CURRENT

Cash and cash equivalents (Note 5)

Short-term investments (Note 6)

Accounts receivable (Note 7)

Inventories (Note 8)

Prepaid expenses

 

TOTAL CURRENT ASSETS

 

LONG-TERM INVESTMENTS (Note 9)

OTHER LONG-TERM INVESTMENTS (Note 10)

PROPERTY, PLANT AND EQUIPMENT (Note 11)

DEFERRED INCOME TAXES (Note 16)

OTHER ASSETS (Note 12)

 

TOTAL ASSETS

 

 

 

CURRENT

Accounts payable and accrued liabilities (Note 13)

Amounts due under credit facilities (Note 14)

Interest payable on long-term debt (Note 15 (b))

Convertible credit facility (Note 15 (a))

Rights offering derivative liability (Note 18 (d))

 

TOTAL CURRENT LIABILITIES

 

CONVERTIBLE CREDIT FACILITY (Note 15 (b))

AMOUNTS DUE UNDER CREDIT FACILITIES (Note 14)

PAYABLES TO RELATED PARTY (Note 22 (a))

DEFERRED INCOME TAXES (Note 16)

ASSET RETIREMENT OBLIGATIONS (Note 17)

 

TOTAL LIABILITIES

 

COMMITMENTS AND CONTINGENCIES (Note 24)

 

 

SHARE CAPITAL (Note 18)

Authorized

Unlimited number of preferred shares without par value

Unlimited number of common shares without par value

Issued and outstanding

568,560,669 (2009 — 425,447,552) common shares

SHARE PURCHASE WARRANTS (Note 18 (b) and (c))

BENEFICIAL CONVERSION FEATURE (Note 15 (a))

ADDITIONAL PAID-IN CAPITAL

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Note 19)

DEFICIT

 

TOTAL IVANHOE MINES LTD. SHAREHOLDERS’ EQUITY

 

NONCONTROLLING INTERESTS (Note 20)

 

TOTAL EQUITY

 

TOTAL LIABILITIES AND EQUITY

 

/s/ D. Korbin D. Korbin, Director

 

 

REVENUE

COST OF SALES

Production and delivery

Depreciation and depletion

Write-down of carrying value of inventory

 

COST OF SALES

 

EXPENSES

Exploration (Note 3 and 18 (a))

General and administrative (Note 18 (a))

Depreciation

Accretion of asset retirement obligations

Gain on sale of other mineral property rights

Write-down of carrying values of property, plant and equipment

 

TOTAL EXPENSES

 

OPERATING LOSS

 

 

OTHER INCOME (EXPENSES)

Interest income

Interest expense

Accretion of convertible credit facilities (Note 15)

Foreign exchange gains

Unrealized gains on long-term investments (Note 9 (d))

Unrealized gains on other long-term investments

Realized gain on redemption of other long-term investments (Note 10 (a))

Change in fair value of derivative (Note 18 (d))

Change in fair value of embedded derivatives (Note 15 (b))

Loss on conversion of convertible credit facility (Note 15 (b))

Transaction costs on issuance of convertible debenture (Note 15 (b))

Write-down of carrying value of long-term investments (Note 9 (c))

Gain on sale of long-term investment

SouthGobi Hong Kong listing fees

 

LOSS BEFORE INCOME TAXES AND OTHER ITEMS

Recovery of income taxes (Note 16)

Share of loss of significantly influenced investees (Note 9)

 

NET LOSS FROM CONTINUING OPERATIONS

INCOME (LOSS) FROM DISCONTINUED OPERATIONS (Note 4)

 

NET LOSS

NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS (Note 20)

 

NET LOSS ATTRIBUTABLE TO IVANHOE MINES LTD.

 

 

BASIC AND DILUTED (LOSS) EARNINGS PER SHARE

ATTRIBUTABLE TO IVANHOE MINES LTD. FROM

CONTINUING OPERATIONS

DISCONTINUED OPERATIONS

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000’s)

 

 

Balances, December 31, 2008

Net loss

Other comprehensive income (Note 19)

 

Comprehensive loss

 

 

Shares issued for:

Exercise of stock options

Private placement (Note 18 (b)), net of issue costs of $3,032

Bonus shares

Share purchase plan

Convertible credit facility (Note 15 (a))

Other increase in noncontrolling interests (Note 20)

Dilution gains

Stock compensation charged to operations

 

Balances, December 31, 2009

Net loss

Other comprehensive income (Note 19)

 

Comprehensive loss

 

 

Shares issued for:

Exercise of stock options

Exercise of share purchase warrants (Note 18 (b)), net of issue costs of $9,730

Conversion of Rio Tinto convertible credit facility (Note 15 (a))

Private placement (Note 18 (b)), net of issue costs of $167

Consulting services

Bonus shares

Share purchase plan

Convertible credit facility (Note 15 (a))

Other increase in noncontrolling interests (Note 20)

Rights offering (Note 18 (d))

Dilution gains

Stock-based compensation

 

Balances, December 31, 2010

 

 

Cash used in operating activities (Note 21)

 

 

Proceeds from sale of discontinued operations

Purchase of short-term investments

Purchase of long-term investments

Purchase of other long-term investments

Proceeds from sale of other mineral property rights

Proceeds from redemption of short-term investments

Proceeds from sale of long-term investments

Proceeds from redemption of other long-term investments

Expenditures on property, plant and equipment

Increase in environmental bonds

Proceeds from other assets

 

Cash used in investing activities of continued operations

Cash used in investing activities of discontinued operations

 

Cash used in investing activities

 

 

Issue of share capital

Proceeds from convertible credit facility (Note 15)

Proceeds from credit facilities

Repayment of credit facilities

Increase to deferred charges

Noncontrolling interests’ reduction of investment in subsidiaries

Noncontrolling interests’ investment in subsidiaries

 

Cash provided by financing activities

 

 

 

 

 

 

 

Cash on hand and demand deposits

Short-term money market instruments

 

 

 

Ivanhoe Mines Ltd. (the “Company”), together with its subsidiaries (collectively referred to as “Ivanhoe Mines”), is an international mineral exploration, development and production company holding interests in and conducting operations on mineral resource properties principally located in Central Asia and Australia.

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The significant accounting policies used in these consolidated financial statements are as follows:

These consolidated financial statements include the accounts of the Company and those entities in which the Company has a controlling financial interest either through voting rights or means other than voting rights. For these entities, the Company records 100% of the revenues, expenses, cash flows, assets and liabilities in the consolidated financial statements. For entities that the Company controls but holds less than a 100% ownership interest, a noncontrolling interest is recorded in the consolidated statement of operations and balance sheet to reflect the noncontrolling interest’s share of the net income (loss) and net assets of the entity, respectively.

The Company has assessed all entities, including those entities that hold economic interests in projects that are in the exploration or development stage, in which the Company holds an economic interest, to determine if they are variable interest entities (“VIEs”). If they are determined to be VIEs, the Company assesses on an ongoing basis who the primary beneficiary is based on who has the power to direct matters that most significantly impact the VIE’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Matters that may have a significant impact on the VIE’s economic performance include, but are not limited to, approval of budgets and programs, financing decisions, construction decisions and delegation of certain responsibilities to the operator of the project. For VIEs where the Company is the primary beneficiary, the Company consolidates the entity and records a noncontrolling interest, measured initially at its estimated fair value, for the interest held by other equity owners. For VIEs where the Company has shared power with unrelated parties over the aforementioned matters that most significantly impact the VIE’s economic performance, the Company uses the equity method of accounting to report their results.

The following table illustrates the Company’s policy used to account for its interests in significant entities where the Company holds less than a 100% economic interest. The Company consolidates all entities where it holds a 100% economic interest.

Ivanhoe Australia Limited (i)

SouthGobi Resources Ltd. (ii)

Oyu Tolgoi LLC (iii)

Altynalmas Gold Ltd. (iv)

The Company holds a 50.0% interest in Altynalmas Gold Ltd. (“Altynalmas”), which owns the Kyzyl Gold Project that hosts the Bakyrchik and Bolshevik gold deposits in Kazakhstan. The Company accounts for its interest in this VIE using the equity method. The maximum exposure related to this VIE is limited to the carrying amount of the shareholder loan due from Altynalmas (Note 9(a)).

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, among other things, the recoverability of accounts receivable and investments, the proven and probable ore reserves, the estimated recoverable tonnes of ore from each mine area, the estimated net realizable value of inventories, the provision for income taxes and composition of deferred income tax assets and deferred income tax liabilities, the expected economic lives of and the estimated future operating results and net cash flows from property, plant and equipment, depreciation and depletion, stock-based compensation, beneficial conversion feature, estimated fair value of share purchase warrants, estimated fair value of derivatives and embedded derivatives, and the anticipated costs and timing of asset retirement obligations.

The Company has determined 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 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 are translated 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 and losses are included in operations.

For foreign subsidiaries whose functional currency is the local currency, assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates in effect for the period. The related translation gains and losses are included in accumulated other comprehensive income (loss) within shareholders’ equity.

Sales revenues are recognized when the risks and rewards of ownership pass to the customer, collection is reasonably assured and the price is reasonably determinable. This occurs when coal is either loaded onto a train or truck or when it is unloaded at the final destination, depending on the terms of the sales contract.

Cash and cash equivalents include short-term money market instruments with terms to maturity, at the date of acquisition, not exceeding 90 days.

Short-term investments include money market instruments with terms to maturity, at the date of acquisition, exceeding 90 days and with remaining terms at December 31, 2010 of less than one year.

Stockpiles are valued at the lower of production cost and net realizable value. Production cost includes direct and indirect labour, operating materials and supplies, transportation costs, and an applicable portion of operating overhead, including depreciation and depletion. Net realizable value is the expected average selling price of the finished product less the costs to get the product into saleable form and to the selling location.

Mine stores and supplies are valued at the lower of the weighted average cost, less allowances for obsolescence, and replacement cost.

Long-term investments in companies in which Ivanhoe Mines has voting interests between 20% and 50%, or where Ivanhoe Mines has the ability to exercise significant influence, are accounted for using the equity method. Under this method, Ivanhoe Mines’ share of the investees’ 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.

Long-term investments in equity securities that have readily determinable fair values and are not subject to significant influence are classified as either “available-for-sale” or “held-for-trading”. Available-for-sale investments are measured at fair value with unrealized gains and losses recognized in accumulated other comprehensive income as a separate component of shareholders’ equity, unless the declines in market value are judged to be other than temporary, in which case the losses are recognized in income for the period. Held-for-trading investments are measured at fair value with changes in those fair values recognized in income for the period.

The cost method is used to account for long-term investments in equity securities that are not accounted for using the equity method or classified as either “available-for-sale” or “held-for-trading”.

All direct costs related to the acquisition of mineral property interests are capitalized in the period incurred.

Generally, 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. Exploration costs include value-added taxes incurred in foreign jurisdictions when recoverability of those taxes is uncertain.

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.

Property, 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 one to twenty years).

Capital works in progress are not depreciated until the capital asset has been put into operation.

Ivanhoe Mines reviews the carrying values of its property, plant and equipment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. An impairment is considered to exist if total estimated future cash flows, or probability-weighted cash flows on an undiscounted basis, are less than the carrying value of the assets. An impairment loss is measured and recorded based on discounted estimated future cash flows associated with values beyond proven and probable reserves and resources. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable future cash flows that are largely independent of cash flows from other asset groups. Generally, in estimating future cash flows, all assets are grouped at a particular mine for which there is identifiable cash flows.

Stripping costs incurred during the production phase of a mine are variable production costs that are included in the costs of inventory produced during the period that the stripping costs are incurred.

Ivanhoe Mines recognizes liabilities for statutory, contractual or legal obligations associated with the retirement of property, plant and equipment, when those obligations result from the acquisition, construction, development or normal operation of the assets. Initially, a liability for an asset retirement obligation is recognized at its fair value in the period in which it is incurred. Upon initial recognition of the liability, the corresponding asset retirement cost is added to the carrying amount of that asset and the cost is amortized as an expense over the economic life of the related asset. Following the initial recognition of the asset retirement obligation, the carrying amount of the liability is increased for the passage of time and adjusted for changes to the amount or timing of the underlying cash flows needed to settle the obligation.

The Company has an Employees’ and Directors’ Equity Incentive Plan which is disclosed in Note 18. The fair value of stock options at the date of grant is amortized to operations, with an offsetting credit to additional paid-in capital, on a straight-line basis over the vesting period. If and when the stock options are ultimately exercised, the applicable amounts of additional paid-in capital are transferred to share capital.

The provision for deferred income taxes is based on the liability method. Deferred taxes arise from the recognition of the tax consequences of temporary differences by applying statutory tax rates applicable to future years to differences between the financial statement’s carrying amounts and the tax bases of certain assets and liabilities. The Company records a valuation allowance against any portion of those deferred income tax assets that management believes will, more likely than not, fail to be realized.

The basic loss per share is computed by dividing the net loss attributable to common stock by the weighted average number of common shares outstanding during the year. All stock options and share purchase warrants outstanding at each period end have been excluded from the weighted average share calculation. The effect of potentially dilutive stock options, share purchase warrants and the Rio Tinto convertible credit facility was antidilutive in the years ending December 31, 2010 and 2009.

The potentially dilutive shares excluded from the loss per share calculation due to antidilution are as follows:

Options

Share purchase warrants

Convertible credit facility

 

Total potentially dilutive shares

 

In February 2011, the Company completed a rights offering which was open to all shareholders on a dilution free, equal participation basis at a subscription price less than the fair value of a common share of the Company (Note 18 (d)). In accordance with the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) guidance for earnings per share, basic and diluted loss per share for all periods presented have been adjusted retroactively for a bonus element contained in the rights offering. Specifically, the weighted average number of common shares outstanding used to compute basic and diluted loss per share for the years ended December 31, 2010 and 2009 have been multiplied by a factor of 1.06.

The Company has three operating segments, its development division located in Mongolia, its coal division located in Mongolia, and its exploration division with projects located primarily in Australia and Mongolia.

Certain of the comparative figures have been adjusted retroactively for a bonus element contained in the rights offering (Note 2 (o)). In particular, the Company has adjusted the weighted average number of common shares outstanding and loss per share in the prior period.

In January 2010, the ASC guidance for fair value measurements and disclosures was updated to require additional disclosures related to transfers in and out of level 1 and 2 fair value measurements and enhanced detail in the level 3 reconciliation. The updated guidance clarified the level of disaggregation required for assets and liabilities and the disclosures required for inputs and valuation techniques used to measure the fair value of assets and liabilities that fall in either level 2 or level 3. The updated guidance was effective for the Company’s fiscal year beginning January 1, 2010, except for the level 3 disaggregation which is effective for the Company’s fiscal year beginning January 1, 2011. The adoption of the updated guidance had no impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2009, the ASC guidance for consolidation accounting was updated to require an entity to perform a qualitative analysis to determine whether the enterprise’s variable interest gives it a controlling financial interest in a VIE. This qualitative analysis identifies the primary beneficiary of a VIE as the entity that has both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE. The updated guidance was effective for the Company’s fiscal year beginning January 1, 2010. The adoption of the updated guidance had no impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2010, the ASC guidance for business combinations was updated to clarify existing guidance requiring a public entity to disclose pro forma revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual period only. The update also expands the supplemental pro forma disclosures required to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The updated guidance is effective for the Company’s fiscal year beginning January 1, 2011. The Company does not expect the updated guidance to have a material impact on its financial position or results of operations.

Generally, exploration costs are charged to operations in the period incurred until it has been determined that a property has economically recoverable reserves, at which time subsequent exploration costs and the costs incurred to develop a property are capitalized.

Summary of exploration expenditures by location:

Mongolia

Oyu Tolgoi ⁽¹⁾

Coal Division

Other Mongolia Exploration

 

 

Australia

Indonesia

Other

 

 

 

 

Savage River (a)

Indonesia Coal Division (b)

 

 

 

Cash and cash equivalents at December 31, 2010 included SouthGobi’s balance of $492.0 million (December 31, 2009 — $357.3 million) and Ivanhoe Australia’s balance of $59.3 million (December 31, 2009 — $10.6 million), which were not available for Ivanhoe Mines’ general corporate purposes.

Short-term investments at December 31, 2010 included SouthGobi’s balance of $17.5 million (December 31, 2009 — $15.0 million) and Ivanhoe Australia’s balance of $80.8 million (December 31, 2009 — $nil), which were not available for Ivanhoe Mines’ general corporate purposes.

 

Contingent income (Note 4 (a))

Refundable taxes

Trade receivables

Accrued interest

Related parties (Note 22)

Other

 

 

 

 

Stockpiles

Materials and supplies

 

 

 

 

Investments in companies subject to significant influence:

Altynalmas Gold Ltd. (a)

Exco Resources N.L. (b)

Available-for-sale equity securities (c)

Held-for-trading equity securities (d)

Other equity securities, cost method (e)

 

 

 

 

Amount due from Altynalmas

Carrying amount of equity method investment

 

Net investment in Altynalmas

 

 

Entrée Gold Inc.

Aspire Mining Limited (i)

Emmerson Resources Limited

Intec Ltd. (ii)

Other

 

 

 

 

Ivanhoe Nickel & Platinum Ltd. (i)

GoviEx Gold Inc.

 

 

 

 

Long-Term Notes (a)

Government of Mongolia Treasury Bill (b)

Government of Mongolia tax prepayment (b)

Money Market investments (c)

 

 

 

Bankers Acceptance Rate:

Discount Rates:

Maturity Dates:

Expected Return of Principal:

A-1 Notes

A-2 Notes

B Notes

C Notes

IA Notes

TA Notes

The first tax prepayment of $50.0 million was made pursuant to this arrangement on April 7, 2010.

The second tax prepayment of $100.0 million will be made within 14 days of Oyu Tolgoi LLC fully drawing down the financing necessary to enable the complete construction of the Oyu Tolgoi Project, or on June 30, 2011, whichever date is earlier.

Face Value:

Discount Rates:

Term to Maturity

Face Value:

Discount Rates:

Term to Maturity

Mining plant and equipment

Ovoot Tolgoi, Mongolia (b)

 

 

Other mineral property interests

Oyu Tolgoi, Mongolia (a)

Ovoot Tolgoi, Mongolia (b)

Australia (c)

Other exploration projects

 

 

 

 

Other capital assets

Oyu Tolgoi, Mongolia (a)

Ovoot Tolgoi, Mongolia (b)

Australia (c)