The Oyu Tolgoi Project is approximately 550 kilometres south of Ulaanbaatar, Mongolia"s capital city, and 80 kilometres north of the Mongolia-China border. Mineralization on the property consists of porphyry-style copper, gold, silver and molybdenum contained in a linear structural trend (the Oyu Tolgoi Trend) that has a strike length extending over 23 kilometres. Mineral resources have been identified in a series of deposits throughout this trend. They include, from south to north, the Heruga Deposit, the Southern Oyu deposits (Southwest Oyu, South Oyu, Wedge and Central Oyu) and the Hugo Dummett deposits (Hugo South, Hugo North and Hugo North Extension).
Ivanhoe Mines began capitalizing Oyu Tolgoi development costs on April 1, 2010. During 2011, additions to property, plant and equipment for the Oyu Tolgoi Project totalled $2.8 billion, which included development costs. In 2011, Ivanhoe Mines incurred exploration expenses of $31.8 million at Oyu Tolgoi, compared to $83.4 million incurred in 2010.
Construction of the Oyu Tolgoi copper-gold complex is advancing toward its planned start-up in 2012 and commercial production in the first half of 2013
The Oyu Tolgoi Project initially is being developed as an open-pit operation, with the first phase of mining to start at the near-surface Southern Oyu deposits, which include Southwest Oyu and Central Oyu. A copper concentrator plant, with related facilities and necessary infrastructure to support an initial throughput of 100,000 tonnes of ore per day, is being constructed to process ore scheduled to be mined from the Southern Oyu open pit. Initial production of copper-gold-silver concentrate is expected in Q3"12 and commercial production is projected to begin in the first half of 2013.
In conjunction with the surface activities, an 85,000-tonne-per-day underground block-cave mine also is being developed at the Hugo North Deposit. The throughput capacity of the concentrator plant is expected to be between 150,000 and 160,000 tonnes of ore per day when the underground mine begins production.
Fluor Corporation is in charge of overall Oyu Tolgoi construction program management, as well as services related to engineering, procurement and construction management for the ore processing plant and mine-related infrastructure, such as roads, water supply, a regional airport and administration buildings.
Progress continuing to be made on supply of interim electrical power
The long-term Investment Agreement for the development and operation of Oyu Tolgoi, signed by Ivanhoe Mines, Rio Tinto and the Government of Mongolia on October 6, 2009, recognized that the reliable supply of electrical power is critical to the project. The agreement also confirmed that Ivanhoe Mines has the right to obtain electrical power from inside or outside Mongolia, including China, to meet its initial electrical power requirements for up to four years after Oyu Tolgoi begins commercial production. The agreement established that a) Ivanhoe Mines has the right to build or sub-contract construction of a coal-fired power plant at an appropriate site in Mongolia"s South Gobi Region to supply Oyu Tolgoi; and b) all of the project"s power requirements would be sourced from within Mongolia no later than four years after the start of commercial production.
Oyu Tolgoi LLC is proceeding with arrangements to ensure that electrical power from China will be available for the start of initial production that is expected in Q3"12. In early March 2012, Chinese contractors began construction of the power line and switching station as part of the 87-kilometre, 220-kilovolt power transmission line to be built from the electrical distribution grid in Inner Mongolia, China, to the China-Mongolia border. The construction of the transmission towers along the 95-kilometre section of the power line from the Oyu Tolgoi mine site to the Mongolia-China border was completed in October 2011.
A separate power-purchase agreement establishing a supply arrangement between Mongolian and Chinese authorities is required before Chinese electrical power can be imported into Mongolia. Oyu Tolgoi LLC will be a party to any agreement for the purchase and supply of electrical power.
Subject to negotiations and final agreement, commercial arrangements and power-purchase tariffs are expected to be expedited to ensure that imported power will be available at the Oyu Tolgoi site by Q3"12. In the meantime, additional diesel-powered generating capacity is being provided, with expansion planned for April 2012 to meet the project"s more immediate requirements during the remaining stages of construction.
In November 2011, the Mongolian government provided Oyu Tolgoi LLC with a cabinet resolution allowing for the future construction by Oyu Tolgoi LLC of a coal-fired power plant in Mongolia dedicated to the Oyu Tolgoi Project. Such a plant would require certain Mongolian government permits, the negotiation of commercial agreements with the Mongolian government and coal suppliers, and the arrangement of financing for the accelerated construction. If the establishment of a dedicated power plant is required for the early production at Oyu Tolgoi, the required revisions to the construction schedule for the Oyu Tolgoi Project could adversely affect the project"s ability to achieve the planned start of commercial production in 2013. Although construction of a power plant is expected as part of the Oyu Tolgoi Project"s future development, there is no provision for a plant in the current capital cost estimates for 2012 and the financing that would be required for such a plant is not contemplated as part of the Company"s current financing plan. The Heads of Agreement signed with Rio Tinto in December 2010 provided that if construction of a 50-megawatt, or greater, power plant was started before January 1, 2015, the construction would be funded by loans from Rio Tinto, with 40% of the outstanding balance to be repaid in 2015 and the remainder in 2016.
Overall construction of the Oyu Tolgoi Project 70% complete at the end of 2011
Overall construction of Oyu Tolgoi"s first phase of development reached 70.0% completion at the end of 2011 and had advanced to 72.7% completion at the end of February 2012. Total capital invested in the construction of the first phase of the Oyu Tolgoi Project to the end of 2011 was approximately $4.0 billion.
SOUTHGOBI RESOURCES (58% owned)
Ongoing expansion of SouthGobi"s Ovoot Tolgoi coal mine
SouthGobi continues to mine and sell coal produced at its Ovoot Tolgoi Mine in Mongolia"s South Gobi Region, approximately 40 kilometres north of the Shivee Khuren-Ceke crossing at the Mongolia-China border.
Sales and operations
In 2011, SouthGobi had sales of approximately 4.0 million tonnes of coal at an average realized selling price, before royalties and selling fees, of approximately $54 per tonne. This was an improvement over the sale of approximately 2.5 million tonnes in 2010 at an average realized selling price, before royalties and selling fees, of $35 per tonne. Revenue, net of royalties and selling fees, increased from $79.8 million in 2010 to $179.0 million in 2011 due to the increased sales volumes and increased selling prices for individual coal types - a 52% increase for raw, semi-soft coking coal and a 47% increase for raw, higher-ash coal.
In 2011, SouthGobi produced 4.6 million tonnes of raw coal with a strip ratio of 3.63 compared to 2.8 million tonnes of raw coal produced in 2010 with a strip ratio of 3.47. Mining capacity increased in 2011 due to the commissioning of additional mining equipment. Mining activities also commenced in the Sunrise Pit during Q3"11. In 2010, production also was negatively impacted by the Sunset Pit realignment in the first half of 2010, which required substantial, above-trend waste removal that resulted in lower production volumes.
SouthGobi is subject to a 5% royalty on all coal sold based on a set reference price per tonne published monthly by the Government of Mongolia. Effective January 1, 2011, SouthGobi also became subject to a sliding-scale additional royalty of up to 5% based on the set reference price of coal. Based on the reference prices over 2011, SouthGobi was subject to an average 8% royalty, based on a weighted average reference price of $99 per tonne. SouthGobi"s effective royalty rate for 2011, based on its average realized sales price of $54 per tonne, was 15%.
Cost of sales was $168.2 million in 2011, compared to $94.8 million in 2010. Cost of sales is comprised of the cost of the product sold, inventory write-downs, mine administration costs, equipment depreciation, depletion of pre-production stripping costs and stock-based compensation costs. The increase from 2010 was due to higher sales volumes and higher unit costs.
In February 2012, SouthGobi successfully commissioned and started up the dry-coal handling facility (DCHF) at the Ovoot Tolgoi Mine. The DCHF has the capacity to process nine million tonnes of run-of-mine (ROM) coal per year. The facility includes a 300-tonne-capacity dump hopper, which receives ROM coal to feed a rotary breaker, and screens that size coal to a maximum of 50 millimetres and reject oversize ash. The DCHF will be upgraded during 2012 to include dry-air separation, as well as covered load-out conveyors with fan stackers to transfer processed coals to stockpiles that will enable blending.
In July 2011, SouthGobi entered into an agreement with Ejinaqi Jinda Coal Industry Co. Ltd. (Ejin Jinda), a subsidiary of China Mongolia Coal Co. Ltd., to toll-wash coal from the Ovoot Tolgoi Mine. The five-year agreement, expected to begin in Q2"12, provides for an annual washing capacity of approximately 3.5 million tonnes of raw coal.
Ejin Jinda"s washing facility is approximately 10 kilometres inside China from the Mongolia-China border crossing, approximately 50 kilometres from the Ovoot Tolgoi Mine. Medium- and higher-ash coals processed through the DCHF will be transported from the Ovoot Tolgoi Mine to the washing facility. Based on preliminary samples, SouthGobi expects that the washed coal generally will meet semi-soft coking coal specifications.
Sale of Tsagaan Tolgoi property
On March 5, 2012, SouthGobi announced an agreement to sell its Mongolian thermal coal property, the Tsagaan Tolgoi Deposit, to Modun Resources Limited (Modun), a company listed on the Australian Stock Exchange. Under the transaction, SouthGobi expects to receive $30 million of total consideration, comprising $7.5 million up-front in cash, $12.5 million up-front in Modun shares and deferred consideration of an additional $10.0 million also payable in Modun shares.
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