ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
With the exception of historical information,
certain matters discussed in this Quarterly Report on Form 10-Q (“Form 10-Q”), including those within this Item 2
- Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), are forward-looking
statements that involve risks and uncertainties.
Statements that contain words such as “could”,
“should”, “can”, “anticipate”, “estimate”, “propose”, “plan”,
“expect”, “seek”, “believe”, “will”, “may” and similar expressions
and statements relating to matters that are not historical facts constitute “forward-looking statements” within the
meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. In
particular, forward-looking statements contained in this Form 10-Q include, but are not limited to, statements relating to or
associated with individual wells, regions or projects; future crude oil prices; possible future production levels; future royalty
and tax levels; future capital expenditures, their timing and their allocation to exploration and development activities; future
asset acquisitions or dispositions; future sources of funding for the Company’s capital programs; future debt levels; availability
of future credit facilities; possible commerciality of the Company’s projects; development plans or capacity expansions;
future ability to execute dispositions of assets or businesses; future formation of joint ventures and other business relationships
with third parties; future sources of liquidity, cash flows and their uses; future drilling of new wells; ultimate recoverability
of current and long term assets; ultimate recoverability of reserves or resources; expected operating costs; estimates on a per
share basis; future foreign currency exchange rates, future expenditures and future allowances relating to environmental matters
and the Company’s ability to comply therewith; dates by which certain areas will be developed, come on-stream or reach expected
operating capacity; and changes in any of the foregoing.
Statements relating to “reserves”
are forward-looking statements, as they involve the implied assessment, based on estimates and assumptions, that the reserves
described exist in the quantities predicted or estimated and can be profitably produced in the future.
The forward-looking statements contained in
this Form 10-Q are based on certain assumptions and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate
in the circumstances. By their nature, forward-looking statements involve inherent risks and uncertainties, including the risk
that the outcome that they predict will not be achieved. Undue reliance should not be placed on forward-looking statements as
a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations
and anticipations, estimates and intentions expressed in the forward-looking statements, including those set out below and those
detailed in Item 1A, “Risk Factors” and Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”
in the 2013 Form 10-K. Such factors include, but are not limited to: the Company’s short history of limited revenue, losses
and negative cash flow from its current exploration and development activities in Canada, Ecuador, Mongolia and the United States;
the Company’s limited cash resources and consequent need for additional financing; the ability to raise capital as and when
required, or to raise capital on acceptable terms; the timing and extent of changes in prices for oil and gas; competition for
oil and gas exploration properties from larger, better financed oil companies; environmental risks; title matters; drilling and
operating risks; uncertainties about the estimates of reserves and the potential success of the Company’s Heavy-to-light
(“HTL
®
”) technology; the potential success of the Company’s oil and gas properties in Canada,
Ecuador and Mongolia; the prices of goods and services; the availability of drilling rigs and other support services; legislative
and government regulations; political and economic factors in countries in which the Company operates; and implementation of the
Company’s capital investment program.
The forward-looking statements contained in
this Form 10-Q are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise, unless required by applicable securities laws.
The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement.
Special Note to Canadian Investors
The Company is a registrant under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and voluntarily files reports with the United States Securities
and Exchange Commission (“SEC”) on Form 10-K, Form 10-Q and other forms used by registrants that are US domestic issuers.
Therefore, the Company’s reserves estimates and securities regulatory disclosures generally follow SEC requirements. National
Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities (“NI 51-101”), adopted by the Canadian Securities
Administrators (“CSA”), prescribes certain standards for the preparation, and disclosure of reserves and related information
by Canadian issuers. The Company has been granted certain exemptions from NI 51-101. Please refer to the Special Note to Canadian
Investors in the 2013 Form 10-K.
Advisories
This Form 10-Q should be read in conjunction
with the Company’s March 31, 2014 unaudited condensed consolidated financial statements (the “Financial Statements”)
contained herein, and the audited consolidated financial statements and Management’s Discussion and Analysis of Financial
Condition and Results of Operations contained in the 2013 Form 10-K. The Financial Statements have been prepared using accounting
policies consistent with International Financial Reporting Standards (“IFRS”) and in accordance with International
Accounting Standard 34, Interim Financial Reporting (“IAS 34”).
As a foreign private issuer in the US, Ivanhoe
is permitted to file with the SEC financial statements prepared under IFRS, as issued by the International Accounting Standards
Board, without a reconciliation to US GAAP. It is possible that some of the Company’s accounting policies under IFRS could
be different from US GAAP.
ALL TABULAR AMOUNTS ARE EXPRESSED IN THOUSANDS
OF U.S. DOLLARS, EXCEPT PER SHARE DATA.
Electronic copies of the Company’s filings
with the SEC and the CSA are available, free of charge, through the Company’s website (www.ivanhoeenergy.com) or, upon request,
by contacting its investor relations department at (403) 261-1700. Alternatively, the SEC and the CSA each maintains a website
(www.sec.gov and www.sedar.com) from which the Company’s periodic reports and other public filings with the SEC and the
CSA can be obtained. Copies of the charters for each of the committees of the Company's board of directors are available through
the Company’s website at
www.ivanhoeenergy.com/index.php?page=mandate_of_the_boardcommittee_overview.
HIGHLIGHTS
|
|
|
Three
months ended March 31,
|
($000,
except as stated)
|
|
|
|
|
2014
|
|
2013
|
Capital
expenditures
|
|
|
|
|
1,003
|
|
7,533
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
|
|
(8,744)
|
|
(18,586)
|
Net
loss from continuing operations
|
|
|
|
|
(7,880)
|
|
(11,975)
|
Net
loss per share from continuing operations - basic and diluted
|
|
|
|
|
(0.07)
|
|
(0.09)
|
Net loss from continuing operations during
the three months ended March 31, 2014 was $7.9 million, which was $4.1 million lower compared to a net loss from continuing operations
of $12.0 million incurred during the same period in 2013. The decrease is primarily due to a $5.4 million decrease in general
and administrative (“G&A”) expenses and a $0.7 million increase in foreign currency exchange gains compared to
the prior year quarter. This was partially offset by a $0.9 million decrease in deferred income tax recoveries, a $0.5 million
increase in finance expense and a $0.6 million net increase in other items impacting net loss from continuing operations. These
changes are explained in detail below under “Results of Operations”.
RESULTS OF OPERATIONS
General and Administrative
G&A expenses mainly consist of staff, office
and legal and other contract services costs.
G&A expenses for the three months ended
March 31, 2014 was $7.3 million, which was $5.4 million lower compared to G&A expenses of $12.7 million incurred during the
same period in 2013. The decrease is primarily due to a $1.2 million decrease in accrued bonuses as no bonuses were accrued in
2014, a $1.2 million decrease in legal costs related to the proceedings discussed in Part II, Item 1 “Legal Proceedings”
disclosed within this Form 10-Q, a $1.1 million decrease in travel and business expenses due to reduced business activities, a
$1.0 million decrease in staff costs related to severance and retention of key employees in the Asia segment incurred in 2013
not recurring in 2014, and a $0.9 net decrease related to other miscellaneous G&A items.
Foreign Currency Exchange
The gain or loss on foreign currency exchange
results from the revaluation of monetary assets and liabilities denominated in currencies other than the Company’s functional
currency, the US dollar, at each period end and from the settlement of the Company’s receivables and payables denominated
in foreign currencies.
Foreign currency exchange gains for the three
months ended March 31, 2014 were $2.0 million, which was $0.7 million higher compared to the foreign currency exchange gains of
$1.3 million incurred during the same period in 2013. The decrease is primarily due to the revaluation of the Cdn$73.3 million
of Convertible Debentures. The Canadian dollar weakened in relation to the US dollar more in the first quarter of 2014 than it
did in the same period in 2013, resulting in increased gains on translation of the US dollar Convertible Debentures in the first
quarter of 2014 compared to same period in 2013. This was partially offset by Ivanhoe holding more Canadian dollar cash in the
first quarter of 2014 than it did in the same period in 2013, resulting in increased losses on translation of the Canadian dollar
cash in the first quarter of 2014 compared to same period in 2013.
Finance
Finance expense consists of interest expense
and the unwinding of the discount rate for decommissioning obligations.
Finance expense for the three months ended
March 31, 2014 was $1.0 million, which was $0.5 million higher compared to finance expense of $0.5 million incurred during the
same period in 2013. The increase is primarily due to a lower allocation of interest expense to capital projects mainly resulting
from Ivanhoe suspending activity on its current Tamarack oil sands project in the first quarter of 2014.
Recovery of Income Taxes
The deferred income tax recovery for the three
months ended March 31, 2014 was nil, which was $0.9 million lower compared to a recovery of $0.9 million incurred during the same
period in 2014. The decrease is primarily due to the impact of no additional deferred income tax recoveries being recognized for
net operating losses.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
LIQUIDITY AND CAPITAL RESOURCES
Contractual Obligations and Commitments
The following information about our contractual
obligations and other commitments summarizes certain liquidity and capital resource requirements. The information presented in
the table below does not include planned, but not legally committed, capital expenditures or obligations that are discretionary
and/or being performed under contracts which are cancelable with a 30 day notification period.
|
|
Total
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
After
2017
|
Long
term debt
(1)
|
|
66,316
|
|
-
|
|
-
|
|
66,316
|
|
-
|
|
-
|
Interest
on long term debt
(1)
|
|
9,517
|
|
3,813
|
|
3,813
|
|
1,891
|
|
-
|
|
-
|
Decommissioning
obligations
(2)
|
|
4,076
|
|
-
|
|
-
|
|
192
|
|
-
|
|
3,884
|
Leases
|
|
2,741
|
|
741
|
|
808
|
|
686
|
|
348
|
|
158
|
Total
|
|
82,650
|
|
4,554
|
|
4,621
|
|
69,085
|
|
348
|
|
4,042
|
|
(1)
|
Long
term debt is denominated in Canadian dollars and has been translated to US dollars at
an exchange rate of approximately CDN=
0.9046
USD.
|
|
(2)
|
Represents undiscounted decommissioning
obligations after inflation. The discounted value of these estimated obligations ($2.5
million) is provided for in the consolidated financial statements.
|
Long Term Debt and Interest
As described in the financial statements included
in the 2013 Form 10-K, the Company issued Cdn$73.3 million of Convertible Debentures maturing on June 30, 2016. The Convertible
Debentures bear interest at an annual rate of 5.75%, payable semi-annually on the last day of June and December of each year.
Decommissioning Provisions
The Company is required to remedy the effect
of our activities on the environment at our operating sites by dismantling and removing production facilities and remediating
any damage caused. At March 31, 2014, Ivanhoe estimated the total undiscounted, inflated cost to settle its long term decommissioning
obligations in Canada, for the feedstock test facility in the US and in Ecuador was $4.1 million. These costs are expected to
be incurred in 2016-2032, 2029 and 2038, respectively.
Leases
The Company has long term leases for office
space and vehicles, which expire between 2014 and 2018.
Other
Should Ivanhoe receive government and other
approvals necessary to develop the northern border of one of the Tamarack Project leases, the Company will be required to make
a cash payment to Talisman Energy Canada of up to Cdn$15.0 million, as a conditional, final payment for the 2008 purchase transaction.
This particular geographical area of the lease is not currently part of the project for which the Company has requested approval
from the Alberta Energy Regulator (“AER”).
From time to time,
Ivanhoe enters into
consulting agreements whereby a success fee may be payable if and when either a definitive agreement is signed or certain other
contractual milestones are met. Under the agreements, the consultant may receive cash, common shares, stock options or some combination
thereof. Similarly, agreements entered into by the Company may contain cancellation fees or liquidated damages provisions for
early termination. These fees are not considered to be material.
The Company may provide indemnities to third
parties, in the ordinary course of business, that are customary in certain commercial transactions, such as purchase and sale
agreements. The terms of these indemnities will vary based upon the contract, the nature of which prevents Ivanhoe from making
a reasonable estimate of the maximum potential amounts that may be required to be paid. The Company’s management is of the
opinion that any resulting settlements relating to indemnities are not likely to be material.
In the ordinary course of business, the Company
is subject to legal proceedings being brought against it. While the final outcome of these proceedings is uncertain, the Company
believes that these proceedings, in the aggregate, are not reasonably likely to have a material effect on its financial position
or earnings.
Sources and Uses of Cash
The Company’s cash flows from operating,
investing and financing activities, as reflected in the unaudited condensed consolidated statements of cash flows, are summarized
in the following table:
|
|
|
Three
months ended March 31,
|
|
|
|
|
|
2014
|
|
2013
|
Cash
used in operating activities
|
|
|
|
|
(8,744)
|
|
(18,586)
|
Cash
(used in) provided by investing activities
|
|
|
|
|
(822)
|
|
17,794
|
Cash
provided by (used in) financing activities
|
|
|
|
|
1
|
|
(5)
|
Liquidity
Ivanhoe’s existing financial resources
are insufficient to fund the future capital expenditures necessary to advance the development of our existing projects and to
maintain the Company’s business activities at their current level. In the near term, the Company will require other sources
of financing in order to continue operating its business as currently constituted. Ivanhoe intends to finance its future funding
requirements through a combination of partnering with strategic investors and/or public and private debt and equity markets, either
at the parent company level or at the project level, and through the sale of interests in existing oil properties. There is no
assurance that the Company will be able to obtain such financing, or obtain it on favorable terms.
These activities include discussions with a
large international oil company for the creation of a joint financial participation arrangement in respect of its Pungarayacu
project in Ecuador. The transaction contemplated by these discussions, if and when consummated, would be expected to generate
additional cash. While progress in reaching the transaction objective has been made by the potential transaction participants,
there is no assurance that the objective can be achieved, or achieved in a timely manner or that such participation will be approved
by regulatory authorities in Ecuador. Without timely access to a sufficient source of financing to enable the Company to make
its planned capital expenditures and otherwise fund the cost of carrying on its business, the Company may have to significantly
curtail its existing business activities and may be unable to continue as a going concern.
Operating Activities
Net cash used in operating activities for the
three months ended March 31, 2014 was $8.7 million, which was $9.9 million lower compared to net cash used in operating activities
of $18.6 million incurred during the same period in 2013. The decrease is primarily due to $5.1 million in decreased cash G&A
expenses as discussed above which excludes non-cash share-based compensation expense, $2.1 million in transaction costs and $1.8
million in income tax payments related to discontinued operations incurred in three months ended March 31, 2013 not recurring
in the same period in 2014 and $0.9 million in other net changes impacting operating activities.
Capital Structure
|
As
at March 31, 2014
|
|
As
at December 31, 2013
|
Long
term debt
|
61,118
|
|
28.4%
|
|
63,012
|
|
28.2%
|
Shareholders’
equity
|
152,986
|
|
71.6%
|
|
160,277
|
|
71.8%
|
Total
capital
|
215,104
|
|
100.0%
|
|
223,289
|
|
100.0%
|
On September 6, 2013, the Company received
a notification letter from the Listing Qualifications Department of the NASDAQ notifying the Company that the Company did not
meet the minimum bid price requirements set forth in the NASDAQ Listing Rules and that the Company could regain compliance if
at any time prior to March 5, 2014 the closing bid price of the Company’s common shares was at least $1.00 for a minimum
of 10 consecutive business days. For additional information, refer to the Form 8-K filed on September 12, 2013. On February 18,
2014, the Company applied to the NASDAQ for an additional compliance period of 180 days, which was granted and will expire on
September 2, 2014.
OUTLOOK
Corporate
Management’s plans for financing future
expenditures include traditional project financing, debt and mezzanine financing, the sale of non-core assets or the sale of equity
securities as well as the potential for partnerships or other arrangements with strategic investors. However, no assurances can
be given that Ivanhoe will be able to arrange such financing, to enter into one or more strategic business alliances with third
parties or that the Company will be able to sell non-core assets on acceptable terms or raise sufficient additional capital. If
the Company is unable to enter into such business alliances or obtain adequate additional financing, the Company may be required
to abandon assets and otherwise curtail its operations.