##### 



EXHIBIT 3 
 Highlights
 Results of Operations -
 Oyu Tolgoi Project
 Integrated Development Plan
    Mine planning update 
  - 1 -




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Reserve and resource estimates
 Tonnesof Ore
    
    Copper
    
    GoldClass
    
    (Million)
    
    (%)
    
    (g/t)(a)Proven
    
    
    127
    
    
    
    0.58
    
    
    
    0.93Probable
    
    
    803
    
    
    
    0.48
    
    
    
    0.27Total
    
    
    930
    
    
    
    0.50
    
    
    
    0.36
 (a)
    
    g/t grams per tonne
   Tonnes
    
    Copper
    
    GoldClass
    
    (Million)
    
    (%)
    
    (g/t)Additional inferred resourcesUsing 0.6% copper equivalent cut-off grade(1)
    
    
    281
    
    
    
    1.49
    %
    
    
    0.51Using 2.0% copper equivalent cut-off grade(1)
    
    
    87
    
    
    
    2.62
    %
    
    
    1.19
 (1)
    
    Copper equivalent has been calculated using assumed metal prices ($0.80/pound
for copper and $350/ounces gold); % Copper equivalent.= % Cu + Au (gpt) x (11.25/17.64).
 Stability Agreement
   - 2 -




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Other Projects
 S&K Mine 
 
    
    The first issue concerns plans for the future expansion of the mine. The expected
decrease in mined copper grades at the Sabetaung pit coupled with the Companys potential
inability to import into Myanmar additional required mining equipment in a timely manner,
may limit production in 2006 to as low as 16,000 tonnes of copper cathode, down from
approximately 34,500 tonnes in 2005.
    
    The second issue involves a difference of interpretation between the Company and
certain Myanmar tax authorities concerning the imposition of commercial tax on all copper
cathode exports. The imposition of this commercial tax would be equivalent to an
additional 8% net smelter return charge on the project sales, retroactive to January 1,
2003. The Company is seeking a written legal opinion from the Attorney General of Myanmar
on the applicability of this tax and the Company has received certain assurances that the
ruling may be favorable.
    
    The Company is also concerned about timely approvals for the expansion of the
Letpadaung deposit. To date, the expansion of the deposit has been neither approved nor
denied by the Government of Myanmar.
  Sale of an interest in the S&K Mine 
 Sale of Savage River
 Jinshan
 - 3 -




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Mongolia Coal
 Financings
   - 4 -




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INTRODUCTION
  www.sedar.com
 FORWARD LOOKING STATEMENTS
  - 5 -




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- 6 -




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CORPORATE STRATEGY & OUTLOOK
  Development of the Oyu Tolgoi Project
 Stability Agreement
    - 7 -




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Financing alternatives 
  - 8 -




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Asset rationalization
 Liquidity and future funding requirements -
  - 9 -




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- 10 -




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SELECTED FINANCIAL INFORMATION
 ($ in millions of U.S. dollars, except per share information)
 Years ended December 31,2005
    
    2004
    
    2003Exploration expenses
    
    
    127.2
    
    
    
    98.2
    
    
    
    68.0General and administrative costs
    
    
    23.8
    
    
    
    22.2
    
    
    
    16.4Share of income from Joint venture
    
    
    23.0
    
    
    
    21.4
    
    
    
    1.1Foreign exchange gain
    
    
    7.8
    
    
    
    4.6
    
    
    
    12.6Net (loss) from continuing operations
    
    
    (125.7
    )
    
    
    (99.0
    )
    
    
    (78.6
    )Net income (loss) from discontinued operations
    
    
    35.9
    
    
    
    4.5
    
    
    
    (9.1
    )Net (loss)
    
    
    (89.8
    )
    
    
    (94.5
    )
    
    
    (87.7
    )Net income (loss) per shareContinuing operations
    
    ($
    0.41
    )
    
    ($
    0.35
    )
    
    ($
    0.32
    )Discontinued operations
    
    $
    0.12
    
    
    $
    0.01
    
    
    ($
    0.04
    )Total assets
    
    
    396.8
    
    
    
    376.3
    
    
    
    371.6Exploration DivisionCapital expenditures
    
    
    29.8
    
    
    
    6.0
    
    
    
    8.5Joint venture operationsCopper cathode - 50% shareUnits sold  tonnes
    
    
    17,485
    
    
    
    15,730
    
    
    
    13,808Units produced  tonnes
    
    
    17,239
    
    
    
    15,878
    
    
    
    13,935Average sale priceCopper cathode  US$/pound
    
    $
    1.83
    
    
    $
    1.33
    
    
    $
    0.79
 - 11 -




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SELECTED QUARTERLY DATA
 ($ in millions of U.S. dollars, except per share information)
 YearQUARTER ENDED
    
    EndedMar-31
    
    Jun-30
    
    Sep-30
    
    Dec-31
    
    Dec.312005Exploration expenses
    
    
    (24.4
    )
    
    
    (33.8
    )
    
    
    (28.9
    )
    
    
    (40.1
    )
    
    
    (127.2
    )General and administrative
    
    
    (4.8
    )
    
    
    (5.9
    )
    
    
    (7.3
    )
    
    
    (5.8
    )
    
    
    (23.8
    )Share of income from joint venture
    
    
    7.7
    
    
    
    7.8
    
    
    
    8.0
    
    
    
    (0.5
    )
    
    
    23.0Gain (loss) on foreign exchange
    
    
    (0.6
    )
    
    
    1.7
    
    
    
    7.1
    
    
    
    (0.4
    )
    
    
    7.8Net (loss) from continuing operations
    
    
    (24.2
    )
    
    
    (31.1
    )
    
    
    (20.6
    )
    
    
    (49.8
    )
    
    
    (125.7
    )Net income (loss) from discontinued
operations
    
    
    15.7
    
    
    
    5.9
    
    
    
    6.4
    
    
    
    7.9
    
    
    
    35.9Net (loss)
    
    
    (8.5
    )
    
    
    (25.2
    )
    
    
    (14.3
    )
    
    
    (41.8
    )
    
    
    (89.8
    )Net income (loss) per shareContinuing operations
    
    ($
    0.08
    )
    
    ($
    0.10
    )
    
    ($
    0.07
    )
    
    ($
    0.16
    )
    
    ($
    0.41
    )Discontinued operations
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.12Total
    
    ($
    0.03
    )
    
    ($
    0.08
    )
    
    ($
    0.05
    )
    
    ($
    0.13
    )
    
    ($
    0.29
    )2004Exploration expenses
    
    
    (20.7
    )
    
    
    (24.8
    )
    
    
    (28.5
    )
    
    
    (24.2
    )
    
    
    (98.2
    )General and administrative
    
    
    (5.2
    )
    
    
    (4.8
    )
    
    
    (6.0
    )
    
    
    (6.2
    )
    
    
    (22.2
    )Share of income from joint venture
    
    
    4.2
    
    
    
    6.1
    
    
    
    4.6
    
    
    
    6.5
    
    
    
    21.4Gain (loss) on foreign exchange
    
    
    (1.7
    )
    
    
    (1.4
    )
    
    
    4.2
    
    
    
    3.5
    
    
    
    4.6Net (loss) from continuing operations
    
    
    (23.8
    )
    
    
    (23.1
    )
    
    
    (25.5
    )
    
    
    (26.6
    )
    
    
    (99.0
    )Net income (loss) from discontinued
operations
    
    
    (7.9
    )
    
    
    2.2
    
    
    
    0.7
    
    
    
    9.5
    
    
    
    4.5Net (loss)
    
    
    (31.6
    )
    
    
    (21.0
    )
    
    
    (24.8
    )
    
    
    (17.1
    )
    
    
    (94.5
    )Net income (loss) per shareContinuing operations
    
    ($
    0.09
    )
    
    ($
    0.09
    )
    
    ($
    0.09
    )
    
    ($
    0.08
    )
    
    ($
    0.35
    )Discontinued operations
    
    ($
    0.03
    )
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.01Total
    
    ($
    0.12
    )
    
    ($
    0.08
    )
    
    ($
    0.09
    )
    
    ($
    0.05
    )
    
    ($
    0.34
    )
 - 12 -




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QUARTERLY ANALYSIS Q405 vs. Q404
 Ø
    
    Exploration.Total exploration and development expenditures capitalized in Q405
totalled $10.2 million, compared to $2.5 million in Q404. The $8.1 million increase in
capitalized expenditures is mainly due to the capitalization of the Oyu Tolgoi Projects
surface and collar infrastructure for the exploration shaft.In Q405, Ivanhoe Mines expensed $40.1 million in exploration and development activities,
compared to $24.2 million in Q404. The majority of the $40.1 million was spent on Ivanhoe
Mines Mongolian properties ($37.6 million compared to $18.3 million). Approximately $29.8
million (79%) of the $37.6 million was spent on the Oyu Tolgoi project and various coal
exploration activities in the south Gobi region of Mongolia. The remaining 21% was spent
on various exploration activities, including the Bronze Fox District, the Kharmagtai
project, regional reconnaissance, licence holding fees and general in-country
administrative charges.Ø
    
    Administrative costs.Administrative costs in Q405 were slightly lower, but consistent
with expenditures in Q404.Ø
    
    Income from joint venture interest.At the end of 2005, the Company adopted U.S. GAAP
as the basis for the consolidation of its financial statements.Under U.S. GAAP, the equity method is used to account for interests in joint venture
operations. Under the equity method, account details of the S&K Mines assets, liabilities
and operating results are now included in notes to the financial statements and the
Companys share of the net assets and liabilities of the S&K Mine are consolidated on the
Companys balance sheet as a net equity investment in joint venture. The Companys share
of the S&K Mines operating results are consolidated on its Consolidated Statement of
Operations as share of income from joint venture.In Q405, Ivanhoe Mines share of operating profit from the S&K Mine increased by 51% over
the same period in 2004. This increase was due to a 65% increase in copper prices less a
17% decrease in cathode production and a 34% increase in operating costs. The increase in
operating costs is mainly attributed to increases in the unit costs of power and chemicals.
In Q405, net loss from the S&K Mine totalled $0.5 million compared to a profit of $6.5
million in Q404.Ø
    
    Investment in joint venture. In Q105 the Company announced its intention to expand, in
a series of incremental steps, the S&K Mines production capacity to a target of 200,000
tonnes per annum. Various mining equipment was ordered at that time to increase the
annual copper cathode capacity to 50,000 tonnes per annum by mid-2006 as part of the
expansion program.
 
 - 13 -




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§
    
    Economic sanctions imposed against Myanmar by the United States have started to
seriously impact the mines ability to function in a normal way. In Q405, both the
mines insurance broker and the off-shore banking institution terminated their
relationship with the mine on account of these sanctions. Although the mine had in
excess of $40 million in off-shore bank accounts at December 31, 2005, the operations
of the mine were shut-down in March 2006. The mine is expected to resume operations
shortly when additional fuel, required to operate mining equipment and chemicals,
required for the leaching and electrowinning process, become available. The
management of the S&K Mine has established a new banking relationship with an
off-shore institution.§
    
    The mine has not yet been able to obtain from the Myanmar authorities the necessary
import permits for its previously ordered mining equipment. The equipment is
currently off-shore, awaiting approval for delivery. The Company does not know if and
when import permits will be granted for the importation of the necessary mining
equipment. The Company has received recent oral assurances from its joint venture
partner that the necessary documentation is nearing finalization. The increase in
mining capacity is crucial to allow waste stripping for the Sabetaung deposit and
ultimately for the future development of the Kysingtaung and Letpadaung deposits.
Without a substantial increase in mining capacity, these two deposits cannot be
economically developed. The drop in copper grades at the Sabetaung pit, combined with
the mines potential inability to obtain the necessary importing permits resulted in
significant decreases in copper cathode production in Q405. Significant decreases in
copper production are now forecasted for 2006 and subsequent years.
 Copper cathodeproduction(tonnes)Q105
    
    
    
    
    
    

    9,603Q205
    
    
    
    
    

    
    9,118Q305
    
    
    
    
    
    
    8,497Q405
    
    
    
    
    
    
    7,260Total production - 2005
    
    
    
    
    
    
    34,478Actual  Jan06
    
    
    
    
    
    
    2,134EstimatedFeb to March06
    
    
    
    
    
    
    3,718Apr to Dec06
    
    
    
    
    
    
    10,428Total forecasted production - 2006
    
    
    
    
    
    
    16,280
 - 14 -




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§
    
    In the Q305, the Company reported its disagreement with certain Myanmar tax
authorities on a commercial tax issue involving the purported imposition of an eight
percent commercial tax on all export sales. The Companys management believes that
tax provisions in the S&K Mine joint venture agreement clearly exempt the mines
copper exports from all forms of tax of a commercial nature. The imposition of such a
commercial tax, equivalent to an additional 8% royalty, would have a significant
negative impact on future cash flows and any future development plans for the S&K
Mine. The Commercial tax is being claimed retroactively to January 1, 2003, on all
copper export sales. If the Myanmar governments position on this issue prevails, the
joint ventures estimated commercial tax liability at December 2005 would total
approximately $22 million ($11.0 million net to the Company). The Company is seeking
a written legal opinion from the Attorney General of Myanmar on the applicability of
this tax and the Company has received certain assurances that the ruling may be
favorable.§
    
    The Company is also concerned about the timely approvals for the expansion of the
Letpadaung deposit. To date, the expansion of the deposit has been neither approved
nor denied by the Government of Myanmar.
  Ø
    
    Net income (loss) from discontinued operations.The Company announced the sale of the
Savage River mine operations in February 2005. The 2005 and 2004 operating results from
the mine have been reclassified as net income from discontinued operations.Income from the Savage River mine operations totalled $7.9 million in Q405, compared to
$9.5 million in Q404. Income from the Savage River mine in Q405 represents the accrual
of the pellet premium earned during the quarter on the estimated sale of 600,000 tonnes of
iron ore pellets from the Savage River mine. The high earnings in Q404 were mainly due to
a large portion of pellet
sales being settled at the spot market rates, which were much higher than the negotiated
normal annual rates.The net gain from discontinued operations reported for the quarter under U.S. GAAP exceeded
by $0.4 million the gain reported under Canadian GAAP. At the
 - 15 -




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##### 



time of sale of the Savage
River mine, the mine assets reported under Canadian GAAP exceeded the mine assets value
reported under U.S. GAAP. As a result, under Canadian GAAP, smaller profits are reported
for the remaining ten months of 2005 as proceeds recorded from the sale of the mine are
first recorded to off-set the remaining asset values prior to any revenue being recorded.
 Ø
    
    Foreign exchange gain.In Q405, the Company maintained most of its cash resources in
Canadian dollars (Cdn$). The foreign exchange gain during the quarter was mainly
attributable to the strengthening of the Canadian dollar against the U.S. dollar.
 - 16 -




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REVIEW OF OPERATIONS
 A) EXPLORATION
    a) Oyu Tolgoi Project, Mongolia
 i) Oyu Tolgoi Exploration.
 Drilling program
  Reserve estimate 
 - 17 -




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Mineral Reserves * - Southern Oyu Open pits, Oyu Tolgoi  January, 2006
 Recovered
    
    RecoveredTonnes
    
    
    
    
    
    
    
    
    
    
    
    
    
    CuEq
    
    Copper
    
    Goldof Ore
    
    NSR
    
    Copper
    
    Gold
    
    Grade
    
    (Millions
    
    (MillionsClass
    
    (Million)
    
    ($/Tonne)
    
    (%)
    
    (gpt)
    
    (%)
    
    pounds)
    
    ounces)Proven
    
    
    127
    
    
    
    15.91
    
    
    
    0.58
    
    
    
    0.93
    
    
    
    1.18
    
    
    
    1.5
    
    
    
    2.8Probable
    
    
    803
    
    
    
    7.96
    
    
    
    0.48
    
    
    
    0.27
    
    
    
    0.66
    
    
    
    7.4
    
    
    
    4.8Total
    
    
    930
    
    
    
    9.05
    
    
    
    0.50
    
    
    
    0.36
    
    
    
    0.73
    
    
    
    8.9
    
    
    
    7.6
 *
    
    Reserves estimated using metal prices of $400/oz and $1.00/pound copper and
block value of NSR cut-off grades of $3.54/tonne for Southwest Oyu and $3.39/tonne for
Central Oyu.
  Resource estimate
  - 18 -




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CuEq(1)CuEq(1)
    
    cut-offTonnes
    
    Copper
    
    Gold
    
    Grade
    
    gradeDeposit and Class
    
    (Million)
    
    (%)
    
    (gpt)
    
    (%)
    
    (%)Southern Oyu depositsMeasured
    
    
    101.6
    
    
    
    0.64
    %
    
    
    1.10
    
    
    
    1.34
    %
    
    
    0.60
    %Indicated
    
    
    465.6
    
    
    
    0.62
    %
    
    
    0.43
    
    
    
    0.89
    %
    
    
    0.60
    %Measured + Indicated
    
    
    567.2
    
    
    
    0.62
    %
    
    
    0.55
    
    
    
    0.97
    %
    
    
    0.60
    %Inferred(2)
    
    
    88.5
    
    
    
    0.47
    %
    
    
    0.41
    
    
    
    0.73
    %
    
    
    0.60
    %Hugo Dummett depositsIndicated
    
    
    581.3
    
    
    
    1.91
    %
    
    
    0.41
    
    
    
    2.17
    %
    
    
    0.60
    %Inferred
    
    
    1,162.0
    
    
    
    1.08
    %
    
    
    0.23
    
    
    
    1.24
    %
    
    
    0.60
    %Total Oyu Tolgoi ProjectMeasured
    
    
    101.6
    
    
    
    0.64
    %
    
    
    1.10
    
    
    
    1.34
    %
    
    
    0.60
    %Indicated
    
    
    1,046.9
    
    
    
    1.34
    %
    
    
    0.42
    
    
    
    1.60
    %
    
    
    0.60
    %Measured + Indicated
    
    
    1,148.5
    
    
    
    1.27
    %
    
    
    0.48
    
    
    
    1.58
    %
    
    
    0.60
    %Inferred(2)
    
    
    1,250.5
    
    
    
    1.04
    %
    
    
    0.24
    
    
    
    1.20
    %
    
    
    0.60
    %
 (1)
    
    CuEq has been calculated using assumed metal prices ($0.80/pound
for copper and $350/ounces gold); %CuEq.= % Cu + Au (gpt) x (11.25/17.64).(2)
    
    Resources classified as Inferred are separate and in addition to resources
classified as Measured or Indicated.
  CuEq(1)Tonnes
    
    Copper
    
    Gold
    
    CuEq(1)
    
    cut-offDeposit and Class
    
    (Million)
    
    (%)
    
    (gpt)
    
    Grade (%)
    
    grade (%)Ivanhoe/Entrée ShiveeTolgoi propertyInferred
    
    
    190.2
    
    
    
    1.57
    %
    
    
    0.53
    
    
    
    1.91
    %
    
    
    0.60
    %
 (1)
    
    CuEq has been calculated using assumed metal prices ($0.80/pound
for copper and $350/ounces gold); %CuEq.= % Cu + Au (gpt) x (11.25/17.64).
 ii) Oyu Tolgoi Integrated Development Plan
 Forty-year mine life 
 - 19 -




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The IDP outlines the framework for the responsible development of the mine, allowing the
Company to integrate economic progress with environmental care and social responsibility.
The mine development proposed by the IDP will be completed over a 15-year period, resulting
in an ultimate mine life expectancy of 40 years.The IDP combined reports for two major aspects of development of the Oyu Tolgoi Project.
First was a feasibility-level evaluation of an initial, large open-pit mine developed on
the near-surface Southern Oyu deposits. Second were pre-feasibility and scoping-level
evaluations of the associated infrastructure, such as power supply, and of a world-class,
underground block-cave mining operation at the Hugo Dummett deposits. Because the
information used to prepare the IDP includes different levels of study, in accordance with
CIM Standards on Mineral Resources and Reserves referred to in National Instrument 43-101,
the overall
IDP report was released as a Preliminary Assessment Report.Phase One- 70,000 tpd scenario Phase one, expected to start in mid-2008, involves
open-pit mining of the Southwest Oyu deposits. At the beginning of 2009, a concentrator is
projected to produce a gold-rich copper concentrate at a throughput rate of 70,000 tonnes
per day (tpd). After three years, following the completion of the underground block-cave
development of the Hugo North deposit, mining production from underground will begin.
Because the underground mineralization is of much higher economic value than the open-pit
mineralization, the concentrator will give priority to the underground material. After
year five, open-pit production will be curtailed and material from the Hugo North deposit
will represent the predominant source of mill feed to the concentrator.Phase Two- 140,000 tpd scenario Phase two involves the development of a block-cave
underground operation at Hugo South combined with the deepening of the open pit at
Southwest Oyu, and is expected to result in a doubling of the daily throughput for the
entire Oyu Tolgoi Project to 140,000 tpd. The decision to proceed with phase two is
expected to be made in year three and the doubling of throughput capacity, that would
result from proceeding with phase two, is expected to be reached by year seven.
Underground production from the Hugo South deposit is expected to commence in year 12, at
which time the combined underground production from the Hugo Dummett deposits is expected
to reach 140,000 tpd.Given the significant potential to expand the known resources at the Oyu Tolgoi Project,
management believes that the ultimate rate of production could far exceed the projections
presented in the IDP. Management anticipates that production from an estimated 29 year
mining life in the open pit coupled with block caving operations at Hugo North and Hugo
South could ultimately increase mill throughput into the 200,000 to 250,000 tonnes per day
range.
 - 20 -




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Valuation from IDP-Using a base copper price of $1 per pound and a base gold price of $400
per ounce, and based on interpretation of existing tax, mining and other relevant Mongolian
laws and the terms of the draft Special Stability Agreement currently being negotiated with
the Mongolian government, the Oyu Tolgoi Projects estimated net present value (NPV),
using an 8% discount rate and assuming the implementation of the phase-two scenario, is
estimated at $3.44 billion before tax  and $2.71 billion after tax. At a 10% discount
rate, the NPV is $2.40 billion before tax and $1.85 billion after tax.The IDP estimated the average recoveries over the life-of-mine at 90.4% for copper and
78.1% for gold. Assuming implementation of the phase-two scenario, the IDP also estimates
that, over the life of the project, total cash costs, after gold credits, will average
$0.40 per pound of copper.The open-pit resources used in the IDP are all in the Measured and Indicated
categories. The underground resources used in the IDP include some Inferred resources that
have not yet been sufficiently drilled to have economic considerations applied to them to
enable them to be categorized as reserves. Mineral resources that are not reserves do not
have demonstrated economic viability. Until there is additional underground drilling and
geotechnical rock characterization to upgrade the Inferred resources to Measured and
Indicated resources, the economic analysis contained in the IDP is a preliminary assessment
and there can be no certainty that the predicted results of the IDP will be realized.Mine Planning Update .The IDP was based on mineral resources as of March 2005; more
recent drilling and mine planning initiatives suggest alternative approaches to the mine
schedule that may yield higher returns and/or a lowering of risk associated with the IDP
mine plan. Studies commenced in January 2006 to update the IDP mine plan and are expected
to be completed in the latter half of 2006. The Company is considering an opportunity to
mine, earlier than previously anticipated, a high grade zone at the shallowest part of the
southern end of Hugo North deposit using a Sub-Level Cave mining method. This mining would
be carried out in parallel with the deeper development work for the block cave mine.
Access to the ore zone would be by a 1.3 kilometre drift development from Shaft #1 at an
elevation as much as 300 metres shallower than envisaged by the IDP for the
Characterization drift. This Characterization is required to prove that block caving is
a suitable method to mine the Hugo North deposit. This drifting may allow the feasibility
study for the block caving of Hugo North to be completed as much as one year earlier than
previously anticipated.Mining from this zone is targeted at a rate in excess of 15,000 tpd during the third year
of the project life and while it is envisaged to continue for a period of more than five
years until the large deep block cave begins producing, its life may be extended. This
targeted mining zone is closest to Shaft #1 and the infrastructure required for the
long-term mining at the deeper block caving operations and should not require a duplication
of infrastructure. This early mining will provide
 - 21 -




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##### 



a proving ground to train mining crews.
It will also permit Ivanhoe Mines to gather geotechnical data, undertake orebody
characterization and evaluate different drawpoint designs and layouts. This knowledge and
experience, when applied to the block cave mine, will reduce the mining/technical risks
from those associated with a caving operation without the early mining scenario. This early
mining option may offer an opportunity to increase the ore column height for the block
caving operation allowing the full height to be mined in a single lift and at higher
production tonnages. A single lift would dispense with the requirement for a second
extraction level and associated infrastructure and would result in a reduction in capital
expenditures anticipated to be incurred over the life of the mine.Additional studies will focus on mining beyond Phase 3 of the open pit and at higher mill
throughput tonnages than those indicated in the IDP. Production from
an estimated 29 year mining life in the open pit coupled with block caving operations at
Hugo North and Hugo South could ultimately increase mill throughput into the 200,000 to
250,000 tpd range.Exploration shaft Early access to the deep potential of the Hugo North deposit is
important to the financial success of the Oyu Tolgoi Projects development. In furtherance
of this objective, the construction of the headframe, hoisting plant, associated
infrastructure and pre-sinking excavation for Shaft #1, a 6.7-metre-diameter exploration
shaft, was undertaken in 2005. All surface installations for the shaft were completed by
the end of January 2006 including pre-sinking to a depth of 35 metres. As of March 10,
2006, after initial teething problems, sinking has reached a depth of approximately 100
metres. The sinking of the Shaft #1 to an originally planned depth of 1,340 metres below
surface is expected to be completed in late-2007, with underground drifting and drilling
occurring in 2007 and 2008.The sinking of Shaft #1 is being performed by the Redpath Group of North Bay, Ontario,
Canada, one of the worlds leading shaft-sinking firms. When completed, Shaft #1 will
provide access to the Hugo Dummett deposits and enable the completion of detailed
feasibility studies, further resource-delineation drilling and rock-characterization work.To maximize project value from the high-grade Hugo North deposit, the Company plans to
commence construction of a ten-metre-diameter production/service shaft (Shaft #2) as soon
as possible. Engineering and geotechnical studies for the construction of Shaft #2 were
initiated in 2005, and are ongoing. Geotechnical drilling to identify suitable ground to
locate the proposed Shaft Pillar continues and is expected to be completed in Q306.
Construction of the surface works are not expected to commence until the site investigation
is completed. Sinking of the shaft is scheduled to commence in early 2007.
 - 22 -




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##### 



Planning associated with the open pit phase of the project, covering the Southwest open pit
development and the construction of the concentrator and related infrastructures, is well
advanced. Major elements or issues yet to be finalized include interim and long-term
power, potential rail access and the completion of environmental assessments.During Q405, the consulting engineering firm, Fluor Canada Ltd. (Fluor) carried out a
strategic planning review of the IDP report, including a strategic assessment of the
concentrator facilities development. Following the completion of Fluors review, expected
in April 2006, Ivanhoe Mines and Fluor intend to negotiate a definitive agreement providing
for the management of the offshore design, procurement and onshore construction for the Oyu
Tolgoi Project.
 b)
    
    Other Mongolian copper/gold exploration projects.
 During 2005, Ivanhoe Mines continued its exploration efforts on other Mongolian prospects,
including the Kharmagtai project and the Bronze Fox district. Diamond drilling at the
Kharmagtai project tested several previously untested porphyry prospects.At the end of September 2005, the Company announced the commencement of the Falcon airborne
gravity gradiometer survey by BHP Billiton (BHPB) on an area covering approximately
35,640 square kilometres (the BHPB Joint Venture Area) of Ivanhoe Mines non-core
exploration licences in southern Mongolia. The survey is part of a joint-venture agreement
with BHPB that allows BHPB the right to earn up to a 50% interest in the BHPB Joint Venture
Area. The survey is expected to be completed in early 2006.The BHPB Joint Venture Area, which represents approximately 40% of Ivanhoe Mines land
holdings in this region, excludes all coal mineralization, as well as Ivanhoe Mines
advanced exploration and development-stage projects (the Oyu Tolgoi Project, the
Kharmagtai, Yellow Hills and Bronze Fox prospects).On July 5, 2005, Asia Gold announced a similar agreement with BHPB. The agreement,
covering approximately 3,600 square kilometres of Asia Golds mineral licences in southern
Mongolia, grants BHPB the right to earn a 50% interest by spending $2 million prior to
December 31, 2007. The expenditures include an initial commitment to conduct a Falcon
airborne gravity gradiometer survey before December 31, 2006. Following the initial
earn-in, BHPB has a second option to earn an additional 20% interest (for a total interest
of 70%) by funding a feasibility study on one exploration target up to a maximum value of
$45 million. BHPB also agreed to purchase an equity interest in Asia Gold by acquiring
approximately 1.15 million units valued at $1 million, each unit consisting of one common
share and a two-year warrant to purchase one half common share of Asia Gold at Cdn$1.395
per share.
 - 23 -




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##### 



In Q405 and in early 2006, Asia Gold announced the results of several projects all located
in Southern Mongolia. In 2005, Asia Gold completed exploration activities on several
projects including the Naran Bulag project and the Tsakhir licences located north of the
Konghor project.c)
    
    Mongolian coal projects.Nariin Sukhait Coal Project The Nariin Sukhait Coal Project, covering an area of 3,240
square kilometres, is located 40 kilometres north of the Mongolia-China border and the
shipping terminus for a newly constructed 450-kilometre Chinese rail line. A railway line
to the Nariin Sukhait Coal Project from the Mongolia-China border is being evaluated.
Engineering mine plans and a detailed Environmental Impact Assessment are being completed
in preparation for the application for a mining licence.On February 14, 2006, the Company announced the results of an updated resource estimate for
the Nariin Sukhait Coal Project. The estimate was prepared by Norwest Corporation
(Norwest), an independent consulting firm and included results from drilling up to the
end of October 2005. Total coal resources contained in two separate fields, the South-East
field and the West field, is estimated at 124.0 million tonnes of Measured plus Indicated
resources (79.5 million tonnes of Measured resources and 44.5 million tonnes of Indicated
resources) and an additional Inferred resource of approximately 33.8 million tonnes.
 In Place ResourcesASTM
    
    
    
    (Tonnes Million)Category
    
    Fields
    
    Measured
    
    Indicated
    
    InferredHigh Volatile
    
    South-East Field
    
    
    38.8
    
    
    
    13.8
    
    
    
    12.4Bituminous
    
    West Field
    
    
    40.7
    
    
    
    30.7
    
    
    
    21.4Total
    
    
    124.0
    
    
    
    
    
    
    
    33.8
 The results, which were delineated by a total of 212 drill holes, are considered to be
of immediate interest as surface open-pit deposits that are amenable to near-term
production. Ten coal seams have been identified with an estimated combined total thickness
for the coal-bearing sequence of approximately 1,370 metres and a coal thickness ranging
from 68 metres to 250 metres. To date, exploration efforts have been focused on
identifying resources in seams above, and including, the No. 5 Seam  the thickest seam
within the coal bearing sequence.Extensive laboratory testing has been performed to determine the quality of the coal at
Nariin Sukhait. Proximate and thermal testing has been completed on samples obtained from
35 core holes and 45 reverse circulation drill holes,
 - 24 -




---



##### 



washability tests were completed for
samples from 26 drill holes and metallurgical tests were completed for samples from 21
drill holes. Following American Society for Testing and Materials standards (ASTM),
quality testing in both fields ranks the Nariin Sukhait coals as high-volatile bituminous,
containing volatiles ranging from 32% to 35% on a dry basis. Also, tests on some of the
No. 5 Seam in the West Field categorized the coal as high-rank, low-ash, low-sulphur coal
suitable for producing a high-volatile metallurgical blend.Ivanhoe Mines plans to complete a mining study on the Nariin Sukhait Coal Project some time
early in Q206. A potential annual throughput of 4 million tonnes of coal is currently
being evaluated by Ivanhoe Mines and its independent
consultants. Annual production is anticipated to yield thermal coal for power generation
and coal products used by the steel industry including coal used in the pulverized coal
injection process and metallurgical (coking) blends. Discussions with potential Chinese
customers interested in coal supply from Nariin Sukhait are ongoing.Tsagaan Tolgoi Coal Project The Project, discovered by Ivanhoe Mines, is located
approximately 100 kilometres from the Oyu Tolgoi Project. Significant coal thicknesses
were encountered along a strike length of six kilometres as a result of deep trenching
efforts and a drilling program which included a total of 46 drill holes. However, due to
the wide spacing of the drill holes, an estimate of coal resources cannot be made at this
time. Further drilling will be completed in 2006 with the objective of delineating
sufficient thermal coal resources to support the preparation of an initial study on the
development a major, long-life, coal-fired generating capacity to supply electricity to the
Oyu Tolgoi Project and the residents of the sparsely populated southern part of Mongolia.d)
    
    Other
 i) China: Jinshan Gold Mines Inc (Jinshan).
   
 - 25 -




---



##### 



ii) Australia: Cloncurry
  Swan Prospect 
 Placer farm-in 
 Amethyst Castle copper, gold and uranium Project -
 - 26 -




---



##### 



iii) Bulgaria:
  iv) Kazakhstan: Bakyrchik Project.
   Years ended December 31,2005
    
    
    2004
    
    
    2003Total exploration
expenditures-($000)
    
    
    127,165
    
    
    
    98,174
    
    
    
    67,989Percentage allocationMongolia
    
    
    92
    %
    
    
    86
    %
    
    
    87
    %China
    
    
    4
    %
    
    
    4
    %
    
    
    5
    %Myanmar
    
    
    1
    %
    
    
    2
    %
    
    
    4
    %Bulgaria
    
    
    2
    %
    
    
    1
    %
    
    
    0
    %Australia
    
    
    1
    %
    
    
    5
    %
    
    
    0
    %Korea
    
    
    0
    %
    
    
    0
    %
    
    
    3
    %Other
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %100
    %
    
    
    100
    %
    
    
    100
    %
 - 27 -




---



##### 



B) INVESTMENT IN JOINT VENTURE
  Year ended December 31,Total Operation
    

Companys 50% net share% Increase
    
    
    
    
    
    
    
    
    
    % Increase2005
    
    2004
    
    (decrease)
    
    2005
    
    2004
    
    (decrease)Total tonnes moved (1)
    
    Tonnes (000s)
    
    
    13,527
    
    
    
    10,675
    
    
    
    27
    %Tonnes of ore to heap
    
    Tonnes (000s)
    
    
    9,544
    
    
    
    7,151
    
    
    
    33
    %Ore grade
    
    CuCN %
    
    
    0.48
    %
    
    
    0.65
    %
    
    
    (26
    %)Strip ratio
    
    Waste/Ore
    
    
    0.43
    
    
    
    0.45
    
    
    
    (4
    %)Cathode production
    
    Tonnes
    
    
    34,478
    
    
    
    31,756
    
    
    
    9
    %
    
    
    17,239
    
    
    
    15,878
    
    
    
    9
    %Tonnage sold
    
    Tonnes
    
    
    34,969
    
    
    
    31,460
    
    
    
    11
    %
    
    
    17,485
    
    
    
    15,730
    
    
    
    11
    %Average sale price received
    
    $/pound
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1.83
    
    
    $
    1.33
    
    
    
    38
    %Sales
    
    $(000)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,801
    
    
    
    44,091
    
    
    
    49
    %Cost of operations
    
    $(000)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,768
    
    
    
    12,137
    
    
    
    46
    %Operating profit
    
    $(000)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,376
    
    
    
    26,777
    
    
    
    58
    %Cost of operations
    
    US$/pound
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.46
    
    
    $
    0.35
    
    
    
    32
    %
 
 (1)
    
    Includes ore and waste material
   Investment in joint venture
  Ø
    
    Economic sanctions against Myanmar imposed by the United States have started to
seriously impact the mines ability to function in a normal way. In Q405, both the
mines insurance broker and the off-shore banking institution terminated their
relationship with the mine on account of these sanctions. Although the mine had
 - 28 -




---



##### 



in excess
of $40 million in off-shore bank accounts at December 31, 2005, the operations of the mine
were shut-down in Q106. The mine is expected to resume operations shortly when
additional fuel, required to operate mining equipment and chemicals, required for the
leaching and electrowinning process, become available. The management of the S&K Mine has
established a new banking relationship with an off-shore institution.Ø
    
    The mine has yet not been able to obtain from the Myanmar authorities the necessary
import permits for its previously ordered mining equipment. The equipment is currently
off-shore, awaiting approval for delivery. The Company does not know if or when import
permits will ever be granted for the importation of the necessary mining equipment. The
Company has received recent oral assurances from its joint venture partner that the
necessary documentation is nearing finalization. The increase in mining capacity is
crucial to allow waste stripping for the Sabetaung deposit and ultimately for the future
development of the Kysingtaung and Letpadaung deposits. Without a substantial increase in
mining capacity, these two deposits cannot be economically developed. The drop in copper
grades at the Sabetaung pit, combined with the mines potential inability to obtain the
necessary importing permits resulted in significant decreases in copper cathode production
in Q405. Significant decreases in copper production are now forecasted for 2006 and
subsequent years.
 Copper cathodeproduction(tonnes)Q105
    
    
    
    
    
    
    9,603Q205
    
    
    
    
    
    
    9,118Q305
    
    
    
    
    
    
    8,497Q405
    
    
    
    
    
    
    7,260Total 2005
    
    
    
    
    
    
    34,478Actual  Jan06
    
    
    
    
    
    
    2,134EstimatedFeb to March06
    
    
    
    
    
    
    3,718Apr to Dec06
    
    
    
    
    
    
    10,428Total 2006
    
    
    
    
    
    
    16,280
 Ø
    
    In the Q305, the Company reported its disagreement with certain Myanmar tax
authorities on a commercial tax issue involving the purported imposition of an eight
percent commercial tax on all export sales. The Companys management
believes that tax provisions in the S&K Mine joint venture agreement clearly exempt the
mines copper exports from all forms of tax of a commercial nature. The imposition of such
a commercial tax, equivalent to an additional 8% royalty, would have a significant negative
impact on future cash flows and any future development plans for the S&K Mine. The
commercial tax is being claimed
 - 29 -




---



##### 



retroactively to January 1, 2003, on all copper export
sales. If the Myanmar governments position on this issue prevails, the joint ventures
estimated commercial tax liability at December 2005 would total approximately $22 million
($11 million net to the Company). The Company is seeking a written legal opinion from the
Attorney General of Myanmar on the applicability of this tax and the Company has received
certain assurances that the ruling may be favorable.
 Ø
    
    The Company is also concerned about the timely approvals for the expansion of the
Letpadaung deposit. To date, the expansion of the deposit has been neither approved nor
denied by the Government of Myanmar.In accordance with its accounting policies, as described in note 2 of its audited
consolidated financial statements, the Company reviews the carrying value of its assets
whenever events or changes in circumstances indicate that the carrying value of an asset
might have been impaired. The Company intends to engage in discussions with its joint
venture partner and with the relevant Myanmar government authorities with a view to
satisfactorily resolving these issues. If these issues cannot be satisfactorily resolved
in a timely manner, the Company may, as part of a future review of the carrying value of
its assets, be required to reflect a significant impairment of, and reduce on its financial
statements, the carrying value of its investment in the S&K Mine.
 C) DISCONTINUED OPERATIONS
 Savage River Mine, Tasmania
  D) ADMINISTRATIVE AND OTHER
 General and administrative .
 - 30 -




---



##### 



Foreign exchange gains
 Share of loss on significantly influenced investee .
 Share Capital -
 Share purchase
    
    
    
    
    
    
    
    Total number ofwarrants outstanding
    
    Maturity date
    
    Exercise price
    
    shares to be issued5.76 million(1)(2)
    
    February 15, 2007
    
    $8.68 per share
    
    0.576 million
 (1)
    
    Each 10 warrants entitle the holder to acquire one common share.(2)
    
    In 2006, the expiry date was extended from February, 2006 to February, 2007.
  - 31 -




---



##### 



CASH RESOURCES AND LIQUIDITY
  Operating activities .
 Investing activities from continued operations . ,
 Financing activities .
    - 32 -




---



##### 



- 33 -




---



##### 



OFF BALANCE SHEET ARRANGEMENTS and CONTRACTUAL OBLIGATIONS
  CONTRACTUAL OBLIGATIONS
  Payments due in years ending December 31,2006
    
    2007
    
    2005
    
    2009
    
    2010
    
    2011+
    
    TotalOperating leases(1)
    
    
    2,146
    
    
    
    1,115
    
    
    
    881
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,142Purchase obligations (1)
    
    
    14,199
    
    
    
    1,291
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,492Other long-term obligations (2)
    
    
    
    
    
    
    7,647
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,356
    
    
    
    26,00316,345
    
    
    
    10,053
    
    
    
    883
    
    
    
    
    
    
    
    
    
    
    
    18,356
    
    
    
    45,637
 
 (1)
    
    These amounts mainly represent various long-term contracts that include
commitments for future operating payments under contracts for drilling, engineering,
equipment purchases, rentals and other arrangements.(2)
    
    Other long-term obligations mainly consist of asset retirement obligations.
 - 34 -




---



##### 



CRITICAL ACCOUNTING ESTIMATES
   Ø
    
    Carrying Values of Property, Plant and Equipment;
 Ø
    
    Depletion and Depreciation of Property, Plant and Equipment;
 Ø
    
    Accounting for Stripping Costs
 Ø
    
    Asset Retirement Obligations;
 Ø
    
    Income Taxes.
 Carrying values of Property, Plant and Equipment
   Depletion and Depreciation of Property, Plant and Equipment
   - 35 -




---



##### 



Accounting for Stripping Costs
  Asset Retirement Obligations
  - 36 -




---



##### 



Income Taxes
    - 37 -




---



##### 



Recent Accounting Pronouncements
     - 38 -




---



##### 



IVANHOE
MINES LTD.
 
       n
    
    Permits fair value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation;n
    
    Clarifies which interest-only strips and principal-only strips are not subject to the
requirements of Statement 133;




---



##### 



IVANHOE
MINES LTD.
 
  n
    
    Establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation;n
    
    Clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives; andn
    
    Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.




---



##### 



IVANHOE
MINES LTD.
 
  RISKS AND UNCERTAINTIES
  There can be no assurance that Ivanhoe Mines will be capable of raising the additional funding that
it needs to carry out its development and exploration objectives.
  Ivanhoe Mines may be unsuccessful in obtaining the taxation and fiscal concessions and legal and
investor protection assurances it is seeking from the Government of Mongolia in its negotiations
for a stability agreement in respect of the Oyu Tolgoi Project.
  Future amendments to Mongolian laws could adversely affect Ivanhoe Mines mining rights in the Oyu
Tolgoi Project or make it more difficult or expensive to develop the project and carry out mining.




---



##### 



IVANHOE
MINES LTD.
 
   Ivanhoe Mines ability to carry on business in Mongolia is subject to country risk.




---



##### 



IVANHOE
MINES LTD.
 
   Ivanhoe Mines business in Mongolia may be harmed if the country fails to complete its transition
from state socialism and a planned economy to political democracy and a free market economy.
  Ivanhoe Mines may be unable to enforce its legal rights in certain circumstances.
  The mineral resources identified on the Oyu Tolgoi Project do not have demonstrated economic
viability and the feasibility of mining has not been established.




---



##### 



IVANHOE MINES LTD.
 
   Lack of infrastructure in proximity to the Oyu Tolgoi Project could adversely affect mining
feasibility.
  Ivanhoe Mines may experience difficulties with its joint venture partners.
  Changes in, or more aggressive enforcement of, laws and regulations could adversely impact Ivanhoe
Mines business.




---



##### 



IVANHOE
MINES LTD.
 
   Ivanhoe Mines is subject to substantial environmental and other regulatory requirements and such
regulations are becoming more stringent. Non-compliance with such regulations, either through
current or future operations or a pre-existing condition could materially adversely affect Ivanhoe
Mines.




---



##### 



IVANHOE
MINES LTD.
 
  Previous mining operations may have caused environmental damage at Ivanhoe Mines mining sites, and
if Ivanhoe Mines cannot prove that such damage was caused by such prior operators, its indemnities
and exemptions from liability may not be effective.
  Mining projects are sensitive to the volatility of metal prices.
   Illegal mining is prevalent in Mongolia and Myanmar.




---



##### 



IVANHOE
MINES LTD.
 
   There can be no assurance that the interest held by Ivanhoe Mines in its exploration, development
and mining properties is free from defects or that material contractual arrangements between
Ivanhoe Mines and entities owned or controlled by foreign governments will not be unilaterally
altered or revoked.
  Economic sanctions imposed by the United States, the European Union and Canada against Myanmar may
adversely affect the Monywa Copper Project.
  The proceeds from the sale of the Savage River Project are dependent on iron ore prices and the
remaining supply of ore at the Savage River Project.




---



##### 



IVANHOE
MINES LTD.
 
   Competition for new mining properties by larger, more established companies may prevent Ivanhoe
Mines from acquiring interests in additional properties or mining operations.
  Ivanhoe Mines has a limited operating history, and there is no assurance that it will be capable of
consistently producing positive cash flows.
  A substantial portion of Ivanhoe Mines operations involve exploration and development and there is
no guarantee that any such activity will result in commercial production of mineral deposits.




---



##### 



IVANHOE
MINES LTD.
 
   The Company does not maintain insurance over certain of its business operations.
  Mining operations are subject to numerous hazards that could have a material adverse effect on the
financial position of Ivanhoe Mines.
  Ivanhoe Mines is exposed to risks of changing political stability and government regulation in the
countries in which it operates.




---



##### 



IVANHOE
MINES LTD.
 
    Ivanhoe Mines prospects depend on its ability to attract and retain key personnel.
  Certain directors of Ivanhoe Mines are directors or officers of, or have significant shareholdings,
in other mineral resource companies and there is the potential that such directors will encounter
conflicts of interest with Ivanhoe Mines.




---



##### 



IVANHOE MINES LTD.




---



##### 



IVANHOE
MINES LTD.
 
  RELATED-PARTY TRANSACTIONS
    R. M.FriedlandsOwnershipCompany Name
    
    InterestIvanhoe Energy Inc.
    
    
    21.11
    %Ivanhoe Capital Corporation
    
    
    100.00
    %Ivanhoe Nickel & Platinum Ltd.
    
    
    50.06
    %
   $(000)Years ended December 31,2005
    
    
    2004Exploration
    
    
    1,122
    
    
    
    2,198Legal
    
    
    823
    
    
    
    468Office and administrative
    
    
    2,216
    
    
    
    2,057Salaries and benefits
    
    
    2,904
    
    
    
    2,239Travel (including aircraft rental)
    
    
    3,421
    
    
    
    3,00110,486
    
    
    
    9,963




---



##### 



IVANHOE
MINES LTD.
 
   QUALIFIED PERSONS
  Property
    
    Qualified Person
    
    Relationship to CompanyOyu Tolgoi Project
    
    Charles P.N. Forster
    
    EmployeeNariin Sukhait Project
    
    Steven Kerr (Norwest Corporation)
    
    Independent consultant
 OVERSIGHT ROLE OF THE AUDIT COMMITTEE




---



##### 



IVANHOE
MINES LTD.
 
  MANAGEMENTS REPORT TO THE SHAREHOLDERS
     By:

/s/
R. M. Friedland
    By:

/s/ P. MeredithR. M. FRIEDLAND
    
    P. MEREDITHChairman
    
    Chief Financial Officer
   - 54 -