Detailed preliminary assessment concludes indicates fast-track
start-up is possible in fourth quarter of 2006
Work underway on full feasibility study as the next step
in the project development process
ULAANBAATAR, MONGOLIA, Feb. 2 /PRNewswire-FirstCall/ - Ivanhoe Mines'
Chairman Robert Friedland and President John Macken announced today that an
independent Preliminary Assessment Report, or scoping study, confirms the
potential of Ivanhoe's Oyu Tolgoi (Turquoise Hill) Project in southern
Mongolia to become a new, long-life copper and gold producer that could rank
among the largest in the world.
Three years of exploration by Ivanhoe so far has identified five co-
genetic deposits at Oyu Tolgoi: Southwest Oyu, Central Oyu, South Oyu, Hugo
Dummett South and Hugo Dummett North. The deposits will form the basis for the
Oyu Tolgoi copper-gold production complex that will include open-pit and
underground mines, processing facilities and associated infrastructure.
The Preliminary Assessment Report was prepared by an integrated
engineering team of AMEC E&C Services Ltd., of Canada, and Ausenco
International, the Mining Group of GRD Minproc and SRK Consultants, all of
Australia. Ivanhoe commissioned the report to assess the development
alternatives open to Ivanhoe and to chart an implementation path for the Oyu
Tolgoi mining complex. A sensitivity analysis also was completed to determine
the economic effects of such variable factors as capital, operating costs,
smelting and refining costs and gold and copper prices.
The Preliminary Assessment Report forecasts the economic viability of
both conventional open-pit and underground mining operations.
The Preliminary Assessment Report includes Inferred resources that have
not yet been sufficiently drilled to have economic considerations applied to
them to enable them to be categorized as reserves. Until there is additional
drilling to upgrade the Inferred to Measured and Indicated resources, there
can be no certainty that the preliminary assessment will be realized.
The study examined three alternative development concepts in detail, each
of which has robust rates of return at different levels of capital investment
and production profiles.
The base case for the report was a two-stage build-out of the Oyu Tolgoi
project. It would involve the construction of a process plant to handle 20
million tonnes of ore per year, fed by open pits on the Southwest Oyu, Central
Oyu and Hugo South deposits. This first stage would be followed by a second-
stage build-out that would expand the production rate to 40 million tonnes a
year in Year 5 through the development of the underground mine at the Hugo
North deposit. The base case used metal prices of US$400/oz. gold and
US$0.90/lb copper. The report used average life-of-mine metallurgical
recoveries of 89.6% copper and 65.8% gold. Approximately 78% of the resources
employed in the base case were classified as Inferred at the time of the
study; the remaining 22% were in the Indicated category (see tables below).
The three development concepts are summarized in the following table:
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Overview of Oyu Tolgoi Development Scenarios
(Based on US$400/oz gold and US$0.90/lb copper)
-------------------------------------------------------------------------
Option Production Level
-------------------------------------------------------------------------
1. Full-Scale Production begins at full design capacity of 40
Start-Up million tonnes/ore/year (120,000 tonnes of ore a
day)
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2. Two-Stage Fast-track start-up @ 17-20 million
Build-Out tonnes/ore/year (60,000 tonnes/day) in Stage 1,
(Base Case) expanding to 40 million tonnes (120,000
tonnes/day) in Stage 2
-------------------------------------------------------------------------
3. Stand-Alone Stand alone @ 17-20 million tonnes/ore/year
(Initial Building (60,000 tonnes/day)
Block)
-------------------------------------------------------------------------
Two-Stage
Decision Factor Units Full-Scale Build-Out Stand-Alone
-------------------------------------------------------------------------
Initial capital US$ million 1,167 529 510
-------------------------------------------------------------------------
Pre-tax payback
period Years 5.6 6.2 3.7
-------------------------------------------------------------------------
Total cash cost
- first 10
years(x) US$/lb copper $0.41 $0.39 $0.33
-------------------------------------------------------------------------
After-tax NPV
- 100% equity
-------------------------------------------------------------------------
5% discount US$ million 2,035 2,033 522
-------------------------------------------------------------------------
7.5% discount US$ million 1,293 1,324 359
-------------------------------------------------------------------------
IRR
-------------------------------------------------------------------------
100% equity
financing % 17.5 21.2 18.9
-------------------------------------------------------------------------
70/30 debt-to
-equity financing % 27.8
-------------------------------------------------------------------------
(x) Cash costs include all project general and administrative costs
(G&A), all mine-site costs (including expensing of the pre-stripping
costs of Hugo South Deposit), all treatment and refining charges and
penalties, all concentrate transportation costs and all royalty, lease
and property imposts.
1. Full-Scale Start-Up Option: Full-scale development in one step,
with a start-up rate of 40 million tonnes of ore per year (tpy).
2. Two-Stage Build-Out Option: A two-stage, fast-tracked development,
beginning with Stage 1 fast-track development of open pits at the
Southwest Oyu and Central Oyu deposits and initial production of 17-
20 million tpy, to be followed by the Stage 2 expansion to 40 million
tpy over five years through the subsequent opening of a large open
pit at the Hugo South deposit and underground block-caving at the
Hugo North deposit.
3. Stand-Alone Option: Fast-track development of Southwest Oyu and
Central Oyu as open pits, with production targeted at an annual rate
of 17-20 million tpy beginning in 2007 - and possibly as soon as 2006
- modelled to demonstrate the indicated stand-alone economics of this
initial building block.
In effect, the Stand-Alone Option is the first stage of the Two-Stage
Build-Out Option, showing that - depending on future copper and gold prices -
the project could, particularly with favourable government fiscal and tax
concessions, partially self-finance its own expansion with internally
generated cash flow, as detailed below. The Two-Stage Build-Out Option, which
draws on the Stand-Alone economics and provides similar full-scale benefits,
is used throughout this news release to highlight the full scope of the Oyu
Tolgoi Project's development opportunities now independently confirmed by the
Preliminary Assessment Report.
Given recent volatility in metal prices, the development scenarios also
were modelled using a range of prices. The following table, based on US$1.00
copper and US$400 gold, illustrates the potential effect of a higher copper
price on the financial parameters.
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Alternate Overview of Oyu Tolgoi Development Scenarios
(Based on US$400/oz gold and US$1.00/lb copper)
-------------------------------------------------------------------------
Option Production Level
-------------------------------------------------------------------------
1. Full-Scale Production begins at full design capacity of 40
Start-Up million tonnes/ore/year (120,000 tonnes of ore a
day)
-------------------------------------------------------------------------
2. Two-Stage Fast-track start-up @ 17-20 million
Build-Out tonnes/ore/year (60,000 tonnes/day) in Stage 1,
(Base Case) expanding to 40 million tonnes (120,000
tonnes/day) in Stage 2
-------------------------------------------------------------------------
3. Stand-Alone Stand alone @ 17-20 million tonnes/ore/year
(Initial Building (60,000 tonnes/day)
Block)
-------------------------------------------------------------------------
Two-Stage
Decision Factor Units Full-Scale Build-Out Stand-Alone
-------------------------------------------------------------------------
Initial capital US$ million 1,167 529 510
-------------------------------------------------------------------------
Payback period Years 4.8 5.6 3.3
-------------------------------------------------------------------------
Total cash cost
- first 10
years(x) US$/lb copper $0.41 $0.39 $0.33
-------------------------------------------------------------------------
After-tax NPV
- 100% equity
-------------------------------------------------------------------------
5% discount US$ million 2,772 2,707 705
-------------------------------------------------------------------------
7.5% discount US$ million 1,845 1,814 503
-------------------------------------------------------------------------
IRR
-------------------------------------------------------------------------
100% equity
financing % 20.8 24.9 22.4
-------------------------------------------------------------------------
70/30 debt-to
-equity financing % 33.0
-------------------------------------------------------------------------
(x) Cash costs include all project general and administrative costs
(G&A), all mine-site costs (including expensing of the pre-stripping
costs of Hugo South Deposit), all treatment and refining charges and
penalties, all concentrate transportation costs and all royalty, lease
and property imposts. The project cash-flow model was based on the fiscal
regime that currently would apply to the project. The Two-Stage Build-Out
Option has been modelled with tax holidays, initiated upon the start-up
of each 20-million-tonne stage.
Key elements of a Two-Stage Build-Out Option
The Two-Stage Build-Out Option appears to have a number of important
advantages, given Ivanhoe's 100% ownership of the project and the scenario's
ability to minimize the capital requirement by utilizing internally generated
cash flow. Details of this study, which provides a snapshot of the relative
scale and economic merits of this particular plan, include:
- Stage 1 would deliver initial production of approximately 20 million
tpy from conventional open-pit mining of the gold-rich Southwest and
Central deposits, with production in 2007 - and possibly as soon as
2006.
- Initial capital required to bring the project into Stage 1 production
from Southwest Oyu is estimated at US$529 million, which would generate
annual operating cash flows of up to US$263 million per year and
average approximately US$145 million per year for the first four years
(based on prices of US$400 gold and US$1.00 copper).
- Stage 2 would expand production to 40 million tpy in Year Five as the
Hugo South open pit and Hugo North block-cave underground mine come on
stream.
- The Two-Stage Build-Out scenario has a maximum cash drawdown
requirement of US$643 million.
- At Stage 2 production of 40 million tpy, the project would generate
after-tax cash flows ranging from US$399 to US$516 million per year for
11 years.
- Strong gold production is expected to average 400,000 ounces a year in
the first four years.
- Copper production through Stage 2 is expected to be a minimum of 8.9
million tonnes (19.5 billion pounds), with Years 4 through 21 greater
than 300,000 tpy (661.4 million pounds) and Years 7 through 15 greater
than 400,000 tpy (881.8 million pounds).
- Initial open-pit resource: 862 million tonnes grading 0.70% copper and
0.24 gram of gold per tonne (2.4 billion tonnes of waste at a stripping
ratio of 2.8:1).
- Early after-tax operating cash flow generation of approximately US$146
million per year, growing to approximately $400 million to $516 million
per year as the Hugo South and Hugo North deposits reach capacity.
- The Oyu Tolgoi project generates more than US$20 billion worth of metal
production over the first 30 years of mine life.
- The report also compared debt financing as an alternative to 100%
equity. Using a 7% interest rate, for example, and a 70/30
debt-to-equity ratio, the leveraged case generated a 33.0% internal
rate of return compared to 24.9% as a 100% equity option (based on
US$400 gold and US$1.00 copper).
Mr. Friedland said it is possible that a two-stage, fast-track scenario
could be project-financed with an equity component of approximately US$200
million using a conventional 70/30 debt to equity ratio. "This type of
financing is clearly within Ivanhoe's capability, given that Ivanhoe has the
option of selling existing non-core assets or selling a minority participation
in the Oyu Tolgoi project to one or more strategic partners."
Stephen Hodgson, Technical Director of Mining for AMEC E&C Services
Limited and leader of the engineering team that completed the report, said Oyu
Tolgoi is capable of sustaining a production rate of 40 million tonnes per
year for approximately 25 years, with annual production averaging
approximately 400,000 ounces of gold per year in the early years and 480,000
tonnes of copper per year at a steady state of 40 million tonnes per year.
"There remains significant upside to further enhance the economics of the
project given the continuing exploration underway to expand and upgrade the
resources that were used as the basis for this assessment. It should be noted
that the preliminary assessment process is dynamic in nature and provides a
snapshot of possible production options based upon data available at the time
of the study."
Significant conclusions in the Preliminary Assessment Report
These conclusions are subject to the qualifications contained in the
Preliminary Assessment Report.
- The Hugo South Deposit also is amenable to open-pit mining, which would
help to ensure a smooth transition to the expanded Stage 2 production
from this large copper-rich ore body in Year Five.
- Low-cost block caving has been selected as the mining method for the
deeper high-grade Hugo North Deposit. Shaft sinking and associated
underground development will be fast-tracked by Ivanhoe to upgrade the
Inferred resource to Measured and Indicated and confirm the design
criteria of a 12 million tonne-per-year block cave operation.
- The project's economics will be enhanced by its proximity to China,
which could:
- reduce the costs of transportation and electricity supply; and
- permit the use of Chinese materials and Chinese contractors who
employ Mongolian nationals during construction, achieving further
significant savings over comparable costs in Western countries.
- The project economics will be enhanced as well by utilization of
Mongolian nationals during operation.
- China is the natural market for the copper and gold output from the
project.
- Ore can be treated in a conventional flotation concentrator, using
conventional technology.
- Water resources sufficient to supply the proposed mining operation
already have been identified in the region.
- Continued exploration success and development optimization should add
additional value to the project.
Oyu Tolgoi - estimate of indicated and inferred resources
(Based on a 0.30% copper-equivalent cut- off)
Contained Metal
Copper ---------------------------
Deposit Resources Copper Gold Equiv. Copper Gold Copper
(million Grade Grade Grade (million (million Equiv.
tonnes) (%) (g/t) (%) tonnes) ounces) (million
tonnes)
-------------------------------------------------------------------------
Southwest
Oyu
-------------------------------------------------------------------------
Indicated 508.9 0.40 0.59 0.78 2.06 9.69 3.98
-------------------------------------------------------------------------
Inferred 290.8 0.32 0.50 0.64 0.92 4.70 1.86
-------------------------------------------------------------------------
South Oyu
-------------------------------------------------------------------------
Inferred 270.3 0.39 0.13 0.48 1.07 1.10 1.28
-------------------------------------------------------------------------
Central
Oyu
-------------------------------------------------------------------------
Inferred 236.8 0.67 0.18 0.79 1.59 1.36 1.86
-------------------------------------------------------------------------
Hugo
Dummett
-------------------------------------------------------------------------
Inferred 1,800.3 0.86 0.12 0.94 15.50 7.22 16.92
-------------------------------------------------------------------------
Grand
total: 508.9 0.40 0.59 0.78 2.06 9.69 3.98
Indicated
-------------------------------------------------------------------------
plus
-------------------------------------------------------------------------
Grand
total: 2,598.2 0.73 0.17 0.84 19.08 14.38 21.92
Inferred
-------------------------------------------------------------------------
(Based on a 0.60% copper-equivalent cut-off)
Contained Metal
Copper ---------------------------
Deposit Resources Copper Gold Equiv. Copper Gold Copper
(million Grade Grade Grade (million (million Equiv.
tonnes) (%) (g/t) (%) tonnes) ounces) (million
tonnes)
-------------------------------------------------------------------------
Southwest
Oyu
-------------------------------------------------------------------------
Indicated 267.0 0.53 0.86 1.08 1.42 7.35 2.88
-------------------------------------------------------------------------
Inferred 126.6 0.44 0.68 0.87 0.55 2.78 1.10
-------------------------------------------------------------------------
South Oyu
-------------------------------------------------------------------------
Inferred 48.4 0.61 0.26 0.77 0.29 0.40 0.37
-------------------------------------------------------------------------
Central
Oyu
-------------------------------------------------------------------------
Inferred 147.5 0.84 0.24 0.99 1.24 1.14 1.46
-------------------------------------------------------------------------
Hugo
Dummett
-------------------------------------------------------------------------
Inferred 961.6 1.30 0.18 1.41 12.48 5.42 13.56
-------------------------------------------------------------------------
Grand
total: 267.0 0.53 0.86 1.08 1.42 7.35 2.88
Indicated
-------------------------------------------------------------------------
plus
-------------------------------------------------------------------------
Grand
total: 1,284.1 1.13 0.24 1.28 14.58 9.74 16.50
Inferred
-------------------------------------------------------------------------
Resource estimates prepared by AMEC E&C Services Limited, of Canada, in
November and February, 2003.
1) Calculation of copper equivalent grades based on US$0.80/lb. for
copper and US$350/oz. for gold); %Cu eq. (equal sign) %Cu + Au (g/t) x
(11.25/17.64).
2) The contained gold and copper represent estimated contained metal in
the ground and have not been adjusted for the metallurgical recoveries of gold
and copper. The determination of an adjustment factor to account for
differences in relative metallurgical recoveries between gold and copper will
depend upon the completion of definitive metallurgical testing.
3) Resource classifications conform to CIM Standards on Mineral Resources
and Reserves referred to in National Instrument 43-101. Mineral resources that
are not reserves do not have demonstrated economic viability. An indicated
mineral resource is that part of a mineral resource for which quantity and
grade can be estimated with a level of confidence sufficient to allow the
application of technical and economic parameters to support mine planning and
evaluation of the economic viability of the deposit. An inferred mineral
resource is that part of a mineral resource for which quantity and grade can
be estimated on the basis of geological evidence and limited sampling and
reasonably assumed, but not verified.
Resources used in Preliminary Assessment Report
Mineral Inventory - Base Case: Two-Stage Build-Out
---------------------------------------------------------------------
Total Resource Mined Waste Total
Deposit Tonnes CuEq Cu Au Tonnes Tonnes
(000s) % % g/t (000s) (000s)
---------------------------------------------------------------------
Southwest 357,185 0.78 0.48 0.48 420,667 777,852
Central 126,611 0.84 0.75 0.14 206,021 332,632
Hugo South 378,372 1.00 0.97 0.05 1,780,374 2,158,746
Hugo North 176,539 2.21 1.99 0.35 176,539
(U/G)
Total 1,038,707 1.11 0.95 0.26 2,407,062 3,445,769
---------------------------------------------------------------------
Resource Classification in Mineral Inventory
- Base Case: Two-Stage Build-Out
--------------------------
Indicated
--------------------------
Resource CuEq Cu Au
--------------------------
kt % % g/t
--------------------------
229,043 0.87 0.49 0.59
--------------------------
Inferred
--------------------------
Resource CuEq Cu Au
--------------------------
kt % % g/t
--------------------------
809,664 1.18 1.08 0.17
--------------------------
Milling cut-off, which defines the total mill feed given in the tables
above, is the break-even cut-off where the value of the recoverable metal in a
tonne of ore equals the total of on-site and off-site processing and general
administrative (G&A) costs (but not including mining costs). For this
inventory, the milling cost used was US$2.81 a tonne (including G&A). For
conservative pit design and the purposes of these tables, calculations were
based on US$0.85/lb copper and US$375/oz gold. For purposes of the Preliminary
Assessment Report, the Hugo North underground block-cave mine has been planned
to target the +2% copper equivalent cut-off boundary.
Open-pit and underground mining considerations
Mining of all the deposits except Hugo North is projected to be by open
pit, using the largest available, proven equipment, including, for example,
340- to 360-tonne trucks and large-capacity shovels. In the case of Hugo
South, limited in-pit crushing and conveying of ore and waste rock have been
incorporated into the mine plan. The open-pit cut-off strategy is to feed the
highest available grade to the mills at any time and stockpile lower grade
material above milling cut-off for later processing.
The proposed ore-processing flow sheet is based upon a large flotation
concentrator using conventional 40-foot-diameter SAG mills, ball mills and
flotation.
The current schedule suggests completion of a full feasibility study in
2004 for the first building block - a major open-pit operation centred on the
Southwest and Central deposits as outlined in the Stand-Alone Option.
Construction would begin in 2005 and the first copper-concentrate shipments
would be expected in 2007. There is an opportunity to "fast track" the
development of the project by a rapid implementation of the Stand-Alone
Option. Based on such a scenario, the operation could be in production as
early as 2006. The study team assumed that electricity initially would be
provided from the robust Chinese grid. Ivanhoe is currently in discussions
with the Mongolian government and Chinese electrical power authorities to make
the necessary arrangements. Hugo South open pit could be the subject of a
pre-feasibility study in 2004 after the resource is raised to the Measured
and/or Indicated classifications.
The report is based on mining of the Hugo North deposit by block caving,
subject to confirmation of the assumptions used in the study. The underground
development schedule for Hugo North will be fast-tracked in parallel with the
open-pit development by sinking a shaft on the deposit, continuing the drill
assessment from underground and completing pre-feasibility and feasibility
studies. Mobilization for the shaft sinking will start in the second quarter
of 2004.
"With the initiation of the open-pit feasibility study and the Hugo South
pre-feasibility study this year, shaft sinking on Hugo North and an
underground pre-feasibility study and further exploration drilling, we are
confident we will continue to optimize the overall grade, define additional
high-grade copper and gold mineralization and continue to identify
opportunities that will further improve the project's economics," said Ivanhoe
President John Macken.
Detailed studies of in-pit crushing and conveying and analysis of
electric-trolley-assisted truck haulage are underway for Southwest Oyu, South
Oyu, Central Oyu and Hugo South deposits to assess further reductions in
operating costs.
There will be further detailed consideration of 42- or 44-foot SAG mills
to improve the performance of the SAG/ball mill circuit. This would provide a
second option for the expansion of production beyond the projected 40 million
tonnes per year by milling lower-grade ore, rather than stockpiling it.
Preparations are under way for the drilling of 200mm-core holes on
Southwest Oyu to generate a representative 120-tonne sample for
feasibility-level metallurgical testing to define the expected throughput of a
40-foot SAG mill and downstream components.
Development Scenario Utilizing Fast-Track Development
The Stand-Alone Option represents a viable approach based solely on the
open-pit resources contained in the South, Southwest and Central deposits.
Given that the three deposits are more accessible and subject to more advanced
resource classification than the adjacent Hugo Dummett deposits, they are
amenable to a fast-track development plan that would form the Stage 1 building
block for the two-stage development of the entire project. The Stand-Alone
Option also supplies the base-case information and justification to take the
project to the next step - reflected in the Two-Stage Build-Out Option that
would expand production to 40 million tpy funded in part by cash generated by
the open-pit production from the Southwest Deposit. Staged development has the
advantage of minimizing the maximum capital investment requirement by
utilizing operating cash flows from the first Stand-Alone phase.
Ivanhoe therefore intends to complete a definitive feasibility study on
the Stand-Alone Option by the end of this year, effectively addressing the
requirements of the Stage 1 approach outlined in the Two-Stage Build-Out
Option. Current drilling already has defined a large portion of the Southwest
Zone to the Indicated resource classification and limited additional drilling
is necessary to elevate most of it to Measured and Indicated, as required for
a definitive feasibility study. While this study is in progress, the
additional work necessary to complete a pre-feasibility study on the Hugo
South and Hugo North deposits - which comprise the projected Stage 2 expansion
- would be well advanced.
At prices of US$400/oz for gold and US$1.00/lb for copper, the maximum
capital required (not including interest expense) for the Two-Stage Build-Out
Option would be US$643 million and could occur as the milling capacity of the
project is being doubled from 20 million tonnes of ore per year to 40 million
tonnes.
Average cash costs(x) of copper production for the Two-Stage Build-Out
Option, after gold credits and at prices of $400/oz for gold and $1.00/lb for
copper, are:
Years 1-5: 36 cents/lb
Years 1-15: 40 cents/lb
(x)Cash costs include all project G&A, all mine-site costs (including
expensing of the pre-stripping costs of Hugo South Deposit), all treatment and
refining charges and penalties, all concentrate transportation costs and all
royalty, lease and property imposts.
These cash costs also include smelting charges of US$60 per tonne of
concentrate and refining charges of six cents per pound of copper. Current
smelting and refining charges settled between major concentrate producers and
major smelter/refineries for 2004 are slightly below $40 dollars and 4 cents,
respectively. If similar smelting and refining charges from Chinese smelters
could be locked in for the life of the project, the after-tax Net Present
Value of the staged development at a 5% discount rate, US$400/oz gold price
and US$1.00/lb copper price would increase from $2.707 billion to $2.907
billion and the after-tax Internal Rate of Return would increase from 24.9% to
27.1%. Cash costs of refined copper would be reduced by an average of 5.2
cents per pound. (See table of project sensitivities for calculations).
UPSIDE OPPORTUNITIES
Open-pit resource tops one billion tonnes
An additional open-pit resource totalling 203 million tonnes, grading
0.47% copper and 0.44 g/t gold and containing 950,000 tonnes (2.1 billion
pounds) of copper and 2.9 million ounces of gold, has been identified in the
base of the Southwest Oyu and Central Oyu pits as part of ongoing optimization
engineering.
The resource, which was not part of the Two-Stage Build-Out Option
modelling, increases the total open-pit inferred resource to 1.04 billion
tonnes - sufficient for more than 30 years of production at planned rates.
This additional tonnage will be included in a study to be presented to
the Government of Mongolia on February 20 as part of the recent grant to
Ivanhoe of long-term mining licences for Oyu Tolgoi.
Upgrading of Oyu Tolgoi resource underway
Ivanhoe is conducting an extensive in-fill drilling program that it
expects will increase the overall definition of the Oyu Tolgoi deposits by
upgrading additional resources to the 'Measured' and 'Indicated' categories.
The drill-out of the Central Oyu resource to Measured or Indicated status is
nearing completion and the drill-out of the Southwest Oyu resource to Measured
or Indicated status is expected to be completed by May, 2004. Contract
documentation has been completed for the sinking of a shaft on Hugo North to
facilitate the drill-out of the resource from underground to the Measured and
Indicated status. Ivanhoe management is working to get this shaft collared and
under construction as soon as possible.
An aggressive drilling program is continuing to explore the limits of the
Hugo Dummett deposit, which remains open to depth. Drilling results will be
updated and incorporated into the project's advancing development plans.
There is excellent potential to extend the resources in all five deposits
identified to date and there is important potential to discover additional
deposits on the Oyu Tolgoi Mining Licences and on Ivanhoe's extended
exploration licences.
Treatment of Lower-Grade Material
In the Full-Scale and the Two-Stage options, a total of 310 million
tonnes of lower-grade material above milling grade is planned to be stockpiled
over approximately 15 years before it is fed to the mill and concentrator.
This material averages 0.41% copper and 0.15 g/t gold.
Since G&A costs and the cost of mining this material are sunk costs (it
already has been moved from the pits), only the incremental cost of milling
and downstream costs apply against the production of this additional contained
metal - comprising over 1.270 million tonnes of contained copper (2.8 billion
pounds) and 1.5 million ounces of contained gold.
If, instead of stockpiling this ore, the second concentrator line was
enlarged, or a third concentrator line was built, there could be a significant
potential addition to early net cash flow.
There is more than adequate Inferred resource in the base of the
Southwest Oyu and Central Oyu pits to replace the low-grade stockpile material
later in the mine schedule. The replacement material is approximately 50%
higher in grade than the low-grade material that is stockpiled and then
treated in the base cases. This would sustain cash-flow generation in later
years.
On-site smelting option has advantages
Construction of a smelter on site, designed to maximize the recovery of
copper and gold from Oyu Tolgoi concentrates, could further enhance the
project's value. The estimated cost to build a smelter of sufficient size to
process 500,000 tpy of concentrates is approximately US$220 million; the
estimated operating cost is $0.075 per pound of blister copper.
An on-site smelter would allow significant further optimization of metal
recovery and eliminate the potential for future smelter deductions. The
improved metal recovery, combined with savings in transport charges, lowered
smelter charges and significant energy-generation potential, could
significantly improve total project returns.
The base-case assumption in the Preliminary Assessment Report is that
concentrates will be sold to Chinese smelters. While the preliminary estimates
for a blister copper smelter at Oyu Tolgoi are very attractive, Ivanhoe has
not yet definitively determined to build a smelter in connection with the
project.
Ausmelt Limited, of Melbourne, Australia, has provided input to
preliminary smelter studies and will begin a pre-feasibility study for a
site-based smelter that would use its high-intensity smelting and converting
furnaces. This would be an efficient, state-of-the-art facility with very high
rates of gas capture and environmental controls similar to the Ausmelt smelter
recently constructed in China.
Initial capacity of this smelter would be 500,000 tpy of concentrate. The
smelter could be incrementally expanded as needed. Current assumptions are
that gold recovery could be improved by five percentage points and copper
recovery by one percentage point simply by optimizing the concentrator to
produce at a higher metallurgical recovery rate of copper and gold into a
lower-grade concentrate. Pyrite would be the primary impurity lowering the
concentrate grade. Pyrite simply acts as a source of fuel in the smelting
process.
Ivanhoe also has identified a heap-leach, solvent
extraction-electrowinning (SX-EW) project based on the near-surface chalcocite
blanket at Central Oyu that could be developed as a supplement to the main
project. At a later stage, the SX-EW plant could be used to process copper
leached from mine dumps.
Financial Analysis
Financial analysis of the project was conducted through discounted
cash-flow modelling, which was based on data contained in the preliminary
assessment report.
All cases were based on open-pit mining from the South, Central,
Southwest and Hugo South deposits, underground mining from the Hugo North
deposit and processing of all ore through a concentrator to produce a copper
concentrate containing gold that is sold to smelters outside Mongolia.
The modelling has been conducted on an after-tax basis, without
escalation or inflation, and on the basis that the project will be 100% equity
funded. The U.S. dollar was the currency used for the evaluation. No
provisions were made for exchange-rate variations. A leveraged project-finance
case (30% equity 70% debt) also has been modelled for the Two-Stage Build-Out.
The project-finance internal rate of return (IRR) is 33.0%, employing a 7%
interest rate, US$400 gold and US$1.00 copper.
Sensitivity Analysis
The sensitivity analysis undertaken by AMEC indicates that Oyu Tolgoi
could generate an after-tax, 100% equity IRR of 24.9%, with an associated NPV
of $2.707 billion at US$1.00 copper and US$400 gold - according to the
preliminary assessment of the project's capital costs, operating and
processing costs, taxes and royalties. These robust economics are enhanced by
the large initial gold production. A sensitivity analysis showed that the rate
of return is most sensitive to changes in the copper price, followed by
changes in the gold price, changes to the operating costs and finally changes
in capital costs. For example, at US$1.10 copper andUS$400 gold, the after-tax
IRR increases to 28.2% and the NPV increases to US$3.382 billion.
-----------------------------------------------------
PROJECT SENSITIVITY
-----------------------------------------------------
Parameter Change IRR Change NPV Change
-----------------------------------------------------
(%) ($M)
-----------------------------------------------------
Gold Price (+/-) $25/oz 0.7% 42
-----------------------------------------------------
Copper (+/-) $0.05/lb 2.0% 183
Price
-----------------------------------------------------
Initial (+/-) $52 M 2.1% 82
Capital
-----------------------------------------------------
Smelter (+/-) $10/wmt, 1.1% 100
Charges $0.01/lb
-----------------------------------------------------
Gold
Recovery (+/-) 1% point 0.2% 10
-----------------------------------------------------
Health, Safety and Environment
Ivanhoe Mines has developed a safety management system that utilizes the
international safety standard OHSAS 18001. The Mongolian legal compliance
requirements will be managed and monitored through this system.
The Western Australian Mine Safety & Inspection Regulations (1995) were
adopted as the standard for mine and processing operations. Operating to this
standard will also ensure compliance with International Labour Organization
standards and other internationally recognized standards. The Western
Australian Standards generally are more comprehensive than the Mongolian
requirements identified to date.
Appropriate international standards will be incorporated into design,
construction and contracting activities associated with the project. This
Preliminary Assessment Report has ISO 14001 environmental accreditation.
Water Supply
Groundwater supply investigations by consultant Aquaterra Limited, of
Perth, Western Australia, for the Oyu Tolgoi Project have been ongoing since
April, 2002. Two separate investigations are underway: one is identifying
groundwater resources within the licence area to provide camp and construction
water; the other is a regional search for groundwater resources to provide a
long-term process water supply.
Three deep, sedimentary groundwater systems well within 100 kilometres of
Oyu Tolgoi are being drilled: Galbyn Gobi, Javkhlant and Gunii Hooloi.
Indications are that these groundwater systems, as well as two other systems
in the area, will be able to meet the water demand for a production rate of 40
million tonnes per year.
Study director
The preliminary assessment study was completed under the direction of
Stephen Hodgson, P.Eng., technical director of mining for AMEC E&C Services
Ltd. and an independent Qualified Person as defined by National Instrument
43-101.
Report available on Sedar website
A copy of the Preliminary Assessment Report is available on the Sedar
website at http://www.sedar.com
About Ivanhoe Mines
Ivanhoe Mines, with operations concentrated in the Asia Pacific region,
is a producer of copper, gold and iron ore products. Ivanhoe Mines' core
assets are its 100%-owned Oyu Tolgoi Project (Turquoise Hill) in southern
Mongolia and exploration rights that it holds or controls covering
approximately 111,000 square kilometres in central and southern Mongolia and
the Chinese province of Inner Mongolia.
Ivanhoe shares are listed on the NASDAQ market under the symbol HUGO and
on the Toronto and Australian stock exchanges under the symbol IVN.
Forward-Looking Statements
This press release includes certain "Forward-Looking Statements" within
the meaning of section 21E of the United States Securities Exchange Act of
1934, as amended. All statements, other than statements of historical fact,
included herein, including without limitation, statements regarding potential
mineralization and resources, exploration results and future development plans
and objectives of Ivanhoe Mines for the Oyu Tolgoi project, are
forward-looking statements that involve various risks and uncertainties. There
can be no assurance that such statements will prove to be accurate and actual
results and future events could differ materially from those anticipated in
such statements. Important factors that could cause actual results to differ
materially from Ivanhoe's expectations include comments regarding development
plans for the Oyu Tolgoi project; capital expenditures; planned production;
costs of production; cash flow; sources of capital; copper and gold prices;
geological, technical, permitting, mining or processing problems; financial
market conditions; and other factors disclosed under the heading "Risk
Factors" and elsewhere in Ivanhoe documents filed from time to time with the
Toronto Stock Exchange, the Australian Stock Exchange, the United States
Securities and Exchange Commission and other regulatory authorities.
SOURCE Ivanhoe Mines Ltd.
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CONTACT:
Investors: Bill Trenaman: +1 (604) 688-5755 /
Media: Bob Williamson: +1 (604) 688-5755; To request a free copy
of this organization's annual report, please go to
http://www.newswire.ca and click on reports@cnw.
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