in Mongolia.
MONGOLIA
- - In Q2'03, Ivanhoe Mines accelerated its drilling efforts on the Far North
Zone. In July 2003, Ivanhoe Mines announced the highest-grade
intersections of copper and gold mineralization that have been encountered
to date on the Turquoise Hill project. Following the last two years of
exploration, the Turquoise Hill project is now ranked as one of the largest
copper and gold porphyry deposits in the world.
- - In August 2003, Ivanhoe Mines received from AMEC E&C Services Limited a
revised update of the existing mineral resources. AMEC estimated that the
Turquoise Hill project contained at July 7, 2003 the following inferred and
additional indicated mineral resources, using a 0.3% copper equivalent
cut-off grade:
Gold Copper Gold
Tonnes Copper gram/tonne Million Million
Mineral Resource Million % ("g/t") Tonnes Ounces
- ----------------------------------------------------------------------------------------------------
Inferred 2,450 0.61% 0.14 15.1 11.4
- ----------------------------------------------------------------------------------------------------
Indicated 509 0.40% 0.59 2.1 9.7
- ----------------------------------------------------------------------------------------------------
- - Scoping studies to formulate optimal project development concepts are
underway. Current studies are investigating the development of an
open-pit/underground operation that would process between 40,000 to 100,000
tonnes of ore per day.
- - In July 2003, Ivanhoe Mines announced the discovery of several large
aquifers near the site of the Turquoise Hill project. Independent
consultants are currently estimating that the aquifers are capable of
providing sufficient water to meet the process requirements for a 50,000
tonne-per day mining operation.
Page 1 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
CORPORATE
- - In April 2003, the Company raised a total of approximately $50.8 million
(Cdn$74.5 million) through the issue of 21.3 million common shares of the
Company at Cdn$3.50 per share. The majority of the proceeds from the
financing will be used to finance the exploration and development of the
Mongolian properties.
- - The net loss for the Q2'03 was $19.3 million, or $0.08 per share, compared
with a loss of $2.6 million or $0.01 per share in Q2'02. Included in the
Q2'03 loss is:
- Exploration division expenses, net after tax, of $15.7 million
(Q2'02 - $5.3 million) including total expenditures of $12.8
million in Mongolia.
- A loss of $3.4 million (Q2'02 - $1.2 million profit), including a
$4.3 million inventory write-down, from the S&K Mine copper
operations in Myanmar.
- A loss of $2.9 million (Q2'02 - $2.1 million profit) from the
Savage River Mine operation in Australia.
- Corporate division profit of $2.6 million (Q2'02 - $0.6 million
loss), including a gain on foreign exchange of $6.0 million,
general and administrative expenses of $3.1 million and mining
property care and maintenance costs in Kazakhstan of $0.7 million.
Page 2 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
CRITICAL ACCOUNTING POLICIES
A detailed summary of all of Ivanhoe Mines Ltd.'s (the "Company") significant
accounting policies is included in Note 2 to the annual Consolidated Financial
Statements for the year ended December 31, 2002.
Management is required to make assumptions and estimates that affect the
valuation of its mineral assets. Significant estimates used in the valuation of
inventories and capital 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, impairments in the valuation
of mineral assets are 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
calculations, resulting in a material reduction in the valuation of Ivanhoe
Mines' mineral assets.
FORWARD LOOKING STATEMENTS
Except for statements of historical fact relating to the Company together with
its subsidiaries and joint venture (collectively referred to as "Ivanhoe
Mines"), certain information contained herein constitutes forward- looking
statements. Forward-looking statements are frequently characterized by words
such as "plan," "expect," "project," "intend," "believe," "anticipate" and other
similar words, or statements that certain events or conditions "may" or "will"
occur. Forward-looking statements are based on the opinions and estimates of
management at the date the statements are made, and are subject to a variety of
risks and uncertainties and other factors that could cause actual events or
results to differ materially from those projected in the forward-looking
statements. These factors include the inherent risks involved in the exploration
and development of mineral properties, the uncertainties involved in
interpreting drilling results and other ecological data, fluctuating metal
prices, the possibility of project costs overruns or unanticipated costs and
expenses, uncertainties relating to the availability and costs of financing
needed in the future and other factors described in this report under the
heading "Outlook". The Company undertakes no obligation to update
forward-looking statements if circumstances or management's estimates or
opinions should change. The reader is cautioned not to place undue reliance on
forward- looking statements.
Page 3 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
EXPLORATION AND DEVELOPMENT
Exploration and development expenses in Q2'03 totalled $15.2 million, compared
to $5.4 million in Q2'02. The majority of the $9.8 million increase is due to
the increased activities in the Turquoise Hill project and other Mongolian
properties.
a) MONGOLIA - At the end of June 2003, Ivanhoe Mines held 111
exploration licenses covering approximately 9.5 million hectares and has
applications on 3 licenses totalling an additional 243,000 hectares. In Q2'03
Ivanhoe Mines spent $12.8 million on Mongolian properties and the main focus of
exploration and development activities was on the Turquoise Hill project ($9.0
million) and the Kharmagtai, Shuteen and the Saran Uul projects.
i) TURQUOISE HILL DEVELOPMENT- Several engineering studies were ongoing at
Turquoise Hill during Q2'03. The studies included open pit and underground
mining methods for the Southwest and Far North deposits, metallurgical
studies on the Southwest, Central Oyu and Far North deposits and acid rock
drainage studies on Southwest and Central Oyu deposits.
In July 2003, Ivanhoe Mines announced that the drilling for groundwater
resources, in areas surrounding the Turquoise Hill project, had discovered
aquifers with estimated capacity sufficient to generate water volumes
necessary to support a 50,000 tonne per day mining operation.
In Q2'03 Chinese authorities in the province of Inner Mongolia announced
the approval of construction for an upgraded 226-kilometre highway that
will provide a direct link between the Mongolian border crossing, 80
kilometres south of the Turquoise Hill project, and the Trans-China Railway
system. Ivanhoe has initiated discussions with Mongolian and Chinese
government authorities to extend the highway by an additional 80 kilometres
to the Turquoise Hill site.
ii) TURQUOISE HILL EXPLORATION -
In August 2003, AMEC E&C Services Inc. released a revised update to its
Q1'03 estimate of the existing mineral resources of the Far North Extension
at Turquoise Hill. AMEC increased the Far North Extension inferred
resource, using a 0.60% copper equivalent cut-off grade, from 489 million
tonnes grading 1.08% copper and 0.07 g/t gold to 643 million tonnes grading
1.19% copper and 0.10 g/t gold.
Drilling at the Far North Zone also has delineated a high- grade core of
inferred resources greater than 2% copper equivalent within this larger
mineralized envelope that contains 70.8 million tonnes grading 2.92% copper
and 0.30 g/t gold. The tonnage in the high-grade zone is more than double
the amount of AMEC's previous estimate issued in Q1'03 and is expected to
greatly enhance the parameters of various commercial mining scenarios
currently being modelled by Ivanhoe's independent consultants.
AMEC, using a 0.30% copper equivalent cut-off, now estimates that the
Turquoise Hill project contains estimated inferred resources totalling 2.4
billion tonnes grading
Page 4 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
0.61% copper and 0.14 g/t gold. This represents an increase of 40% in the
amount of copper and a 12% increase in the amount of gold previously
reported by AMEC in their mineral resource report issued in Q1'03.
In addition, using the same 0.30% copper equivalent cut-off grade, 509
million tonnes of indicated resources are estimated in the Southwest Zone
grading 0.4% copper and 0.59 g/t gold.
Copper Gold
Tonnes Copper Gold Million Million
Mineral Resource Million % g/t Tonnes Ounces
- ----------------------------------------------------------------------------------------------
Inferred 2,450 0.61% 0.14 15.1 11.4
- ----------------------------------------------------------------------------------------------
Indicated 509 0.40% 0.59 2.1 9.7
- ----------------------------------------------------------------------------------------------
A summary extracted from the AMEC report containing details of the mineral
resource estimates at various copper equivalent cut-off grades is available
on Ivanhoe Mines's web site at http://www.ivanhoe-mines.com.
iii) KHARMAGTAI AND OVOOT HYAR PROJECTS - These two properties contain
several copper/gold targets. During Q2'03, a second phase of diamond
drilling was completed on the Gold Hill prospect and a first phase of
drilling was completed on the Chun prospect. Regional reconnaissance work
was performed on the remaining projects. In Q2'03 a total of approximately
$1.1 million was spent on these various projects.
iv) SARAN UUL - Based on the results from a gradient array induced
polarization survey completed in Q1'03, a total of 25 trenches totalling
approximately 17,000 metres and 13 diamond drill holes totalling 3,844
metres were completed during Q2'03. In Q2'03 a total of approximately $0.6
million was spent on this project.
v) OYUT ULAAN - Following detailed geological mapping and induced
polarization surveys in 2002, diamond drilling started in June 2003 on this
gold-copper project. Assay results are pending. In Q2'03 a total of
approximately $0.3 million was spent on this project.
vi) SHUTEEN - Four diamond drill holes totalling almost 2,000 metres were
completed in Q2'03. In Q2'03 a total of approximately $0.4 million was
spent on this project.
vii) MX CAPITAL - In July 2003 Ivanhoe Mines completed a transaction with
MX Capital Corp. ("MX"), a private Canadian mineral exploration company,
whereby Ivanhoe Mines transferred to MX a series of early-stage Mongolian
exploration licenses covering approximately 3.1 million hectares (31,000
sq. km) in the South Gobi region of Mongolia, and located approximately 150
kilometres west of the Turquoise Hill project. These licenses, combined
with MX's existing Mongolia licenses, cover approximately 4.0 million
hectares (40,000 sq. km.) throughout the prospective South Gobi porphyry
belt. In addition, Ivanhoe transferred to MX its
Page 5 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
Korean gold and silver projects, including the Eunsan gold and silver
mine, located in Chollanam-Do Province, South Korea. In consideration
for these assets, MX issued approximately 36.8 million MX common shares
to Ivanhoe Mines. Ivanhoe Mines also invested Cdn$1,000,000 in cash to
purchase 5,000,000 MX units, each consisting of one MX common share and
one share purchase warrant exercisable for a period of one year to
purchase one additional MX common share at a price of Cdn$0.22, thereby
increasing Ivanhoe Mines' equity interest in MX to approximately 80% on
a fully diluted basis. Ivanhoe Mines has also agreed in principle to
loan to MX up to an additional US$1,000,000, convertible, subject to
certain restrictions, into MX common shares at a price of Cdn$0.25.
b) MYANMAR - Underground work continued at Modi Taung during Q2'03,
including a total of approximately 829 meters of adit extension following
the Shwesin and the Htongyi Taung vein systems. During Q2'03 a surface
diamond drilling program was undertaken on the southeast projection of the
Htongyi Taung vein system. A total of 1,393 metres was drilled during
Q2'03. Total exploration expenditures in Q2'03 totalled approximately $0.7
million.
c) OTHER -
i) CHINA: PACIFIC MINERALS - Ivanhoe is exploring for gold, copper and
platinum- group metals ("PGMs") in China primarily through a joint
venture with Pacific Minerals Inc. Ivanhoe has the right to participate
in the development of Pacific's 217 Gold project in Inner Mongolia, the
JBS Platinum Palladium project in Yunnan Province, and a right of first
refusal to participate in any new mineral projects discovered by
Pacific in China (excluding Anhui Province). In each case, Ivanhoe will
have the right to earn an 80% interest in each property by advancing it
to production.
ii) INNER MONGOLIA: IVANHOE MINES - Throughout Q2'03, Ivanhoe conducted
extensive reconnaissance programs to identify high-priority targets
based upon geologic models developed at Turquoise Hill and other
epithermal-style deposits. In August 2003, Ivanhoe announced that the
Company entered into a comprehensive joint venture with a Chinese
government entity to explore for and develop gold, copper, silver,
molybdenum and other minerals on three advanced projects in Inner
Mongolia.
The three projects are in addition to the Oblaga gold-copper-molybdenum
project also located in Inner Mongolia.
Page 6 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
OPERATIONS
COPPER OPERATION
S&K MINE, MYANMAR
Three months ended June 30, 2003
-------------------------------------------- ----------------------------
Total Operation Company's 50% net share
-------------------------------------------- ----------------------------
% Increase % Increase
2003 2002 (decrease) 2003 2002 (decrease)
------ ------ ---------- ------ ----- -----------
Total tonnes moved Tonnes (000's) 4,548 3,623 26%
Tonnes of ore to heap Tonnes (000's) 2,260 1,842 23%
Grade CuCn % 0.57% 0.66% (14%)
Strip ratio Waste/Ore 0.86 0.40 115%
Cathode production Tonnes 6,744 7,143 (6%) 3,372 3,572 (6%)
Tonnage sold Tonnes 7,112 7,050 1% 3,556 3,525 1%
Average sale price received US$/pound $0.74 $0.73 2%
Sales US$(000) 5,532 5,434 2%
Cost of operations US$(000) 2,637 2,719 (3%)
Write-down of inventory US$(000) 4,287 - 100%
Operating profit (loss) US$(000) (2,681) 1,729 (255%)
Six months ended June 30, 2003
-------------------------------------------- ----------------------------
Total Operation Company's 50% net share
-------------------------------------------- ----------------------------
% Increase % Increase
2003 2002 (decrease) 2003 2002 (decrease)
------ ------ ---------- ------ ----- -----------
Total tonnes moved Tonnes (000's) 9,957 6,374 56%
Tonnes of ore to heap Tonnes (000's) 4,530 3,396 33%
Grade CuCn % 0.56% 0.60% (7%)
Strip ratio Waste/Ore 0.93 0.47 98%
Cathode production Tonnes 12,874 13,628 (6%) 6,437 6,814 (6%)
Tonnage sold Tonnes 12,966 13,558 (4%) 6,483 6,779 (4%)
Average sale price received US$/pound $0.74 $0.71 5%
Sales US$(000) 10,112 10,087 0%
Cost of operations US$(000) 4,856 5,093 (5%)
Write-down of inventory US$(000) 4,287 - 100%
Operating profit (loss) US$(000) (1,433) 2,924 (149%)
In Q2'03, the S&K Mine's operations experienced both the lowest and the highest
levels of monthly copper production since the start of operations in 1998. In
April 2003, as a result of a major electrical equipment breakdown, the mine was
shutdown for 10 days and produced only 1,608 tonnes of copper. In May 2003, a
total of 2,601 tonnes of copper was produced, the highest level since the start
of operations. This increased production was the result of improved copper
production capacity from the pilot plant and the mine's efforts undertaken over
the last twelve months to increase the heap capacity. In May and June 2003, the
S&K Mine produced copper cathode at an annual average rate of 30,700 tonnes per
annum. The management of the S&K Mine is confident that it will be successful in
maintaining production at a similar rate for the remainder of fiscal 2003.
Page 7 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
The mine moved a total of 4.5 million tonnes in Q2'03 compared to 3.6 million
tonnes in Q2'02. The construction and stacking of various heap cells continued
during the quarter resulting in a 23% increase in total ore stacked in Q2'03
compared to Q2'02.
Total copper sale revenues in Q2'03 increased by 2% over Q2'02 as a result of
increased copper prices. Excluding a $4.3 million write-down against heaps metal
inventories, operating costs in Q2'03 decreased by 3% over Q2'02 mainly due to
decreases in extractant, freight and insurance net of increases in equipment
rental charges, explosives, and electrical parts.
During Q2'03, Ivanhoe Mines wrote down its share of the S&K Mine inventory of
metal on the heaps by approximately $4.3 million, as a result of a downward
adjustment in the estimated recoverable quantities of copper on the heaps.
Ivanhoe Mines continues to review the underlying technical data and accordingly
may subsequently increase or decrease the amount of this write-down. The amount
of any adjustment may be material.
In Q2'03, the mine capitalized approximately $352,000 in costs of removing
additional waste material.
No decisions have been made to implement the expansion plan contemplated by the
scoping study submitted in Q1'03 or any other plan for developing the Letpadaung
deposit. The new economic sanctions against Myanmar recently enacted by the
United States and Great Britain prohibit the exportation or re-exportation of
financial services to Myanmar either from the United States or by any United
States person. The management of the S&K Mine is hopeful it will be able to
adapt to these new sanctions and continue to maintain the mine operations. For
the last several years, the S&K Mine has not transferred funds to nor received
any transfer of funds from the Company. At the end of July 2003, the S&K Mine
had $3.4 million in cash. The management of the S&K Mine intends to assign most
of its August's cash flows to repay the $8.7 million in principal and interest
loan payment due at the end of the August.
Page 8 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
IRON OPERATION
SAVAGE RIVER MINE, TASMANIA
Three months ended June 30, 2003
--------------------------------------------------------
Percent
Increase
2003 2002 (decrease)
--------------------------------------------------------
Total volumes moved BCM (000's) 2,586 2,397 8%
Tonnes milled (000's) 1,278 1,238 3%
Strip ratio BCM waste/BCM ore 7.6 7.4 3%
Concentrate production (000's) 513 587 (13%)
Iron content Fe% 30.5% 36.0% (15%)
Pellet production Tonnes 534,172 576,264 (7%)
Pellet sales Tonnes 556,839 607,275 (8%)
Sales US$/tonne $ 31 $ 32 (2%)
US$(000) 17,486 19,370 (10%)
Cost of operations US$(000) 18,971 14,630 30%
Operating profit (loss) US$(000) (2,660) 3,838 (169%)
Average foreign exchange rate US$/AUD$ 0.6409 0.5511 16%
Six months ended June 30, 2003
--------------------------------------------------------
Percent
Increase
2003 2002 (decrease)
--------------------------------------------------------
Total volumes moved BCM (000's) 5,318 4,872 9%
Tonnes milled (000's) 2,673 2,374 13%
Strip ratio BCM waste/BCM ore 7.9 6.4 24%
Concentrate production (000's) 1,121 1,132 (1%)
Iron content Fe% 31.8% 36.1% (12%)
Pellet production Tonnes 1,112,851 1,109,759 0%
Pellet sales Tonnes 1,128,244 1,194,460 (6%)
Sales US$/tonne $ 30 $ 31 (3%)
US$(000) 33,454 36,492 (8%)
Cost of operations US$(000) 34,813 27,297 28%
Operating profit (loss) US$(000) (3,367) 7,116 (147%)
Average foreign exchange rate US$/AUD$ 0.6169 0.5348 15%
Page 9 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
Total pellet production in Q2'03 decreased by 7% over Q2'02. The decrease in
production was a combination of a 15% decrease in grade offset by a 3% increase
in tonnes milled resulting in a 13% decrease in concentrate tonnage production.
Total tonnage of pellets sold in Q2'03 decreased by 8% over Q2'02. The majority
of the second quarter decrease in sale volumes is attributed to lower
concentrate production and shipment delays at the end of the quarter. The
average pellet prices remained approximately the same for both quarters. Highly
competitive conditions continued to prevail in iron ore markets throughout 2003.
Most of Savage River's planned production over the next 3-4 years has now been
taken up in supply contracts. Prices for iron ore lumps and fines were settled
during the quarter and negotiations for pellet prices should be finalized in the
third quarter with expected price increase in the 9-10% range.
Operating profit decreased from $3.8 million in Q2'02 to a loss of $2.7 million
in Q2'03. The $6.5 million decrease in profit is the result of a $1.9 million
decrease in revenue, a $4.3 million increase in cost of operations and a $0.3
million increase in depreciation.
In Q2'03, the cost of operations in US dollars were up 30% over the same period
in Q2'02. The 30% increase is the combined result of a 12% increase in operating
costs plus a nominal 16% increase in US$ denominated costs due to the
strengthening of the Australian dollar. The majority of the 12% increase in
operating costs is mainly attributable to increases in wages, fleet rental
charges, explosives and consumables offset by a decrease in fuel and insurance
charges attributed to self insuring on some plant assets and business
interruption coverage. The conversion to natural gas of four of the five
furnaces at the pellet plant was completed. The conversion of the fifth furnace
will be completed only when higher production throughput is required.
In June 2003, due to a shortage of sufficient hard ore, the grinding capacity
was reduced which resulted in lower pellet production for the month. During the
second quarter, the redesign of the North Pit Extension was completed in order
to improve the continuity of ore supply over the next five years. In the South
Center pit, improved ore supply planning should be achieved from improved
scheduling of various cut back sequences. In Q2'03 the total tonnages moved
increased by 8% over Q2'02. The removal of waste constitutes the majority of the
increase in volumes moved, resulting in a capitalized pre-stripping charge of
$3.0 million in Q2'03 and $5.6 million in Q2'02.
In May 2003, the Company agreed to make available an AUD$8 million working
capital credit facility to enable Savage River to meet any cash shortfalls that
may arise in fiscal 2003. A total of AUD$5 million was advanced by the Company
during the quarter. The management of Savage River is anticipating that it will
request the transfer of the remaining AUD$3 million by the end of September
2003.
Page 10 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
OTHER PROJECTS
EUNSAN GOLD AND SILVER MINE, SOUTH KOREA
The mill remained on care and maintenance and there was no gold produced during
Q2'03. Underground development continued throughout Q2'03 with the intention to
continue mining the high grade eastern shoot using a combination of cut and fill
and shrinkage stoping mining method. In Q2'03 a total of approximately 6,200
tonnes grading 26 g/t gold equivalent (Q1'03 - 2,700 tonnes grading 15 g/t gold)
was hauled and stored on surface.
During Q2'03, a second mine access, via an open pit, was developed. The purpose
of the second mine access is to allow for the mining of the high-grade eastern
shoot beneath the original open pit. As the existing site tailings pond is
nearly full, other means of dewatering and transporting milled tailings to the
Sanbong pit were investigated in connection with a possible re-commissioning of
the mill in the next quarter.
On the nearby Gasado Island prospect, significant gold and silver intercepts
were encountered in Q2'03 through exploration drilling. Exploration and
underground development expenditures in Q2'03 totalled $0.2 million.
On July 31, 2003 Ivanhoe transferred all of its Korean assets and certain
Mongolian exploration licenses to MX Capital Corp. in exchange for common shares
of MX Capital Corp. (see "Exploration and Development -MX Capital).
BAKYRCHIK GOLD MINE, KAZAKHSTAN
Mining property care and maintenance costs totalled $0.7 million in Q2'03
compared to $0.3 million in Q2'02. The majority of the increase in costs in
Q2'03 is due to additional consultant engineering work and lower revenue from
gold sales. The mine initiated the treatment of oxide ore from stockpiled ore in
May 2003. During the quarter, a total of 23,000 tonnes were processed generating
approximately 920 ounces of gold. In mid July the mining of remaining oxide ore
stockpiles was completed and the focus of the operation will shift to the
possibility of mining and treatment of sulphide ores. Work continued throughout
the quarter on the sulphide ore feasibility and test work programs. Test work
has focussed on a roasting process, but other processes including bacterial and
chemical oxidation were also tested during the quarter.
GENERAL
The corporate general and administrative expenses increased from $2.7 million in
Q2'02 to $3.1 million in Q2'03. The majority of the increase during Q2'03 is
attributed to increased expenses related to investor relations tours, additional
office charges in Asia, travel and legal costs related to financing activities
and negotiation of various Chinese joint venture agreements and alliances.
All funds received in 2003 from private placement financings were transacted in
Canadian dollars and the funds were converted to US dollars only when required.
The
Page 11 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
majority of the $6.0 million corporate foreign exchange gain in Q2'03 mainly
relates to the strengthening of the Canadian dollar by approximately 9% during
the quarter.
CASH RESOURCES AND LIQUIDITY
At June 30, 2003, consolidated working capital was $58.1 million including cash
of $76.2 million compared with working capital of $22.3 million and cash of
$46.9 million at December 31, 2002.
From late December to April 2003 the Company raised a total of $89.4 million
(Cdn$134.5 million) through the issue of 20 million common shares of the Company
at Cdn$3.00 per share and the issue of 21,296,080 common shares of the Company
at Cdn$3.50 per share. The proceeds will be used for working capital and to fund
the Mongolia exploration and property acquisition activities in 2003.
Total expenditures for the balance of 2003, including all exploration, mine
care and maintenance costs and corporate administrative costs, are estimated to
range between $55 million to $65 million.
OUTLOOK
In the third quarter of 2003, annual copper production at the S&K Mine is
expected to increase from 30,000 to 33,000 tonnes while annual pellet and iron
concentrate production at the Savage River Mine is expected to remain at
approximately 2.2 million tonnes per annum.
Apart from variations in production volumes, Ivanhoe Mines' earnings and cash
flows are directly affected by metal prices, variations in the exchange rates
between the Australian and U.S. dollars, and the Canadian and U.S. dollars.
Various risks, including fluctuations in commodity prices, foreign exchange
rates, customer demand, and financing and political uncertainties, can
adversely affect Ivanhoe Mines' future profitability and its ability to realize
anticipated increases in production capacity.
Unlike copper cathode, whose characteristics are set by commonly agreed
standards, iron ore products need to reflect the specific requirements and
limitations of customers. 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
throughout 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 S&K Mine is currently not in compliance with certain covenants in its bank
loan agreement. For the last twelve months, the debt service reserve (an amount
to cover the next principal and interest payments) has been deficient. The
management of the S&K
Page 12 of 13
IVANHOE MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Stated in U.S. dollars)
Mine is of the opinion that the lenders will not demand repayment of the loan
notwithstanding the foregoing. The S&K Mine's bank loan is non-recourse to the
Company.
Ivanhoe Mines' existing cash resources are sufficient to meet all of its planned
capital expenditures for the next six months. However, over the long term,
Ivanhoe Mines 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 Mongolia properties
and the Bakyrchik Gold Mine.
Since the S&K Mine's loan is not at fixed interest rates, future fluctuations in
interest rates will have a significant impact on the profitability of the S&K
Mine and also on Ivanhoe Mines' ability to successfully finance its other
undeveloped or partially developed projects.
Since factors beyond Ivanhoe Mines' control may adversely affect its access to
funding or its ability to recruit third party participants, there can be no
assurance Ivanhoe Mines' undeveloped or partially developed projects can be
fully developed in whole or in part.
Page 13 of 13
OTHER APPENDIX 4D INFORMATION
1 NTA BACKING
Previous
corresponding
Current period period
- ---------------------------------------------------------------------------------------------------
Net tangible assets per ordinary security $0.90 $ 0.91
2 DETAILS OF ENTITIES OVER WHICH CONTROL HAS BEEN GAINED
DURING THE PERIOD
None
3 DETAILS OF ENTITIES OVER WHICH CONTROL HAS BEEN LOST
DURING THE PERIOD
None
4 DETAILS OF INDIVIDUAL AND TOTAL DIVIDENDS OR
DISTRIBUTIONS AND DIVIDEND OR DISTRIBUTION PAYMENTS
None
5 ASSOCIATES AND JOINT VENTURE ENTITIES
Holding of
Ivanhoe Mines
Entity Ltd. in Entity
---------------------------------
Myanmar
Ivanhoe Copper
Company
Limited 50.0%
---------------------------------
Pacific Minerals
Ltd. 36.3%
---------------------------------
6 DETAILS OF AGGREGATE SHARE OF PROFITS OF JOINT
VENTURE - MYANMAR IVANHOE COPPER COMPANY LTD
- 50% INTEREST
Previous
corresponding
Current period period
--------------------------------
Profit from ordinary activities before tax (2,382) 1,780
Income tax on ordinary activities (370) (123)
- ----------------------------------------------------------------------------------------------------
Profit from ordinary activities after tax (2,752) 1,657
Extraordinary items net of tax - -
- ----------------------------------------------------------------------------------------------------
Net profit (loss) (2,752) 1,657
Adjustments - -
- ----------------------------------------------------------------------------------------------------
Share of loss of joint venture (2,752) 1,657
- ----------------------------------------------------------------------------------------------------
7 DETAILS OF AGGREGATE SHARE OF PROFITS OF ASSOCIATES
- PACIFIC MINERALS LTD - 36.3% INTEREST
Previous
corresponding
Current period period
--------------------------------
Share of net loss of associate (613) None
8 ACCOUNTING STANDARDS USED IN COMPILING THE REPORT Canadian GAAP