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Turquoise Hill announces financial results and review of operations for 2016

VANCOUVER, BC--(Marketwired - March 27, 2017) - Turquoise Hill Resources today announced its financial results for the year ended December 31, 2016. All figures are in U.S. dollars unless otherwise stated.

HIGHLIGHTS

Full year 2016

  • Oyu Tolgoi achieved an industry-leading safety performance with an All Injury Frequency Rate of 0.22 per 200,000 hours worked for the year ended December 31, 2016.
  • On May 5, 2016, Oyu Tolgoi received the formal notice to proceed for underground development by the boards of Turquoise Hill, Rio Tinto and Oyu Tolgoi LLC.
  • On October 21, 2016, Turquoise Hill filed the updated Oyu Tolgoi Technical Report.
  • At the end of 2016, 1.6 equivalent kilometres of underground lateral development had been completed for the year.
  • In 2016, progress was made on the sinking of Shafts 2 and 5 with final depth for both shafts expected to be reached in 2017.
  • During 2016, the bulk excavation component of the convey-to-surface system was completed, followed by the commencement of the decline tunnel work in January 2017.
  • Oyu Tolgoi recorded revenue of $1.2 billion in 2016 on record concentrate sales of 828,600 tonnes.
  • For 2016, the Company recorded net income from continuing operations attributable to owners of Turquoise Hill of $210.6 million.
  • Turquoise Hill generated operating cash flow before interest and taxes of $399.2 million in 2016.
  • For 2016, Oyu Tolgoi's cost of sales was $2.07 per pound of copper sold, C1 cash costs were $1.02 per pound of copper produced and all-in sustaining costs were $1.48 per pound of copper produced.(1)
  • Operating cash costs(1) of $775.3 million in 2016 was below the Company's guidance.
  • Turquoise Hill's cash and cash equivalents at December 31, 2016 were approximately $1.4 billion.
  • In June 2016, Oyu Tolgoi drew down approximately $4.3 billion of the project finance facility and used all net proceeds to pay down shareholder loans payable by Oyu Tolgoi to Turquoise Hill.
  • Oyu Tolgoi operated at record levels for material mined and ore treated; concentrator throughput exceeded nameplate capacity by year end.
  • Copper production of 201,300 tonnes and gold production of 300,000 ounces exceeded the Company's guidance.
  • Compared to 2015 results, material mined for 2016 increased 5.6%, concentrator throughput increased 10.5%, copper production was similar and, as expected, gold production decreased 54.1%.

(1) Please refer to the NON-GAAP MEASURES section of this press release for reconciliation of these metrics to the financial statements.

Fourth quarter 2016

  • Revenue of $224.6 million in Q4'16 was slightly lower than Q3'16 reflecting lower concentrate sales.
  • For Q4'16, Turquoise Hill reported net income from continuing operations attributable to owners of $93.3 million.
  • Turquoise Hill generated operating cash flow before interest and taxes of $18.2 million in Q4'16.
  • In Q4'16, concentrator throughput increased 7.4% over Q3'16 resulting in an average daily rate of 106,700 tonnes for the quarter, which was a quarterly high to date.
  • Copper production in Q4'16 was broadly consistent with Q3'16; Q4'16 copper grades were as expected with mining focused mainly on Phases 4 and 6 of the open pit.
  • Gold production in Q4'16 increased 32.4% over Q3'16 due to the final processing of Phase 2 ore.

Outlook for 2017

  • Oyu Tolgoi is expected to produce 130,000 to 160,000 tonnes of copper and 100,000 to 140,000 ounces of gold in concentrates for 2017.
  • Sales contracts have been agreed for a significant majority of Oyu Tolgoi's expected 2017 concentrate production.

FINANCIAL RESULTS

In 2016, the Company recorded net income attributable to owners of Turquoise Hill of $210.6 million or $0.10 per share compared with net income of $313.3 million or $0.16 per share in 2015. The decrease is mainly attributable to reduced gold sales volumes due to lower production and copper prices, partly offset by cost reductions and adjustment to deferred tax assets. Cost of sales for 2016 were $861.8 million compared to $975.0 million in 2015 reflecting lower sales of metals in concentrate and reduced cost of production as a result of cost savings. Operating cash flows before interest and taxes in 2016 were $399.2 million compared with $650.5 million in 2015 mainly reflecting the impact of reduced gold production and lower copper prices.

Capital expenditure on property, plant and equipment was $326.3 million on a cash basis in 2016 compared to $116.2 million in 2015, attributed to both underground and open-pit capital activities.

Turquoise Hill's cash and cash equivalents at December 31, 2016 were $1.4 billion.

OYU TOLGOI

The Oyu Tolgoi mine is approximately 550 kilometres south of Ulaanbaatar, Mongolia's capital city, and 80 kilometres north of the Mongolia-China border. Mineralization on the property consists of porphyry-style copper, gold, silver and molybdenum contained in a linear structural trend (the Oyu Tolgoi Trend) of deposits throughout this trend. They include, from south to north, the Heruga Deposit, the Oyut deposit and the Hugo Dummett deposits (Hugo South, Hugo North and Hugo North Extension).

The Oyu Tolgoi mine was initially developed as an open-pit operation. The copper concentrator plant, with related facilities and necessary infrastructure, was established at 110,000 tonnes of ore per day with the 2016 Oyu Tolgoi Technical Report (2016 OTTR). The concentrator was initially constructed to process ore mined from the Oyut open pit. In August 2013, development of the underground mine was suspended pending resolution of matters with the Government of Mongolia. Following signing of the Oyu Tolgoi Underground Mine Development and Financing Plan (Underground Plan) in May 2015 and the signing of a $4.4 billion project finance facility in December 2015, Oyu Tolgoi received the formal notice to proceed approval by the boards of Turquoise Hill, Rio Tinto and Oyu Tolgoi LLC on May 5, 2016, which was the final requirement for the re-start of underground development. Underground construction recommenced in mid-2016.

At peak production, Oyu Tolgoi is expected to be the world's third-largest copper mine with average production between 2025 to 2030 of more than 550,000 tonnes of copper a year. Copper production is expected to increase more than 300% between 2017 and 2025 (peak production year for Hugo North Lift 1).

Underground development progress

Major underground development programs currently underway include underground lateral development, sinking of Shafts 2 and 5, support infrastructure and the convey-to-surface system. At the end of 2016, the underground project workforce had grown to more than 2,000 people with continued growth expected to peak in 2018.

Prior to suspending underground construction in August 2013, underground lateral development at Hugo North Lift 1 had advanced approximately 16 kilometres off Shaft 1 with a total of 65 kilometres of lateral development expected to be complete by the first draw bell in mid-2020. At the end of 2016, underground lateral development was ahead of schedule with 1.6 equivalent kilometres completed. A further increase in underground lateral development capability is expected in the second half of 2017 due to the installation of a new 3,500 tonne per day crusher, which will replace the existing crusher.

In 2016, progress was made on the sinking of Shafts 2 and 5 with final depth for both shafts expected to be reached in 2017. During 2016, Shaft 2 was connected to the underground workings enabling a second independent means of egress, increased materials delivery capacity and additional ventilation. Shaft 2 activity in 2017 is focused on the fit-out of the 1,202 metre level connections to the underground workings before sinking to the final depth of 1,284 metres. When completed, Shaft 5 will be dedicated to ventilation thereby increasing the capacity for underground activities. The following table outlines the shafts for underground development as at year end 2016.

  Shaft 1 (early development and ventilation)   Shaft 2 (production and ventilation)   Shaft 5 (ventilation)   Shaft 3 (ventilation)   Shaft 4 (ventilation)
Total Depth 1,385 metres   1,284 metres   1,178 metres   1,148 metres   1,149 metres
Diameter 6.7 metres   10 metres   6.7 metres   10 metres   11 metres
Completion 2008   Expected 2017   Expected 2017   Expected 2021   Expected 2021
Remaining Complete   ~85 metres   ~840 metres   Not started   Not started

Infrastructure needed to support underground development progressed during 2016 in areas such as material handling (crushing and conveying), ventilation and water handling equipment, power distribution and maintenance and storage facilities. Some areas began slower than anticipated but did not impact lateral advancement rates.

During 2016, the bulk excavation component of the convey-to-surface system was completed, followed by the commencement of decline tunnel work in January 2017. The convey-to-surface system is the eventual route of the full 95,000 tonne per day underground ore delivery system to the concentrator; however it is not a critical path item for first drawbell planned in 2020. Expected completion of the convey-to-surface system is 2022, which will facilitate the ramp up to full production by 2027.

During 2016, Oyu Tolgoi spent $226.8 million on underground expansion, including $61.9 million of pre-start activities initiated prior to the notice to proceed in May 2016. In addition, Oyu Tolgoi had further capital commitments of $638.8 million(2) at the end of 2016.

(2) Please refer to the NON-GAAP MEASURES section of this press release for reconciliation of this metric to the financial statements.

Full-year 2016 and Q4'16 open-pit operations performance

Safety is a major focus throughout Oyu Tolgoi's operations and the mine's management is committed to reducing risk and injury. Oyu Tolgoi achieved an industry-leading safety performance with a combined All Injury Frequency Rate of 0.22 for open-pit operations and the underground project per 200,000 hours worked for the year ended December 31, 2016.

Key financial metrics for 2016 and Q4'16 are as follows:

Oyu Tolgoi Key Financial Metrics(1)

($ in millions, unless otherwise noted) 4Q
2015
1Q(4)
2016
2Q
2016
3Q
2016
4Q
2016
Full Year
2016
Full Year
2015
               
Revenue 355.6 422.7 329.7 226.3 224.6 1,203.3 1,634.8
Concentrates sold ('000 tonnes) 236.2 213.1 227.4 206.2 181.9 828.6 819.8
Revenue by metals in concentrates              
  Copper 194.6 202.0 207.9 174.2 178.5 762.6 829.6
  Gold 156.4 216.2 115.1 45.8 42.8 419.9 788.9
  Silver 4.6 4.5 6.7 6.3 3.3 20.8 16.2
Cost of sales 239.2 207.9 237.1 232.5 184.3 861.8 975.0
  Production and delivery costs 149.7 125.9 141.2 134.3 112.5 513.9 630.4
  Depreciation and depletion 89.6 82.0 95.9 88.5 79.5 345.9 344.5
Capital expenditure on cash basis 27.5 55.9 53.3 74.4 142.7 326.3 116.2
  Underground 7.3 22.6 36.5 46.7 121.0 226.8 10.3
  Open pit(2) 20.2 33.3 16.8 27.7 21.7 99.5 105.9
Royalties 25.0 22.7 18.5 13.9 13.0 68.1 120.8
Operating cash costs(3)(4) 236.6 196.6 215.5 187.8 175.4 775.3 962.6
Unit costs ($)              
  Cost of sales (per pound of copper sold) 1.98 1.84 1.98 2.31 2.22 2.07 2.20
  C1 (per pound of copper produced)(3)(4) 0.88 0.06 1.12 1.56 1.57 1.02 0.57
  All-in sustaining (per pound of copper produced)(3)(4) 1.56 0.66 1.55 2.00 1.90 1.48 1.37
(1) Any financial information in this press release should be reviewed in conjunction with the Company's consolidated financial statements or condensed interim consolidated financial statements for the reporting periods indicated.
(2) Open-pit capital expenditure includes both sustaining and non-underground development activities.
(3) Please refer to the NON-GAAP MEASURES section of this press release for reconciliation of these metrics to the financial statements.
(4) Operating cash costs, C1 and all-in sustaining unit costs for the three months ended March 31, 2016 have been revised to correctly reflect the change in inventory as reported in the Company's reconciliation of net income (loss) to net cash flow generated from operating activities.

Full year 2016

Revenue of $1.2 billion in 2016 decreased 26.4% over 2015 mainly reflecting reduced gold sales and lower copper prices partially offset by higher gold prices. Concentrate sold in 2016 of 828,600 tonnes increased 1.1% over 2015 reaching an all-time annual high.

Production and delivery costs include primarily the cash costs in inventory sold as well as allocated mine administration costs. Depreciation and depletion includes the depreciation and depletion in inventory sold as well as any depreciation of assets used in the selling and delivery process, including the depreciation of capitalized production phase stripping costs. Cost of sales for 2016 were $861.8 million compared to $975.0 million in 2015 reflecting lower sales of metals in concentrate and reduced cost of production as a result of cost savings.

Capital expenditure, on a cash basis, for 2016 was $326.3 million compared to $116.2 million in 2015, comprising amounts attributed to the underground project and open-pit activities of $226.8 million and $99.5 million, respectively. Open-pit capital expenditure includes deferred stripping of $30.9 million and tailings storage facility spending of $22.0 million.

Total operating cash costs at Oyu Tolgoi were $775.3 million in 2016 compared to $962.6 million in 2015 and below the Company's guidance of $840 million. Lower operating cash costs in 2016 reflect mining and production efficiencies, cost reduction programs and reduced royalty expense as 2015 included one-off adjustments made upon agreement of the Underground Plan. Operating cash costs include the 5% royalty payable to the Government of Mongolia and exclude deferred stripping costs.

Cost of sales were $2.07 per pound of copper sold in 2016, compared with $2.20 per pound in 2015, reflecting reduced cost of production as the results of cost savings. This new metric has been included as a measure of cost per pound of copper sold for comparison with C1 and all-in sustaining costs (AISC) per pound of copper produced.

Oyu Tolgoi's C1 costs in 2016 were $1.02 per pound of copper produced, compared with $0.57 per pound of copper produced in 2015, and are presented net of revenues from gold and silver sales. The increase was mainly due to lower gold sales, reflecting the grade impact from the completion of Phase 2 mining.

AISC in 2016 were $1.48 per pound of copper produced, compared with $1.37 per pound of copper produced in 2015. The increase was mainly due to lower gold revenues.

Fourth quarter 2016

Revenue of $224.6 million in Q4'16 was slightly lower than Q3'16 reflecting lower concentrate sales. Fourth quarter concentrate sold of 182,000 tonnes decreased 11.8% over Q3'16 as a result of limited rail availability into China due to increased coal shipments.

Q4'16 cost of sales were $184.3 million compared to $232.5 million in Q3'16 reflecting lower sales of copper in concentrate and a reduction to net charges for finished goods inventory write-down as a result of higher Copper prices at year end.

Capital expenditure, on a cash basis, for Q4'16 was $142.7 million compared to $74.4 million in Q3'16, attributed to the underground project and open-pit activities of $121.0 million and $21.7 million, respectively. Open-pit capital expenditure includes deferred stripping of $3.1 million and tailings storage facility spending of $4.8 million.

Total operating cash costs at Oyu Tolgoi were $175.4 million in Q4'16 compared to $187.8 million in Q3'16 due to lower operating expenses, including selling costs, in the fourth quarter. Operating cash costs include the 5% royalty payable to the Government of Mongolia and exclude deferred stripping costs.

Cost of sales were $2.22 per pound of copper sold in Q4'16, compared with $2.31 per pound of copper sold in Q3'16, reflecting a reduction to net charges for finished goods inventory write-down as a result of higher prices at year end.

Oyu Tolgoi's C1 costs in Q4'16 were $1.57 per pound of copper produced, a slight increase from Q3'16 of $1.56 per pound of copper produced, due to the net impact of reduced operating cash costs, offset by lower gold sales and decreased production volumes.

AISC in Q4'16 were $1.90 per pound of copper produced, compared with $2.00 per pound of copper produced in Q3'16, mainly due to the lower net charges for inventory write-down.

Key operational metrics for 2016 and Q4'16 are as follows:

Oyu Tolgoi Production Data
All data represents full production and sales on a 100% basis

  4Q
2015
  1Q
2016
  2Q
2016
  3Q
2016
  4Q
2016
  Full Year
2016
  Full Year
2015
                           
Open pit material mined ('000 tonnes) 23,708   22,867   22,716   25,739   25,615   96,938   91,771
Ore treated ('000 tonnes) 9,369   9,662   9,525   9,146   9,819   38,152   34,537
Average mill head grades:                          
  Copper (%) 0.69   0.70   0.64   0.66   0.61   0.65   0.67
  Gold (g/t) 0.92   0.63   0.33   0.21   0.25   0.36   0.78
  Silver (g/t) 1.67   1.92   1.92   1.99   1.50   1.83   1.56
Concentrates produced ('000 tonnes) 231.8   229.5   207.1   203.2   206.7   846.6   788.5
  Average concentrate grade (% Cu) 24.7   25.1   24.9   22.9   22.0   23.8   25.6
Production of metals in concentrates:                          
  Copper ('000 tonnes) 57.3   57.6   51.7   46.6   45.5   201.3   202.2
  Gold ('000 ounces) 207   144   70   37   49   300   653
  Silver ('000 ounces) 355   395   391   361   273   1,420   1,223
Sales of metals in concentrates:                          
  Copper ('000 tonnes) 54.7   51.2   54.4   45.7   37.6   188.9   201.3
  Gold ('000 ounces) 160   175   95   38   39   347   737
  Silver ('000 ounces) 360   305   395   341   239   1,280   1,158
Metal recovery (%)                          
  Copper 88.4   85.6   83.3   78.0   76.6   81.0   87.6
  Gold 74.2   72.2   69.3   62.0   63.4   68.5   74.4
  Silver 70.8   66.4   65.9   61.7   57.2   63.1   69.9
                       
                           

Full year 2016

Oyu Tolgoi operated at record levels in 2016. Productivity improvements in the concentrator implemented throughout the year led to throughput exceeding nameplate capacity by year end. Copper production of 201,300 tonnes for 2016 exceeded the Company's guidance of 175,000 to 195,000 tonnes and annual gold production of 300,000 ounces exceeded 2016 guidance of 255,000 to 285,000 ounces. Compared to 2015 results, mined production for 2016 increased 5.6%, concentrator throughput increased 10.5%, copper production was similar and, as expected, gold production decreased 54.1%. Decreased gold production for 2016 reflects the grade impact from the completion of Phase 2 mining in the second half of the year.

Fourth quarter 2016

Oyu Tolgoi performed well during Q4'16 as open-pit operations focused mainly on Phases 4 and 6. Q4'16 concentrator throughput increased 7.4% over Q3'16 resulting in an average daily rate of 106,700 tonnes for the quarter, which was a quarterly high. Copper production in Q4'16 was broadly consistent with Q3'16 while gold production increased 32.4% over Q3'16 due to the final processing of Phase 2 ore. Copper grades in Q4'16 were as expected as operations focused mainly on Phase 6 of the open pit.

Operational outlook

Oyu Tolgoi is expected to produce 130,000 to 160,000 tonnes of copper and 100,000 to 140,000 ounces of gold in concentrates for 2017. Open-pit operations are expected to mine in Phases 4 and 6 during the year. In addition, stockpiled ore will be processed during the year. The lower production when compared to 2016 is primarily the result of approximately one-quarter less copper head grade and approximately one-half less gold head grade. During 2016, the mine plan for Phase 4 was divided into two stages, referred to as Phases 4A and 4B, in expectation of reaching the high-grade gold zone of Phase 4 around mid-2018. Accordingly, mine stripping for 2017 will focus on Phase 4A.

Operating cash costs for 2017 are expected to be approximately $720 million compared to $775 million in 2016. The reduction reflects cost improvements and the impact of lower logistics costs from decreased production.

Capital expenditures for 2017 on a cash-basis are expected to be approximately $100 million for open-pit operations and $825 million to $925 million for underground development.

Underground development capital includes both expansion capital and VAT. In an effort to encourage bidding by Mongolian suppliers, Oyu Tolgoi has incorporated longer tendering periods resulting in a slightly longer capital deployment process. The Company continues to expect production from the first underground draw bell in mid-2020 and first sustainable production beginning in early 2021.

Open-pit capital includes approximately $40 million of deferred stripping and reflects lower maintenance costs, reduced deferred stripping costs due to optimization and improved tailings storage costs.

Sales contracts have been agreed for a significant majority of Oyu Tolgoi's expected 2017 concentrate production.

Funding of Oyu Tolgoi by Turquoise Hill

In accordance with the Amended and Restated Shareholders' Agreement (ARSHA) dated June 8, 2011, Turquoise Hill has funded Oyu Tolgoi's cash requirements beyond internally generated cash flows by a combination of equity investment and shareholder debt.

For amounts funded by debt, Oyu Tolgoi must repay such amounts, including accrued interest, before it can pay common share dividends. At December 31, 2016, the aggregate outstanding balance of shareholder loans extended by subsidiaries of the Company to Oyu Tolgoi was $3.0 billion, including accrued interest of $103.9 million. These loans bear interest at an effective annual rate of LIBOR plus 6.5%.

In accordance with the ARSHA, a subsidiary of the Company has funded the common share investments in Oyu Tolgoi on behalf of Erdenes. These funded amounts earn interest at an effective annual rate of LIBOR plus 6.5% and are repayable, by Erdenes to a subsidiary of the Company, via a pledge over Erdenes' share of Oyu Tolgoi common share dividends. Erdenes also has the right to reduce the outstanding balance by making cash payments at any time. As of December 31, 2016, the cumulative amount of such funding was $751.1 million, representing 34% of invested common share equity; unrecognized interest on the funding amounted to $302.9 million.

Updated technical report

On October 21, 2016, Turquoise Hill filed an updated compliant independently-prepared technical report under National Instrument 43-101 - Standards of Disclosure for Mineral Projects (NI 43-101) relating to the Oyu Tolgoi Project (Project). Prepared by OreWin Pty Ltd. (OreWin), the 2016 OTTR updates the Oyu Tolgoi Technical Report dated September 20, 2014 (2014 OTTR). On May 5, 2016, Turquoise Hill announced that the 2016 Oyu Tolgoi Feasibility Study (OTFS16) had been finalized and presented to the Board of Directors of Oyu Tolgoi LLC. The 2016 OTTR updates the 2014 Reserve Case to the 2016 Reserves Case based on OTFS16 and includes four Preliminary Economic Assessments with regard to the Oyu Tolgoi resources.

Highlights of the 2016 OTTR Reserves Case compared to the 2014 OTTR are as follows:

  • Reserves and resources have only changed to the extent of mining depletion from open-pit operations.
  • Assumes a January 1, 2017 start date for production schedules and accommodates for the delayed mid-2016 underground project restart.
  • Assumes processing of 1.4 billion tonnes of ore, mined from the Oyut open pit and the first lift in the Hugo North underground block cave.
  • Assumes plant capacity remains at an average production rate of 40 million tonnes per annum (Mt/a).
  • Underground mine remains at targeted full production rate of 95,000 tonnes per day.
  • Updates to expansion capital and Net Present Value (NPV) range analysis.

For a more complete summary of production and financial results for the 2016 Reserves Case and a description of the Alternative Production Cases, please refer to the 2016 OTTR filed on October 21, 2016 under the Company's profile on SEDAR at www.sedar.com.

Updated mineral reserve estimates based on the 2016 OTTR are provided in the table below.

Oyu Tolgoi Mineral Reserves 2016

          Recovered Metal
Deposit by Classification Ore
(Mt)
Cu
(%)
Au
(g/t)
Ag
(g/t)
Cu
(Mlb)
Au
(koz)
Ag
(koz)
Oyut Mineral Reserve              
  Proven 353 0.54 0.35 1.40 3,266 2,775 11,837
  Probable 598 0.39 0.23 1.11 4,058 3,103 15,977
  Oyut Total (Proven and Probable) Mineral Reserve 951 0.45 0.28 1.22 7,325 5,878 27,814
Hugo North Mineral Reserve              
  Probable (Hugo North - OT LLC) 464 1.66 0.34 3.37 15,592 4,199 43,479
  Probable (Hugo North - EJV) 35 1.59 0.55 3.72 1,121 519 3,591
  Hugo North Total (Probable) Mineral Reserve 499 1.66 0.35 3.40 16,713 4,717 47,070
Oyu Tolgoi Mineral Reserve              
  Proven 353 0.54 0.35 1.40 3,266 2,775 11,837
  Probable 1,097 0.97 0.29 2.15 20,771 7,820 63,047
Total Mineral Reserve 1,450 0.86 0.30 1.97 24,037 10,595 74,884

Notes:

  1. Metal prices used for calculating the financial analysis are as follows: long-term copper at $3.00/lb; gold at $1,300/oz; and silver at $19.00/oz. The analysis has been calculated with assumptions for smelter refining and treatment charges, deductions and payment terms, concentrate transport, metallurgical recoveries and royalties.
  2. For mine planning, the metal prices used to calculate block model Net Smelter Return (NSR) were copper at $3.01/lb; gold at $1,250/oz; and silver at $20.37/oz.
  3. The NSR is used to define the Mineral Reserve cut-offs at Oyu Tolgoi, therefore cut-off is denominated in $/t. By definition the cut-off is the point at which the costs are equal to the NSR. For the open pit processing and general administration, the following operating costs have been used to determine cut-off grades: Southwest at $8.37/t, Central Chalcocite, Central Covellite, and Central Chalcopyrite at $7.25/t and the underground (including some mining costs) costs were based on $15.34/t.
  4. For the underground block cave, all Mineral Resources within the shell have been converted to Mineral Reserves. This includes Indicated Mineral Resources below the resource cut-off grade. It also includes Inferred Mineral Resources, which have been assigned a zero grade and treated as dilution.
  5. The Oyut open pit Mineral Reserves are the Mineral Reserves in the pit at the effective date of December 31, 2015. The Mineral Reserves do not include stockpiles as at that date.
  6. For Oyut, only Measured Mineral Resources were used to report Proven Mineral Reserves and only Indicated Mineral Resources were used to report Probable Mineral Reserves.
  7. For Hugo North, Measured and Indicated Mineral Resources were used to report Probable Mineral Reserves.
  8. EJV is the Entrée-OT LLC Joint Venture. The Shivee Tolgoi and Javkhlant licenses are held by Entrée. The Shivee Tolgoi and Javkhlant licenses are planned to be operated by OT LLC. OT LLC will receive 80% of cash flows after capital and operating costs for material originating below 560 m, and 70% above this depth.
  9. The Mineral Reserves reported above were not additive to the Mineral Resources.
  10. Totals may not match due to rounding.
  11. The Oyut deposit was formerly known as Southern Oyu Tolgoi (SOT).

Disclosure of a scientific or technical nature in respect of the 2016 OTTR was prepared by the following qualified persons: Bernard Peters, B. Eng. (Mining), FAusIMM of OreWin, who was responsible for the overall preparation of the report and the mineral reserves estimate of the report, as well as the preparation of the geotechnical sections and the sections related to and including processing, and Sharron Sylvester, B.Sc Geology, MAIG (RPGeo), of OreWin, who was responsible for preparation of the mineral resources estimate of the report, both of whom are "qualified persons" for the purposes of NI 43-101.

CORPORATE ACTIVITIES

Management changes

In January 2016, Turquoise Hill announced the appointment of Brendan Lane as Vice President, Operations and Development effective February 1, 2016. Mr. Lane brings 25-years of industry experience including metallurgical, mine engineering and commercial roles at Rio Tinto, Anglo American and BHP Billiton.

In February 2017, Turquoise Hill announced the retirement of Steeve Thibeault, the Company's Chief Financial Officer, effective May 23, 2017. Turquoise Hill is conducting a search for Mr. Thibeault's successor.

Disposal of SouthGobi Resources shares

On September 22, 2016, the Company announced it had disposed of 375,000 common shares of SouthGobi Resources Ltd. (SouthGobi) and beneficially owned or controlled less than 10% of SouthGobi's issued and outstanding common shares. On October 12, 2016, the Company completed the sale of its remaining stake in SouthGobi.

Board changes

Effective December 31, 2016, Jill Gardiner retired from the Board of Directors of the Company. Independent director Peter Gillin, who has served as a director of Turquoise Hill since May 2012, was appointed Chairman effective January 1, 2017. Mr. Gillin has extensive experience both in the resources sector and as a corporate director.

Effective January 4, 2017, Maryse Saint-Laurent, ICD.D, was appointed to the Company's Board as an independent director. Ms. Saint-Laurent is an accomplished legal executive, corporate director and senior advisor to boards and management teams with almost 20 years of experience in the energy and electricity sectors.

NON-GAAP MEASURES

The Company presents and refers to the following non-GAAP 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 Oyu Tolgoi.

Operating cash costs

The measure of 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.

C1 cash costs

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. It 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 Oyu Tolgoi and the impact of gold and silver credits on the operations' cost structure. C1 cash costs are relevant to 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 as a result of selling these products.

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 Oyu Tolgoi 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 all-in sustaining costs is provided below.

  Operating and unit costs  
  (Three Months Ended)   (Years Ended)  
C1 costs (Stated in $000's of dollars) December 31, 2016   September 30, 2016   December 31, 2016   December 31, 2015  
Cost of sales 184,224   232,490   861,757   974,956  
Cost of sales: $/lb of copper sold 2.22   2.31   2.07   2.20  
Depreciation and depletion (79,507 ) (88,505 ) (345,868 ) (344,543 )
Provision against carrying value of copper-gold concentrate 7,679   (9,706 ) (2,027 ) -  
Change in inventory (1,275 ) (27,584 ) (47,166 ) (29,444 )
Other operating expenses 64,517   75,871   307,719   452,539  
Less:                
  - Reversal (impairment / write-down of inventory) 10,911   (1,512 ) (12,509 ) (103,236 )
  - Depreciation (15,114 ) (561 ) (19,476 ) (11,700 )
Management services payment to Turquoise Hill 3,927   7,335   32,821   24,054  
Operating cash costs 175,362   187,828   775,251   962,626  
Operating cash costs: $/lb of copper produced 1.75   1.83   1.75   2.16  
Adjustments to operating cash costs(1) 28,308   24,180   118,020   98,054  
Less: Gold and silver revenues (45,986 ) (52,163 ) (440,669 ) (805,162 )
C1 costs ($'000) 157,684   159,845   452,602   255,518  
C1 costs: $/lb of copper produced 1.57   1.56   1.02   0.57  
                 
All-in sustaining costs (Stated in $000's of dollars)                
Corporate administration 10,110   4,836   23,606   17,193  
Asset retirement expense 1,786   1,372   6,078   5,280  
Royalty expenses 13,059   13,887   68,142   120,795  
Non-current stockpile and stores write-down (reversal) (10,911 ) 1,512   12,509   103,236  
Other expenses (403 ) 2,771   5,253   2,607  
Sustaining cash capital including deferred stripping 18,999   21,454   87,891   105,808  
All-in sustaining costs ($'000) 190,324   205,677   656,081   610,437  
All-in sustaining costs: $/lb of copper produced 1.90   2.00   1.48   1.37  
(1) Adjustments to 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 cost.

Working capital

Consolidated working capital(3) 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 sustaining of the business, working capital excludes: non-trade receivables and payables (other than accruals and payables relating to capital expenditure); financing items; cash and cash equivalents; deferred revenue and non-current inventory.

A reconciliation of consolidated working capital to the financial statements and notes is provided below.

Working capital
(Stated in $000's of dollars)
December 31,
2016
  December 31,
2015
 
             
Inventories (current) $ 260,668   $ 321,409  
Trade and other receivables   42,557     15,833  
Trade and other payables:            
- trade payables and accrued liabilities   (196,716 )   (165,393 )
- payable to related parties   (37,248 )   (34,801 )
Consolidated working capital   69,261     137,048  
(3) The Company previously reported consolidated working capital as the net amount of current assets and current liabilities in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Beginning December 31, 2016, the Company has revised the calculation of consolidated working capital, as shown in the table above, to reflect the operational and cash generating context in which this metric is presented.

Contractual obligations

Section 8 of this MD&A discloses contractual obligations in relation to the Company's lease, purchase and asset retirement obligations. Amounts relating to these obligations are calculated on the basis 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 at December 31, 2016 to the financial statements and notes is provided below.

  Purchase obligations   Operating leases   Finance leases   Decommissioning obligations  
Commitments (MD&A) $ 638,773   $ 62,517   $ 12,737   $ 257,396  
Cancellable purchase obligations (net of exit costs)   (536,166 )   -     -     -  
Accrued capital expenditure   (60,561 )                  
Discounting and other adjustments   -     -     289     (138,493 )
Financial statement amount $ 42,046   $ 62,517   $ 13,026   $ 118,903  

QUALIFIED PERSON

Disclosure of a scientific or technical nature in the MD&A in respect of the Oyu Tolgoi mine was prepared under the supervision of Bernard Peters Technical Director - Mining OreWin Pty Ltd, B. Eng. (Mining), FAusIMM (201743), and Sharron Sylvester, Technical Director - Geology, OreWin Pty Ltd, BSc (Geol.), RPGeo AIG (10125). Each of these individuals is a "qualified person" as that term is defined in National Instrument Standards of Disclosure for Mineral Projects (NI 43-101).

SELECTED QUARTERLY DATA

($ in millions, except per share information) Quarter Ended
  Dec-31   Sep-30   Jun-30   Mar-31
  2016   2016   2016   2016
Revenue                      
  Copper-gold concentrate $ 224.6   $ 226.3   $ 329.7   $ 422.7
Total revenue $ 224.6   $ 226.3   $ 329.7   $ 422.7
                       
Net income (loss) from continuing operations attributable to owners $ 93.3   $ (31.4 ) $ 29.8   $ 118.9
Loss from discontinued operations attributable to owners   -     -     -     -
Net income (loss) attributable to owners of Turquoise Hill $ 93.3   $ (31.4 ) $ 29.8   $ 118.9
                       
Basic income (loss) per share attributable to owners of Turquoise Hill                      
  Continuing operations $ 0.05   $ (0.02 ) $ 0.01   $ 0.06
  Discontinued operations   -     -     -     -
  Total $ 0.05   $ (0.02 ) $ 0.01   $ 0.06
                       
Diluted income (loss) per share attributable to owners of Turquoise Hill                      
  Continuing operations $ 0.05   $ (0.02 ) $ 0.01   $ 0.06
  Discontinued operations   -     -     -     -
  Total $ 0.05   $ (0.02 ) $ 0.01   $ 0.06
                       
  Dec-31   Sep-30   Jun-30   Mar-31
  2015   2015   2015   2015
Revenue                      
  Copper-gold concentrate $ 355.6   $ 431.7   $ 421.3   $ 426.2
Total revenue $ 355.6   $ 431.7   $ 421.3   $ 426.2
                       
Net income from continuing operations attributable to owners $ 179.7   $ 44.0   $ 49.9   $ 67.1
Income (loss) from discontinued operations attributable to owners   (8.7 )   (22.8 )   (25.0 )   29.1
Net income attributable to owners of Turquoise Hill $ 171.0   $ 21.2   $ 24.9   $ 96.2
                       
Basic income (loss) per share attributable to owners of Turquoise Hill                      
  Continuing operations $ 0.09   $ 0.02   $ 0.02   $ 0.03
  Discontinued operations   -     (0.01 )   (0.01 )   0.01
  Total $ 0.09   $ 0.01   $ 0.01   $ 0.04
                       
Diluted income (loss) per share attributable to owners of Turquoise Hill                      
  Continuing operations $ 0.09   $ 0.02   $ 0.02   $ 0.03
  Discontinued operations   -     (0.01 )   (0.01 )   0.01
  Total $ 0.09   $ 0.01   $ 0.01   $ 0.04

KEY STATISTICS(1)

  4Q
2015
1Q(4)
2016
2Q
2016
3Q
2016
4Q
2015
Full Year
2016
Full Year
2015
Operating results              
Open pit material mined ('000 tonnes) 23,708 22,867 22,716 25,739 25,615 96,938 91,771
Ore treated ('000 tonnes) 9,369 9,662 9,525 9,146 9,819 38,152 34,537
Average mill head grades:              
  Copper (%) 0.69 0.70 0.64 0.66 0.61 0.65 0.67
  Gold (g/t) 0.92 0.63 0.33 0.21 0.25 0.36 0.78
  Silver (g/t) 1.67 1.92 1.92 1.99 1.50 1.83 1.56
Concentrates produced ('000 tonnes) 231.8 229.5 207.1 203.2 206.7 846.6 788.5
  Average concentrate grade (% Cu) 24.7 25.1 24.9 22.9 22.0 23.8 25.6
Production of metals in concentrates:              
  Copper ('000 tonnes) 57.3 57.6 51.7 46.6 45.5 201.3 202.2
  Gold ('000 ounces) 207 144 70 37 49 300 653
  Silver ('000 ounces) 355 395 391 361 273 1,420 1,223
Sales of metals in concentrates:              
  Copper ('000 tonnes) 54.7 51.2 54.4 45.7 37.6 188.9 201.3
  Gold ('000 ounces) 160 175 95 38 39 347 737
  Silver ('000 ounces) 360 305 395 341 239 1,280 1,158
Metal recovery (%)              
  Copper 88.4 85.6 83.3 78.0 76.6 81.0 87.6
  Gold 74.2 72.2 69.3 62.0 63.4 68.5 74.4
  Silver 70.8 66.4 65.9 61.7 57.2 63.1 69.9
               
Financial results ($ in millions, unless otherwise noted)  null