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Turquoise Hill announces financial results and review of operations for the third quarter of 2021

·30 min read

MONTRÉAL, Nov. 2, 2021 /CNW/ - Turquoise Hill Resources Ltd. ("Turquoise Hill" or the "Company") today announced its financial results for the period ended September 30, 2021. All figures are in U.S. dollars unless otherwise stated.

Turquoise Hill (CNW Group/TURQUOISE HILL RESOURCES LTD)
Turquoise Hill (CNW Group/TURQUOISE HILL RESOURCES LTD)

"Oyu Tolgoi produced solid operating results in the third quarter. Copper production of 41,935 tonnes was up 16% year-over-year and 14% relative to Q2'21. The mine also produced 130,799 ounces of gold in the quarter, an increase of 256% compared to the same quarter last year and 16% more than was produced in Q2'21. Revenue for the quarter was $622.8 million, an increase of 135.6% from Q3'20 revenue of $264.4 million. Thanks to the hard work of the Oyu Tolgoi team, and despite the difficult environment created by COVID-19, we are on track to meet our production guidance for 2021. All technical undercut readiness activities to begin underground production have been completed and Oyu Tolgoi has been ready from a technical perspective to commence the undercut since July 2021." Stated Steve Thibeault, Interim Chief Executive Officer of Turquoise Hill Resources.

"While the COVID-19 situation in Mongolia is improving slightly, Oyu Tolgoi is maintaining rigorous anti-COVID protocols at site to ensure the health of our employees. Currently 100% of the Oyu Tolgoi workforce has been double vaccinated and a campaign to administer a third dose is advancing well."

FINANCIAL AND OPERATIONAL HIGHLIGHTS

  • Oyu Tolgoi open-pit and underground workforce posted an AIFR of 0.13 per 200,000 hours worked for the nine months ended September 30, 2021.

  • In Q3'21, Oyu Tolgoi produced 41,935 tonnes of copper and 130,799 ounces of gold.

  • Mill throughput of 9.3 million tonnes in Q3'21 was in line with Q2'21 and 7% lower than Q3'20. Processing of harder ore as well as lower SAG mill availability, due to maintenance, impacted Q3'21 mill throughput.

  • Despite significant COVID-19 related challenges at the Oyu Tolgoi mine site, causing the site to operate at less than 50% of its planned personnel for Q3'21, 2021 production guidance remains on track and some underground progress has been made with the restart of Shaft 4 sinking and commencement of no-load Material Handling System 1 (MHS1) commissioning in October 2021.

  • Revenue of $622.8 million in Q3'21 increased 135.6% from $264.4 million in Q3'20. Both copper and gold volumes increased by 34.9% and 338.2%, respectively, driven by the scheduled move to the higher grade areas of Phase 4B. Average copper prices were 43.8% higher and average gold prices were 6.3% lower than Q3'20.

  • Income for the period was $22.9 million in Q3'21 compared with $161.7 million in Q3'20, reflecting the impact of a $299.9 million deferred tax asset de-recognition in Q3'21 (Q3'20: recognition of $131.1 million), which resulted mainly from underground delays as well as a $34.8 million increase in operating cash costs1 due mainly to higher royalty costs from increased sales revenue, additional COVID-19 related costs and higher consumption and power costs, partially offset by lower power study costs. These unfavourable movements were further offset by a $323.6 million increase in gross margin due to the increased revenue. Income attributable to owners of Turquoise Hill in Q3'21 was $34.9 million ($0.17 per share) vs $128.6 million ($0.64 per share) in Q3'20.

  • Cost of sales was $1.98 per pound of copper sold and C1 cash costs1 were negative $0.65 per pound of copper produced. All-in sustaining costs1 were $0.03 per pound of copper produced.

  • Total operating cash costs1 of $216.2 million in Q3'21 increased 19.2% from $181.4 million in Q3'20, due primarily to higher royalty costs from increased sales revenue, additional COVID-19 related costs and higher consumption and power costs, partially offset by lower power study costs.

  • Underground capital spend in Q3'21 was $200.6 million, including $63.7 million of underground sustaining capital. Total underground capital spend since January 1, 2016 was $5.1 billion, including $0.3 billion of underground sustaining capital, as of September 30, 2021. Given the total underground development spend of $4.8 billion and contractual obligations of $0.4 billion as at September 30, 2021, Oyu Tolgoi is expected to reach the total $5.3 billion underground development (actual spend plus contractual obligations) as stated in the original 2016 feasibility study, during November 2021. In the event that the necessary additional investment to progress underground development is not supported by all directors of the OT LLC board by the end of November 2021, OT LLC will be at risk of having to slow down further work on the underground development.

  • Cash generated from operating activities was $350.6 million in Q3'21 vs $77.6 million in Q3'20, reflecting a $261.9 million improvement in cash generated from operating activities before interest and tax, which resulted from a $323.6 million increase in gross margin from increased sales revenue, partially offset by unfavourable movements in working capital1 and deferred revenue. Deferred revenue decreased in Q3'21 mainly due to exceptionally high deferred revenue at June 30, 2021, which was impacted by the timing of ramp-up in concentrate shipments during Q2'21 following the declaration of force majeure as well as related contingency measures that were put in place during Q2'21 to improve Oyu Tolgoi's short-term liquidity that started to be unwound during Q3'21. Deferred revenue increased in Q3'20.

  • Oyu Tolgoi concentrate shipment volumes to customers improved during Q3'21, compared to Q2'21; however, above target inventory levels remained at the end of Q3'21, reflecting the impact of COVID-19 related Mongolian / Chinese border restrictions, which resulted in force majeure being declared since March 30, 2021. Shipments to Chinese customers recommenced on April 15, 2021, and Oyu Tolgoi LLC (OT LLC) continues to work closely with the Mongolian and Chinese authorities to manage any supply chain disruptions. 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 on-site concentrate inventory to target levels.

  • All technical undercut readiness activities have been completed, and Oyu Tolgoi has been ready from a technical perspective to commence the undercut since July 2021. Undercut commencement remains delayed and is pending resolution of certain non-technical undercut criteria, including the support of all OT LLC Board directors to increase the underground development capital investment and to commence discussions with the project finance lenders, obtaining outstanding required regulatory approvals and agreeing on a pathway to meet OT LLC's long-term power requirements, all of which are critical elements for consideration to proceed with the decision to commence the undercut and remain the subject of ongoing discussions. See the section of this press release titled "Negotiations with the Government of Mongolia".

  • As a result of the cumulative and ongoing impacts of COVID-19, continued delayed commitments from the Definitive Estimate not having received the support of all directors of the OT LLC Board, as well as the outstanding unresolved non-technical undercut issues, the Company now expects sustainable production for Panel 0 to be delayed to H1'23, broadly in line with the currently forecast 6-month delay to undercut commencement.

  • Progress on Shafts 3 and 4 has been impacted by quarantine requirements and international travel restrictions related to COVID-19. As a result, no significant development progress on these shafts was made during Q3'21. Consequently, OT LLC has advised that a 9-month delay on Shafts 3 and 4 is currently forecast which, in combination with a COVID-related reduction in underground development progress as well as expected changes to mining scope, is currently forecast to delay the initiation of Panel 2 by approximately 14-16 months compared to the Definitive Estimate. Panel 1 is currently forecast to be impacted to a lesser extent with an approximate commencement 11 months later than the Definitive Estimate. These delays are expected to extend the ramp up to 95,000 tpd by a similar timeframe. Efforts to minimize the delays to Panel 1 and Panel 2 due to ventilation constraints ahead of Shaft 3 and 4 commissioning continue. See the section of this press release titled "Oyu Tolgoi Underground Update".

  • Turquoise Hill's current estimate of its base case incremental funding requirement is $3.6 billion (June 30, 2021: $2.4 billion). The increase reflects preliminary information provided by OT LLC primarily regarding the delay to the initiation of the undercut.

  • As at September 30, 2021, Turquoise Hill has $0.8 billion of available liquidity, which under current projections is expected to meet the Company's requirements, including funding of underground capital expenditure, into Q3'22.

___________________

1 Please refer to Section – NON-GAAP MEASURES – on page 21 of this press release for further information.

OPERATIONAL OUTLOOK FOR 2021

Oyu Tolgoi's copper and gold production guidance for 2021 remains within the ranges of 150,000 to 180,000 tonnes of copper and 400,000 to 480,000 ounces of gold, respectively.

Operating cash costs2 for 2021 are still expected to be within the range of $800 million to $850 million.

Capital expenditure for 2021 on a cash-basis has been reduced to $80 million to $100 million from $105 million to $125 million for the open-pit and to $0.8 billion to $0.9 billion from $0.9 billion to $1.0 billion for the underground, including underground sustaining capital expenditure, caused mainly by the impact of the delayed undercut commencement and the on-going impacts of on-site COVID-19 restrictions. Open pit capital is mainly comprised of deferred stripping, equipment purchases, tailings storage facility construction and maintenance componentization. Underground capital is inclusive of VAT.

2021 C1 cash costs2 are expected to be in the range of negative $0.20 to positive $0.20 per pound of copper produced. Unit cost guidance assumes the midpoint of the expected 2021 copper and gold production ranges and a gold price of $1,804 per ounce.

___________________

2 Please refer to Section – NON-GAAP MEASURES – on page 21 of this press release for further information

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), 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 2021 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.

At the end of Q3'21, Oyu Tolgoi had a total workforce (employees and contractors), including for underground project construction, of approximately 14,000 workers, of which over 96% were Mongolian.

SELECTED FINANCIAL METRICS (1)


Three months ended

Nine months ended

($ in millions, unless otherwise noted)

3Q

3Q

Change

3Q

3Q

Change

2021

2020

%

2021

2020

%








Revenue

622.8

264.4

135.6%

1,467.1

673.1

118.0%

Income (loss) for the period

22.9

161.7

--

473.9

253.0

--

Income (loss) attributable to owners of Turquoise Hill

34.9

128.6

--

368.5

246.4

--

Basic and diluted income (loss) per share attributable to owners of Turquoise Hill

0.17

0.64

--

1.83

1.22

--

Revenue by metals in concentrates


-


-

-


Copper

362.7

198.7

82.5%

883.8

517.3

70.8%

Gold

254.3

61.1

316.2%

570.0

145.3

292.3%

Silver

5.8

4.6

26.1%

13.3

10.5

26.7%

Cost of sales

202.7

168.0

20.7%

440.9

495.9

(11.1%)

Production and delivery costs

152.6

125.7

21.4%

317.4

367.5

(13.6%)

Depreciation and depletion

50.1

42.2

18.7%

123.5

128.3

(3.7%)

Capital expenditure on cash basis

216.9

254.5

(14.8%)

697.4

817.5

(14.7%)

Underground-Development

136.9

203.2

(32.6%)

479.5

733.7

(34.6%)

Underground-Sustaining

63.7

38.9

63.8%

174.5

49.9

249.7%

Open pit

16.3

12.4

31.5%

43.4

33.9

28.0%

Proceeds from pre-production revenue

(39.3)

(18.5)

112.4%

(51.3)

(26.1)

96.6%

Royalties

37.6

15.5

142.6%

82.8

40.0

107.0%

Operating cash costs (2)

216.2

181.4

19.2%

627.9

550.3

14.1%

Unit costs ($)







Cost of sales (per pound of copper sold)

1.98

2.22

(10.8%)

1.90

2.25

(15.6%)

C1 (per pound of copper produced) (2)

(0.65)

1.48

143.9%

0.06

1.72

(96.5%)

All-in sustaining (per pound of copper produced) (2)

0.03

1.88

(98.4%)

0.63

2.13

(70.4%)

Mining costs (per tonne of material mined) (2)

2.08

1.93

7.6%

2.20

1.78

23.6%

Milling costs (per tonne of ore treated) (2)

8.01

5.90

35.8%

7.10

6.06

17.2%

G&A costs (per tonne of ore treated)

3.63

2.98

22.0%

4.02

3.05

31.8%

Cash generated from (used in) operating activities

350.6

77.6

351.8%

426.7

(28.6)

1,592.0%

Cash generated from operating activities before interest and tax

351.1

89.2

293.6%

895.0

125.4

613.7%

Interest paid

0.9

0.7

28.6%

111.9

146.2

(23.5%)

Total assets

13,908

13,087

6.3%

13,908

13,087

6.3%

Total non-current financial liabilities

4,422

4,390

0.7%

4,422

4,390

0.7%

(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)

Please refer to Section – NON-GAAP MEASURES – on page 21 of this press release for further information.

Q3'21 vs Q3'20

  • Revenue of $622.8 million in Q3'21 increased 135.6% from $264.4 million in Q3'20. Both copper and gold volumes increased, by 34.9% and 338.2% respectively. This was driven by the scheduled move to the higher grade areas of Phase 4B. Average copper prices were 43.8% higher and average gold prices were 6.3% lower than Q3'20.

  • Income for the period was $22.9 million in Q3'21 compared with $161.7 million in Q3'20, reflecting the impact of a $299.9 million deferred tax asset de-recognition in Q3'21 (Q3'20: recognition of $131.1 million), which resulted mainly from underground delays as well as a $34.8 million increase in operating cash costs3 due mainly to higher royalty costs from increased sales revenues, additional COVID-19 related costs and higher consumption and power costs, partially offset by lower power study costs. These unfavourable movements were further offset by a $323.6 million increase in gross margin due to the increased revenue. Income attributable to owners of Turquoise Hill in Q3'21 was $34.9 million ($0.17 per share,) vs $128.6 million ($0.64 per share) in Q3'20.

  • Cost of sales of $202.7 million in Q3'21 increased 20.7% from $168.0 million in Q3'20, reflecting a 33.7% increase in volumes of concentrate sold driven by a 13.9% increase in volumes of concentrates produced and also improvement in Q3'21 shipping rates following introduction of measures to help mitigate the impact of the COVID-19 border restrictions that resulted in declaration of force majeure during Q1'21.

  • Capital expenditure on a cash basis was $216.9 million in Q3'21 compared to $254.5 million in Q3'20, comprised of $200.6 million (Q3'20: $242.1 million) in underground capital spend, including $63.7 million in underground sustaining capital (Q3'20: $38.9 million), and $16.3 million (Q3'20: $12.4 million) in open-pit sustaining capital expenditure.

  • Total operating cash costs3 of $216.2 million in Q3'21 increased 19.2% from $181.4 million in Q3'20, principally due to an increase in royalty costs driven by higher revenue as well as additional costs associated with the implementation of increased COVID-19 safety measures and controls. Further, higher consumption and power costs were partially offset by lower power study costs.

  • Unit cost of sales of $1.98 per pound of copper sold in Q3'21 decreased 10.8% from $2.22 per pound of copper sold in Q3'20, reflecting fixed cost efficiencies from higher metal production as well as higher copper grade and recovery from the scheduled mining progression to the higher grade areas of Phase 4B.

  • Oyu Tolgoi's C1 cash costs3 of negative $0.65 per pound of copper produced in Q3'21 decreased from $1.48 per pound of copper produced in Q3'20, primarily reflecting the impact of a $193.2 million increase in gold revenue.

  • All-in sustaining costs3 of $0.03 per pound of copper produced in Q3'21 decreased from $1.88 per pound of copper produced in Q3'20. Similar to the decrease in C1 cash costs3, this decrease primarily reflects the impact of the higher gold revenues but, unlike C1 cash costs3, was partially offset by the impact of increased royalty costs due to higher sales revenue.

  • Mining costs3 of $2.08 per tonne of material mined in Q3'21 increased 7.6% from $1.93 per tonne of material mined in Q3'20. The increase was mainly due to lower material mined due to lower manning levels caused by COVID-19 related controls and restrictions, increased cycle times caused by mining deeper into the open-pit, higher spend on consumables and fuel driven by market price increases, partially offset by lower maintenance costs due to the lower manning levels.

  • Milling costs3 of $8.01 per tonne of ore treated in Q3'21 increased 35.8% from $5.90 per tonne of ore treated in Q3'20. This increase was mainly due to lower milled ore and higher consumables and power costs caused by the processing of harder, higher grade Phase 4B ore in lieu of softer ore from Phase 6B and stockpiles. G&A costs of $3.63 per tonne of ore treated in Q3'21 increased 22.0% from $2.98 per tonne of ore treated in Q3'20. This increase was mainly due to lower amounts of ore treated as well as higher insurance and COVID-19 related costs.

  • Cash generated from operating activities was $350.6 million in Q3'21 vs $77.6 million in Q3'20, reflecting a $261.9 million improvement in cash generated from operating activities before interest and tax, which resulted from a $323.6 million increase in gross margin from increased sales revenue, partially offset by unfavourable movements in working capital3 and deferred revenue. Deferred revenue decreased in Q3'21 mainly due to exceptionally high deferred revenue at June 30, 2021, which was impacted by the timing of ramp-up in concentrate shipments during Q2'21 following the declaration of force majeure as well as related contingency measures that were put in place during Q2'21 to improve Oyu Tolgoi's short-term liquidity that started to be unwound during Q3'21. Deferred revenue increased in Q3'20.

___________________

3 Please refer to Section – NON-GAAP MEASURES – on page 21 of this press release for further information

OYU TOLGOI

Operations, Safety Performance and COVID-19 Update

The Oyu Tolgoi open-pit and underground workforce posted an AIFR of 0.13 per 200,000 hours worked for the nine months ended September 30, 2021, which represents an improvement from the six months ended 30 June 2021.

During Q3'21, Mongolia continued to experience a significant number of COVID-19 cases, which continued to limit the ability of Oyu Tolgoi to maintain normal roster changes for its workers. While Oyu Tolgoi did experience an improvement in on-site personnel numbers vs Q2'21, average workforce numbers remained below 50% of planned requirements during Q3'21.

COVID-19 restrictions have adversely impacted both open-pit operations and underground development, which, through the end of Q3'21 and as announced on October 14, 2021, have resulted in a cumulative increase of $140 million to the estimate of underground development capital included in the Definitive Estimate. This increase includes the currently known, incremental and time-related costs of COVID-19 restrictions through September 30,2021; however, it does not include any impacts arising from associated schedule delays or delayed commitments caused by the Definitive Estimate not yet having received the support of all the directors of the OT LLC Board, as these are still under assessment. The Company will continue to monitor these costs and will update the market as appropriate.

All workers at the Oyu Tolgoi site have had two doses of a COVID-19 vaccine, and a third dose program is well advanced. Improvements in quarantine protocols both on-site and off-site have resulted in a relaxation of restrictions, which resulted in higher workforce numbers in September 2021 while still minimising the spread of COVID-19. A return to normal workforce levels is expected by the end of 2021, and Oyu Tolgoi will continue to cooperate with the Mongolian authorities to implement and maintain control measures to protect the health and well-being of its workers as well as the local community.

Selected Operational Metrics

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


3Q

3Q

Change

9 months

9 months

Change


2021

2020


2021

2020









Open pit material mined ('000 tonnes)

22,588

23,979

(5.8%)

61,005

74,032

(17.6%)

Ore treated ('000 tonnes)

9,336

10,072

(7.3%)

28,550

30,606

(6.7%)

Average mill head grades:







Copper (%)

0.53

0.45

17.8%

0.52

0.45

15.6%

Gold (g/t)

0.63

0.21

200.0%

0.60

0.18

233.3%

Silver (g/t)

1.29

1.22

5.7%

1.26

1.19

5.9%

Concentrates produced ('000 tonnes)

191.9

168.5

13.9%

567.0

502.9

12.7%

Average concentrate grade (% Cu)

21.9

21.5

1.9%

21.9

21.5

1.9%

Production of metals in concentrates:







Copper ('000 tonnes)

41.9

36.3

15.4%

124.1

108.0

14.9%

Gold ('000 ounces)

131

37

254.1%

390

94

314.9%

Silver ('000 ounces)

249

219

13.7%

739

645

14.6%

Concentrate sold ('000 tonnes)

224.4

167.9

33.7%

503.3

488.1

3.1%

Sales of metals in concentrates:







Copper ('000 tonnes)

46.4

34.4

34.9%

105.0

99.9

5.1%

Gold ('000 ounces)

149

34

338.2%

333

84

296.4%

Silver ('000 ounces)

278

201

38.3%

591

566

4.4%

Metal recovery (%)







Copper

83.9

78.9

6.3%

83.6

77.4

8.0%

Gold

68.7

53.7

27.9%

70.3

51.0

37.8%

Silver

64.1

54.6

17.4%

64.0

54.0

18.5%

In Q3'21, both copper and gold production from the open-pit were higher vs Q3'20 due mainly to mining higher grade material from Phase 4B. Mill throughput of 9.34 million tonnes in Q3'21 was in line with Q2'21 and 7% lower than Q3'20. Processing of harder ore as well as lower SAG mill availability, due to maintenance, impacted Q3'21 mill throughput.

Oyu Tolgoi provided an updated mine plan reflecting the impacts of the mine redesign in response to previously disclosed open-pit geotechnical events, which is currently forecast to result in deferral of some open-pit metal to beyond 2024. In addition, the on-going impacts of on-site COVID-19 restrictions, have resulted in delayed waste movement thereby impacting short term operations. While opportunities to reduce the impact of this forecast metal deferral are under consideration, related work is not expected to be completed until H1'22.

Oyu Tolgoi Underground Update

All technical undercut readiness activities have been completed, and Oyu Tolgoi has been ready from a technical perspective to commence the undercut since July 2021. Undercut commencement remains delayed and is pending resolution of certain non-technical undercut criteria, including the support of all OT LLC Board Directors to increase the underground development capital investment and to commence discussions with the project finance lenders, obtaining outstanding required regulatory approvals and agreeing on a pathway to meet OT LLC's long-term power requirements, all of which are critical elements for consideration to proceed with the decision to commence the undercut and remain the subject of ongoing discussions.

During Q3'21, underground development progress continued to be significantly impacted by COVID-19 constraints on-site and in Mongolia, including restrictions on movement of both domestic and international expertise. Despite these constraints, breakthrough of the conveyor decline was achieved in August 2021, sinking of Shaft 4 recommenced in mid-October 2021, and preparatory work for Shaft 3 sinking continued. Breakthrough of the service decline is forecast in November 2021.

MHS1 construction is almost complete with no-load commissioning commencing in Q3'21 and is currently expected to be completed by the end of January 2022. Construction of the first on-footprint truck chute is well advanced and currently forecast to be completed by February 2022. Completion of both MHS1 and the first on-footprint truck chute is broadly in-line with the Definitive Estimate, a positive result given the challenging circumstances. Nevertheless, given the cumulative and on-going impacts of COVID-19, continued delayed commitments from the Definitive Estimate not yet having received the support of all directors of the OT LLC Board, as well as the outstanding unresolved non-technical undercut issues, the Company now expects sustainable production for Panel 0 to be delayed to H1'23, broadly in line with the current forecast 6-month delay to undercut commencement.

Progress on Shafts 3 and 4 has been impacted by quarantine requirements and international travel restrictions related to COVID-19. As a result, no significant development progress on these shafts was made during Q3'21. Consequently, OT LLC has advised that a 9-month delay on Shafts 3 and 4 is currently forecast which, in combination with a COVID- related reduction in underground development progress as well as expected changes to mining scope, is currently forecast to delay the initiation of Panel 2 by approximately 14 – 16 months compared to the Definitive Estimate. Panel 1 is currently forecast to be impacted to a lesser extent with an approximate commencement 11 months later than the Definitive Estimate. These delays are expected to extend the ramp up to 95,000 tpd by a similar timeframe. Efforts to minimize the delays to Panel 1 and Panel 2 due to ventilation constraints ahead of Shaft 3 and 4 commissioning continue

As at the end of Q3'21, cumulative* underground development progress was 60,085 equivalent metres (eqm) and cumulative* Conveyor to Surface advancement was 15,174 eqm. It is anticipated that development rates will continue to be impacted into Q4'21.

Oyu Tolgoi Underground Project Development Progress Excluding Conveyor Declines**

Year

Total Equivalent
Development

(Km)

Lateral Development
(Km)

Mass Excavation
('000' m3)

2016

1.6

1.5

3.0

Q1'17

1.0

0.8

5.2

Q2'17

1.4

0.9

9.2

Q3'17

1.4

1.2

8.3

Q4'17

2.2

1.9

8.9

2017

6.1

4.8

31.6

Q1'18

2.6

2.1

11.6

Q2'18

2.4

2.1

8.6

Q3'18

3.0

2.1*

23.3*

Q4'18

2.3

1.6

16.0

2018

10.3

7.9

59.5

Q1'19

3.2

2.3

21.4

Q2'19

3.2

2.4

19.3

Q3'19

3.6

3.2

11.4

Q4'19

4.8

4.5

9.0

2019

14.9

12.4

61.1

Q1'20

5.5

5.3

3.2

Q2'20

5.5

5.1

10.6

Q3'20

4.7

4.1

14.3

Q4'20

4.2

3.8

8.5

2020

19.9

18.4

36.6

Q1'21

3.5

2.9

13.5

Q2'21

1.7

1.2

11.6

Q3'21

2.2

1.8

8.1

Total

60.1

51.0

225.2

Notes:


Totals may not match due to rounding.

*

Lateral development and mass excavation amounts for Q3'18 have been updated to reflect revised results.

**

Excludes Conveyor Declines but includes sustaining capital development metres in the quarter.

Oyu Tolgoi Conveyor Decline Project Development Progress

Year

Total Equivalent
Development

(Km)

Lateral Development
(Km)

Mass Excavation
('000' m3)

2016

0.0

0.0

0.0

Q1'17

0.1

0.1

0.0

Q2'17

0.4

0.4

0.2

Q3'17

0.9

0.9

0.5

Q4'17

0.9

0.8

0.5

2017

2.3

2.3

1.2

Q1'18

0.8

0.8

0.1

Q2'18

0.8

0.8

0.1

Q3'18

0.8

0.8

0.3

Q4'18

0.6

0.6

0.1

2018

...

3.0

3.0

0.6

Q1'19

0.8

0.8

0.8

Q2'19

0.9

0.9

0.8

Q3'19

0.9

0.7

4.9

Q4'19

1.1

0.7

8.3

2019

3.7

3.1

14.7

Q1'20

1.0

0.7

7.5

Q2'20

1.0

0.9

2.6

Q3'20

0.9

0.9

0.0

Q4'20

1.0

1.0

0.0

2020

4.0

3.6

10.1

Q1'21

0.8

0.8

0.0

Q2'21

0.7

0.6

3.2

Q3'21

0.6

0.6

1.6

Total

15.2

13.9

31.5

Note: Totals may not match due to rounding.

The Company continues to engage Rio Tinto and various Mongolian governmental bodies to resolve the remaining outstanding non-technical undercut criteria, and remains committed to moving the project forward and ensuring long-term and mutually beneficial solutions to the issues under discussion. Rio Tinto and the Company have recently tabled a proposal to the Government of Mongolia, which the Company believes addresses all of the major outstanding issues while ensuring that OT LLC will continue to deliver compelling value to all partners. By way of examples, certain items contained in the overall proposed package that the Company is willing to discuss include proposals to reduce a portion of the debt currently owing by Erdenes and to accelerate or increase the anticipated returns to Erdenes and the Government of Mongolia. Nevertheless, delayed resolution of outstanding issues, as well as the slowing of discussions as a result of the COVID-19 situation in Mongolia, will delay the Company's expected timing for initiation of the undercut. Due to the delays of the approval of the Definitive Estimate and necessary additional investment by the OT LLC Board, some contractual commitments for future works on items such as Material Handling System 2 and the Concentrator upgrade have experienced delays, and are expected to impact the overall project duration, which will have ongoing cost implications. Any significant further delay to the initiation of the undercut would result in further, unfavourable impacts to the underground project schedule, including the timing of sustainable production for Panel 0, the timing to commence Panel 2 and the timing and quantum of underground capital expenditure, all of which would materially, adversely impact the timing of expected cash flows from the Oyu Tolgoi underground project thereby further increasing the quantum of Turquoise Hill's estimated incremental funding requirement and would also, in turn, adversely affect the ability of the Company and OT LLC to obtain additional funding or r-profile existing debt as contemplated within the timeframe set out in the Heads of Agreement entered into between the Company and Rio Tinto in April 2021 ("HoA"). See the section of this press release titled "Funding of OT LLC by Turquoise Hill".

The Definitive Estimate, which was completed in December 2020, forecast first sustainable production in October 2022 and estimated a development capital cost of $6.75 billion. It assumed COVID-19 related restrictions in 2021 would be no more stringent than those experienced in September 2020. As actual 2021 COVID-19 restrictions have been and are expected to be, for a period of time, more stringent than those assumed in the Definitive Estimate, a reassessment is underway to consider potential impacts thereof on the underground development capital estimate as well as the overall project schedule. The additional 2021 development cost impact of the known COVID-19 delays up to September 30, 2021 is estimated to be approximately $140 million, and additional impacts are expected as COVID-19 restrictions persist into Q4'21. The Company continues to monitor the impacts associated with COVID-19 delays as well as the time to resolve the non-technical undercut and other issues on the underground development capital estimate as well as the overall project schedule.

Given the cumulative and on-going impacts of COVID-19, continued delayed commitments resulting from the Definitive Estimate not yet having received the support of all directors of the OT LLC Board, as well as the outstanding non-technical undercut issues, the Company now expects sustainable production for Panel 0 to be delayed to H1'23, broadly in line with the current forecast 6-month delay to undercut commencement.

OT LLC spent $200.6 million on underground capital during Q3'21, including $63.7 million of underground sustaining capital. Total underground project spend from January 1, 2016, to September 30, 2021, was approximately $5.1 billion, including $0.3 billion of underground sustaining capital. Underground project spend on a cash basis includes VAT and capitalised management services payments but excludes capitalised interest. In addition, OT LLC had contractual obligations7 of $0.4 billion as at September 30, 2021. Since the restart of project development in 2016 through September 30, 2021, Oyu Tolgoi has committed over $3.9 billion to Mongolian vendors and contractors. Given the total underground development spend of $4.8 billion and contractual obligations of $0.4 billion as at September 30, 2021, Oyu Tolgoi is expected to reach the total $5.3 billion underground development (actual spend plus contractual obligations) as stated in the original 2016 feasibility study, during November 2021. In the event that the necessary additional investment to progress underground development is not supported by all directors of the OT LLC board by the end of November 2021, OT LLC will be at risk of having to slow down further work on the underground development.

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