EX-99.2
Exhibit 99.2
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| Turquoise Hill Resources Ltd. |
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| Management’s Discussion and Analysis of Financial Condition |
| and Results of Operations |
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| March 31, 2022 |
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TURQUOISE HILL
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
INTRODUCTION
This management’s discussion and analysis of the financial condition and results of operations (MD&A) of Turquoise Hill Resources Ltd. should
be read in conjunction with the unaudited condensed interim consolidated financial statements of Turquoise Hill Resources Ltd. and the notes thereto for the three months ended March 31, 2022, as well as the MD&A for the year ended
December 31, 2021 dated as of March 2, 2022 and annual audited consolidated financial statements and accompanying notes for the years ended December 31, 2021 and December 31, 2020. The interim financial statements have been
prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). In this MD&A, unless the context otherwise dictates, a reference to the “Company”,
“we” or “our” refers to Turquoise Hill Resources Ltd. and a reference to “Turquoise Hill” refers to Turquoise Hill Resources Ltd. together with its subsidiaries. Additional information about the Company, including its
Annual Information Form for the year ended December 31, 2021, dated as of March 2, 2022 (AIF), is available under the Company’s profile on SEDAR at www.sedar.com.
References to “C$” refer to Canadian dollars and “$” to United States dollars.
This MD&A refers to the All Injury Frequency Rate (AIFR), which is an indicator of workplace health and safety and provides insight into an
organisation’s efforts to protect its workforce from work-related hazards. Oyu Tolgoi’s AIFR is based on 200,000 hours of work exposure.
This MD&A contains certain forward-looking statements and certain forward-looking information. Please refer to the cautionary language commencing on
page 32.
This MD&A also contains certain non-GAAP financial measures,
non-GAAP ratios, and supplementary financial measures. Please refer to the section titled “Non-GAAP and Other Financial Measures” commencing on page 28 for
more information.
All readers of this MD&A are advised to review and consider the risk factors discussed under the heading “Risks and
Uncertainties” in this MD&A commencing on page 24.
The date of this MD&A is May 10, 2022.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
TABLE OF CONTENTS
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| FINANCIAL AND OPERATIONAL HIGHLIGHTS |
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3 |
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| OPERATIONAL OUTLOOK FOR 2022 |
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5 |
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| OUR BUSINESS |
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5 |
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| SELECTED FINANCIAL METRICS |
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6 |
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| OYU TOLGOI |
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8 |
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| FUNDING OF OT LLC BY TURQUOISE HILL |
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12 |
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| PRIVATISATION PROPOSAL RECEIVED FROM RIO TINTO |
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15 |
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| GOVERNMENT RELATIONS |
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15 |
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| CLASS ACTION COMPLAINTS |
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18 |
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| CORPORATE ACTIVITIES |
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19 |
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| INCOME AND OTHER TAXES |
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19 |
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| LIQUIDITY AND CAPITAL RESOURCES |
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20 |
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| SHARE CAPITAL |
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22 |
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| COPPER, GOLD AND FOREIGN EXCHANGE MARKET COMMENTARY |
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22 |
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| OFF-BALANCE SHEET ARRANGEMENTS |
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23 |
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| CONTRACTUAL OBLIGATIONS |
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23 |
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| CRITICAL ACCOUNTING ESTIMATES |
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24 |
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| RECENT ACCOUNTING PRONOUNCEMENTS |
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24 |
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| RISKS AND UNCERTAINTIES |
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24 |
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| RELATED-PARTY TRANSACTIONS |
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26 |
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| SELECTED QUARTERLY DATA |
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27 |
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| NON-GAAP AND OTHER FINANCIAL MEASURES |
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28 |
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| INTERNAL CONTROL OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES |
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31 |
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| QUALIFIED PERSON |
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32 |
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| CAUTIONARY STATEMENTS |
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32 |
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| FORWARD-LOOKING STATEMENTS AND FORWARD-LOOKING INFORMATION |
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32 |
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Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
FINANCIAL AND OPERATIONAL HIGHLIGHTS
| · |
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Oyu Tolgoi open-pit and underground workforce posted an AIFR of 0.09 per 200,000
hours worked for the three months ended March 31, 2022. |
| · |
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In Q1’22, Oyu Tolgoi produced 30.3 thousand tonnes of copper in concentrate and 59 thousand ounces of
gold in concentrate. |
| · |
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Mill throughput of 9.6 million tonnes in Q1’22 was 2% lower than Q1’21 and 9% lower than Q4’21, in
line with expectations due to planned maintenance. |
| · |
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Turquoise Hill successfully reached a mutual understanding for a renewed partnership with the Government of Mongolia and
the board of directors of Oyu Tolgoi LLC (OT LLC) unanimously approved commencement of the undercut. On January 25, 2022, a ceremony was held at the mine site to celebrate the commencement of blasting the undercut that started the Oyu Tolgoi
Hugo North underground mine production phase. |
| · |
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Turquoise Hill and Rio Tinto International Holdings Ltd. (Rio Tinto) agreed a comprehensive and binding, amended funding
agreement that provides a pathway forward to address the Company’s estimated funding requirements. |
| · |
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Turquoise Hill currently estimates a base case incremental funding requirement of $3.4 billion (unchanged from
Q4’21). |
| · |
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As at March 31, 2022, Turquoise Hill had $0.6 billion of available liquidity in the form of cash and cash
equivalents, which under current projections is expected to meet the Company’s requirements, including funding of underground capital expenditure, into October 2022, after which the Company is able to rely on funding available under the amended
funding agreement to provide it with sufficient liquidity and resources to meet its minimum obligations for a period of at least 12 months from the balance sheet date of March 31, 2022. |
| · |
|
Revenue of $402.7 million in Q1’22 decreased 23.5% from $526.5 million in Q1’21 due to the planned
transition of mining to the next phase of operations, resulting in 33.3% and 59.6% lower production volumes of copper and gold, respectively, and processing lower grade stockpile material, partially offset by 17.9% higher copper and 4.3% gold
average prices. |
| · |
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Income for the period was $394.3 million in Q1’22 versus $332.1 million in Q1’21 reflecting higher
tax benefits offset by lower revenue. Income attributable to owners of Turquoise Hill in Q1’22 was $275.2 million ($1.37 per share) versus $236.7 million ($1.18 per share) in Q1’21. |
| · |
|
Cost of sales in Q1’22 was $2.65 per pound of copper sold1 and C1 cash costs were $1.66 per pound of copper produced2.
All-in sustaining costs were $2.72 per pound of copper produced2. |
| · |
|
Total operating cash costs3 of
$228.9 million in Q1’22 increased 13.8% from $201.2 million in Q1’21 largely due to inflationary pressures on prices for critical supplies including fuel, power, explosives and grinding media. |
1 Cost
of sales per pound of copper sold is a supplementary financial measure. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information.
2 C1
cash costs per pound of copper produced and all-in sustaining costs per pound of copper produced are non-GAAP ratios. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further
information.
3 Total operating cash costs is a non-GAAP financial measure. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
| · |
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Expenditures on property, plant and equipment in Q1’22 were $229.9 million, which included $203.8 million
of capital expenditures on the underground project. Capital expenditures4 on the underground project included $84.8 million of underground sustaining
capital expenditure4. At March 31, 2022, total capital expenditure on the underground project since January 1, 2016 was $5.6 billion, including
$0.4 billion of underground sustaining capital expenditure. |
| · |
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Net cash generated from operating activities in Q1’22 was $122.4 million compared to cash used in operating
activities of $133.2 million in Q1’21, primarily due to $356 million in taxes paid in Q1’21 related to the 2013 to 2015 and 2016 to 2018 Tax Assessments. Cash generated from operating activities before interest and tax decreased
by $125.6 million compared to Q1’21 due largely to inflationary pressures on prices for critical supplies including fuel, power, explosives and grinding media. |
| · |
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Oyu Tolgoi concentrate shipment volumes to customers continued to steadily improve with
on-site concentrate inventory levels reducing by 30% during Q1’22. |
| · |
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The commissioning of Materials Handling System 1 and the first on-footprint
truck chute were successfully completed during Q1’22. |
| · |
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Preliminary outcomes from the 2022 cost and schedule update for the underground project, which incorporate the known,
incremental COVID-19 cost impact of $195 million through March 31, 2022, associated taxes and an estimate of further COVID-19 management costs over the
remaining development schedule, indicate an increase in the total expected development capital from $6.75 billion to $7.06 billion. The 2022 cost and schedule update is currently under review by the Company. |
| · |
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Shaft 3 headframe was commissioned and sinking commenced on March 31, 2022 from a cumulative depth of 83 metres
below ground level. Shaft 4 sinking re-started on March 25, 2022 after work was interrupted on February 17, 2022 due to an electrical fault. Shaft 4 advancement is 190 metres below ground level as at
March 31,2022. |
| · |
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A total of 25,000 metres of drilling is planned for 2022 and into 2023. Most of these drill metres are into potential
future mining areas which are on the Lift 1 horizon and currently excluded from the Mineral Reserve. |
| · |
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As previously disclosed, the first drawbells for Panels 1 and 2 were delayed due to a later than planned commencement of
the undercut, lateral development scope changes, impacts of COVID-19 on development progression and delays to the forecast completion dates for Shaft 3 and 4. As part of the 2022 cost and schedule update,
schedules for Shafts 3 and 4 are under review, and a programme of work is underway to maximise the productivity of their development. The potential impact of any further schedule slippage to Shafts 3 and 4 on the timing of Panels 1 and 2 is under
review but is not expected to result in equivalent delays to Panels 1 and 2 given the current underground development approach and further mitigation opportunities under investigation. |
| · |
|
On March 13, 2022, the board of directors of the Company (the Board) received a
non-binding proposal from Rio Tinto, the Company’s majority shareholder, to acquire the approximately 49% of the outstanding common shares of Turquoise Hill held by the Company’s minority
shareholders for cash consideration of C$34.00 per share (the Proposal). |
| · |
|
OT LLC signed an Electricity Supply Agreement (ESA) to provide Oyu Tolgoi with a long-term source of power from the
Mongolian grid on terms fully agreed with the Government of Mongolia. Power will be delivered pursuant to the ESA once certain technical conditions are satisfied. |
4 Capital
expenditures on the underground project and underground sustaining capital expenditure are supplementary financial measures. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for
further information.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
OPERATIONAL OUTLOOK FOR 2022
Oyu Tolgoi is expected to produce 110 to 150 thousand tonnes of copper and 135 to 165 thousand ounces of gold in concentrates in 2022 from
processing ore from the open-pit, underground development material and stockpiles. Gold production guidance has been revised upward from a previous forecast range of 115 to 165 thousand ounces and
is trending toward the higher end of the range. Gold and copper production are forecast to be lower in 2022 compared with 2021 due to the planned transition of mining to the next phase of operations and the processing of lower grade stockpile
material.
Total operating cash costs5 for 2022 are expected to be $800 million to $875 million, though inflationary pressures could see these costs trending towards the higher end of the range.
Expenditures on property, plant and equipment for 2022 are now expected to be approximately $155 million to $185 million for open-pit operations due to schedule changes impacting the timing of spend. This compares to the original guidance of $170 million to $200 million. Expenditures on property, plant and equipment for the
underground are expected to remain within the original guidance of $1.2 billion to $1.4 billion.
Open-pit capital is mainly comprised of deferred stripping, equipment purchases, tailings storage facility
construction and maintenance componentisation. Underground capital is inclusive of VAT.
2022 C1 cash costs are expected to be in the range of
positive $1.95 to positive $2.35 per pound of copper produced6, which is higher than 2021 due
to lower gold production in 2022, as mining transitions to the next phase of operations. Unit cost guidance assumes the midpoint of the expected 2022 copper and gold production ranges and a gold commodity price assumption of $1,801 per ounce.
Estimates of future production, expenditures on property, plant and equipment, total operating cash costs and C1 cash costs per pound of
copper produced presented in this MD&A are based on mine plans that reflect the expected method by which the Company will mine reserves at Oyu Tolgoi. Actual gold and copper production and associated costs may vary from these estimates due to a
number of operational and non-operational risk factors (see the section “Forward-Looking Statements and Forward-Looking Information” of this MD&A for a description of certain risk factors that
could cause actual results to differ materially from these estimates).
OUR BUSINESS
Turquoise Hill is an international mining company focused on the operation and continued development of the Oyu Tolgoi copper-gold mine in Mongolia,
which is the Company’s principal and only material mineral resource property. The Company’s ownership of the Oyu Tolgoi mine is held through a 66% interest in OT LLC; the remaining 34% interest is held by Erdenes Oyu Tolgoi LLC (Erdenes or
EOT), a Mongolian state-owned entity.
The Oyu Tolgoi property is located approximately 550 kilometres south of Ulaanbaatar, Mongolia’s capital
city, and 80 kilometres north of the Mongolia-China border. The property is cut by the Oyu Tolgoi trend, a 12 kilometres north-south orientated corridor which is host to the known deposits, Hugo North, Hugo South, Oyut and Heruga. Open-pit mining operations commenced at Oyut in 2013. The Hugo North deposit (Lift 1) is currently being developed as an underground operation.
The copper concentrator plant, with related facilities and necessary infrastructure, was originally designed to process approximately 100,000 tonnes of
ore per day from the Oyut open-pit. However, since 2014, the concentrator has consistently achieved a throughput of over 105,000 tonnes per day due to improvements in operating practices. Concentrator
throughput for 2022 is targeted at over 110,000 tonnes per day and expected to be approximately 40 million tonnes for the year due to improvements in concentrator performance and more favourable ore characteristics.
5 Total
operating cash costs is a non-GAAP measure that is forward-looking information. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information.
6 C1
cash costs per pound of copper produced is a non-GAAP ratio. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
As at March 31, 2022, Oyu Tolgoi had a total workforce (employees and contractors), including for
underground project construction, of approximately 16,300 workers, of which over 97% were Mongolian.
SELECTED FINANCIAL METRICS (1)
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Three months ended |
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Year ended |
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1Q |
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1Q |
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Change |
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12 months |
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| ($ in millions, unless otherwise noted) |
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2022 |
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2021 |
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% |
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2021 |
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Restated (6) |
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| Revenue (6)
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402.7 |
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526.5 |
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(23.5 |
%) |
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2,040.8 |
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| Income for the period (6)
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394.3 |
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332.1 |
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18.7 |
% |
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735.9 |
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| Income attributable to owners of Turquoise Hill Resources Ltd (6) |
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275.2 |
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236.7 |
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16.3 |
% |
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561.1 |
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| Basic and diluted earnings per share attributable to owners of Turquoise Hill |
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| Resources Ltd (6)
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1.37 |
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1.18 |
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|
16.1 |
% |
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2.79 |
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| Revenue by metals in concentrates |
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| Copper (6) |
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290.5 |
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333.7 |
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(12.9 |
%) |
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1,262.5 |
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| Gold (6) |
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108.0 |
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188.2 |
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(42.6 |
%) |
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759.5 |
|
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| Silver (6) |
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4.2 |
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4.6 |
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(8.7 |
%) |
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18.8 |
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| Cost of sales (6)
|
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|
175.0 |
|
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|
155.6 |
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|
12.5 |
% |
|
|
637.2 |
|
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| Production and delivery costs (6)
|
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135.5 |
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103.4 |
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31.0 |
% |
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474.2 |
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| Depreciation and depletion |
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39.5 |
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52.2 |
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(24.3 |
%) |
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163.0 |
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| Capital expenditure on cash basis (2)(6) |
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229.9 |
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250.3 |
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(8.2 |
%) |
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982.0 |
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| Underground-Development (6)
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119.0 |
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181.1 |
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(34.3 |
%) |
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666.0 |
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| Underground-Sustaining |
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84.8 |
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60.9 |
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39.2 |
% |
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232.4 |
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| Open pit |
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26.1 |
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8.3 |
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214.5 |
% |
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83.6 |
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| Royalty expenses |
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24.9 |
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22.7 |
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9.7 |
% |
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105.4 |
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| Total operating cash costs
(3)(6) |
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228.9 |
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201.2 |
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13.8 |
% |
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889.7 |
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| Unit costs ($) |
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| Cost of sales (per pound of copper sold) (4)(6) |
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2.65 |
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1.81 |
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46.4 |
% |
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2.07 |
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| C1 (per pound of copper produced)
(5)(6) |
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1.66 |
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0.08 |
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|
1,975.0 |
% |
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0.23 |
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| All-in sustaining (per pound of copper produced) (5)(6) |
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2.72 |
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0.49 |
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|
455.1 |
% |
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|
0.89 |
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| Mining costs (per tonne of material mined) (5) |
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2.25 |
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|
1.97 |
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14.2 |
% |
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|
2.24 |
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| Milling costs (per tonne of ore treated) (5) |
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7.10 |
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6.25 |
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13.6 |
% |
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|
7.13 |
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| G&A costs (per tonne of ore treated) (4) |
|
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3.72 |
|
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|
3.47 |
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|
7.2 |
% |
|
|
3.99 |
|
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| Net cash generated from (used in) operating activities (6) |
|
|
122.4 |
|
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|
(133.2 |
) |
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|
191.9 |
% |
|
|
630.9 |
|
|
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| Cash generated from operating activities before interest and tax (6) |
|
|
122.6 |
|
|
|
248.2 |
|
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(50.6 |
%) |
|
|
1,265.6 |
|
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|
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| Interest paid |
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|
0.8 |
|
|
|
26.5 |
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(97.0 |
%) |
|
|
276.4 |
|
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| Total assets (6)(7)
|
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14,641 |
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|
13,694 |
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6.9 |
% |
|
|
14,200 |
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| Total non-current financial liabilities |
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4,103 |
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4,431 |
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(7.4 |
%) |
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|
4,084 |
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| (1) |
All financial information in this MD&A should be reviewed in conjunction with the Company‘s consolidated
financial statements for the reporting periods indicated. |
| (2) |
Capital expenditure on cash basis for underground-development, underground sustaining and for open-pit are supplementary financial measures, which are not standardised financial measures and are not intended to replace measures prepared in accordance with IFRS. Please refer to the Section titled – “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information. |
| (3) |
Total operating cash costs is a non-GAAP financial measure. Please refer to the
Section titled – “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information. |
| (4) |
Cost of sales (per pound of copper sold) and General & Administrative (G&A) costs (per tonne of ore
treated) are supplementary financial measures which are not standardised financial measures and are not intended to replace measures prepared in accordance with IFRS. Please refer to the Section titled –
“Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information. |
| (5) |
C1 cash costs (per pound of copper produced), all-in sustaining costs (per
pound of copper produced), mining costs (per tonne of material mined), and milling costs (per tonne of ore treated) are non-GAAP ratios which are not standardised financial measures and are not intended to
replace measures prepared in accordance with IFRS. Please refer to the Section titled – “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information.
|
| (6) |
Prior year comparatives have been restated for adoption of the IAS16 amendment to Property, Plant and Equipment:
Proceeds before intended use. Please refer to the Section titled “Recent Accounting Pronouncements” on page 24 of this MD&A for further information. |
| (7) |
Q1 2021 comparative has been restated for adoption of the IAS16 amendment to Property, Plant and Equipment: Proceeds
before intended use. Please refer to the Section titled “Recent Accounting Pronouncements” on page 24 of this MD&A for further information. |
Q1’22 vs Q1’21
| · |
|
Revenue of $402.7 million in Q1’22 decreased 23.5% from $526.5 million in Q1’21 due to the planned
transition of mining to the next phase of operations, resulting in 33.3% and 59.6% lower production volumes |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
| |
of copper and gold, respectively, and processing of lower grade stockpile material, partially offset by 17.9% higher copper and 4.3% gold average prices. |
| · |
|
Income for the period was $394.3 million in Q1’22 versus $332.1 million in Q1’21, reflecting higher
tax benefits partially offset by lower revenue. $256.6 million of deferred tax assets were recognised in Q1’22 compared to $52.3 million in Q1’21. The recognition in Q1’22 was due to an increase in temporary differences
related primarily to tax depreciation on property, plant and equipment and an increase in utilisation of 2016 losses against higher projected 2022 taxable income driven by higher metal pricing. Income attributable to owners of Turquoise Hill in
Q1’22 was $275.2 million ($1.37 per share) versus $236.7 million ($1.18 per share) in Q1’21. |
| · |
|
Cost of sales of $175.0 million in Q1’22 increased 12.5% from $155.6 million in Q1’21 largely
due to the inflationary pressures on prices for critical supplies, including fuel, power, explosives and grinding media. |
| · |
|
Expenditures on property, plant and equipment were $229.9 million in Q1’22 versus $250.3 million in
Q1’21, comprised of $203.8 million (Q1’21: $242.0 million) in capital expenditure on the underground project7, including $84.8 million
(Q1’21: $60.9 million) in underground sustaining capital expenditure7 as well as $26.1 million
(Q1’21: $8.3 million) in open-pit sustaining capital expenditure7. |
| · |
|
Total operating cash
costs8 of $228.9 million in Q1’22 increased 13.8% from $201.2 million in Q1’21, largely due to inflationary pressures on prices for
critical supplies, including fuel, power, explosives and grinding media. |
| · |
|
Unit cost of sales of $2.65 per pound of copper sold9 in Q1’22 increased 46.4% from $1.81 per pound of copper sold in Q1’21, reflecting higher operating cash costs and an increase in unit fixed costs from lower metal production.
|
| · |
|
Oyu Tolgoi’s C1 cash costs of $1.66 per pound of copper produced10 in Q1’22 increased from $0.08 per pound of copper produced in Q1’21 due to higher operating cash costs and lower copper produced due to the planned transition of mining to the next
phase of operations. Similarly, gold revenue credits also decreased by $80.2 million. |
| · |
|
All-in sustaining costs of $2.72 per pound of copper produced10 in Q1’22 increased from $0.49 per pound of copper produced in Q1’21. All-in sustaining costs were impacted by the
same factors as C1 cash costs as well as a $17.8 million increase in open-pit sustaining capital expenditure due to higher deferred stripping from Phase 5 waste removal and commencement of the Gashuun
Sukhait (GSK) road. |
| · |
|
Mining costs of $2.25 per tonne of material mined10 in Q1’22 increased 14.2% from $1.97 per tonne of material mined in Q1’21. The increase was mainly driven by higher fuel,
blasting and power costs due to market price increases and an increase in maintenance costs due to additional manpower availability from an easing in COVID-19 restrictions. |
| · |
|
Milling costs of $7.10 per tonne of ore
treated10 in Q1’22 increased 13.6% from $6.25 per tonne of ore treated in Q1’21. The increase was due to higher milling cost as a result of processing
harder ore from Phase 5, higher costs due to a planned maintenance shutdown and higher power and grinding media costs as a result of market price increases. |
7 Capital expenditures on the underground project, underground sustaining capital expenditure and open-pit sustaining capital expenditure are supplementary financial measures. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28
of this MD&A for further information.
8 Total
operating cash costs is a non-GAAP financial measure. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28 of this MD&A
for further information.
9 Cost of sales per pound of copper sold is a supplementary financial measure. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on
page 28 of this MD&A for further information.
10 C1
cash costs per pound of copper produced, all-in sustaining costs per pound of copper produced, mining costs per tonne of material mined and milling costs per tonne of ore treated are non-GAAP ratios. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
| · |
|
G&A costs of $3.72 per tonne of ore
treated11 in Q1’22 increased 7.2% from $3.47 per tonne of ore treated in Q1’21. The increase was mainly due to lower tonnes of ore treated, higher
project monitoring and support costs associated with underground activities offset with reduced COVID-19 related costs and lower ore treated from planned concentrator maintenance in Q1’22.
|
| · |
|
Net cash generated from operating activities in Q1’22 was $122.4 million versus cash used in operating
activities of $133.2 million in Q1’21, primarily due to $356 million in taxes paid in Q1’21 related to the 2013 to 2015 and 2016 to 2018 Tax Assessments. Cash generated from operating activities before interest and tax decreased
by $125.6 million due to lower gross margin from lower revenue and higher operating expenses due to inflationary pressures on prices for critical supplies including fuel, power, explosives and grinding media. |
OYU TOLGOI
Operations, Safety
Performance and COVID-19 Update
The safety and wellbeing of our workers continues to be our priority.
For the Q1’22 quarter, Oyu Tolgoi achieved an All Injury Frequency Rate (AIFR) of 0.09 per 200,000 hours worked.
Oyu Tolgoi continues to
utilise multiple COVID-19 controls at site, including maintaining 1.5 metres social distancing, always wearing masks, regular hand washing, sanitisation and regular testing to suppress virus prevalence.
During Q1’22, COVID-19 cases identified at Oyu Tolgoi trended downward. Consequently, onsite workforce
numbers over the quarter increased to approximately 90% of plan with mobilisation of personnel across multiple work-fronts. COVID-19 related restrictions for international arrivals to Mongolia have been lifted
and international flights have resumed across the region.
Concentrate inventory levels on site continued to decrease over Q1’22; and although
we have seen improvements in shipping cross-border into China, the force majeure declared by OT LLC from March 30, 2021 will remain in place until there are sufficiently sustained volumes of convoys to ensure Oyu Tolgoi’s ability to meet
its on-going commitments to customers and to return on-site concentrate inventory to target levels. The global supply chain reaction to the Russia-Ukraine conflict has
prompted the business to more closely monitor and hold greater inventory levels of critical supplies. Supply routes and commodity origins have been altered to reduce risk to the business and ensure continuous supply of goods.
In Q1’22, an even time roster was implemented across the site as required by newly updated Mongolian labour laws resulting in the need to hire and
train additional personnel. Despite these challenges a safe and productive quarter was achieved.
11 G&A costs per tonne of ore treated is a supplementary financial measure. Please refer to the Section titled
“Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Selected Operational Metrics
Oyu Tolgoi Production Data
All data represents full production and sales
on a 100% basis
|
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|
1Q |
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2Q |
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3Q |
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4Q |
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|
1Q |
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Full Year |
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| |
|
2021 |
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|
2021 |
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|
2021 |
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|
2021 |
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|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
| Open pit material mined (‘000 tonnes) |
|
|
22,588 |
|
|
|
15,829 |
|
|
|
22,588 |
|
|
|
23,979 |
|
|
|
24,386 |
|
|
|
84,983 |
|
|
|
|
|
|
|
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| Ore treated (‘000 tonnes) |
|
|
9,813 |
|
|
|
9,401 |
|
|
|
9,336 |
|
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10,573 |
|
|
|
9,581 |
|
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39,124 |
|
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|
|
|
|
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| Average mill head grades: |
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| Copper (%) |
|
|
0.56 |
|
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|
0.47 |
|
|
|
0.53 |
|
|
|
0.46 |
|
|
|
0.40 |
|
|
|
0.50 |
|
|
|
|
|
|
|
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| Gold (g/t) |
|
|
0.68 |
|
|
|
0.50 |
|
|
|
0.63 |
|
|
|
0.38 |
|
|
|
0.32 |
|
|
|
0.54 |
|
|
|
|
|
|
|
|
| Silver (g/t) |
|
|
1.29 |
|
|
|
1.19 |
|
|
|
1.29 |
|
|
|
1.27 |
|
|
|
1.25 |
|
|
|
1.26 |
|
|
|
|
|
|
|
|
| Concentrates produced (‘000 tonnes) |
|
|
201.9 |
|
|
|
173.2 |
|
|
|
191.9 |
|
|
|
182.7 |
|
|
|
144.3 |
|
|
|
749.6 |
|
|
|
|
|
|
|
|
| Average concentrate grade (% Cu) |
|
|
22.5 |
|
|
|
21.2 |
|
|
|
21.9 |
|
|
|
21.3 |
|
|
|
21.0 |
|
|
|
21.7 |
|
|
|
|
|
|
|
|
| Production of metals in concentrates: |
|
|
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|
|
|
|
|
|
|
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|
|
|
|
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|
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|
|
|
|
|
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| Copper (‘000 tonnes) |
|
|
45.4 |
|
|
|
36.7 |
|
|
|
41.9 |
|
|
|
38.9 |
|
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|
30.3 |
|
|
|
163.0 |
|
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|
|
|
|
|
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| Gold (‘000 ounces) |
|
|
146 |
|
|
|
113 |
|
|
|
131 |
|
|
|
79 |
|
|
|
59 |
|
|
|
468 |
|
|
|
|
|
|
|
|
| Silver (‘000 ounces) |
|
|
255 |
|
|
|
235 |
|
|
|
249 |
|
|
|
238 |
|
|
|
211 |
|
|
|
977 |
|
|
|
|
|
|
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| Concentrate sold (‘000 tonnes) |
|
|
186.3 |
|
|
|
92.6 |
|
|
|
224.4 |
|
|
|
165.9 |
|
|
|
148.3 |
|
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|
669.2 |
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|
|
|
|
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| Sales of metals in concentrates: |
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|
|
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| Copper (‘000 tonnes) |
|
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39.0 |
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|
19.6 |
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46.4 |
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34.4 |
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29.9 |
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139.4 |
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| Gold (‘000 ounces) |
|
|
111 |
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|
73 |
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|
149 |
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|
102 |
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|
57 |
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|
435 |
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|
|
|
|
|
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| Silver (‘000 ounces) |
|
|
207 |
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|
106 |
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|
278 |
|
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|
192 |
|
|
|
179 |
|
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|
783 |
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| Metal recovery* (%) |
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|
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| Copper |
|
|
86.3 |
|
|
|
79.7 |
|
|
|
83.9 |
|
|
|
80.1 |
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|
|
78.1 |
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82.8 |
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|
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| Gold |
|
|
72.2 |
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|
69.3 |
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|
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68.7 |
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59.3 |
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59.0 |
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68.4 |
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| Silver |
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|
65.3 |
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62.5 |
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64.1 |
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55.1 |
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54.3 |
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|
61.6 |
|
*Metal recovery is a function of head grade and reflects grades delivered in the quarter.
Oyut Open-Pit Operations and Hugo North Underground
During Q1’22, the combined open-pit and underground operations produced 30.3 thousand tonnes of copper in concentrate and 59 thousand
ounces of gold in concentrate, representing a planned reduction from Q4’21 due to a planned reduction in mill throughput from scheduled maintenance activities as well as the planned transition of mining to the next phase of operations resulting
in lower copper and gold head grades. The mill feed for Q1’22 included approximately 262 thousand tonnes of underground development material with 0.52% copper and 0.25g/t gold of headgrades. The remaining 9.3 million tonnes of mill feed
was sourced from Phases 4B and 5 of the open-pit as well as low grade stockpiles. Mining in Phase 4B was completed in March 2022. Mill head grades will remain low through to the end of 2022 as mined-material direct mill feed will continue to be
supplemented by low grade stockpiles.
As previously disclosed, open-pit optimisation opportunities that reduce the impact of the previously
forecast metal deferral resulting from the Q4’20 pitwall failure are improving in definition. Related work is still expected to be incorporated into an updated mine plan in Q3’22.
During Q1’22, the underground project achieved several significant milestones, including commencement of the undercut and commissioning of both
Materials Handling System 1 and the first on-footprint truck chute. The timing of first drawbell remains aligned with the previously disclosed timing of Q3’22. Despite the delayed commencement of the
undercut, undercut blasting and on footprint construction work continue to progress well ahead of the first drawbell blast. Infrastructure to support production ramp-up also progressed during the quarter,
including completion of the conveyor to surface decline mining and transfer chamber mass excavation.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Shaft 3 headframe was commissioned and sinking commenced on March 31, 2022 from a cumulative depth
of 83 metres below ground level. Shaft 4 sinking re-started on March 25, 2022 after work was interrupted on February 17, 2022 due to an electrical fault and subsequent repairs. Shaft 4 advancement
was 190 metres below ground level as of March 31, 2022. Although the progress of these shafts continued during Q1’22, challenges with sinking rates continue, and a programme of work has been initiated to optimise shaft sinking progress
going forward. The impact of shaft sinking rates and related optimisation efforts on post-Panel 0 ramp up will be evaluated at the conclusion of the current schedule review and will be incorporated in an update expected to be completed in
Q2’22.
Following undercut commencement in January 2022, Panels 1 and 2 are expected to be delayed due to changes to mining scope as well as COVID-19 related work restrictions impacting both Shafts 3 and 4 and underground development progress as previously disclosed.
The table below provides the Company’s updated estimated key milestone dates compared to the 2020 Oyu Tolgoi Technical Report (2020 OTTR),
including updates to Shaft 3 and 4 milestones. Once the Shaft 3 and 4 schedule is finalised in Q2’22, an assessment of the impact on Panel 1 and 2 will be completed. Delays to Shaft 3 and 4 are not expected to result in equivalent delays to
Panels 1 and 2 given the current underground development approach and the further mitigation opportunities under investigation.
The Panel 0 first
draw bell remains on track for Q3’22, as does timing of sustainable production in H1’23, and neither are expected to be impacted by the updates to the schedule for Shafts 3 and 4.
|
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| Milestone |
|
2020 OTTR |
|
Actual or Currently Projected Dates |
| Start Undercut blasting |
|
July 2021 |
|
January 2022 (Actual) |
| MHS 1 (including Crusher 1) commissioning |
|
Q4’21 |
|
February 2022 (Actual) |
| First draw bell blasted |
|
May 2022 |
|
Q3’22 |
Sustainable Production
(sustainable cave propagation) |
|
February 2023
(~30 drawbells active(1)) |
|
H1’23
(~ 21 drawbells active(1)) |
| Shaft 3 commissioned |
|
H1’22 |
|
H1’24(2) |
| Shaft 4 commissioned |
|
H1’22 |
|
H1’24(2) |
| First draw bell Panel 2 |
|
Q4’24 |
|
H1’26(2) |
| First draw bell Panel 1 |
|
H2’26 |
|
H1’27(2) |
| (1) |
Design refinements identified that a minor modification to undercut sequence following additional geotechnical
assessment of cave initiation conditions, changed the estimated number of drawbells to reach critical hydraulic radius, which is the point at which sustainable production is anticipated to commence. Critical hydraulic radius is an estimated factor,
based on the best available data but some variability in the exact number of drawbells needed to reach critical hydraulic radius could occur with the potential for the requirement to be more or less than 21 drawbells. |
| (2) |
Shaft 3 and 4 schedules are under review as part of the preliminary cost and schedule update. A programme of work is
underway to maximise productivity in the shaft areas. The impact of schedule slippage to the shafts on the timing of Panels 1 and 2 is yet to be defined, but it is not expected to be equivalent. |
At the end of March 2022, cumulative underground capital development is 66,920 equivalent metres (eqm) and cumulative Conveyor to Surface advancement is
16,088 eqm.12
|
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| Q1’2022 |
|
Total Equivalent
metres |
|
Lateral Development
metres |
|
Mass Excavation (000’ cubic metres)13 |
| UDS Development |
|
646 |
|
220 |
|
10,529 |
| UDS Sustaining |
|
2,856 |
|
2,757 |
|
2,492 |
| C2S |
|
225 |
|
30 |
|
4,843 |
| Overall |
|
3,727 |
|
3,007 |
|
17,864 |
12 Totals
include sustaining capital metres.
13 Mass Excavation includes stripping cubic metres.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
The total cumulative increase to the Definitive Estimate14 underground development capital cost due to the impacts of COVID-19 through the end of Q1’22
increased by $20 million from $175 million to $195 million excluding taxes. This increase included the currently known, incremental, time-related costs of COVID-19 restrictions.
Preliminary outcomes from the 2022 cost and schedule update for the underground project, which incorporate the known, incremental COVID-19 cost impact of $195 million through March 31, 2022, associated taxes and an estimate of further COVID-19 management costs over the remaining development
schedule, indicate an increase in the total expected development capital of the Definitive Estimate from $6.75 billion to $7.06 billion. The 2022 cost and schedule update is currently under review by the Company with some areas of risk to
cost and schedule identified that remain under assessment.
OT LLC spent $203.8 million on capital expenditures on the underground project15 during Q1’22, including $84.8 million of underground sustaining capital expenditure.
Total capital expenditure on the underground project from January 1, 2016, to December 31, 2021, was approximately $5.6 billion, including $0.4 billion of underground sustaining capital expenditure. Underground capital
expenditure on a cash basis includes VAT and capitalised management services payments but excludes capitalised interest. In addition, OT LLC had contractual obligations16 of $0.5 billion as at March 31, 2022. From the restart of project development in 2016 through March 31, 2022, Oyu Tolgoi has
committed over $4.3 billion to Mongolian vendors and contractors.
Incremental Mine Design Refinements
Studies on Hugo North Lift 1 continue with the focus on design optimisation for Panels 1 and 2 and pillar recovery. To support the mining studies,
additional data is being collected via a surface and underground drilling programme. Drilling continues at Hugo North to increase orebody knowledge and extend the current mine design.
| |
· |
|
Lift 1 – A total of 25,000 metres of drilling is planned for 2022 and into 2023. Most of these drill metres
are into potential future mining areas which are on the Lift 1 horizon and currently excluded from the Mineral Reserve. |
| |
· |
|
Lift 2 - Over the next 4 years (2022-2025) approximately 100,000 metres of drilling is planned to improve the orebody
knowledge and geotechnical modelling of Lift 2. |
During Q1’22, the focus of the drilling programme was the northern part of
Lift 1, Panel 1 and the southern part of Lift 1, Panel 2. Drilling has ramped up since Q4’21 due to improvements in the COVID-19 situation on site.
Preliminary results from the ongoing Lift 1, Panel 2 mine design optimisation are expected before the end of H1’22. The scope of this study
includes a review of the base case, including optimisation of the extraction drive orientation and the undercut strategy, reducing exposure to caving-related risks. Risk reduction efforts could alter the mining sequence within panels, which may
result in changes to the metal profile. The initial focus is on the northern section of Panel 2, where additional data is already available and will be expanded to include the southern section in H2’22.
The Panel 1 and Pillar Recovery studies are scheduled for completion in early 2023.
14 The
confirmatory analysis of the underground project costs and schedule contained in the 2020 statutory study required pursuant to, and prepared by OT LLC in accordance with Mongolian laws and filed with the Mongolian Minerals Council in 2021.
15
Capital expenditure on the underground project and Underground sustaining capital expenditure are supplementary financial measures. Please refer to the Section titled “Non-GAAP and Other Financial
Measures” on page 28 of this MD&A for further information.
16 Contractual obligations is a non-GAAP financial measure. Please refer to the Section titled “Non-GAAP and Other Financial Measures” on page 28 of this MD&A for further information.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
FUNDING OF OT LLC BY TURQUOISE HILL
In accordance with the Amended and Restated Shareholders’ Agreement dated June 8, 2011 (ARSHA), Turquoise Hill has funded OT LLC’s cash
requirements beyond internally generated cash flows by a combination of equity investment and shareholder debt.
For amounts funded by debt, OT LLC
must repay such amounts, including accrued interest, before it can pay common share dividends. As at March 31, 2022, the aggregate outstanding balance of shareholder loans extended by subsidiaries of the Company to OT LLC was $8.4 billion,
including accrued interest of $2.3 billion. These loans bear interest at an effective annual rate of LIBOR plus 6.5%.
In accordance with the
ARSHA, a subsidiary of the Company had previously funded the common share investments in OT LLC on behalf of state-owned Erdenes. These funded amounts, also referred to as carry account loans, earned interest at an effective annual rate of LIBOR
plus 6.5% and were expected to be repayable by Erdenes to a subsidiary of the Company via a pledge over Erdenes’ share of OT LLC common share dividends. Erdenes also had the right to reduce the outstanding balance by making cash payments at any
time. As announced on January 24, 2022, the Company waived in full the cumulative $2.4 billion in non-recourse loans to Erdenes. The loan comprised the amount of equity invested of $1.4 billion
in OT LLC by the Company on behalf of Erdenes, plus $1.0 billion of unrecognized interest as at January 25, 2022, the date that the waiver was formally granted to and acknowledged by Erdenes.
On December 30, 2021 the Parliament of Mongolia passed Resolution 103 to resolve the outstanding issues among the Company, Rio Tinto and the
Government of Mongolia in relation to the implementation of Resolution 92 (see the section “Government Relations - Negotiations with Government of Mongolia” of this MD&A). Resolution 103 placed financing debt restrictions that limit
the Company’s ability to fund OT LLC with shareholder debt or to carry common share investments in OT LLC on behalf of Erdenes until sustainable production is achieved, which is currently expected in H1’23.
As at March 31, 2022, Turquoise Hill had $0.6 billion of available liquidity in the form of cash and cash equivalents, which, under current
projections and together with the various sources of funding available to the Company under the Amended and Restated Heads of Agreement (the Amended HoA) dated January 24, 2022 between the Company and Rio Tinto, are expected to provide the
Company with sufficient liquidity and resources to meet its minimum obligations for a period of at least 12 months from the balance sheet date of March 31, 2022.
The Amended HoA replaced the prior Heads of Agreement entered into on April 9, 2021, which itself replaced the
non-binding Memorandum of Understanding that Rio Tinto and Turquoise Hill entered into on September 9, 2020. The Amended HoA is binding and delineates a comprehensive funding arrangement (the Funding
Plan) to address the Company’s estimated incremental funding requirement.
Key elements of the Amended HoA include:
| |
· |
|
Pursuing the rescheduling of principal repayments of existing debt
(Re-profiling) to potentially reduce the base case incremental funding requirement by up to $1.7 billion; |
| |
· |
|
Seeking to raise up to $500 million of additional senior supplemental debt (SSD); |
| |
· |
|
Rio Tinto committing to provide a co-lending facility (Co-Lending Facility), incremental to the Re-profiling and the SSD, of up to $750 million to be made available once sustainable production has been achieved;
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Rio Tinto committing to provide one or more secured advances directly to the Company of up to a maximum of
$300 million (RT Advance), which would be available during the debt funding restriction period identified in Resolution 103 and would be indirectly repaid out of the proceeds of the $750 million
Co-Lending Facility; and |
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The Company agreeing to conduct an equity offering in a form of its choosing of at least $650 million (Initial
Equity Offering) (including a Rio Tinto pro rata participation) by no later than August 31, 2022. |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Under the current base case assumptions, additional equity in excess of the initial $650 million
would not be required if the Re-profiling, SSD and Co-Lending Facility are fully successful. In addition, the Amended HoA provides that, if necessary, Turquoise Hill
could be required to raise up to a total of $1.5 billion (less the amount raised in the Initial Equity Offering) via equity in a form of its choosing.
The requirement of Rio Tinto to advance funds under the Co-Lending Facility is subject to a number of conditions
precedent set out in the Amended HoA, including, among others: that certain undertakings provided by the Company in favour of the Oyu Tolgoi project finance lenders be amended to cover the Co-Lending Facility;
that terms of the Oyu Tolgoi project finance agreements with respect to a “Sponsor Senior Loan” not be amended in any material respect; the absence of new material claims and proceedings against Turquoise Hill or Rio Tinto that could
adversely impact the funding elements of the Amended HoA; the absence of a material adverse change and of a “Suspensive Event” as defined under the Oyu Tolgoi project finance agreements, and operations at Oyu Tolgoi not having been
suspended for certain defined periods of time; and all relevant third party approvals and consents having been obtained. The requirement of Rio Tinto to advance funds under the RT Advance is also subject to a number of conditions precedent set out
in the Amended HoA substantially similar to those applicable to the Co-Lending Facility. The foregoing list of conditions does not purport to be exhaustive, and investors should refer to a copy of the Amended
HoA as filed on the SEDAR and EDGAR profiles of the Company.
In light of the financing debt restrictions in Resolution 103, until sustainable
production is achieved (currently expected in H1’23), OT LLC’s estimated funding requirements are expected to be addressed by cash on hand at OT LLC, the Re-profiling and a pre-paid copper concentrate sale arrangement between Turquoise Hill and OT LLC.
Assuming successful completion of
the above elements, the Company currently estimates it can address its $3.4 billion incremental funding requirement (December 31, 2021: $3.4 billion) within the new timing framework of the Amended HoA, which sets a target date for the Re-profiling of no later than December 31, 2022 and an outside date for the SSD and Co-Lending Facility to the earlier of the three months following the lifting of the
debt restrictions under Resolution 103 and December 31, 2023.
Successful implementation of the Amended HoA is subject to achieving alignment
with relevant stakeholders in addition to Rio Tinto (including existing lenders, any potential new lenders and the Government of Mongolia), market conditions and other factors. However, non-fulfilment of any
of the conditions precedent identified in the Amended HoA would also adversely affect the ability of the Company and OT LLC to obtain additional funding or re-profile existing debt as contemplated within the
timeframe set out in the Amended HoA. The Company is in discussions with Rio Tinto regarding implementation of the Amended HoA as well as its residual funding requirements.
The Amended HoA and the timing of the execution of its various components could also be affected by the unsolicited
non-binding proposal from Rio Tinto, the Company’s majority shareholder, to acquire through a plan of arrangement the approximately 49% of the outstanding shares of Turquoise Hill held by the
Company’s minority shareholders for cash consideration of C$34.00 per share. Rio Tinto has stated that its Proposal is conditional on, among other things, Turquoise Hill not raising additional equity capital, including through a rights
offering, bought deal or other share placement, pending completion of the proposed transaction. The Proposal does not purport to formally amend the terms of the Amended HoA.
Given the uncertainties outlined above, the Company is currently assessing alternatives in the event that the timeline as outlined in the Amended HoA is
not achieved.
Turquoise Hill’s liquidity outlook will continue to be impacted, either positively or negatively, by various factors, many of
which are outside the Company’s control, including:
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Successful implementation of the Amended HoA; |
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Changes in commodity prices and other market-based assumptions; |
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Open-pit operating performance as well as the successful implementation (or
otherwise) of ongoing optimisation efforts; |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
| |
· |
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The underground mine cost and schedule review and update that is underway and expected to be completed in Q2 2022;
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Further and/or unanticipated impacts on operations and underground development related to the COVID-19 pandemic as well as the economic, commercial and financial consequences thereof; |
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The Proposal from Rio Tinto to acquire through a plan of arrangement the outstanding shares of the Company; and
|
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The outcomes of Turquoise Hill’s and Rio Tinto’s ongoing engagement with various Mongolian governmental bodies
as the Mongolian Government implements Resolution 103, as discussed in the “Negotiations with the Government of Mongolia” section of this MD&A below. |
Turquoise Hill continues to monitor its liquidity outlook and will provide updates as and when circumstances require.
As noted above, Turquoise Hill currently estimates its base case incremental funding requirement to be $3.4 billion (December 31, 2021: $3.4
billion), taking into consideration:
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Metal price assumptions for copper and gold over the incremental funding period, as delineated in the table below;
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Preliminary outcomes from the 2022 cost and schedule update for the underground project, which incorporate the known,
incremental COVID-19 cost impact of $195 million through March 31, 2022, associated taxes and an estimate of further COVID-19 management costs over the
remaining development schedule, indicate an increase in the total expected development capital from $6.75 billion to $7.06 billion. The 2022 cost and schedule update is currently under review by the Company, with some areas of risk to cost
and schedule identified that remain under assessment; |
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The current forecast of sustainable production for Panel 0, which is H1’23; |
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The current forecast of delays to Shafts 3 and 4 (for further information, see the “Oyut Open-Pit Operations and Hugo North Underground” section of this MD&A above); and |
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Any updates or changes to the mine plan of either the open-pit or underground mines (for further information, see the
“Oyut Open-Pit Operations and Hugo North Underground” section of this MD&A above). |
The specific metal price assumptions used in determining the base case incremental funding gap are as follows:
|
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| Year |
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Copper ($ / pound) |
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Gold ($ / troy ounce) |
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| 2022 |
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4.48 |
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1,900 |
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| 2023 |
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4.06 |
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1,789 |
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| 2024 |
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3.91 |
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1,716 |
Within the base case funding requirement are $1.8 billion of scheduled principal repayments, which the Company is attempting to re-profile.
Turquoise Hill currently estimates its base case incremental funding will continue to be influenced,
either positively or negatively, by various factors over the incremental funding period, many of which are outside the Company’s control, including:
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Any potential further revisions to the amount of underground development capital required or revisions to schedule;
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The timing of sustainable production and ramp-up profile and their impact on
cash flows including any further COVID-19-related delays (for further information, see the “Oyut Open-Pit Operations and
Hugo North Underground” section of this MD&A above); |
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The outcomes of Turquoise Hill’s and Rio Tinto’s ongoing engagement with various Mongolian governmental bodies
to resolve remaining outstanding items relating to the Government of Mongolia’s implementation of Resolution 103 as discussed in the “Negotiations with the Government of Mongolia” section of this MD&A below; |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
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Changes to the amount of cash flow expected to be generated from open-pit
operations, net of underground and open-pit sustaining capital requirements; |
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Further and/or unanticipated impacts on operations and underground development related to the COVID-19 pandemic as well as the economic, commercial and financial consequences thereof; and |
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Changes in expected commodity prices and other market-based assumptions (upside and downside pricing sensitivities would
have, respectively, a favourable or unfavourable impact on the base case incremental funding requirement). |
More generally, any
changes in the above factors may impact the incremental funding requirement and, as a result, the actual quantum of incremental funding required may be greater or less than the $3.4 billion base case estimate, and such variance may be
significant. See the sections “Risks and Uncertainties” and “Forward-Looking Statements and Forward-Looking Information” in this MD&A.
PRIVATISATION PROPOSAL RECEIVED FROM RIO TINTO
On March 13, 2022, the Board received a non-binding proposal from Rio Tinto, the Company’s majority
shareholder, to acquire the approximately 49% of the outstanding common shares of Turquoise Hill held by the Company’s minority shareholders (approximately 99 million common shares) for cash consideration of C$34.00 per share. Rio Tinto
has stated that the Proposal is conditional on, among other things, Turquoise Hill not raising additional equity capital, including through a rights offering, bought deal or other share placement, pending completion of the proposed transaction. The
Proposal does not amend the terms of the amended and restated Heads of Agreement entered into by Turquoise Hill and Rio Tinto on January 24, 2022 which establishes a binding funding plan for the completion of the Oyu Tolgoi underground mine.
In response to the Proposal, the Board formed a Special Committee of independent directors comprised of Maryse Saint-Laurent (Chair), George Burns,
Peter Gillin and Russel Robertson (the Special Committee). The Special Committee has retained BMO Nesbitt Burns Inc. as its financial advisor and Blake, Cassels & Graydon LLP as its legal counsel. In addition, the Special Committee has
retained TD Securities as an independent valuator to prepare a formal valuation of the common shares of the Company in accordance with Multilateral Instrument 61-101– Protection of Minority Shareholders
in Special Transactions.
In addition to responsibility for reviewing and considering the Proposal, the Special Committee’s mandate includes
responsibility for considering the Company’s liquidity needs and financing options pending the Company’s consideration of the Proposal, including consideration of whether the Company should proceed with an equity offering to meet its
liquidity requirements or consider other financing options, including potential financing from Rio Tinto pending the Special Committee’s consideration of the Proposal. The Proposal is non-binding on
Turquoise Hill. There can be no assurance that a transaction will result from the Proposal, and if a transaction does result, whether such transaction will be completed or on what terms.
Turquoise Hill does not intend to comment on or disclose further developments regarding the Special Committee’s evaluation of the Proposal unless
and until it deems further disclosure is appropriate or required.
GOVERNMENT RELATIONS
Turquoise Hill’s ownership of the Oyu Tolgoi mine is held through a 66% interest in OT LLC. The remaining 34% interest in OT LLC is held by
Erdenes. Turquoise Hill was obliged to fund Erdenes’ share of Oyu Tolgoi’s funding requirements until September 2016, and Erdenes’ share of the capital costs and operating costs of the underground mine until September 2021 under the
ARSHA and the Oyu Tolgoi Underground Mine Development and Financing Plan (UDP) entered into on May 18, 2015 between, among others, the Company, the Government of Mongolia, Erdenes and OT LLC.
Underground construction recommenced in May 2016 when OT LLC received the final requirement for the restart of underground development: formal notice to
proceed approval by the Board, Rio Tinto (as project manager) and OT LLC. Approval followed the signing of the UDP in May 2015 and the signing of a $4.4 billion
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
project finance facility in December 2015. Development had been suspended in August 2013 pending resolution of matters with the Government of Mongolia.
Turquoise Hill’s investment in the Oyu Tolgoi mine is governed by the 2009 Investment Agreement among Turquoise Hill, the Government of Mongolia,
OT LLC and an affiliate of Rio Tinto (Investment Agreement or IA). The Investment Agreement framework was authorised by the Mongolian Parliament and was concluded after 16 months of negotiations. It was reviewed by numerous constituencies within the
Government. Turquoise Hill has been operating in good faith under the terms of the Investment Agreement since 2009, and we believe not only that it is a valid and binding agreement, but that it has proven to be beneficial for all parties.
Adherence to the principles of the Investment Agreement, the ARSHA and the UDP has allowed for the development of the Oyu Tolgoi mine in a manner that
has given rise to significant long-term benefits to Mongolia. Benefits from the Oyu Tolgoi mine open-pit operations and underground development include, but are not limited to, employment, royalties and taxes,
local procurement, economic development and sustainability investments.
Renewed Partnership with Government of Mongolia
On January 24, 2022, the Company announced that it had successfully reached a mutual understanding for a renewed partnership with the Government of
Mongolia and that the OT LLC Board had unanimously approved the commencement of the undercut, namely the commencement of blasting on January 25, 2022 that started the Oyu Tolgoi underground mine production and the full Definitive Estimate
underground development budget.
The decision to approve the undercut represented a reset of the relationship with the Government of Mongolia with a
view to delivering economic benefits to all stakeholders including the people of Mongolia and followed resolution of many of the conditions required in Resolution 103 including:
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Turquoise Hill agreeing to waive in full the US$2.4 billion carry account loan of Erdenes. See the section
“Funding of OT LLC by Turquoise Hill” in this MD&A; |
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Improved cooperation with Erdenes in monitoring the Oyu Tolgoi underground development and enhancing environment, social
and governance (ESG) matters; |
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The approval of the ESA; and |
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The establishment of a funding structure at OT LLC that does not incur additional loan financing prior to sustainable
production for Panel 0 (expected in the first half of 2023). |
The Company continues to work with the Government of Mongolia and
Rio Tinto to finalise the remaining outstanding measures of Resolution 103, namely the formal termination of the UDP and resolution of the outstanding OT LLC tax arbitration.
Oyu Tolgoi Mine Power Supply
OT LLC
currently sources power for the Oyu Tolgoi mine from China’s Inner Mongolian Western Grid, via overhead power line, pursuant to back-to-back power purchase
arrangements with Mongolia’s National Power Transmission Grid (NPTG), the relevant Mongolian power authority, and Inner Mongolia Power International Cooperation Co., Ltd (IMPIC), the subsidiary of Inner Mongolia’s power grid company
expiring in July 2023.
OT LLC is obliged under the Investment Agreement to secure a long-term domestic source of power for the Oyu Tolgoi mine. The
Power Source Framework Agreement (PSFA) entered into between OT LLC and the Government of Mongolia in December 2018 (and as amended in June 2020) provides a binding framework and pathway for long-term power supply to the Oyu Tolgoi mine.
OT LLC entered into the ESA on January 26, 2022, with, amongst others, Southern Region Electricity Distribution Network to provide OT LLC with
power from the Mongolian grid. Power will be delivered under the ESA once certain technical conditions are satisfied, and the Mongolian grid becomes capable of providing electricity to meet OT LLC’s total power requirements on a long-term
basis.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
The ESA has a term of 20 years from the date on which supply commences and provides a pathway to
meeting OT LLC’s long-term power requirements from domestic power sources.
While the Mongolian grid undergoes an upgrade to be in a position
to provide stable and reliable power to the Oyu Tolgoi mine, OT LLC will continue to import its power from Inner Mongolia, China. An agreement in-principle has been reached between NPTG and IMPIC for a
three-year fixed term extension to 2026, followed by an extension to up to 2030, if required. Some outstanding commercial terms are in the process of being finalised with IMPIC by a dedicated working group established by the Ministry of Energy,
which also includes representatives from Oyu Tolgoi LLC and NPTG.
Oyu Tolgoi Tax Assessments
On January 16, 2018, Turquoise Hill announced that OT LLC had received and was evaluating a tax assessment for approximately $155 million
(which was converted from Mongolian Tugrik to U.S. dollars at the exchange rate on that date) from the Mongolian Tax Authority (MTA) relating to an audit on taxes imposed and paid by OT LLC between 2013 and 2015 (the 2013 to 2015 Tax Assessment). In
January 2018, OT LLC paid an amount of approximately $4.8 million to settle unpaid taxes, fines and penalties for accepted items.
On
February 20, 2020, the Company announced that OT LLC would be proceeding with the initiation of a formal international arbitration proceeding in accordance with dispute resolution provisions within Chapter 14 of the Investment Agreement and
Chapter 8 of the UDP. The dispute resolution provisions call for arbitration under the United Nations Commission on International Trade Law (UNCITRAL) seated in London before a panel of three arbitrators. By agreeing to resolve certain matters
within the 2013 to 2015 Tax Assessment dispute under UNCITRAL Arbitration Rules, both parties have agreed that the arbitral award shall be final and binding on both parties and the parties shall carry out the award without delay.
On December 23, 2020, Turquoise Hill announced that OT LLC had received and was evaluating a tax assessment for approximately $228 million
(which was converted from Mongolian Tugrik to U.S. dollars at the exchange rate on that date) from the MTA relating to an audit on taxes imposed and paid by OT LLC between 2016 and 2018 (the 2016 to 2018 Tax Assessment). Most of the matters raised
in respect of the 2016 to 2018 Tax Assessment are of a similar nature to the matters that were raised in the 2013 to 2015 Tax Assessment. The MTA also proposed a $1.4 billion adjustment to the balance of OT LLC’s carried forward tax
losses. The adjustments are to disallow or defer certain tax deductions claimed in the 2016 to 2018 years.
On January 11, 2021, Turquoise Hill
announced that OT LLC had completed its evaluation of the 2016 to 2018 Tax Assessment claim and confirmed that OT LLC had given notice of its intention to apply to the UNCITRAL tribunal to amend its statement of claim to include certain matters
raised in the 2016 to 2018 Tax Assessment. OT LLC’s application to include these matters in the pending arbitration for the 2013 to 2015 Tax Assessment was accepted. In addition to those matters included within the statement of claim, there are
certain limited tax matters included in the 2013 to 2015 and 2016 to 2018 Tax Assessments, which were addressed in local Mongolian tax courts. As there was less certainty with respect to the resolution of these matters, the Company accrued for
certain amounts and has also adjusted its loss carry forwards.
In February 2021, OT LLC received notices of payment totalling approximately
$228 million (which were converted from Mongolian Tugrik to U.S. dollars at the exchange rate on those dates) relating to amounts disputed under the 2016 to 2018 Tax Assessment, and in March 2021, OT LLC received notices of payment totalling
$126 million (which were converted from Mongolian Tugrik to U.S. dollars at the exchange rate on those dates) relating to amounts disputed under the 2013 to 2015 Tax Assessment. Under the Mongolian General Tax Law, the amounts were due and paid
by OT LLC within 10 business days from the dates of the notices of payment. Under the same legislation, OT LLC would be entitled to recover the amounts, including via offset against future tax liabilities, in the event of a favourable decision from
the relevant dispute resolution authorities.
On May 3, 2021, the Company announced that the Government of Mongolia filed its statement of
defence together with a counterclaim (GoM Defence and Counterclaim) in relation to the tax arbitration proceeding. Turquoise Hill was not a party to the arbitration, but the GoM Defence and Counterclaim requested that the arbitral tribunal add both
the Company and a member of the Rio Tinto Group as parties to the tax arbitration. The principal thrust of the GoM Defence and Counterclaim is to seek the rejection of OT LLC’s tax claims in
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
their entirety. As part of the counterclaim, the Government of Mongolia also makes assertions surrounding previously reported allegations of historical improper payments made to Government of
Mongolia officials and seeks unquantified damages. Also, in the event OT LLC’s tax claims are not dismissed in their entirety, the Government of Mongolia is seeking in the counterclaim an alternative declaration that the Investment Agreement is
void.
Turquoise Hill denied the allegations relating to the Company in the GoM Defence and Counterclaim and filed submissions to the arbitral
tribunal to oppose the Government of Mongolia’s request that it be added to the tax arbitration. As announced by the Company on January 17, 2022, the arbitral tribunal issued a ruling deciding that Turquoise Hill not be added as a party to
the arbitration. As described above, Resolution 103 authorised certain measures to be completed by the Government of Mongolia in order for Resolution 92 to be considered formally implemented.
Regarding previously disclosed tax assessments of OT LLC, on February 11, 2022, at the request of the parties to the tax arbitration, the arbitral
tribunal issued an order suspending the tax arbitration for six months or until 21 days from when the tribunal receives notice from OT LLC or the Government of Mongolia to terminate the suspension. The Company remains committed to continue to work
with the Government of Mongolia and Rio Tinto to finalise the outstanding tax matters whether through arbitration or negotiation.
The Company
remains of the opinion that the tax positions adopted by OT LLC in its tax filings were correct and that OT LLC has paid all taxes and charges required under the Investment Agreement, the ARSHA, the UDP and Mongolian law.
Anti-Corruption Authority Information requests
On March 1, 2022, OT LLC notified the Company that it received a letter from the Mongolian Anti-Corruption Authority requesting certain documents
and information relating to an investigation regarding the underground construction work. The Company has no further details at this time and will update the market as appropriate.
CLASS ACTION COMPLAINTS
In October 2020, a
class action complaint was filed in the U.S. District Court, Southern District of New York against the Company, certain of its current and former officers as well as Rio Tinto and certain of its officers. The complaint alleges that the defendants
made material misstatements and material omissions with respect to, among other things, the schedule, cost and progress to completion of the development of Oyu Tolgoi in violation of Section 10(b) of the U.S. Securities Exchange Act of 1934, as
amended (the Exchange Act) and Rule 10b-5 thereunder. Under the schedule established by the court, a first amended complaint was filed on March 16, 2021, and a second amended complaint was filed on
September 16, 2021. The defendants moved to dismiss the operative amended complaint on October 19, 2021, under Rule 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, for failure to
state a claim. As of December 17, 2021, the motion was fully briefed and pending before the Court. The Company believes that the complaint against it is without merit.
In January 2021, a proposed class action was initiated in the Superior Court in the District of Montreal against the Company and certain of its current
and former officers. An amended complaint was filed on July 27, 2021 which did not substantially alter the claim. The claim alleges that the Company and its current and former officers named therein as defendants made material misstatements and
material omissions with respect to, among other things, the schedule, cost and progress to completion of Oyu Tolgoi, in violation of, among other things, sections 225.8, 225.9 and 225.11 of the Securities Act (Quebec). On January 7, 2022 the
plaintiff re-amended its claim to include allegations relating to developments arising since the previous amended complaint was filed. No hearing has been scheduled yet. The Company believes that the complaint
against it is without merit and is preparing to defend the application for leave and certification of the proceeding.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
See the risk factor titled “The Company may be subject to public allegations, regulatory
investigations or litigation that could materially and adversely affect the Company’s business” in the “RISKS AND UNCERTAINTIES” section of the Company’s MD&A for the year ended December 31, 2021.
CORPORATE ACTIVITIES
Exploration
Turquoise Hill, through its wholly owned subsidiaries, Asia Gold Mongolia LLC, Heruga Exploration LLC and SGLS LLC, operates an exploration
programme in Mongolia on licences that are not part of Oyu Tolgoi. Turquoise Hill owns three exploration licences: Bag and Od-2 in the Umnugobi province and Khatavch in the Dornogovi province. During
Q1’22 the Bag and Od-2 licences were renewed for another three years to 2025.
During Q1’22, the
main exploration activities completed were administrative in nature. The work included, but was not limited to, due diligence of potential contractors and updating the project risk registry. In addition, the 2021 government reports and 2022
exploration plans were approved for all three licenses.
As part of Turquoise Hill’s exploration growth strategy, the team continues to pursue
other land opportunities. During Q1’22, the exploration team reviewed a total of 2 tenders with 30 parcels of land areas that were made available for tender by the Mineral Resources and Petroleum Authority of Mongolia. In addition, the team
prepared for upcoming tenders by reviewing prime terrane areas.
INCOME AND OTHER TAXES
The Company recorded an income statement credit of $247.6 million for income and other taxes during Q1’22, compared with $44.3 million in
Q1’21. Income and other taxes include adjustments to deferred tax assets in Mongolia and Canada, in addition to withholding taxes accrued and current tax payable.
Adjustments to deferred tax assets resulted in a credit within income and other taxes for Q1’22 of $256.6 million. During Q1’22,
there was an increase to the amount of Mongolian deferred tax assets recognised of $264.1 million and a decrease to Canadian deferred tax assets of $7.5 million.
Deferred tax assets relate to tax operating losses, accrued but unpaid interest expense on shareholder loans and other temporary differences.
Recoverability of these losses was assessed against an estimate of future taxable profits. Movements in the deferred tax assets result from period end reassessments of recoverability and include adjustments to record potential deferred tax assets
not recognised in previous periods.
The adjustment to the Mongolian deferred tax assets in Q1’22 included an increase of $257.5 million
in the recognised deferred tax asset for prior year losses and other temporary differences, mainly related to property, plant and equipment. Operating losses and accrued but unpaid interest expense incurred by OT LLC during Q1’22 increased the
recognised deferred tax assets by $6.6 million.
The $264.1 million recognition of Mongolian deferred tax assets in Q1’22 compared
with $46.5 million in Q1’21. The recognition in Q1’22 was due to an increase in temporary differences that relates primarily to tax depreciation on property, plant and equipment and partial increase in utilisation of 2016 losses
against higher projected 2022 taxable income, which have benefited from higher expected long term commodity prices and changes to the timing of interest payments expected from implementation of the comprehensive financing plan announced on
January 24, 2022.
A negative tax rate of approximately 170% during Q1’22 arose as the Company reported income from continuing operations
before tax of $146.7 million while recording in the same period a net income statement tax credit (inclusive of adjustments to deferred tax assets and accrued withholding taxes) of $247.6 million.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
During Q1’21, there was an increase to the amount of Mongolian deferred tax assets recognised of
$46.5 million and to Canadian deferred tax assets of $5.8 million.
The adjustment to the Mongolian deferred tax assets in Q1’21
represented an increase of $39.0 million in the recognised deferred tax assets for prior year losses and other temporary differences, mainly related to property, plant and equipment. In addition, operating losses and accrued but unpaid interest
expense incurred by Oyu Tolgoi during Q1’21 increased the recognised deferred tax assets by $7.5 million.
A negative effective tax rate
of approximately 15% during Q1’21 arose as the Company reported income from continuing operations before tax of $287.8 million while recording in the same period a net income statement tax credit (inclusive of adjustments to deferred tax
assets and accrued withholding taxes) of $44.3 million.
Turquoise Hill’s effective tax rate represents the income statement charge or
credit for income and other taxes as a percentage of income or loss from operations before taxes. It is possible for Turquoise Hill’s effective tax rate to be in excess of +/- 100%, primarily because of different tax jurisdictions applying
different tax rates to intercompany loan interest, recognition of previously unrecognised deferred tax assets and/or de-recognition of deferred tax assets previously recognised.
Additional income statement information, including income and other taxes relating to OT LLC and the Company’s corporate operations is provided in
Note 3 – Operating segment – to the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Operating
activities. Net cash generated from operating activities was $122.4 million in Q1’22 versus cash used in operating activities of $133.2 million in Q1’21. Cash generated from operating activities before interest and tax
was $122.6 million in Q1’22 versus $248.2 million in Q1’21, resulting from a $143.3 million decrease in gross margin from decreased sales revenue and higher operating costs.
Interest paid in Q1’22 was $0.8 million versus $26.5 million in Q1’21 due to a timing difference in payment of the completion
support fee to a related party. Interest received in Q1’22 was $0.5 million versus $1.2 million in Q1’21, primarily due to lower funds invested in bank deposits and money market funds. $356.1 million of income and other
taxes was paid in Q1’21 versus nil in Q1’22. The $356.1 million in tax payments made by OT LLC in Q1’21 related to the 2013 to 2015 and 2016 to 2018 Tax Assessments.
Investing activities. Cash used in investing activities was $229.9 million in Q1’22 versus
$280.2 million in Q1’21. Cash used in investing activities in Q1’22 reflects expenditures on property, plant and equipment of $229.9 million . Cash used in investing activities in Q1’21 reflects expenditures on property,
plant and equipment of $250.3 million and $29.9 million spent by the Company on the purchase of copper and gold put options to establish a synthetic copper and gold price floor in order to provide increased certainty around the
Company’s liquidity horizon.
Financing activities. Cash used in financing activities
in Q1’22 was $2.4 million, compared to $8.4 million cash generated from financing activities in Q1’21. Cash used in financing activities in Q1’22 is comprised of payments in relation to lease liabilities. Cash
generated from financing activities in Q1’21 principally relates to amounts drawn down on Oyu Tolgoi’s overdraft facility at March 31, 2021.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Liquidity
As at March 31, 2022, Turquoise Hill had consolidated cash and cash equivalents of approximately $0.6 billion (December 31, 2021:
$0.7 billion) and consolidated working capital17 of negative $26.0
million (December 31, 2021: negative $68.8 million). The movement in consolidated working capital during Q1’22 was primarily due to higher inventories and trade and other receivables. The increase in inventories was mainly a
result of increased warehouse consumables reserve for critical stocks and reclassifications of certain ore inventories from long term to short term. The increase in receivables was mainly due to higher metal prices. Consolidated working capital is
expected to remain negative while expenditure on underground development continues and associated payables are recorded.
Turquoise Hill
manages liquidity risk by the preparation of internally generated short-term cash flow forecasts. These short-term cash flow forecasts consider the aggregation of non-cancellable obligations together with an
estimation of future operating costs, financing and tax costs, capital expenditures and cash receipts from sales revenue. Among other things, the Company’s short-term cash flow forecasts at March 31, 2022 also gave consideration to:
| |
· |
|
Possible impacts of the COVID-19 pandemic, including the increase of
$195 million to the estimate of underground development capital cost included in the Definitive Estimate through March 31, 2022; |
| |
· |
|
The impact of expected first sustainable production for Panel 0 in H1’23; |
| |
· |
|
The estimated impact on the timing of cash receipts resulting from the ongoing force majeure that was declared by OT LLC
on March 30, 2021; and |
| |
· |
|
Plans to access additional sources of funding under the Amended HoA where management consider implementation of those
plans to be probable. |
As at March 31, 2022, the Company had $0.6 billion of liquidity in the form of cash and cash
equivalents. Sensitivity analyses were performed over the short-term cash flow forecasts, including the impact of estimated commodity prices on cash receipts. Liquidity forecasts reflect management’s assessment of the probability of executing
on the additional sources of funding included within the Amended HoA. The additional funding needed until March 31, 2023 is expected to be provided through proceeds from the Initial Equity Offering, the RT Advance as well as the Re-profiling. Management considers the timeframe and acceptability of expected terms and conditions for the Re-profiling and equity offerings under the Amended HoA to be
probable. In early 2023, the Company is also expected to access the committed RT Advance of $300 million. On the basis of all of the foregoing, the Company believes that its $0.6 billion of available liquidity as at March 31, 2022,
together with the various sources of funding available to the Company under the Amended HoA, should provide it with sufficient liquidity and resources to meet its minimum obligations for a period of at least 12 months from the balance sheet date of
March 31, 2022, including its operations and capital expenditures, over the same period. Turquoise Hill also expects to access the incremental financing to sustain its operations and underground development beyond this period through further
implementation of the Amended HoA (see “Funding of OT LLC by Turquoise Hill” of this MD&A).
The Company received an unsolicited non-binding proposal from Rio Tinto on March 14, 2022 to acquire through a plan of arrangement the approximately 49% of the outstanding shares of Turquoise Hill held by the Company’s minority shareholders.
The Proposal, which does not amend the terms of the Amended HOA, includes a statement that Rio Tinto would be prepared to discuss providing Turquoise Hill with the liquidity necessary to operate through completion of the proposed transaction.
Capital Resources
The Company considers its
capital to be share capital and third-party borrowings. To effectively manage capital requirements, the Company has in place a planning and budgeting process to help determine the funds required to ensure the Company has the appropriate liquidity to
meet its strategic and operating needs.
17 Consolidated working capital is a non-GAAP financial measure. Please refer to the Section titled “Non-GAAP
and Other Financial Measures” on page 28 of this MD&A for further information.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
In December 2015, OT LLC signed the $4.4 billion project finance facility for the purposes of
developing the underground mine, of which $4.3 billion had been drawn down as at December 31, 2021. The additional $0.1 billion would be available, subject to certain conditions, under the Company’s facility with the
Export-Import Bank of the United States. As of March 31, 2022, the full original net proceeds of $4.2 billion had been advanced to OT
LLC18.
The project finance lenders have agreed to a debt cap of $6.0 billion thus allowing for the potential of an additional $1.6 billion of SSD to
be raised in the future subject to meeting certain requirements relating to the tenor, amount and timing of debt service obligations of such SSD and other customary conditions. The restrictions imposed by Resolution 103 on additional third party
funding at OT LLC until achievement of sustainable production, which is currently expected in H1’23, mean that SSD would not be drawn down until after sustainable production. However, negotiations with the project finance lenders can start
before sustainable production is achieved.
OT LLC notified the senior project finance lenders that the commencement of the undercutting for the
underground mine in January 2022 may have constituted an event of default under the Common Terms Agreement as a material amendment to the mine plan that existed at the time project finance was secured and could indirectly result in Oyu Tolgoi’s
inability to meet the original project completion longstop date specified in the project finance agreements. On May 4, 2022 a waiver of this potential event of default was executed between OT LLC and Sumitomo Mitsui Banking Corporation, in its
capacity as Intercreditor agent.
The Company’s accumulated deficit as at March 31, 2022 was $4.0 billion, compared to
$2.8 billion19 at December 31, 2021. The $1.2 billion increase in the year
represents the $1.4 billion waiver of carry account loans made on behalf of Erdenes as part of the agreement with the Government of Mongolia as at January 25, 2022 offset by the $0.3 billion in income for the quarter attributable to
the owners of Turquoise Hill.
See also the section “Funding of OT LLC by Turquoise Hill” of this MD&A for a discussion of
future capital requirements.
SHARE CAPITAL
As at March 31, 2022 the Company had a total of 201,231,446 common shares issued and outstanding.
COPPER, GOLD AND FOREIGN EXCHANGE MARKET COMMENTARY
The information below is in addition to disclosures already contained in this report regarding the Company’s operations and activities.
Copper and Gold Markets
The copper price
experienced a strong upward trajectory over Q1’22, reaching a record-high of $10,730/t in early March. By the end of Q1’22, prices were up 7% year over year. This was due to a broad-based commodities price rally in reaction to the
Russia-Ukraine conflict. The conflict has led to a surge in energy prices, financial sanctions, and trade flow bans on Russian material, resulting in widespread raw materials inflation. Meanwhile, visible inventories remain tight, despite a recovery
from multi-year lows, and continue to support prices. Demand in China has been undermined by lockdowns in Shanghai, which could affect manufacturing activity in neighbouring provinces. Demand in North America and Europe held up in Q1’22, but
rising inflation calls for aggressive monetary policy tightening, which could undermine consumer sentiment and dampen demand. On the supply side, new projects are coming online in 2022, with expected starts and
ramp-up skewed
18 Please
refer to the Section titled “Our Business” on page 5 and to the Section titled “Related-party Transactions” on page 26 of this MD&A.
19 Prior
year comparative numbers have been restated for adoption of the IAS16 amendment to Property, Plant and Equipment: Proceeds before intended Use. Please refer to the Section titled “Recent Accounting Pronouncements” on page 24 of this
MD&A for further information.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
to H2 2022. Along with anticipation of easing supply chain bottlenecks, we expect more material to be available in the market as the year progresses.
Spot treatment charges and refining charges (TC/RCs) rallied strongly in Q1’22, ending the quarter at $71.3/t and 7.13c/lb, up 23.5% year over
year. Smelter disruptions increased availability of raw material in the spot market as the annual Chinese smelter maintenance schedule was getting underway, and as such smelters were largely well-stocked and in no hurry to buy. This was despite
disruption in mine production in Peru (such as community action at Las Bambas) and Chile (drought issues). With increased mine supply anticipated in H2 2022, TC/RCs will continue to face upward pressure amid ample supply.
Gold prices moved upwards in Q1’22, ending the quarter at $1,942/oz, up 7.5% year over year. In March, gold price rallied to $2,039/oz on
Russia’s invasion of Ukraine, close to its historical high of $2,067/oz in 2020. Ongoing geopolitical concerns and intensifying global inflation pressures will continue to underpin gold price, but this will be tempered by central banks’
hawkish monetary policies, as a swifter pace of rate hikes will increase opportunity cost to hold non-yielding gold.
Foreign Exchange Rates
OT LLC’s sales are determined
and settled in U.S. dollars and a portion of its expenses are incurred in local currencies. Short-term foreign exchange fluctuations could have an effect on Turquoise Hill’s operating margins; however, in view of the proportion of locally
incurred expenditures, such fluctuations are not expected to have a significant impact on Turquoise Hill’s long-term financial performance.
OFF-BALANCE SHEET ARRANGEMENTS
With the exception of the Company’s power commitments disclosed within
the section “Contractual Obligations” and “Oyu Tolgoi Mine Power Supply” of this MD&A, as at March 31, 2022, Turquoise Hill was not a party to any off-balance sheet arrangements
that have, or are reasonably likely to have, a significant current or future effect on the results of the operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources of the Company.
CONTRACTUAL OBLIGATIONS
The following table summarises Turquoise
Hill’s contractual obligations20 as at March 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Stated in $000’s of dollars) |
|
Payments Due by Period(4) |
|
| |
|
Less than 1 |
|
|
1 - 3 years |
|
|
4 - 5 years |
|
|
After 5 years |
|
|
Total |
|
| |
|
year |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Project finance facility
(1) |
|
|
403,483 |
|
|
|
1,446,635 |
|
|
|
1,163,810 |
|
|
|
1,268,212 |
|
|
|
4,282,140 |
|
| Purchase obligations
(2) |
|
|
423,982 |
|
|
|
79,842 |
|
|
|
426 |
|
|
|
- |
|
|
|
504,250 |
|
| Other obligations
(3) |
|
|
387,839 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
387,839 |
|
| Power commitments |
|
|
128,428 |
|
|
|
33,075 |
|
|
|
- |
|
|
|
- |
|
|
|
161,503 |
|
| Lease liabilities |
|
|
8,353 |
|
|
|
17,329 |
|
|
|
1,285 |
|
|
|
- |
|
|
|
26,967 |
|
| Decommissioning obligations |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
363,856 |
|
|
|
363,856 |
|
| Total |
|
|
1,352,085 |
|
|
|
1,576,881 |
|
|
|
1,165,521 |
|
|
|
1,632,068 |
|
|
|
5,726,555 |
|
| (1) |
These amounts relate to principal repayments on the project finance facility. |
| (2) |
These amounts mainly represent various long-term contracts that include commitments for future development and operating
payments for supply of engineering, equipment rentals and other arrangements. |
| (3) |
These amounts include trade and other payables. |
20 Contractual
obligations is a non-GAAP financial measure. Please refer to the Section titled – “Non-GAAP and Other Financial Measures” – on page 28 of this MD&A for further information.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
| (4) |
The columns are represented in dates as follows: 12 months to March 31, 2023; 24 months between April 1, 2023
and March 31, 2025; 24 months between April 1, 2025 and March 31, 2027; Beyond April 1, 2027. |
The total of non-derivative financial liabilities is $4,605 million as at March 31, 2022 (December 31, 2021: $4,567 million). The total reported financial liabilities represents obligations that are non-cancellable.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with IFRS requires Turquoise Hill to establish accounting policies and to make estimates that
affect both the amount and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.
The Company’s estimates identified as being critical are substantially unchanged from those disclosed in the MD&A for the year ended
December 31, 2021.
RECENT ACCOUNTING PRONOUNCEMENTS
A number of new standards, and amendments to standards and interpretations, are effective as of January 1, 2022, and have been applied in preparing
these consolidated financial statements.
Property, Plant and Equipment: Proceeds before Intended Use (Amendments to International Accounting
Standards (IAS) 16): This amendment prohibits entities from deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while the Company is preparing the asset for its intended use. Instead, sales
proceeds and the cost of producing these items will be recognised in profit or loss in the Consolidated Statement of Income. The amendment applies retrospectively, but only to items of property, plant and equipment made available for use on or after
the beginning of the earliest period presented in the financial statements. The amendment is effective for annual reporting periods beginning on or after January 1, 2022, with earlier application permitted.
The Company adopted the amendment on January 1, 2022 and, accordingly, the information presented for 2021 has been restated. On initial
application, $21 million of net proceeds from the sale of Oyu Tolgoi underground ore concentrate prior to January 1, 2021 was transferred from capital work in progress to deficit, and a further $55 million of net proceeds from the
sale of Oyu Tolgoi underground ore concentrate was transferred from capital work in progress to deficit at December 31, 2021 related to sales and cost of sales during the year ended December 31, 2021.
There were no sales of Oyu Tolgoi underground ore concentrate in the three months ended March 31, 2021. Consequently, there was no restatement of
the Consolidated Statements of Comprehensive Income or Cash Flows for the three months ended March 31, 2021.
The Company is in the process of
assessing the impacts of the remaining standards and amendments to standards and interpretations, which have been issued but are not yet effective.
RISKS AND
UNCERTAINTIES
Turquoise Hill is subject to a number of risks due to the nature of the industry in which it operates, the present state of
development of its business and the foreign jurisdictions in which it carries on business. The material risks and uncertainties affecting Turquoise Hill, their potential impact, and the Company’s principal risk-management strategies are subject
to disclosure made elsewhere in this MD&A and are substantially unchanged from those disclosed in its MD&A for the year ended December 31, 2021 and in the AIF in respect of such period, except as supplemented below. See, in particular,
the sections in this MD&A titled “OPERATIONAL OUTLOOK FOR 2022”, “OYU TOLGOI – Oyut Open-Pit Operations and Hugo North Underground”; “FUNDING OF OT LLC BY TURQUOISE HILL”
and “GOVERNMENT RELATIONS” for more specific updates regarding, among other matters, the impact of COVID-19 on Turquoise Hill’s and Oyu Tolgoi’s
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
operations, the anticipated size of future funding requirements and the status of discussions regarding details to implement various funding elements under the Amended HoA as well as various
matters involving the Government of Mongolia. See also the Section of this MD&A titled “Forward-Looking Statements and Forward-Looking Information”. If any of such risks or risks not currently known to the Company actually occurs or
materialises, the Company’s business, financial condition or results of operations could be adversely affected, even materially adversely affected.
The following risk factors supplement the risk factors disclosed and described in the Company’s annual MD&A and AIF:
The ongoing Russia-Ukraine conflict is causing certain supply disruptions of oil and gas to the Oyu Tolgoi project and may have an adverse effect on
the Company’s business, financial conditions and results of operations.
Russia’s invasion of Ukraine in February 2022 has led to
economic sanctions and export control measures being levied against Russia by the international community and may result in additional sanctions, export control measures or other international action, which have and could in the future result in,
among other things, severe or complete restrictions on exports and other commerce and business dealings involving Russia, certain regions of Ukraine, and/or particular entities and individuals, any of which may lead to increased inflation and have a
destabilizing effect on commodity prices, supply chains and global economies more broadly. While the Company does not have any operations in Russia or Ukraine, the ongoing military conflict between Russia and Ukraine has the potential to cause
volatility in commodity prices and supply chain disruptions, including the supply of oil and gas from the region, which the Company utilizes in connection with its operations, all of which may adversely affect the Company’s business, financial
condition and results of operations. The extent and duration of the current Russia-Ukraine conflict and related international action cannot be accurately predicted at this time and the effects of such conflict may magnify the impact of other risk
factors relevant to the Company, including those relating to commodity price volatility and supply chain. The situation is rapidly changing and unforeseeable impacts may materialise and may have an adverse effect on the Company’s business,
financial condition and results of operations.
Multinational companies and businesses may in the future be subject to a minimum corporate tax
rate and other new tax measures under evolving global initiatives.
Members of the OECD/G20 Inclusive Framework on Base Erosion and Profit
Shifting have endorsed a “Two-Pillar Solution” designed in part to ensure that in-scope multinational enterprises are subject to a minimum tax rate of 15%,
building on its previous work on tax avoidance which targets, among other things, certain “base eroding” payments. The Company continues to monitor the ongoing implementation of such initiatives by countries where the Company is present.
The Company is unable to predict when and how such initiatives will be enacted into law in all such countries. It is possible that implementation of such initiatives, including the global minimum corporate tax rate, could have a material effect on
the Company’s liability for corporate taxes and its consolidated effective tax rate, which could in turn have a material effect, even a material adverse effect, on the Company’s financial position.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
RELATED-PARTY TRANSACTIONS
As at March 31, 2022, Rio Tinto’s equity ownership in the Company was 50.8%, which was unchanged from December 31, 2021. The following
tables present the consolidated financial statement line items within which transactions with Rio Tinto are reported.
|
|
|
|
|
|
|
|
|
| Statements of Income |
|
Three Months Ended March 31, |
|
| (Stated in $000’s of dollars) |
|
2022 |
|
|
2021 |
|
|
|
|
| Operating and corporate administration expenses: |
|
|
|
|
|
|
|
|
| Cost recoveries - Turquoise Hill |
|
|
49 |
|
|
|
494 |
|
| Management services payment (i) |
|
|
(7,253 |
) |
|
|
(6,478 |
) |
| Cost recoveries - Rio Tinto (ii) |
|
|
(11,914 |
) |
|
|
(12,886 |
) |
|
|
|
| Finance costs: |
|
|
|
|
|
|
|
|
| Completion support fee (iii) |
|
|
(26,763 |
) |
|
|
(27,035 |
) |
| |
|
|
(45,881 |
) |
|
|
(45,905 |
) |
|
|
|
|
|
|
|
|
|
| Statement of Cash Flows |
|
Three Months Ended March 31, |
|
| (Stated in $000’s of dollars) |
|
2022 |
|
|
2021 |
|
|
|
|
| Cash generated from operating activities |
|
|
|
|
|
|
|
|
| Interest paid (iii) |
|
|
- |
|
|
|
(26,171) |
|
|
|
|
| Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
| Expenditures on property, plant and equipment: |
|
|
|
|
|
|
|
|
| Management services payment and cost recoveries - Rio Tinto (i), (ii) |
|
|
(5,916 |
) |
|
|
(6,922) |
|
|
|
|
| Balance sheets |
|
March 31, |
|
|
December 31, |
|
| (Stated in $000’s of dollars) |
|
2022 |
|
|
2021 |
|
|
|
|
| Prepaid expenses and other assets |
|
|
54,962 |
|
|
|
81,764 |
|
| Trade and other payables: |
|
|
|
|
|
|
|
|
| Management services payment - Rio Tinto (i) |
|
|
(25,179 |
) |
|
|
(14,584) |
|
| Cost recoveries - Rio Tinto (ii) |
|
|
(47,248 |
) |
|
|
(39,569) |
|
| Total |
|
|
(17,465 |
) |
|
|
27,611 |
|
| (i) |
In accordance with the Amended and Restated Shareholders’ Agreement, which was signed on June 8, 2011, and
other related agreements, Turquoise Hill is required to make a management services payment to Rio Tinto equal to a percentage of all capital costs and operating costs incurred by Oyu Tolgoi from March 31, 2010 onwards. After signing the
Underground Mine Development and Financing Plan on May 18, 2015, the management services payment to Rio Tinto is calculated as 1.5% applied to underground development and sustaining capital costs, and 3% applied to operating costs and capital
related to current operations. |
| (ii) |
Rio Tinto recovers the costs of providing general corporate support services and mine management services to Turquoise
Hill. Mine management services are provided by Rio Tinto in its capacity as the manager of the Oyu Tolgoi project. |
| (iii) |
As part of the project finance agreements, Rio Tinto agreed to provide a guarantee, known as the completion support
undertaking (“CSU”) in favour of the Commercial Banks and the Export Credit Agencies. In consideration for providing the CSU, the Company is required to pay Rio Tinto a fee equal to 2.5% of the amounts drawn under the facility. The annual
completion support fee of 2.5% on amounts drawn under the facility is accounted for as a borrowing cost and included within interest expense and similar charges. The fee payment obligation will terminate on the date Rio Tinto’s CSU obligations
to the project lenders terminate. |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
SELECTED QUARTERLY DATA
The Company’s interim financial statements are reported under IFRS applicable to interim financial statements, including IAS 34 Interim Financial Reporting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ($ in millions, except per share information) |
|
Quarter Ended |
|
| |
|
Mar-31
2022 |
|
|
Dec-31
2021
Restated (b) |
|
|
Sep-30
2021
Restated (b) |
|
|
Jun-30
2021
Restated (b) |
|
|
|
|
|
|
| Revenue |
|
|
402.7 |
|
|
|
522.3 |
|
|
|
662.1 |
|
|
|
329.8 |
|
|
|
|
|
|
| Income for the period |
|
|
394.3 |
|
|
|
221.6 |
|
|
|
54.4 |
|
|
|
127.8 |
|
|
|
|
|
|
| Income attributable to owners of Turquoise Hill Resources
Ltd |
|
|
275.2 |
|
|
|
165.8 |
|
|
|
55.7 |
|
|
|
102.9 |
|
|
|
|
|
|
| Basic and diluted earnings per share attributable to owners of Turquoise Hill Resources Ltd
(a) |
|
|
1.37 |
|
|
|
0.82 |
|
|
|
0.28 |
|
|
|
0.51 |
|
|
|
| |
|
Quarter Ended |
|
| |
|
Mar-31
2021 |
|
|
Dec-31
2020 |
|
|
Sep-30
2020
Restated (b) |
|
|
Jun-30
2020
Restated (b) |
|
|
|
|
|
|
| Revenue |
|
|
526.5 |
|
|
|
405.1 |
|
|
|
283.0 |
|
|
|
285.6 |
|
|
|
|
|
|
| Income for the period |
|
|
332.1 |
|
|
|
241.6 |
|
|
|
177.8 |
|
|
|
76.9 |
|
|
|
|
|
|
| Income attributable to owners of Turquoise Hill Resources
Ltd |
|
|
236.7 |
|
|
|
159.9 |
|
|
|
139.2 |
|
|
|
75.6 |
|
|
|
|
|
|
| Basic and diluted earnings per share attributable to owners of
Turquoise Hill Resources Ltd (a) |
|
|
1.18 |
|
|
|
0.79 |
|
|
|
0.69 |
|
|
|
0.38 |
|
| (a) |
Basic and diluted earnings per share has been recalculated pursuant to the share consolidation completed on
October 23, 2020 for all periods presented. |
| (b) |
Comparatives have been restated for adoption of the IAS16 amendment to Property, Plant and Equipment: Proceeds before
intended Use. Please refer to the Section titled “Recent Accounting Pronouncements” on page 24 of this MD&A for further information. |
| (c) |
During 2020, the Company determined that it had incorrectly accounted for the impact of capitalised intragroup
borrowings in the calculation of non-controlling interests, thereby understating the income attributable to the non-controlling interest in the periods ended
June 30, 2020. As a result of these adjustments, income attributable to owners of Turquoise Hill decreased by $12.3 million in the three-month periods ended June 30, 2020. |
Factors necessary to understand general trends in the select unaudited quarterly financial information are summarised below.
Changes in revenue over the periods presented have resulted mainly from variable metal prices combined with changes in sales volume. Revenue in
Q1’22 was lower than in the previous two quarters and than in Q1’21 due to the planned transition of mining to the next phase of operations. Revenue in Q2’20 and Q3’20 was lower due to lower sales volumes impacted by lower gold
and copper production as the mine transitioned to Phase 4B. Q2’21 revenue was lower due to the COVID related border closure that resulted in force majeure being declared on concentrate shipments. The five consecutive quarters ended
December 31, 2021 benefited from increasing average copper and gold prices together with increased copper and gold production, reflecting the scheduled move to mining the higher grade gold areas of Phase 4B. Revenue in Q2’21 remained
impacted by the force majeure declared by the OT LCC from March 30, 2021. The impacts of the force majeure had been partially mitigated by Q3’21 through the introduction of COVID-19 control measures
and increased shipping capacity, but some border disruptions have continued into Q1’22, and the force majeure will remain in place until there are sufficiently sustained volumes of convoys crossing the border to ensure OT LLC’s ability to
meet its ongoing commitments to customers and to return onsite concentrate inventory to target levels.
Changes in income over the periods presented
resulted mainly from the changes in revenue noted above and adjustments made to deferred tax assets. Income in Q1’22 and for the period in the four consecutive quarters
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
ended March 31, 2021 was impacted by deferred tax asset recognition adjustments of $256.6 million (Q1’22), $47.4 million (Q2’20), $131.1 million (Q3’20),
$86.1 million (Q4’20) and $52.3 million (Q1’21), respectively. Income in three consecutive quarters ended December 31,2021 was negatively impacted by deferred tax asset de-recognition
adjustments of $10.5 million (Q2’21), $299.9 million (Q3’21) and $19.7 million (Q4’21), respectively. The adjustment to deferred tax assets in Q1’22 was due to an increase in temporary differences that relates
primarily to tax depreciation on property, plant and equipment and the partial increase in utilisation of 2016 losses against Q1’22 income driven by higher long term metal price estimates.
NON-GAAP AND OTHER FINANCIAL MEASURES
The Company presents and refers to the following non-GAAP financial measures,
non-GAAP ratios and supplementary financial measures, which are not defined in IFRS. A description and calculation of each measure is given below and may differ from similarly named measures provided by other
issuers. These measures are presented in order to provide investors and other stakeholders with additional understanding of performance and operations at the Oyu Tolgoi mine and are not intended to be used in isolation from, or as a replacement for,
measures prepared in accordance with IFRS. These measures and ratios are not standard and therefore may not be comparable to other issuers.
Non-GAAP financial measures
Non-GAAP financial measures are defined
in National Instrument 52-112 – Non-GAAP and Other Financial Measures Disclosure (NI 52-112) as a financial measure
disclosed that (a) depicts the historical or expected future financial performance, financial position or cash flow of an entity, (b) with respect to its composition, excludes an amount that is included in, or includes an amount that is
excluded from, the composition of the most directly comparable financial measure disclosed in the primary financial statements of the entity, (c) is not disclosed in the financial statements of the entity, and (d) is not a ratio, fraction,
percentage or similar representation.
Total operating cash costs
The measure of total operating cash costs excludes: depreciation and depletion; exploration and evaluation; charges for asset write-down (including
write-down of materials and supplies inventory) and includes management services payments to Rio Tinto and management services payments to Turquoise Hill, which are eliminated in the consolidated financial statements of the Company. Total operating
cash costs is used internally by management to assess the performance of the business in effectively allocating and managing costs and is provided in order to provide investors and other stakeholders with additional information about the underlying
cash costs of OT LLC. Total operating cash costs are relevant to the understanding of the Company’s operating profitability and ability to generate cash flows. The most comparable financial measure that is disclosed in the primary financial
statements for total operating costs is “Cost of sales”. A reconciliation operating cash costs for its current and comparative period is presented under “Non-GAAP Ratios” herein below.
Consolidated working capital
Consolidated working capital comprises those components of current assets and liabilities which support and result from the Company’s ongoing
running of its current operations. It is provided in order to give a quantifiable indication of the Company’s short-term cash generation ability and business efficiency. As a measure linked to current operations and the sustainability of the
business, the Company’s definition of consolidated working capital excludes: non-trade receivables and payables; financing items; cash and cash equivalents; deferred revenue and non-current inventory. Management and investors consider movements in consolidated working capital to understand the Company’s cash flow generated from operating activities before interest and tax.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
A reconciliation of consolidated working capital to the financial statements and notes is provided
below.
|
|
|
|
|
|
|
|
|
| Consolidated working capital |
|
March 31, |
|
|
December 31, |
|
| (Stated in $000’s of dollars) |
|
2022 |
|
|
2021 |
|
|
|
|
| Inventories (current) |
|
|
314,423 |
|
|
|
290,017 |
|
| Trade and other receivables |
|
|
33,918 |
|
|
|
16,119 |
|
| Trade and other payables: |
|
|
|
|
|
|
|
|
| - trade payables and accrued liabilities |
|
|
(301,916 |
) |
|
|
(320,791 |
) |
| - payable to related parties |
|
|
(72,429 |
) |
|
|
(54,153 |
) |
|
|
|
| Consolidated working capital |
|
|
(26,004 |
) |
|
|
(68,808 |
) |
Contractual obligations
The following section of this MD&A discloses contractual obligations in relation to the Company’s project finance, lease, purchase, power and
asset retirement obligations. Amounts relating to these obligations are calculated on the assumptions of the Company carrying out its future business activities and operations as planned at the period end. As such, contractual obligations presented
in this MD&A will differ from amounts presented in the financial statements, which are prepared on the basis of minimum uncancellable commitments to pay in the event of contract termination. The MD&A presentation of contractual obligations
is provided in order to give an indication of future expenditure, for the disclosed categories, arising from the Company’s continuing operations and development projects.
A reconciliation of contractual obligations as at March 31, 2022 to the relevant line items from among the current assets and liabilities in the
consolidated financial statements and notes is provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Stated in $000’s of dollars) |
|
Project
Finance
Facility
|
|
|
Purchase
obligations
|
|
|
Other
Obligations
|
|
|
Power
commitments |
|
|
Lease
liabilities
|
|
|
Decommissioning
obligations
|
|
|
|
|
|
|
|
|
| Commitments (MD&A) |
|
|
4,282,140 |
|
|
|
504,250 |
|
|
|
387,839 |
|
|
|
161,503 |
|
|
|
26,967 |
|
|
|
363,856 |
|
| Cancellable obligations |
|
|
- |
|
|
|
(444,865) |
|
|
|
- |
|
|
|
(97,289) |
|
|
|
- |
|
|
|
- |
|
| (net of exit costs) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accrued capital expenditure |
|
|
- |
|
|
|
(33,921) |
|
|
|
33,921 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Discounting and other adjustments |
|
|
(120,870) |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,599) |
|
|
|
(203,354) |
|
| Financial statement amount |
|
|
4,161,270 |
|
|
|
25,464 |
|
|
|
421,760 |
|
|
|
64,214 |
|
|
|
22,368 |
|
|
|
160,502 |
|
Contractual obligations is used to present contractual and other obligations that are both cancellable or non-cancellable.
Non-GAAP ratios
A non-GAAP ratio is defined by NI 52-112 as a financial measure
disclosed that (a) is in the form of a ratio, fraction, percentage or similar representation, (b) has a non-GAAP financial measure as one or more of its components, and (c) is not disclosed in
the financial statements. The non-GAAP financial measures used to calculate the non-GAAP ratios below are C1 cash costs, all-in
sustaining costs, mining costs and milling costs.
C1 cash costs per pound of copper produced
C1 cash costs is a metric representing the cash cost per unit of extracting and processing the Company’s principal metal product, copper, to a
condition in which it may be delivered to customers net of gold and silver credits from concentrates sold. This metric is provided in order to support peer group comparability and to provide investors and other stakeholders with additional
information about the underlying cash costs of OT LLC and the impact of gold and silver credits on the operations’ cost structure. C1 cash costs are relevant to
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
understanding the Company’s operating profitability and ability to generate cash flow. When calculating costs associated with producing a pound of copper, the Company deducts gold and silver
revenue credits as the production cost is reduced by selling these products.
All-in sustaining costs
per pound of copper produced
All-in sustaining costs (AISC) is an extended cash-based cost metric
providing further information on the aggregate cash, capital and overhead outlay per unit and is intended to reflect the costs of producing the Company’s principal metal product, copper, in both the short term and over the life-cycle of its
operations. As a result, sustaining capital expenditure on a cash basis is included rather than depreciation. As the measure seeks to present a full cost of copper production associated with sustaining current operations, development project capital
is not included. AISC allows Turquoise Hill to assess the ability of OT LLC to support sustaining capital expenditures for future production from the generation of operating cash flows.
A reconciliation of total operating cash costs, C1 cash costs and AISC is provided below.
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
(Three Months Ended) |
|
|
|
(Year Ended) |
| C1 costs (Stated in $000’s of dollars) |
|
March 31, 2022 |
|
December 31, 2021
(Restated)(1) |
|
March 31, 2021 |
|
|
|
December 31, 2021
(Restated)(2) |
| Cost of sales(1)(2)
|
|
175,011 |
|
185,466 |
|
155,644 |
|
|
|
637,229 |
| Cost of sales: $/lb of copper sold(1)(2) |
|
2.65 |
|
2.45 |
|
1.81 |
|
|
|
2.07 |
| Depreciation and depletion |
|
(39,485) |
|
(39,459) |
|
(52,194) |
|
|
|
(163,007) |
| Change in inventory |
|
21,932 |
|
28,405 |
|
30,297 |
|
|
|
109,212 |
| Other operating expenses |
|
65,006 |
|
68,181 |
|
56,488 |
|
|
|
275,487 |
| Less: |
|
|
|
|
|
|
|
|
|
|
| - Inventory (write-down) reversal |
|
(304) |
|
(133) |
|
5,126 |
|
|
|
3,465 |
| - Depreciation |
|
(544) |
|
(584) |
|
(602) |
|
|
|
(2,359) |
| Management services payment to Turquoise Hill |
|
7,253 |
|
9,125 |
|
6,478 |
|
|
|
29,706 |
| Total operating cash
costs(1)(2) |
|
228,868 |
|
251,001 |
|
201,237 |
|
|
|
889,734 |
| Total operating cash costs: $/lb of copper produced(1)(2) |
|
3.43 |
|
2.93 |
|
2.01 |
|
|
|
2.48 |
| Adjustments to total operating cash costs(1)(2)(3) |
|
(5,694) |
|
(2,809) |
|
(208) |
|
|
|
(27,451) |
| Less: Gold and silver revenues(1)(2) |
|
(112,206) |
|
(186,235) |
|
(192,879) |
|
|
|
(778,265) |
| C1 costs ($‘000)(1)(2)
|
|
110,968 |
|
61,958 |
|
8,150 |
|
|
|
84,018 |
| C1 costs: $/lb of copper produced(1)(2) |
|
1.66 |
|
0.72 |
|
0.08 |
|
|
|
0.23 |
|
|
|
|
|
|
| All-in sustaining costs (Stated in $000’s of
dollars) |
|
|
|
|
|
|
|
|
|
|
| Corporate administration |
|
15,620 |
|
10,876 |
|
13,043 |
|
|
|
37,699 |
| Asset retirement expense |
|
2,432 |
|
2,042 |
|
1,595 |
|
|
|
7,482 |
| Royalty expenses |
|
24,937 |
|
22,605 |
|
22,740 |
|
|
|
105,399 |
| Ore stockpile and stores write-down (reversal) |
|
304 |
|
133 |
|
(5,126) |
|
|
|
(3,465) |
| Other expenses |
|
1,174 |
|
3,884 |
|
254 |
|
|
|
5,598 |
| Sustaining cash capital including deferred stripping |
|
26,095 |
|
40,263 |
|
8,296 |
|
|
|
83,648 |
| All-in sustaining costs ($‘000)(1)(2) |
|
181,530 |
|
141,761 |
|
48,952 |
|
|
|
320,379 |
| All-in sustaining costs: $/lb of copper produced(1)(2) |
|
2.72 |
|
1.65 |
|
0.49 |
|
|
|
0.89 |
| (1) |
Q4 2021 comparatives have been restated for adoption of the IAS16 amendment to Property, Plant and Equipment: Proceeds
before intended Use. Please refer to the Section titled “Recent Accounting Pronouncements” on page 24 of this MD&A for further information. |
| (2) |
Prior year comparatives have been restated for adoption of the IAS16 amendment to Property, Plant and Equipment:
Proceeds before intended Use. Please refer to the Section titled “Recent Accounting Pronouncements” on page 24 of this MD&A for further information. |
| (3) |
Adjustments to total operating cash costs include: treatment, refining and freight differential charges less the 5%
Government of Mongolia royalty and other expenses not applicable to the definition of C1 cash cost. |
Mining costs per tonne
of material mined
Mining costs per tonne of material mined for the three months ended March 31, 2022 are calculated by reference to
total mining costs of $54.9 million (Q1’21: $44.4 million) and total material mined of 24.4 million tonnes (Q1’21: 22.6 million tonnes).
Cost of sales is the most comparable measure for mining and milling costs. Mining and milling costs represent total operating cash costs of Oyu
Tolgoi’s open-pit mining and concentrator operations.
Mining, milling and G&A costs per tonne
ratios are used internally by management and investors to assess the performance of the business by providing information on cost efficiency across the important components of Oyu Tolgoi’s operations - its
open-pit mine, concentrator and support functions.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Milling costs per tonne of ore treated
Milling costs per tonne of ore treated for the three months ended March 31, 2022 are calculated by reference to total milling costs of
$68.0 million (Q1’21: $61.3 million) and total ore treated of 9.6 million tonnes (Q1’21: 9.8 million tonnes).
Supplementary financial measures
Supplementary financial measures are defined under NI 52-112 as financial measures (a) which are neither non-GAAP financial measures nor non-GAAP ratios, (b) that are not presented in the financial statements and (c) that are, or are intended to be, disclosed
periodically to depict the historical or expected future financial performance, financial position or cash flow. The below are supplementary financial measures that the Company uses to depict its financial performance, financial position or cash
flows.
Cost of sales per pound of copper sold
Cost of sales is reported in the consolidated income statement. Cost of sales per pound of copper sold supports management’s objective of efficient
cost allocation and is used by management and investors to understand operating profitability.
Capital expenditure on a cash basis for underground-development/underground-sustaining/open-pit
Capital expenditure comprises sustaining and
development expenditure on property, plant and equipment, and on intangible assets. This is equivalent to “Expenditures on property, plant and equipment” in the cash flow statement. Capital expenditures have been further disaggregated to
reflect the open-pit operations, underground and tailings storage.
This measure is used to support
management’s objective of effective and efficient capital allocation as the Company needs to invest in existing assets across our operations in order to maintain and improve productive capacity, and to deliver growth through completion of the
underground project.
Total underground spend is not an annual measure but represents total underground capital expenditure on the underground
project since January 1, 2016.
G&A costs per tonne of ore treated
G&A costs per tonne of ore treated for the three months ended March, 2022 are calculated by reference to total general & administrative
costs. General & administrative costs are equivalent to Oyu Tolgoi administrative expenses of $35.6 million (Q1’21: $34.1 million). Total ore treated for those periods was 9.6 million tonnes (Q1’21: 9.8 million
tonnes). G&A is used to promote cost effectiveness through measurement of the overhead required to support the business.
INTERNAL CONTROL
OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES
There were no changes in the Company’s internal control over financial
reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2022 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Disclosure
controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company under applicable securities legislation is gathered and reported to senior management, including the Company’s CEO and
CFO, on a timely basis so that appropriate decisions can be made regarding public disclosures. There were no changes in the Company’s disclosure controls and procedures during the three months ended March 31, 2022.
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
QUALIFIED PERSON
Disclosure of information of a scientific or technical nature in this MD&A in respect of the Oyu Tolgoi mine was approved by Jo-Anne Dudley (FAusIMM(CP)), Chief Operating Officer of the Company. Jo-Anne Dudley is a “qualified person” within the meaning of National Instrument 43-101
– Standards of Disclosure for Mineral Projects (NI 43-101).”
CAUTIONARY STATEMENTS
Language regarding reserves and resources
Readers are advised that NI 43-101 requires that each category of mineral reserves and mineral resources be
reported separately. For detailed information related to Company’s mineral resources and mineral reserves, readers should refer to the AIF of the Company for the year ended December 31, 2021, and other continuous disclosure documents filed
by the Company since January 1, 2022 under Turquoise Hill’s profile on SEDAR at www.sedar.com.
Note to United States investors
concerning estimates of measured, indicated and inferred resources
This document has been prepared in accordance with the requirements of
Canadian securities laws, which differ from the requirements of U.S. securities laws. Unless otherwise indicated, all reserve and resource estimates included in this document have been prepared in accordance with NI
43-101, and the CIM Definition Standards for mineral resources and mineral reserves. NI 43-101 is a rule developed by the Canadian Securities Authorities that
establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. NI 43-101 differs significantly from the disclosure requirements of the SEC
generally applicable to U.S. companies. For example, the terms “mineral reserve”, “proven mineral reserve”, “probable mineral reserve”, “mineral resource”, “measured mineral resource”,
“indicated mineral resource”, and “inferred mineral resource” are defined in NI 43-101. These definitions differ from the definitions in the disclosure requirements promulgated by the SEC.
Accordingly, information concerning mineral deposits set forth herein may not be comparable with information made public by companies that report in accordance with SEC disclosure requirements.
FORWARD-LOOKING STATEMENTS AND FORWARD-LOOKING INFORMATION
Certain statements made herein, including statements relating to matters that are not historical facts and statements of the Company’s beliefs,
intentions and expectations about developments, results and events which will or may occur in the future, constitute “forward-looking information” within the meaning of applicable Canadian securities legislation and “forward-looking
statements” within the meaning of the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements and information relate to future events or future performance, reflect
current expectations or beliefs regarding future events and are typically identified by words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “likely”,
“may”, “plan”, “seek”, “should”, “will” and similar expressions suggesting future outcomes or statements regarding an outlook. These include, but are not limited to, statements and information
regarding: the nature of the Company’s ongoing relationship and interaction with the Government of Mongolia with respect to the continued operation and development of Oyu Tolgoi as and when the key agreements entered into with the Government of
Mongolia announced on January 24, 2022 (the GoM Agreements), are implemented along with the implementation of Resolution 103; the continuation of undercutting in accordance with the mine plan and design; the actual timing of first sustainable
production as well as the lifting of restrictions by the Government of Mongolia on the ability of OT LLC to incur any additional indebtedness; the terms and conditions of the Proposal, and its review and evaluation by the Special Committee; the
implementation and successful execution of the updated funding plan that is the subject of the Amended HoA, as such agreement may be further amended or restated, and the amount of any additional future funding gap to complete the Oyu Tolgoi project
and the availability and amount of potential sources of additional funding required therefor, all as contemplated by the Amended HoA, as well as potential delays in the ability of the Company and OT LLC to proceed with the funding
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
elements contemplated by the Amended HoA; liquidity, funding sources and funding requirements in general, in particular until sustainable first production is achieved, including the
Company’s ability to reach agreement with project finance lenders on the re-profiling of existing debt payments in line with current cash flow projections, as well as the Company (or a wholly-owned
subsidiary) and OT LLC entering into a pre-paid copper concentrate sale arrangement; the availability and amount of potential sources of additional funding, including the short-term secured advance to be
provided by Rio Tinto to the Company under the Amended HoA; the amount by which a successful re-profiling of the Company’s existing debt would reduce the Company’s currently projected funding
requirements; the Company’s ability to conduct one or more equity offerings as contemplated by the Amended HoA in light of future and then prevailing market conditions; the expectations set out in the 2020 OTTR; the timing and amount of future
production and potential production delays; statements in respect of the impacts of any delays on achieving first sustainable production and on the Company’s cash flows; expected copper and gold grades; the merits of the class action complaints
filed against the Company in October 2020 and January 2021, respectively; the merits of the defence and counterclaim filed by the Government of Mongolia in the international tax arbitration brought by OT LLC and the likelihood of the parties being
able to amicably resolve the ongoing tax issues; the timing of studies, announcements and analyses; the status of underground development, including any slowdown of work; the causes of the increase in costs and schedule extension of the underground
development; the mine design for Panel 0 of Hugo North Lift 1 and the related cost and production schedule implications; the re-design studies for Panels 1 and 2 of Hugo North Lift 1 and the possible outcomes,
content and timing thereof; the timing of the sinking of Shafts 3 and 4 and any delays in that regard in addition to previously announced delays; expectations regarding the possible recovery of ore in the two structural pillars, to the north and
south of Panel 0; the possible progression of a state-owned power plant (SOPP) and related amendments to the PSFA, as amended, as well as power purchase agreements and extensions thereto; finalisation of an agreement with IMPIC on extension of the
current power import arrangements; the timing of construction and commissioning of the potential SOPP; sources of interim power; the continuing impact of COVID-19, including any restrictions imposed by health
or governmental authorities relating thereto on the Company’s business, operations and financial condition, as well as delays and the development cost impacts of delays caused by the COVID-19 pandemic;
the Company’s ability to operate sustainably, its community relations and its social licence to operate in Mongolia; capital and operating cost estimates, including inflationary pressures thereon resulting in cost escalation; the content of the
Definitive Estimate; mill and concentrator throughput; anticipated business activities, planned expenditures, corporate strategies; supply disruptions of oil and gas to the Oyu Tolgoi project caused by the ongoing Russia-Ukraine conflict, and other
statements that are not historical facts.
Forward-looking statements and information are made based upon certain assumptions and other important
factors that, if untrue, could cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such statements or information. There can be no
assurance that such statements or information will prove to be accurate. Such statements and information are based on numerous assumptions regarding present and future business strategies, local and global economic conditions, and the environment in
which the Company will operate in the future, including: the price of copper, gold and silver; projected gold, copper and silver grades; anticipated capital and operating costs; anticipated future production and cash flows; the anticipated location
of certain infrastructure in Hugo North Lift 1 and sequence of mining within and across panel boundaries; the nature of the Company’s ongoing relationship and interaction with the Government of Mongolia with respect to the continued operation
and development of Oyu Tolgoi as and when the GoM Agreements are implemented along with the implementation of Resolution 103; the continuation of undercutting in accordance with the mine plan and design; the actual timing of first sustainable
production as well as the lifting of restrictions by the Government of Mongolia on the ability of OT LLC to incur any additional indebtedness; the possibility that the Company and Rio Tinto are unable to come to an agreement on the terms and
conditions of a going private transaction or that the terms and conditions of a definitive agreement between the Company and Rio Tinto in respect of a going private transaction will differ from those that are currently contemplated by the Proposal;
the availability and timing of required governmental and other approvals for the construction of the SOPP; the ability of the Government of Mongolia to finance and procure the SOPP within the timeframes anticipated in the PSFA, as amended, subject
to ongoing discussions relating to a standstill period; finalisation of an agreement with IMPIC on an extension of the current power import arrangements; the eventual pre-payment arrangement between the
Company (or a wholly-owned subsidiary) and OT LLC; the implementation and successful execution of the updated funding plan that is the subject of the Amended HoA, as such agreement may be further amended and restated; the Company’s ability to
operate sustainably, its community relations and its social licence to operate
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
in Mongolia; and the amount of any additional future funding gap to complete the Oyu Tolgoi project and the availability and amount of potential sources of additional funding required therefor.
Certain important factors that could cause actual results, performance or achievements to differ materially from those in the forward-looking
statements and information include, among others: copper, gold and silver price volatility; discrepancies between actual and estimated production; mineral reserves and resources and metallurgical recoveries; development plans for processing
resources; the accuracy of the Definitive Estimate; public health crises such as COVID-19; matters relating to proposed exploration or expansion; mining operational and development risks, including
geotechnical risks and ground conditions; litigation risks, including the outcome of the class action complaints filed against the Company; the outcome of the international arbitration proceedings, including the likelihood of the parties being able
to amicably resolve the ongoing tax issues; regulatory restrictions (including environmental regulatory restrictions and liability); OT LLC or the Government of Mongolia’s ability to deliver a domestic power source for the Oyu Tolgoi project
within the required contractual time frame; the Company’s ability to operate sustainably, its community relations, and its social licence to operate in Mongolia; activities, actions or assessments, including tax assessments, by governmental
authorities; events or circumstances (including public health crises strikes, blockades or similar events outside of the Company’s control) that may affect the Company’s ability to deliver its products in a timely manner; currency
fluctuations; the speculative nature of mineral exploration; the global economic climate; global climate change; dilution; share price volatility; competition; loss of key employees; cyber security incidents; additional funding requirements,
including in respect of the development or construction of a long-term domestic power supply for the Oyu Tolgoi project; capital and operating costs, including with respect to the development of additional deposits and processing facilities;
inflationary pressures on prices for critical supplies for Oyu Tolgoi including fuel, power, explosives and grinding media resulting in cost escalation; defective title to mineral claims or property; human rights requirements; international
conflicts such as the ongoing Russia-Ukraine conflict; and new tax measures, such as a minimum corporate tax rate, that might be implemented as a result of evolving global initiatives. Although the Company has attempted to identify important factors
that could cause actual actions, events or results to differ materially from those described in forward-looking statements and information, there may be other factors that cause actions, events or results not to be as anticipated, estimated or
intended. All such forward-looking statements and information are based on certain assumptions and analyses made by the Company’s management in light of their experience and perception of historical trends, current conditions and expected
future developments, as well as other factors management believes are reasonable and appropriate in the circumstances. These statements, however, 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 or information.
With respect to specific forward-looking
information concerning the continued operation and development of the Oyu Tolgoi project, the Company has based its assumptions and analyses on certain factors which are inherently uncertain. Uncertainties and assumptions include, among others: the
nature of the Company’s ongoing relationship and interaction with the Government of Mongolia with respect to the continued operation and development of Oyu Tolgoi as and when the GoM Agreements are implemented along with the implementation of
Resolution 103; the continuation of undercutting in accordance with the mine plan and design; the approval or non-approval by the OT LLC Board of any future necessary additional investment, and the likely
consequences on the timing and overall economic value of the Oyu Tolgoi project, including slowdown on the underground development and significant delays to first sustainable production; the timing and cost of the construction and expansion of
mining and processing facilities; the timing and availability of a long-term domestic power source (or the availability of financing for the Company or the Government of Mongolia to construct such a source) for Oyu Tolgoi; the implementation and
successful execution of the updated funding plan that is the subject of the Amended HoA, as such agreement may be further amended or restated, and the amount of any additional future funding gap to complete the Oyu Tolgoi project and the
availability and amount of potential sources of additional funding required therefor the eventual pre-payment arrangement between the Company (or a wholly-owned subsidiary) and OT LLC; the potential impact of COVID-19, including any restrictions imposed by health and governmental authorities relating thereto, as well as the development cost impacts of delays caused by the COVID-19
pandemic; the Company’s ability to operate sustainably, its community relations and its social licence to operate in Mongolia; the impact of changes in, changes in interpretation to or changes in enforcement of, laws, regulations and government
practices in Mongolia; the availability and cost of skilled labour and transportation; the obtaining of (and the terms and timing of obtaining) necessary environmental and other government approvals, consents and permits; delays and the costs which
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
would result from delays, including delays caused by COVID-19 restrictions and impacts and related factors, in the development of the underground mine
(which could significantly exceed the costs projected in the 2020 OTTR); projected copper, gold and silver prices and their market demand; production estimates and the anticipated yearly production of copper, gold and silver at Oyu Tolgoi;
inflationary pressures on prices for critical supplies for Oyu Tolgoi, including fuel, power, explosives and grinding media resulting in cost escalation; and the potential impact of the ongoing Russia-Ukraine conflict, including supply disruptions
of oil and gas to the Oyu Tolgoi project caused thereby.
The cost, timing and complexities of mine construction and development are increased by
the remote location of a property such as Oyu Tolgoi. It is common in mining operations and in the development or expansion of existing facilities to experience unexpected problems and delays during development, construction and mine start-up. Additionally, although Oyu Tolgoi has achieved commercial production, there is no assurance that future development activities will result in profitable mining operations.
This MD&A also contains references to estimates of mineral reserves and mineral resources. The estimation of reserves and resources is inherently
uncertain and involves subjective judgments about many relevant factors. The mineral resource estimates contained in this MD&A are exclusive of mineral reserves. Further, mineral resources that are not mineral reserves do not have demonstrated
economic viability. The accuracy of any such estimates is a function of the quantity and quality of available data, and of the assumptions made and judgments used in engineering and geological interpretation (including future production from Oyu
Tolgoi, the anticipated tonnages and grades that will be achieved or the indicated level of recovery that will be realised), which may prove to be unreliable. There can be no assurance that these estimates will be accurate or that such mineral
reserves and mineral resources can be mined or processed profitably. Such estimates are, in large part, based on the following:
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Interpretations of geological data obtained from drill holes and other sampling techniques. Large scale mineral
continuity and character of the deposits can be improved with additional drilling and sampling; actual mineralisation or formations may be different from those predicted. It may also take many years from the initial phase of drilling before
production is possible, and during that time the economic feasibility of exploiting a deposit may change. Reserve and resource estimates are materially dependent on prevailing metal prices and the cost of recovering and processing minerals at the
individual mine sites. Market fluctuations in the price of metals or increases in the costs to recover metals or the actual recovery percentage of the metal(s) from the Company’s mining projects may render mining of mineral reserves uneconomic
and affect the Company’s operations in a materially adverse manner. Moreover, various short-term operating factors may cause a mining operation to be unprofitable in any particular accounting period; |
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Assumptions relating to commodity prices and exchange rates during the expected life of production, mineralisation of
the area to be mined, the projected cost of mining, and the results of additional planned development work. Actual future production rates and amounts, revenues, taxes, operating expenses, environmental and regulatory compliance expenditures,
development expenditures, and recovery rates may vary substantially from those assumed in the estimates. Any significant change in these assumptions, including changes that result from variances between projected and actual results, could result in
material downward revision to current estimates; |
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Assumptions relating to projected future metal prices. The Company uses prices reflecting market pricing
projections in the financial modelling for Oyu Tolgoi which are subjective in nature. It should be expected that actual prices will be different than the prices used for such modelling (either higher or lower), and the differences could be
significant; and |
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Assumptions relating to the costs and availability of treatment and refining services for the metals mined from Oyu
Tolgoi, which require arrangements with third parties and involve the potential for fluctuating costs to transport the metals and fluctuating costs and availability of refining services. These costs can be significantly impacted by a variety of
industry-specific as well as regional and global economic factors (including, among others, those which affect commodity prices). Many of these factors are beyond the Company’s control. |
Turquoise Hill Resources Ltd.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Stated in U.S. dollars, except where noted)
Readers are cautioned not to place undue reliance on forward-looking information or statements. By
their nature, forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the predicted outcomes will not occur. Events or circumstances could cause
the Company’s actual results to differ materially from those estimated or projected and expressed in, or implied by, these forward-looking statements. Important factors that could cause actual results to differ from these forward-looking
statements are included in the “Risk Factors” section in the AIF, as supplemented by the “Risks and Uncertainties” section in this MD&A.
Readers are further cautioned that the list of factors enumerated in the “Risk Factors” section in the AIF and the “Risks and
Uncertainties” section of this MD&A that may affect future results is not exhaustive. When relying on the Company’s forward-looking statements and information to make decisions with respect to the Company, investors and others should
carefully consider the foregoing factors and other uncertainties and potential events. Furthermore, the forward-looking statements and information contained herein are made as of the date of this document and the Company does not undertake any
obligation to update or to revise any of the included forward-looking statements or information, whether as a result of new information, future events or otherwise, except as required by applicable law. The forward-looking statements and information
contained herein are expressly qualified by this cautionary statement.
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| /s/ Steve Thibeault |
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/s/ Luke Colton |
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| Steve Thibeault |
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Luke Colton |
| Interim Chief Executive Officer |
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Chief Financial Officer |
May 10, 2022
Montreal, QC, Canada
turquoisehill.com
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Turquoise Hill Resources Ltd. Suite 3680,1 Place Ville- Marie Montreal Quebec, Canada
H3B 3P2 |
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TRQ : TSX & NYSE
Turquoise Hill is an international mining company focused on the operation and development of the Oyu Tolgoi copper-gold mine in
southern Mongolia. |
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