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[LOGO - IVANHOE MINES LIMITED]
WORLD TRADE CENTRE TEL: 604-688-5755
Suite 654-999 Canada Place FAX: 604-682-2060
Vancouver-British Columbia-Canada V6C3EI www.ivanhoemines.com
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November 29, 2006
BY EDGAR
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Lily Dang, Staff Accountant
RE: IVANHOE MINES LTD.
FORM 40-F FOR FISCAL YEAR ENDED DECEMBER 31, 2005
FILED APRIL 5, 2006
FILE NO. 001-32403
Dear Ms. Dang:
This letter is in response to a supplemental request made by you, on Tuesday
November 7, 2006, that Ivanhoe Mines Ltd. provide additional information to the
Securities and Exchange Commission (the "Commission") concerning the above
captioned Annual Report on Form 40-F for the fiscal year ended December 31,
2005 (the "40-F") and the audited consolidated financial statements for the
year ended December 31, 2005 (the "Financial Statements") included therein.
We submit this letter in response to the supplemental request. For ease of
reference, we have reproduced our understanding of the request in bold-face
type below, followed by our response. Terms used but not defined herein have
the meanings set forth in the 40-F.
RESPONSE TO SUPPLEMENTAL REQUEST
FORM 40-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
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EXHIBIT 2 - FINANCIAL STATEMENTS
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NOTE 9 - PROPERTY, PLANT AND EQUIPMENT, PAGE 78
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PLEASE PRESENT THE KEY ARGUMENTS AS TO WHY YOU BELIEVE THAT THE EXPENDITURES
IDENTIFIED IN NOTE 9 RELATING TO THE EXPLORATION SHAFT (CAPITAL WORKS IN
PROGRESS AT DECEMBER 31, 2005 CONSISTED MAINLY OF SURFACE ASSETS BEING
CONSTRUCTED FOR THE EXPLORATION SHAFT AT OYU TOLGOI ($21.4 MILLION)) SHOULD BE
CAPITALIZED. IN FORMULATING YOUR RESPONSE PLEASE REFER TO SEC INDUSTRY GUIDE 7,
WHICH PROVIDES GUIDANCE ON THE CAPITALIZATION OF EXPLORATION EXPENDITURES.
Page 2 of 6
RESPONSE
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Ivanhoe Mines has been exploring the Oyu Tolgoi properties since May 2000. In
2002, Ivanhoe Mines exercised its earn-in right to acquire a 100% interest in
the Oyu Tolgoi project from BHP Minerals International Exploration Inc. In
December 2003, Ivanhoe Mines converted its 4 exploration licenses on the
properties into 60 year mining licenses, which are renewable for an additional
40 years.
From 2000 to 2005, the Company has expensed exploration expenditures of
approximately $293 million. These expenditures primarily consist of payroll
expenses, contractor costs, drilling expenditures and camp costs.
Property, plant and equipment acquired from May 2000 onward including moveable
equipment, were capitalized where the equipment had an alternative use.
In September 2005 the Company issued its Integrated Development Plan ("IDP")
which outlined the framework for the development of the project. The project
consists of two deposit groups, called the Southern Oyu Deposits and the Hugo
Dummett North and South Deposits. The IDP schedules development to occur over a
15-year period, providing for an ultimate mine life that is expected to exceed
40 years.
The IDP consisted of:
1. a feasibility-level evaluation of an initial, large open-pit mine
developed on the near-surface Southern Oyu deposits; and
2. pre-feasibility and scoping-level evaluations of the associated
infrastructure, such as power supply, and of an underground
block-cave mining operation at the Hugo Dummett North and South
deposits.
During the second half of 2005, Ivanhoe Mines commenced constructing Shaft No.
1. In certain disclosure documents Ivanhoe Mines has made reference to this
shaft as the Exploration Shaft, mainly to differentiate it from Shaft No. 2, or
the Production Shaft. These terms are used internally for ease of reference;
however, the current plan for development would result in both shafts being
used in the exploration, development, construction and production stages of the
Oyu Tolgoi mine. This shaft will be 1,340 meters in depth once completed and
will be used for drilling of the underground deposits in order to quantify
reserves. The Company estimates that the cost to construct Shaft 1 will be
approximately $135 million, consisting of approximately $30 million for the
shaft surface assets and $105 million for the below surface costs.
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The surface assets include the Head Frame, control room, hoisting equipment and
ancillary facilities. The surface assets were considered capital works in
progress at December 31, 2005 and became available for use in January 2006. The
below surface shaft costs consist of the excavation costs, concrete associated
with the shaft liner and other associated sinking costs. Pre-sinking for the
shaft was completed in January 2006 and sinking for the shaft commenced in
February 2006 and is expected to be completed in late 2007.
At December 31, 2005, $21.4 million had been spent on the surface assets for
Shaft No. 1. These amounts were capitalized as "capital works in progress" as
disclosed in Note 9 to the Financial Statements. This accounting treatment was
based on Ivanhoe Mines assessment that these expenditures met the definition of
an asset under Statement of Financial Accounting Concepts No. 6 ("CON 6"). CON
6 provides the following definition, "Assets are probable future economic
benefits obtained or controlled by a particular entity as a result of past
transactions and events." (paragraph 25). Management determined that these
surface assets have the three essential characteristics of an asset (CON6
paragraph 26):
o Embodies a probable future benefit that involves a capacity singly or in
combination with other assets, to contribute directly or indirectly to
future cash net inflows. The surface assets will be used for either future
underground exploration at the existing or alternative sites, the results
of which we believe will bring probable future net cash inflows; or to
facilitate production activities.
o A particular entity can obtain the benefit and control others access to it.
Ivanhoe Mines can obtain the benefit and control others' access to the
assets; and
o The transaction or other event giving rise to the entity's right to or
control of the benefit has already occurred. Ivanhoe Mines already owns and
controls the assets.
Management further determined that the surface assets are tangible assets that
can be sold or transferred to other locations to further either exploration or
production activities. This is in contrast to the below surface shaft costs
which cannot be transferred to other locations or dismantled and sold to third
parties. The Company has also confirmed with independent third parties that a
market does exist for used mining equipment and above ground infrastructure.
The Company also concluded that the sinking costs amounting to $2.4 million at
December 31, 2005, did not meet the definition of an asset since they were not
tangible or exchangeable (CON6 paragraph 26). These costs relate to the below
surface costs that cannot be moved or reused at other sites. These costs have
been expensed as exploration costs as incurred during 2005. From January 1,
2006 to October 31, 2006 a further $27 million of below surface costs were
expensed. Future sinking costs will be treated in the same manner.
Ivanhoe Mines determined based on this analysis that an asset had been acquired
and it was appropriate to capitalize the acquisition costs. At the end of the
reporting period the Company considered whether a day two impairment of the
surface assets had occurred. In establishing whether an impairment of the
Page 4 of 6
assets had occurred under FASB Statement No 144, Accounting for Impairment or
Disposal of Long-Lived Assets, reference was made to EITF 04-3: Mining Assets:
Impairment and Business Combinations.
A major issue addressed by the EITF was Issue 2:
"Whether an entity should consider the future cash flows associated
with value beyond proven and probable reserves (VBPP) in the cash
flow analysis used to test mining assets for impairment under
Statement 144".
The conclusion of the Task Force was:
"On Issue 2, the Task Force reached a consensus that an entity
should include the cash flows associated with VBPP in estimates of
future cash flows (both discounted and undiscounted) used for
determining whether a mining asset is impaired under Statement 144.
The Task Force noted that estimated cash flows also should include
the estimated cash outflows required to develop and extract the
VBPP."
Ivanhoe Mines considered the potential impairment of these assets by comparing
the carrying value of property, plant and equipment and the mineral property
assets to the cash flows that are contained in the IDP and the disposal value
that could be obtained from a timely disposition of the surface assets. The
conclusion of management was that the assets were not impaired at December 31,
2005. Ivanhoe Mines continues to consider whether an indication of impairment
is present at each reporting period.
OTHER CONSIDERATIONS
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The Division of Corporation Finance issued FREQUENTLY REQUESTED ACCOUNTING AND
FINANCIAL REPORTING INTERPRETATIONS AND GUIDANCE in March 31, 2001 which stated
with respect to mining exploration costs that:
"Recoverability of capitalized costs is likely to be insupportable
under FASB Statement No. 121 prior to determining the existence of
a commercially minable deposit, as contemplated by Industry Guide 7
for a mining company in the exploration stage. As a result, the
staff would generally challenge capitalization of exploration
costs, and believes that those costs should be expensed as incurred
during the exploration stage under US GAAP."
Ivanhoe Mines believes that the Company's accounting policy follows this
guidance in that exploration costs, including amortization of capital assets
used in exploration activities, are expensed prior to the establishment of
proven and probable reserves. Management believes that the presumption that the
"recoverability of capitalized costs is likely to be insupportable" can be
rebutted with respect to costs capitalized by the Company to property, plant
and equipment.
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CONCLUSION
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Based on the above, the Company concludes that its accounting policies are in
accordance with US GAAP and SEC Industry Guide 7. Specifically the Company
considers that the expenditures in question represent an asset in accordance
with CON 6 and that recoverability of costs is supportable in accordance with
the provisions of FASB 144 and EITF 04-3. Therefore it is appropriate to
capitalize the surface expenditures as assets and depreciate the assets over
their useful lives. Depreciation charges during the exploration stage will be
expensed as exploration costs whereas thereafter the depreciation charges will
be capitalized as development costs, or as a cost of production, as
appropriate. This treatment is consistent with our property, plant and
equipment accounting policy in Note 2 (h) of the Financial Statements.
As a follow-up to the IDP, on January 30, 2006 the Company announced that an
independent estimate prepared by GRD Minproc Limited, of Perth, Australia,
upgraded the Measured and Indicated gold and copper resources contained within
the planned open-pit deposits in the southern part of the Company's Oyu Tolgoi
Project to the Proven and Probable Mineral Reserve categories. The conversion
of previously classified resources to proven and probable reserves evidence the
merits of this property, however this subsequent event was not the basis upon
which the Company considered it appropriate to capitalize the surface assets.
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CLOSING COMMENTS
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The Company acknowledges that the Company is responsible for the adequacy and
accuracy of the disclosures in the Annual Report. The Company further
acknowledges that comments of the staff of the Commission or changes to
disclosure in response to such comments do not foreclose the Commission from
taking any action with respect to the Annual Report. In addition, the Company
further acknowledges that it may not assert the comments of the staff of the
Commission as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
We appreciate your assistance in reviewing this supplemental response. Please
direct all questions or comments regarding this filing to the undersigned at
604-331-9875.
Yours very truly,
IVANHOE MINES LTD.
By: /s/ Tony Giardini
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Name: Tony Giardini
Title: Chief Financial Officer
cc: Karl Hiller, Securities and Exchange Commission
Audit Committee of Ivanhoe Mines Ltd.
John Macken, President and CEO, Ivanhoe Mines Ltd.
Gregg Orr, Deloitte & Touche LLP
Andrew J. Foley, Paul, Weiss, Rifkind, Wharton & Garrison LLP
Paul Goldman, Goodmans Barristers and Solicitors