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Deloitte & Touche LLP2800 - 1055 Dunsmuir Street4 Bentall CentreP.O. Box 49279Vancouver BC V7X 1P4CanadaTel: 604-669-4466Fax: 604-685-0395www.deloitte.ca
  
    Internal Control  Integrated
Framework




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Deloitte & Touche LLP2800 - 1055 Dunsmuir Street4 Bentall CentreP.O. Box 49279Vancouver BC V7X 1P4CanadaTel: 604-669-4466Fax: 604-685-0395www.deloitte.ca
  
 Internal Control  Integrated Framework




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Internal Control  Integrated Framework Internal Control  Integrated Framework




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IVANHOE MINES LTD.
Consolidated Balance Sheets
(Stated in thousands of U.S. dollars)
 December 31,2006
    
    
    2005ASSETSCURRENTCash and cash equivalents
    
    $
    363,572
    
    
    $
    101,681Accounts receivable (Note 5)
    
    
    24,739
    
    
    
    33,350Inventories
    
    
    5,313
    
    
    
    3,547Prepaid expenses
    
    
    7,941
    
    
    
    6,353Other current assets (Note 6)
    
    
    286
    
    
    
    3,286TOTAL CURRENT ASSETS
    
    
    401,851
    
    
    
    148,217INVESTMENT HELD FOR SALE (Note 4)
    
    
    157,738
    
    
    
    139,874LONG-TERM INVESTMENTS (Note 7)
    
    
    36,879
    
    
    
    18,417PROPERTY, PLANT AND EQUIPMENT (Note 8)
    
    
    101,994
    
    
    
    85,706DEFERRED INCOME TAXES (Note 12)
    
    
    481
    
    
    
    171OTHER ASSETS (Note 9)
    
    
    4,216
    
    
    
    4,394TOTAL ASSETS
    
    $
    703,159
    
    
    $
    396,779LIABILITIESCURRENTAccounts payable and accrued liabilities (Note 10)
    
    $
    37,201
    
    
    $
    20,594TOTAL CURRENT LIABILITIES
    
    
    37,201
    
    
    
    20,594LOANS PAYABLE TO RELATED PARTIES (Note 11)
    
    
    5,088
    
    
    
    5,088DEFERRED INCOME TAXES (Note 12)
    
    
    660
    
    
    
    315ASSET RETIREMENT OBLIGATIONS (Note 13)
    
    
    6,353
    
    
    
    6,231TOTAL LIABILITIES
    
    
    49,302
    
    
    
    32,228MINORITY INTERESTS (Note 14)
    
    
    
    
    
    
    8,928COMMITMENTS AND CONTINGENCIES (Note 20)SHAREHOLDERS EQUITYSHARE CAPITAL (Note 15)AuthorizedUnlimited number of preferred shares without par valueUnlimited number of common shares without par valueIssued and outstanding373,463,637 (2005 - 315,900,668) common shares
    
    
    1,462,039
    
    
    
    994,442SHARE PURCHASE WARRANTS AND SHARE ISSUANCE COMMITMENT (Note 15
(b))
    
    
    23,062
    
    
    
    ADDITIONAL PAID-IN CAPITAL
    
    
    33,705
    
    
    
    25,174ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 16)
    
    
    13,233
    
    
    
    6,711DEFICIT
    
    
    (878,182
    )
    
    
    (670,704
    )TOTAL SHAREHOLDERS EQUITY
    
    
    653,857
    
    
    
    355,623TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS EQUITY
    
    $
    703,159
    
    
    $
    396,779
  /s/ J. Weatherall
    
    
    
    /s/ D. KorbinJ. Weatherall, Director
    
    
    
    D. Korbin, Director




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IVANHOE MINES LTD.  Consolidated Statements of Operations  (Stated in thousands of U.S. dollars, except for share and per share amounts)
 Year ended December 31,2006
    
    
    2005OPERATING EXPENSESExploration (Note 8 (b))
    
    $
    (212,955
    )
    
    $
    (133,286
    )General and administrative
    
    
    (28,170
    )
    
    
    (17,704
    )Accretion (Note 13)
    
    
    (458
    )
    
    
    (354
    )Depreciation
    
    
    (4,117
    )
    
    
    (2,558
    )Mining property care and maintenance
    
    
    (4,421
    )
    
    
    (3,706
    )Gain on sale of other mineral property rights
    
    
    2,724
    
    
    
    Write-down of carrying values of property, plant and equipment
    
    
    (700
    )
    
    
    (609
    )OPERATING LOSS
    
    
    (248,097
    )
    
    
    (158,217
    )OTHER INCOME (EXPENSES)Share of income from investment held for sale (Note 4)
    
    
    18,471
    
    
    
    23,036Interest income
    
    
    8,187
    
    
    
    3,421Foreign exchange gains
    
    
    398
    
    
    
    7,751Share of loss of significantly influenced investees (Note 7 (a))
    
    
    (1,648
    )
    
    
    (2,651
    )Gain on sale of long-term investments (Note 7 (b) and (f))
    
    
    2,724
    
    
    
    115Write-down of carrying value of long-term investment (Note 7 (e) and (f))
    
    
    (1,000
    )
    
    
    (1,438
    )LOSS BEFORE TAXES AND OTHER ITEMS
    
    
    (220,965
    )
    
    
    (127,983
    )Provision for income taxes (Note 12)
    
    
    (683
    )
    
    
    (433
    )Minority interests (Note 14)
    
    
    3,369
    
    
    
    2,714NET LOSS FROM CONTINUING OPERATIONS
    
    
    (218,279
    )
    
    
    (125,702
    )NET INCOME AND GAIN ON SALE FROMDISCONTINUED OPERATIONS (Note 3)
    
    
    19,622
    
    
    
    35,916NET LOSS
    
    $
    (198,657
    )
    
    $
    (89,786
    )BASIC AND DILUTED (LOSS) EARNINGS PER SHARE FROMCONTINUING OPERATIONS
    
    $
    (0.65
    )
    
    $
    (0.41
    )DISCONTINUED OPERATIONS
    
    
    0.06
    
    
    
    0.12$
    (0.59
    )
    
    $
    (0.29
    )WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000s)
    
    
    336,128
    
    
    
    305,160




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IVANHOE MINES LTD.  Consolidated Statements of Shareholders Equity
 (Stated in thousands of U.S. dollars, except for share amounts)
 Share Purchase
    
    
    
    
    
    
    AccumulatedShare Capital
    
    
    Warrants and
    
    
    Additional
    
    
    OtherNumber
    
    
    
    
    
    
    Share Issuance
    
    
    Paid-In
    
    
    Comprehensiveof Shares
    
    
    Amount
    
    
    Commitment
    
    
    Capital
    
    
    Income
    
    
    Deficit
    
    
    TotalBalances, December 31, 2004
    
    
    292,870,998
    
    
    $
    868,606
    
    
    $
    
    
    
    $
    16,283
    
    
    $
    2,879
    
    
    $
    (580,918
    )
    
    $
    306,850Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (89,786
    )
    
    
    (89,786
    )Other comprehensive income (Note 16):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,832
    
    
    
    
    
    
    
    3,832Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85,954
    )Shares issued for:Private placement, net of issue costs of $6,095
    
    
    19,750,000
    
    
    
    119,801
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,801Exercise of stock options
    
    
    3,213,172
    
    
    
    5,555
    
    
    
    
    
    
    
    (1,835
    )
    
    
    
    
    
    
    
    
    
    
    3,720Property, plant and equipment purchased (Note 18 (b))
    
    
    50,000
    
    
    
    362
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    362Share purchase plan
    
    
    16,498
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118Dilution gain on issuance of shares by a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,012
    
    
    
    
    
    
    
    
    
    
    
    3,012Stock compensation charged to operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,714
    
    
    
    
    
    
    
    
    
    
    
    7,714Balances, December 31, 2005
    
    
    315,900,668
    
    
    $
    994,442
    
    
    $
    
    
    
    $
    25,174
    
    
    $
    6,711
    
    
    $
    (670,704
    )
    
    $
    355,623Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (198,657
    )
    
    
    (198,657
    )Other comprehensive income (Note 16):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,522
    
    
    
    
    
    
    
    6,522Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (192,135
    )Shares issued for:Private placements, net of issue costs of $14,731
    
    
    55,489,883
    
    
    
    455,819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    455,819Exercise of stock options
    
    
    1,921,498
    
    
    
    10,488
    
    
    
    
    
    
    
    (3,475
    )
    
    
    
    
    
    
    
    
    
    
    7,013Bonus shares
    
    
    124,657
    
    
    
    1,097
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,097Share purchase plan
    
    
    26,931
    
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193Share purchase warrants and share issuancecommitment (Note 15 (b))
    
    
    
    
    
    
    
    
    
    
    23,062
    
    
    
    (14,240
    )
    
    
    
    
    
    
    (8,821
    )
    
    
    1Dilution gain on issuance of shares by a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,288
    
    
    
    
    
    
    
    
    
    
    
    6,288Stock compensation charged to operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,958
    
    
    
    
    
    
    
    
    
    
    
    19,958Balances, December 31, 2006
    
    
    373,463,637
    
    
    $
    1,462,039
    
    
    $
    23,062
    
    
    $
    33,705
    
    
    $
    13,233
    
    
    $
    (878,182
    )
    
    $
    653,857




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IVANHOE MINES LTD.
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
 Year ended December 31,2006
    
    
    2005OPERATING ACTIVITIESNet loss
    
    $
    (198,657
    )
    
    $
    (89,786
    )Net income and gain on sale from discontinued operations
    
    
    (19,622
    )
    
    
    (35,916
    )Items not involving use of cashStock-based compensation
    
    
    19,958
    
    
    
    7,714Accretion expense
    
    
    458
    
    
    
    354Depreciation
    
    
    4,117
    
    
    
    2,558Gain on sale of other mineral property rights
    
    
    (2,724
    )
    
    
    Write-down of carrying values of property, plant and equipment
    
    
    700
    
    
    
    609Share of income from investment held for sale, net of cash distribution
    
    
    (18,471
    )
    
    
    (13,036
    )Unrealized foreign exchange gains
    
    
    108
    
    
    
    (7,691
    )Share of loss of significantly influenced investees
    
    
    1,648
    
    
    
    2,651Gain on sale of long-term investments
    
    
    (2,724
    )
    
    
    (115
    )Write-down of carrying value of long-term investments
    
    
    1,000
    
    
    
    1,438Deferred income taxes
    
    
    13
    
    
    
    (15
    )Minority interests
    
    
    (3,369
    )
    
    
    (2,714
    )Bonus shares
    
    
    1,097
    
    
    
    Net change in non-cash operating working capital items (Note 18 (a))
    
    
    5,789
    
    
    
    (1,756
    )Cash used in operating activities of continuing operations
    
    
    (210,679
    )
    
    
    (135,705
    )Cash provided by operating activities of discontinued operations
    
    
    
    
    
    
    2,592Cash used in operating activities
    
    
    (210,679
    )
    
    
    (133,113
    )INVESTING ACTIVITIESProceeds from sale of discontinued operations
    
    
    34,674
    
    
    
    15,000Purchase of long-term investments
    
    
    (2,452
    )
    
    
    (6,310
    )Purchase of subsidiary, net of cash acquired of $15,414
    
    
    
    
    
    
    12,022Proceeds from sale of other mineral property rights
    
    
    2,724
    
    
    
    Proceeds from sale of long-term investments
    
    
    1,777
    
    
    
    4,539Cash reduction on commencement of equity accounting (Note 7 (a))
    
    
    (4,202
    )
    
    
    Expenditures on property, plant and equipment
    
    
    (34,253
    )
    
    
    (32,180
    )Proceeds from (expenditures on) other assets
    
    
    222
    
    
    
    (794
    )Other
    
    
    494
    
    
    
    (2,007
    )Cash used in investing activities of continuing operations
    
    
    (1,016
    )
    
    
    (9,730
    )Cash used in investing activities of discontinued operations
    
    
    
    
    
    
    (502
    )Cash used in investing activities
    
    
    (1,016
    )
    
    
    (10,232
    )FINANCING ACTIVITIESIssue of share capital
    
    
    463,025
    
    
    
    123,639Minority interests investment in subsidiaries
    
    
    10,564
    
    
    
    1,104Cash provided by financing activities of continuing operations
    
    
    473,589
    
    
    
    124,743Cash used in financing activities of discontinued operations
    
    
    
    
    
    
    (37
    )Cash provided by financing activities
    
    
    473,589
    
    
    
    124,706EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (3
    )
    
    
    7,842NET CASH INFLOW
    
    
    261,891
    
    
    
    (10,797
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    101,681
    
    
    
    112,478CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    363,572
    
    
    $
    101,681CASH AND CASH EQUIVALENTS IS COMPRISED OF:Cash on hand and demand deposits
    
    $
    32,179
    
    
    $
    33,240Short-term money market instruments
    
    
    331,393
    
    
    
    68,441$
    363,572
    
    
    $
    101,681




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IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 1.
    
    NATURE OF OPERATIONSIvanhoe Mines Ltd. (the Company), together with its subsidiaries and joint venture
(collectively referred to as Ivanhoe Mines), is an international mineral exploration and
development company holding interests in and conducting operations on mineral resource
properties principally located in Southeast and Central Asia and Australia.2.
    
    SIGNIFICANT ACCOUNTING POLICIESThese consolidated financial statements have been prepared in accordance with United States
of America generally accepted accounting principles (U.S. GAAP). In the case of the
Company, U.S. GAAP differs in certain respects from accounting principles generally accepted
in Canada (Canadian GAAP) as explained in Note 22. The significant accounting policies
used in these consolidated financial statements are as follows:
 (a)
    
    Principles of consolidationThese consolidated financial statements include the accounts of the Company and all of
its subsidiaries. The principal subsidiaries of the Company are Ivanhoe Mines Mongolia
Inc. (B.V.I.), Ivanhoe Mines China (B.V.I.), Ivanhoe Cloncurry Mines Pty Limited
(Australia), and their respective subsidiaries, and Bakyrchik Mining Venture
(Kazakhstan) (70% owned) (BMV).Jinshan Gold Mines Inc. (B.C., Canada) (Jinshan) became a subsidiary of the Company
in December 2005 and ceased being a subsidiary in August 2006. From September 1, 2006
it has been accounted for as an equity investment (Note 7 (a)). At December 31, 2006,
Ivanhoe Mines owns 46% of Jinshan.Ivanhoe Mines investment in Asia Gold Corp. (Asia Gold) (B.C., Canada) (45% owned)
remains consolidated at December 2006 due to Ivanhoe Mines having control over the
operating, financing and strategic decisions of Asia Gold.Ivanhoe Mines investment in Myanmar Ivanhoe Copper Company Limited (JVCo) (Myanmar)
(50% owned), which is subject to joint control, is accounted for using the equity
method (Note 4).All intercompany transactions and balances have been eliminated, where appropriate.Variable Interest Entities (VIEs), which include, but are not limited to, special
purpose entities, trusts, partnerships, and other legal structures, as defined by
Financial Accounting Standards Board (FASB) Interpretation No. 46 (Revised 2003)
(FIN 46R) Consolidation of Variable Interest Entities  an Interpretation of ARB No.
51, are entities in which equity investors do not have the characteristics of a
controlling financial interest or there is not sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support.
VIEs are subject to consolidation by the primary beneficiary who will absorb the
majority of the entities expected losses and/or expected residual returns.




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IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 2.
    
    SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (b)
    
    Measurement uncertaintiesGenerally accepted accounting principles require management to make assumptions and
estimates that affect the reported amounts and other disclosures in these consolidated
financial statements. Actual results may differ from those estimates.Significant estimates used in the preparation of these consolidated financial
statements include, among other things, the recoverability of accounts receivable and
investments, the proven and probable ore reserves, the estimated recoverable tonnes of
ore from each mine area, the estimated net realizable value of inventories, the
provision for income taxes and composition of deferred income tax assets and deferred
income tax liabilities, the expected economic lives of and the estimated future
operating results and net cash flows from property, plant and equipment, stock-based
compensation, estimated fair value of share purchase warrants, estimated fair value of
share issuance commitment, and the anticipated costs and timing of asset retirement
obligations.(c)
    
    Foreign currenciesThe Company considers the U.S. dollar to be its functional currency as it is the
currency of the primary economic environment in which the Company and its subsidiaries
operate. Accordingly, monetary assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the exchange rate in effect at the
balance sheet date and non-monetary assets and liabilities are translated at the
exchange rates in effect at the time of acquisition or issue. Revenues and expenses are
translated at rates approximating the exchange rates in effect at the time of the
transactions. All exchange gains and losses are included in operations.(d)
    
    Cash and cash equivalentsCash and cash equivalents include short-term money market instruments with terms to
maturity, at the date of acquisition, not exceeding 90 days.(e)
    
    InventoriesMine stores and supplies are valued at the lower of the weighted average cost, less
allowances for obsolescence, and replacement cost.




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IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 2.
    
    SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (f)
    
    Long-term investmentsLong-term investments in companies in which Ivanhoe Mines has voting interests of 20%
to 50%, or where Ivanhoe Mines has the ability to exercise significant influence, are
accounted for using the equity method. Under this method, Ivanhoe Mines share of the
investees earnings and losses is included in operations and its investments therein
are adjusted by a like amount. Dividends received are credited to the investment
accounts.The other long-term investments are classified as available-for-sale investments.
Unrealized gains and losses on these investments are recorded in accumulated other
comprehensive income as a separate component of shareholders equity, unless the
declines in market value are judged to be other than temporary, in which case the
losses are recognized in income in the period. Realized gains and losses from the sale
of these investments are included in income in the period.(g)
    
    Exploration and developmentAll direct costs related to the acquisition of mineral property interests are
capitalized in the period incurred.Generally, exploration costs are charged to operations in the period incurred until
such time as it has been determined that a property has economically recoverable
reserves, in which case subsequent exploration costs and the costs incurred to develop
a property are capitalized. Exploration costs include value-added taxes incurred in
foreign jurisdictions when recoverability of those taxes is uncertain.Certain costs incurred constructing surface assets for an exploration shaft were
capitalized (Note 8). These surface assets included the shaft head frame, control
room, hoisting equipment and ancillary facilities. The Company determined that these
costs met the definition of an asset and that they were recoverable through salvage
value or transfer of the assets to other locations. These costs were tested for
impairment using estimated future cash flows based on reserves and resources beyond
proven and probable reserves, in accordance with accounting policy Note 2(h) for
property, plant and equipment.




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IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 2.
    
    SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (h)
    
    Property, plant and equipmentProperty, plant and equipment are carried at cost (including development and
preproduction costs, capitalized interest, other financing costs and all direct
administrative support costs incurred during the construction period, net of cost
recoveries and incidental revenues), less accumulated depletion and depreciation
including write-downs. Following the construction period, interest, other financing
costs and administrative costs are expensed as incurred.On the commencement of commercial production, depletion of each mining property is
provided on the unit-of-production basis, using estimated proven and probable reserves
as the depletion basis.Property, plant and equipment are depreciated, following the commencement of
commercial production, over their expected economic lives using either the
unit-of-production method or the straight-line method (over one to twenty years).Capital works in progress are not depreciated until the capital asset has been
put into operation.Ivanhoe Mines reviews the carrying values of its property, plant and equipment
whenever events or changes in circumstances indicate that their carrying values may
not be recoverable. An impairment is considered to exist if total estimated future
cash flows, or probability-weighted cash flows on an undiscounted basis, are less than
the carrying value of the assets. An impairment loss is measured and recorded based
on discounted estimated future cash flows associated with values beyond proven and
probable reserves and resources. In estimating future cash flows, assets are grouped
at the lowest level for which there is identifiable future cash flows that are largely
independent of cash flows from other asset groups. Generally, in estimating future
cash flows, all assets are grouped at a particular mine for which there is
identifiable cash flows.




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##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 2.
    
    SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (i)
    
    Stripping costsStripping costs incurred during the production phase of a mine are variable production
costs that are included in the costs of inventory produced during the period that the
stripping costs are incurred.(j)
    
    Asset retirement obligationsIvanhoe Mines recognizes liabilities for statutory, contractual or legal obligations
associated with the retirement of property, plant and equipment, when those obligations
result from the acquisition, construction, development or normal operation of the
assets. Initially, a liability for an asset retirement obligation is recognized at its
fair value in the period in which it is incurred. Upon initial recognition of the
liability, the corresponding asset retirement cost is added to the carrying amount of
that asset and the cost is amortized as an expense over the economic life of the
related asset. Following the initial recognition of the asset retirement obligation,
the carrying amount of the liability is increased for the passage of time and adjusted
for changes to the amount or timing of the underlying cash flows needed to settle the
obligation.(k)
    
    Revenue recognitionRevenue at JVCo (Note 4) from the sale of copper is recognized, net of related
royalties and sales commissions, when: (i) persuasive evidence of an arrangement
exists; (ii) the risks and rewards of ownership pass to the purchaser including
delivery of the product; (iii) the selling price is fixed or determinable; and (iv)
collectibility is reasonably assured. Revenue from copper cathode includes
provisional pricing arrangements accounted for as embedded derivative instruments under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended.JVCo sells its copper cathode with pricing based on the averaged London Metal Exchange
Grade  A Copper Cash Settlement Price during the second calendar month following the
contractual month of shipment. Revenues are recorded under these contracts at the
time title passes to the buyer based on the forward price for the expected settlement
period. These contracts provide for a provisional payment based upon provisional assays
and the previous months average quoted copper price. JVCos provisionally priced
sales contain an embedded derivative that, because it is closely related to the
commodity sale, is not required to be accounted for separately from the host contract.
At December 31, 2006 and 2005, JVCo had accrued a loss of $594,000 and a gain of
$320,000, respectively, in accounts receivable and revenue in relation to the embedded
derivative.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 2.
    
    SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (l)
    
    Stock-based compensationThe Company has an Employees and Directors Equity Incentive Plan which is disclosed
in Note 15. On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
Share-Based Payment, on a modified prospective basis. Prior to January 1, 2006, the
Company recorded compensation costs using the fair value based method in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation. The adoption of SFAS No.
123(R) did not have an impact on the Companys consolidated financial position and
results of operations (Note 15). The fair value of stock options at the date of grant
is amortized to operations, with an offsetting credit to additional paid-in capital, on
a straight-line basis over the vesting period. If and when the stock options are
ultimately exercised, the applicable amounts of additional paid-in capital are
transferred to share capital.(m)
    
    Deferred income taxesThe Company computes income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. SFAS 109 requires that the provision for deferred income taxes be based
on the liability method. Deferred taxes arise from the recognition of the tax
consequences of temporary differences by applying statutory tax rates applicable to
future years to differences between the financial statements carrying amounts and the
tax bases of certain assets and liabilities. The Company records a valuation allowance
against any portion of those deferred income tax assets that management believes will,
more likely than not, fail to be realized.(n)
    
    Loss per shareThe Company follows SFAS No. 128, Earnings Per Share, which requires the presentation
of basic and diluted earnings per share. The basic loss per share is computed by
dividing the net loss attributable to common stock by the weighted average number of
common shares outstanding during the year. All stock options and share purchase
warrants outstanding at each period end have been excluded from the weighted average
share calculation. The effect of potentially dilutive stock options and share purchase
warrants was antidilutive in years ending December 31, 2006 and 2005.Details of potentially dilutive shares excluded from the loss per share calculation due
to antidilution:
 December 31,2006
    
    
    2005Options
    
    
    13,644,434
    
    
    
    7,416,700Share purchase warrants
    
    
    92,629,044
    
    
    
    576,000Total potentially dilutive shares
    
    
    106,273,478
    
    
    
    7,992,700




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 2.
    
    SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (o)
    
    Segmented reportingThe Company operates in a single reportable segment, being exploration and development
of mineral properties.(p)
    
    Comparative figuresCertain of the comparative figures have been reclassified to conform with the
presentation as at and for the year ended December 31, 2006. In particular, $6,121,000
of stock-based compensation charged to operations has been reclassified from general
and administrative expenses to exploration expenses.(q)
    
    Recent accounting pronouncementsIn February 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial
Instrumentsan amendment of FASB Statements No. 133 and 140 (SFAS 155). This
Statement amends FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, and FASB Statement No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. SFAS 155 resolves issues
addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133
to Beneficial Interests in Securitized Financial Assets. This Statement will be
effective for financial instruments acquired or issued by the Company after the
beginning of its 2007 fiscal year. The Company expects that the adoption of this
Statement will not have a material effect on its financial condition or results of
operations.In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156,
Accounting for Servicing of Financial Assets  an amendment of FASB Statement No. 140
(SFAS 156). This Statement provides guidance addressing the recognition and
measurement of separately recognized servicing assets and liabilities, common with
mortgage securitization activities, and provides an approach to simplify efforts to
obtain hedge accounting treatment. SFAS 156 is effective after the beginning of an
entitys fiscal year that begins after September 15, 2006. The Company expects that the
adoption of this Statement will have no impact on its financial condition or results of
operations.In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation clarifies the recognition threshold and measurement of a tax position
taken or expected to be taken on a tax return, and requires expanded disclosure with
respect to the uncertainty in income taxes. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosures, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company expects that the adoption of FIN 48 will not have a
material effect on its financial condition or results of operations.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 2.
    
    SIGNIFICANT ACCOUNTING POLICIES (Continued)
 (q)
    
    Recent accounting pronouncements (Continued)In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157). This Statement defines fair value, establishes
guidelines for measuring fair value and expands disclosures regarding fair value
measurements. SFAS 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Company expects that adoption of SFAS 157 will not have a material impact on
its financial condition or results of operations.In September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (SAB 108). SAB 108 provides guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. SAB 108 permits companies to record the cumulative
effect of initially applying this approach in the first fiscal year ending after
November 15, 2006 by recording necessary correcting adjustments to the carrying values
of assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings. Adoption of SAB 108
did not have a material impact on the Companys financial condition and results of
operations.In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities  including an
amendment of FASB Statement No. 115 (SFAS 159) which permits entities to choose to
measure many financial instruments and certain other items at fair value. This
statement is effective for fiscal periods beginning after November 15, 2007. The
Company is currently evaluating the impact, if any, that adoption of SFAS 159 will have
on its financial condition or results of operations.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 3.
    
    DISCONTINUED OPERATIONSIn February 2005, the Company disposed of the Savage River Iron Ore Project (the Project).Ivanhoe Mines sold the Project for two initial payments totalling $21.5 million, plus a
series of contingent, annual payments that commenced on March 31, 2006. The annual payments
are based on annual iron ore pellet tonnes sold and an escalating price formula based on the
prevailing annual Nibrasco/JSM pellet price.To date, Ivanhoe Mines has received $49.7 million in proceeds from the sale of the Project.
The first initial payment of $15.0 million was received in 2005 and the second initial
payment of $6.5 million was received in January 2006. In March 2006, Ivanhoe Mines received
its first contingent annual payment of $28.0 million with an additional $0.2 million
adjustment received in May 2006. This $28.2 million payment included $7.9 million in
contingent income which was recognized in the first quarter of 2006 for tonnes sold during
the quarter.At December 31, 2006, Ivanhoe Mines has accrued $11.7 million as receivable in relation to
the tonnes of iron ore sold during the nine month period ended December 31, 2006. This
amount will form part of the second contingent annual payment to be received in March 2007.The following table presents summarized financial information related to discontinued
operations:
 Years ended December 31,2006
    
    
    2005 (1)REVENUE
    
    $
    
    
    
    $
    18,031COST OF OPERATIONS
    
    
    
    
    
    
    (11,965
    )DEPRECIATION AND DEPLETION
    
    
    
    
    
    
    GENERAL AND ADMINISTRATIVE
    
    
    
    
    
    
    (195
    )OPERATING PROFIT
    
    
    
    
    
    
    5,871Interest expense
    
    
    
    
    
    
    (203
    )INCOME BEFORE THE FOLLOWING
    
    
    
    
    
    
    5,668Interest income
    
    
    
    
    
    
    16Foreign exchange losses
    
    
    
    
    
    
    (285
    )INCOME BEFORE INCOME TAXES
    
    
    
    
    
    
    5,399Recovery of income and capital taxes
    
    
    
    
    
    
    7NET INCOME
    
    
    
    
    
    
    5,406Contingent income
    
    
    19,622
    
    
    
    20,243Gain on sale of Savage River
    
    
    
    
    
    
    10,267NET INCOME AND GAIN ON SALE
FROM DISCONTINUED OPERATIONS
    
    $
    19,622
    
    
    $
    35,916
 (1)
    
    Net income for the year ended December 31, 2005, includes only two months of results for
the Project as it was sold on February 28, 2005.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 4.
    
    INVESTMENT HELD FOR SALEIvanhoe Mines has a 50% interest in JVCo, a joint venture formed to develop open-pit copper
mining operations located at Monywa in the Union of Myanmar.As part of the Rio Tinto Plc (Rio Tinto) strategic partnership that was announced in
October 2006, Ivanhoe Mines agreed to divest all of its business interests and assets in
Myanmar, including its indirect interest in the Monywa Copper Project. During February 2007
the Myanmar assets were transferred to an independent third-party trust (the Trust),
pending their sale. The sole purpose of the Trust is to sell the assets to one or more
arms-length third parties. Ivanhoe Mines only interest in the Trust is as an unsecured
creditor under a promissory note  issued by the Trust on the transfer of the Myanmar assets
 that is to be repaid once the assets are sold.In consideration for the Myanmar Assets, a company wholly-owned by the Trust (Trust
Holdco) issued a promissory note to a subsidiary of the Company. The principal amount of
the promissory note is equal to the cash proceeds to be realized upon the future sale of the
Myanmar Assets, plus 50% of any cash generated by the Monywa Copper Project that is
available for distribution to the project participants but remains undistributed at the time
of any such sale, less certain contractually specified deductions, including any fees and
expenses incurred in carrying out the sale. Ivanhoe Mines retains no ownership interest in
the Myanmar Assets, directly or indirectly, except as a creditor of Trust Holdco pursuant to
the promissory note.Trust Holdcos mandate is to engage one or more qualified third parties (a Sale Service
Provider) who will be responsible for identifying potential third-party purchasers,
soliciting expressions of interest from such potential purchasers, negotiating sale terms
and facilitating the sale of the Myanmar Assets on behalf of Trust Holdco. A Sale Service
Provider who successfully facilitates the sale of the Myanmar Assets to a purchaser will be
entitled to a fee equal to a percentage of the proceeds realized by Trust Holdco on the sale
of the Myanmar Assets.Following the sale of the Myanmar Assets, Trust Holdco will use the proceeds to pay the Sale
Service Providers fee and any other expenses or liabilities incurred in carrying out the
sale. Trust Holdco then will use the remaining proceeds of sale, less contractually
specified deductions, to repay the promissory note held by the Companys subsidiary. Upon
having retired the promissory note, the Trust will wind up Trust Holdco and distribute the
remaining assets of the Trust, which are expected to consist solely of cash, to the
designated beneficiaries of the Trust, whereupon the Trust will terminate.During 2006, JVCo continued the appeal process with the Myanmar tax authorities regarding
the imposition of an 8% commercial tax on all export sales since April 1, 2003. JVCo
believes that the tax provisions in the S&K mine joint venture agreement clearly exempt the
mines copper exports from all tax of a commercial tax nature. In September 2006, JVCo
received an unfavourable ruling from the tax authorities on its appeal and in October 2006,
JVCo filed a second appeal. Notwithstanding the appeal, JVCo has paid the disputed
commercial tax for the period April 2003 to March 2005 and has accrued in accounts payable
at December 31, 2006, an amount of $20.1 million (net $10.0 million to Ivanhoe Mines) for
the period April 1, 2005 to December 31, 2006.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 4.
    
    INVESTMENT HELD FOR SALE (Continued)During 2006, JVCo received a ruling from the Myanmar tax authorities regarding its 2003 and
2004 income tax returns. JVCo had filed its 2003 and 2004 returns on the basis that it would
receive a 50% exemption on the 30% corporate tax rate; however, this did not occur.
Notwithstanding an appeal of the corporate tax ruling, JVCo in 2006 paid the disputed
additional tax and has increased its provision for income tax for the 2005 and 2006 tax
years, which cover the period from April 1, 2004 to December 31, 2006. At December 31, 2006,
JVCos accounts payable balance included $39.3 million (net $19.6 million to Ivanhoe Mines)
in income tax for the period April 2005 to December 2006.Subsequent to year end, dividends of $30.0 million (net $15.0 million to Ivanhoe Mines) were
paid by JVCo.The following table summarizes Ivanhoe Mines investment in JVCo:
 December 31,2006
    
    
    2005Balance, at beginning of year
    
    $
    139,874
    
    
    $
    126,911Share of income from JVCo
    
    
    18,471
    
    
    
    23,036Cash distribution
    
    
    
    
    
    
    (10,000
    )Other
    
    
    (607
    )
    
    
    (73
    )Balance, at end of year
    
    $
    157,738
    
    
    $
    139,874
 The following table summarizes Ivanhoe Mines 50% share of the financial position of JVCo as
at December 31, 2006 and 2005.
 December 31,2006
    
    
    2005Cash and cash equivalents
    
    $
    57,462
    
    
    $
    22,843Accounts receivable
    
    
    104
    
    
    
    11,364Inventories
    
    
    18,465
    
    
    
    16,754Prepaid expenses
    
    
    1,574
    
    
    
    1,558Property, plant and equipment
    
    
    148,772
    
    
    
    128,405Deferred income tax assets
    
    
    1,250
    
    
    
    432Other assets
    
    
    1,313
    
    
    
    1,585Accounts payable and accrued liabilities
    
    
    (33,400
    )
    
    
    (14,784
    )Deferred income tax liabilities
    
    
    (29,487
    )
    
    
    (11,321
    )Other liabilities
    
    
    (8,315
    )
    
    
    (16,962
    )Share of Net Assets of JVCo
    
    $
    157,738
    
    
    $
    139,874




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 4.
    
    INVESTMENT HELD FOR SALE (Continued)The following table summarizes Ivanhoe Mines 50% share of the results of operations of JVCo
for the years ending December 31, 2006 and 2005.
 Years ended December 31,2006
    
    
    2005Revenue (1)
    
    $
    58,731
    
    
    $
    54,584Cost of operations
    
    
    (15,927
    )
    
    
    (17,768
    )Depreciation and depletion
    
    
    (4,577
    )
    
    
    (5,657
    )General and administrative
    
    
    (649
    )
    
    
    (484
    )Interest expense
    
    
    (300
    )
    
    
    (489
    )OPERATING PROFIT
    
    
    37,278
    
    
    
    30,186Interest income
    
    
    985
    
    
    
    374Foreign exchange gains (losses)
    
    
    1,234
    
    
    
    (50
    )INCOME BEFORE TAXES
    
    
    39,497
    
    
    
    30,510Provision for income taxes
    
    
    (21,026
    )
    
    
    (7,474
    )SHARE OF INCOME FROM JOINT VENTURE
    
    $
    18,471
    
    
    $
    23,036Cash flowsFrom operating activities
    
    $
    55,278
    
    
    $
    24,805For investing activities
    
    
    (20,659
    )
    
    
    (4,561
    )For financing activities
    
    
    
    
    
    
    (7,500
    )$
    34,619
    
    
    $
    12,744
 (1)
    
    Revenue is net of commercial tax. 5.
    
    ACCOUNTS RECEIVABLE
 December 31,2006
    
    
    2005Contingent income (Note 3)
    
    $
    11,691
    
    
    $
    20,243Proceeds from sale of Project (Note 3)
    
    
    
    
    
    
    6,500Sale of investment (Note 7(b))
    
    
    1,324
    
    
    
    Refundable taxes
    
    
    9,053
    
    
    
    4,423Related parties (Note 17)
    
    
    319
    
    
    
    451Accrued interest
    
    
    910
    
    
    
    340Other
    
    
    1,442
    
    
    
    1,393$
    24,739
    
    
    $
    33,350




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 6.
    
    OTHER CURRENT ASSETS
 December 31,2006
    
    
    2005Loan receivable
    
    $
    
    
    
    $
    3,000Restricted cash
    
    
    286
    
    
    
    286$
    286
    
    
    $
    3,286
 In 2006, the Company received full repayment from Lepanto Consolidated Mining Company of
the $3.0 million plus interest originally loaned to them in December 2004.7.
    
    LONG-TERM INVESTMENTS
 December 31, 2006
    
    
    December 31, 2005Equity
    
    
    Cost/Equity
    
    
    Unrealized
    
    
    Fair/Equity
    
    
    Equity
    
    
    Cost/Equity
    
    
    Unrealized
    
    
    Fair/EquityInterest
    
    
    Basis
    
    
    Gain
    
    
    Value
    
    
    Interest
    
    
    Basis
    
    
    Gain
    
    
    ValueInvestment in companies subject
to significant influence:Jinshan Gold Mines Inc. (a)
    
    
    46.3
    %
    
    $
    10,866
    
    
    
    N/a
    
    
    $
    10,866
    
    
    
    N/a
    
    
    
    N/a
    
    
    
    N/a
    
    
    
    N/aInvestments available-for-sale:Intec Ltd. (b)
    
    
    7.1
    %
    
    $
    1,062
    
    
    $
    7,088
    
    
    $
    8,150
    
    
    
    12.5
    %
    
    $
    1,446
    
    
    $
    1,331
    
    
    $
    2,777Entrée Gold Inc. (c)
    
    
    14.7
    %
    
    
    10,156
    
    
    
    6,044
    
    
    
    16,200
    
    
    
    15.0
    %
    
    
    10,157
    
    
    
    5,380
    
    
    
    15,537Redox Diamonds Ltd. (d)
    
    
    13.8
    %
    
    
    1,451
    
    
    
    
    
    
    
    1,451
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wind Energy Group Inc. (e)
    
    
    21.3
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Asia Now Resources Corp.
    
    
    2.0
    %
    
    
    103
    
    
    
    101
    
    
    
    204
    
    
    
    3.1
    %
    
    
    103
    
    
    
    
    
    
    
    103Other
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,780
    
    
    $
    13,233
    
    
    $
    26,013
    
    
    
    
    
    
    $
    11,706
    
    
    $
    6,711
    
    
    $
    18,417$
    23,646
    
    
    $
    13,233
    
    
    $
    36,879
    
    
    
    
    
    
    $
    11,706
    
    
    $
    6,711
    
    
    $
    18,417




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 7.
    
    LONG-TERM INVESTMENTS (Continued)
 (a)
    
    In November 2005, the Company and Jinshan restructured their participating
arrangements to simplify Jinshans corporate structure. The Company transferred to
Jinshan its entire participating interest in the 217 Gold Project, its interests in
other joint venture arrangements between the parties, its existing contractual rights
to participate in Jinshan projects in China and cash proceeds of $3,392,000 in exchange
for Jinshan issuing Ivanhoe Mines 48,552,948 of its common shares. As a result of this
transaction, in December 2005, Ivanhoe Mines ceased equity accounting for its
investment in Jinshan as it held approximately 53% of the issued and outstanding common shares of Jinshan, thereby making Jinshan a controlled subsidiary, requiring
consolidation.On August 31, 2006, Jinshan completed a private placement which diluted Ivanhoe
Mines investment in Jinshan to 48.9%. As a result of this transaction, Ivanhoe
Mines ceased consolidating Jinshan on August 31, 2006 and commenced equity
accounting for its investment. During the year Ivanhoe Mines recorded a $1,648,000
(2005  $2,651,000) equity loss on this investment. At December 31, 2006, the
carrying value of the Companys investment in Jinshan was lower than its share of
the underlying book value of Jinshans net assets by approximately $1,476,000. This
difference relates to unrecognized dilution gains associated with warrants issued by
Jinshan during the year. These dilution gains will be recognized as the warrants
are exercised.At December 31, 2006 the quoted market value of the Companys investment in Jinshan
was $88,250,000.(b)
    
    During the fourth quarter of 2006, Ivanhoe Mines sold 14,391,586 shares of its
investment in Intec Ltd. for $3,099,000. These transactions resulted in a gain on sale
of $2,724,000 being recognized in operations. At December 31, 2006, $1,777,000 in
proceeds had been received and $1,324,000 was included in accounts receivable (Note 5).(c)
    
    During 2004, the Company purchased 4.6 million units of Entrée Gold Inc.
(Entrée) at a cost of $3,846,000 (Cdn$4,600,000). Each unit consisted of one Entrée
common share and one share purchase warrant exercisable until October 2006 to purchase
an additional Entrée common share at a price of Cdn$1.10. In 2005, the Company
exercised these share purchase warrants to acquire 4.6 million common shares of Entrée
at a cost of $4,111,000 (Cdn$5,060,000).Also during 2005, the Company acquired 1.2 million units in Entrée at a cost of
$2,199,000 (Cdn$2,718,000). Each unit consisted of one Entrée common share and two
share purchase warrants. These share purchase warrants are outstanding at December
31, 2006, and if not exercised will expire in July 2007.(d)
    
    During 2006, the Company purchased 8.3 million units of Redox Diamonds Ltd.
(Redox) at a cost of $1.5 million. Each unit consists of one Redox common share and
one Redox
share option exercisable until April 2008 to purchase an additional Redox common
share at a price ranging from Cdn$0.30 to Cdn$0.35.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 7.
    
    LONG-TERM INVESTMENTS (Continued)
 (e)
    
    During 2006, the Company purchased 2.0 million common shares of Wind Energy
Group Inc. (Wind Energy), in two $0.5 million tranches, at a cost of $1.0 million.
In September 2006, the Company recorded an impairment provision of $1.0 million against
this investment based on an assessment of the underlying book value of Wind Energys
net assets. This investment is not being accounted for using the equity method as the
Company does not have significant influence over Wind Energy.(f)
    
    In March 2005, the share price of Olympus Pacific Minerals Inc. (Olympus)
deteriorated, with the result that the market value of Ivanhoe Mines investment in
Olympus decreased significantly below carrying value. Accordingly, the Company recorded
an other-than-temporary impairment of $1,438,000, reducing the carrying value of this
investment to $4,424,000.In May 2005, Ivanhoe Mines sold its investment in Olympus, generating proceeds of
$4,539,000. This transaction resulted in a gain on sale of $115,000 being
recognized in operations.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 8. PROPERTY, PLANT AND EQUIPMENT
 December 31,2006
    
    2005Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedDepletion and
    
    
    
    
    
    
    
    
    
    Depletion andDepreciation,
    
    
    
    
    
    
    
    
    
    Depreciation,Including
    
    Net Book
    
    
    
    
    
    Including
    
    Net BookCost
    
    Write-downs
    
    Value
    
    Cost
    
    Write-downs
    
    ValueMining propertiesBakyrchik Mining Venture,
Kazakhstan (a)
    
    $
    87,541
    
    
    $
    (87,541
    )
    
    $
    
    
    
    $
    87,541
    
    
    $
    (87,541
    )
    
    $
    Mining plant and equipmentBakyrchik Mining Venture,
Kazakhstan (a)
    
    $
    3,107
    
    
    $
    (3,107
    )
    
    $
    
    
    
    $
    3,107
    
    
    $
    (3,107
    )
    
    $
    Other mineral property interestsOyu Tolgoi, Mongolia (b)
    
    $
    43,190
    
    
    $
    (6,251
    )
    
    $
    36,939
    
    
    $
    43,562
    
    
    $
    (6,244
    )
    
    $
    37,318Cloncurry, Australia (c)
    
    
    6,293
    
    
    
    (126
    )
    
    
    6,167
    
    
    
    6,293
    
    
    
    (126
    )
    
    
    6,167Other exploration projects
    
    
    1,647
    
    
    
    (115
    )
    
    
    1,532
    
    
    
    1,530
    
    
    
    (115
    )
    
    
    1,415$
    51,130
    
    
    $
    (6,492
    )
    
    $
    44,638
    
    
    $
    51,385
    
    
    $
    (6,485
    )
    
    $
    44,900Other capital assetsOyu Tolgoi, Mongolia (b)
    
    $
    22,192
    
    
    $
    (6,377
    )
    
    $
    15,815
    
    
    $
    14,334
    
    
    $
    (3,326
    )
    
    $
    11,008Cloncurry, Australia (c)
    
    
    1,518
    
    
    
    (131
    )
    
    
    1,387
    
    
    
    1,833
    
    
    
    (174
    )
    
    
    1,659Other exploration projects
    
    
    2,489
    
    
    
    (1,406
    )
    
    
    1,083
    
    
    
    2,961
    
    
    
    (2,181
    )
    
    
    780$
    26,199
    
    
    $
    (7,914
    )
    
    $
    18,285
    
    
    $
    19,128
    
    
    $
    (5,681
    )
    
    $
    13,447Capital works in progressOyu Tolgoi, Mongolia (b)
    
    $
    34,295
    
    
    $
    
    
    
    $
    34,295
    
    
    $
    22,939
    
    
    $
    
    
    
    $
    22,939Bakyrchik Mining Venture,
Kazakhstan (a)
    
    
    4,776
    
    
    
    
    
    
    
    4,776
    
    
    
    4,420
    
    
    
    
    
    
    
    4,420$
    39,071
    
    
    $
    
    
    
    $
    39,071
    
    
    $
    27,359
    
    
    $
    
    
    
    $
    27,359$
    207,048
    
    
    $
    (105,054
    )
    
    $
    101,994
    
    
    $
    188,520
    
    
    $
    (102,814
    )
    
    $
    85,706
 (a)
    
    Ivanhoe Mines placed the Bakyrchik Mining Venture on a care and maintenance
basis in prior years.(b)
    
    Ivanhoe Mines has a 100% interest in the Oyu Tolgoi copper-gold project located
in
Mongolia. In 2003, Ivanhoe Mines converted its four exploration licences on the
project into 60-year mining licences, which are renewable for an additional 40
years.Capital works in progress at December 31, 2006 consisted mainly of surface assets
being constructed for the Shaft No. 1 at Oyu Tolgoi ($27.4 million (2005 -
$21.4 million)).A significant portion of exploration expenses incurred during the
year relate directly to the development of the Oyu Tolgoi project located in
Mongolia. Included in exploration expenses are shaft sinking, engineering, and
development costs that have been expensed and not capitalized.(c)
    
    Ivanhoe Mines owns certain copper-gold and uranium mining and exploration
leases in Queensland, Australia.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 9.
    
    OTHER ASSETS
 December 31,2006
    
    
    2005Advances to suppliers
    
    $
    1,333
    
    
    $
    1,711Environmental bond (Queensland, Australia)
    
    
    2,883
    
    
    
    2,683$
    4,216
    
    
    $
    4,394
 10.
    
    ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 December 31,2006
    
    
    2005Accounts payable
    
    $
    33,101
    
    
    $
    11,902Payroll and other employee related payables
    
    
    454
    
    
    
    546Accrued construction costs
    
    
    2,227
    
    
    
    7,044Amounts payable to related parties (Note 17)
    
    
    1,419
    
    
    
    1,102$
    37,201
    
    
    $
    20,594
 11.
    
    LOANS PAYABLE TO RELATED PARTIESThese loans are payable to the Chairman of the Company or a company controlled by him. They
are non-interest bearing, unsecured and repayable in U.S. dollars. Repayment of these loans
has been postponed until Ivanhoe Mines receives an aggregate of $111.1 million from the sale
of the Savage River Project. At December 31, 2006, $49.7 million has been received from the
sale with a further $11.7 million accrued as receivable (Note 3 and 5).




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 12.
    
    INCOME TAXESAs referred to in Note 2(b), Ivanhoe Mines must make significant estimates in respect of its
provision for income taxes and the composition of its deferred income tax assets and
liabilities. Ivanhoe Mines operations are, in part, subject to foreign tax laws where
interpretations, regulations and legislation are complex and continually changing. As a
result, there are usually some tax matters in question that may, on resolution in the future,
result in adjustments to the amount of deferred income tax assets and liabilities, and those
adjustments may be material to Ivanhoe Mines financial position and results of operations.Ivanhoe Mines provision for income and capital taxes for continuing operations consists of
the following:
 Years ended December 31,2006
    
    
    2005Deferred income taxes
    
    $
    13
    
    
    $
    (15
    )Capital taxes
    
    
    670
    
    
    
    448$
    683
    
    
    $
    433
 Deferred income tax assets and liabilities for continuing operations at December 31, 2006 and
2005 arise from the following:
 December 31,2006
    
    
    2005Deferred income tax assetsLong-term investments
    
    $
    3,921
    
    
    $
    279Loss carry-forwards
    
    
    208,965
    
    
    
    133,562Other
    
    
    14,379
    
    
    
    10,107227,265
    
    
    
    143,948Valuation allowance
    
    
    (226,784
    )
    
    
    (143,777
    )Net deferred income tax assets
    
    
    481
    
    
    
    171Deferred income tax liabilitiesProperty, plant and equipment
    
    
    660
    
    
    
    315660
    
    
    
    315Deferred income tax liabilities, net
    
    $
    179
    
    
    $
    144




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 12.
    
    INCOME TAXES (Continued)A reconciliation of the provision for income and capital taxes for continuing operations is
as follows:
 Years ended December 31,2006
    
    
    2005Recovery of income taxes based on the combinedCanadian federal and provincial statutory tax
rates of 34.1% in 2006 and 34.9% in 2005
applied to the loss before taxes and other items
    
    $
    75,393
    
    
    $
    44,666(Deduct) addLower foreign tax rates
    
    
    (17,253
    )
    
    
    (7,109
    )Tax benefit of losses not recognized
    
    
    (136,278
    )
    
    
    (78,836
    )Change in valuation allowance for deferred
income tax assets
    
    
    84,935
    
    
    
    43,986Capital taxes
    
    
    (670
    )
    
    
    (448
    )Other, including non-deductible expenses
    
    
    (6,810
    )
    
    
    (2,692
    )Provision for income and capital taxes
    
    $
    (683
    )
    
    $
    (433
    )
 At December 31, 2006, Ivanhoe Mines had the following unused tax losses from continuing
operations, for which no deferred income tax assets had been recognized:
 Local
    
    U.S. Dollar
    
    ExpiryCurrency
    
    Equivalent (i)
    
    DatesNon-capital losses:Canada
    
    Cdn.
    
    $
    127,632
    
    
    $
    109,471
    
    
    2007 to 2026Australia
    
    
    
    A
    
    $
    17,101
    
    
    $
    13,486
    
    
    (a)Mongolia
    
    Mongolian Tugrik
    
    
    551,908,121
    
    
    $
    473,741
    
    
    (b)Kazakhstan
    
    Kazakhstan Tenge
    
    
    15,369,664
    
    
    $
    121,212
    
    
    2007 to 2013Capital losses:Canada
    
    Cdn.
    
    $
    119,455
    
    
    $
    102,457
    
    
    (c)
 
 (i)
    
    Translated using the year-end exchange rate.(a)
    
    These losses are carried forward indefinitely, subject to continuity of ownership
and business tests.(b)
    
    These losses are carried forward until production from a mine commences;
thereafter, they can be amortized on a straight-line basis over a period of five years.(c)
    
    These losses are carried forward indefinitely for utilization against any future
net realized capital gains.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 12.
    
    INCOME TAXES (Continued)Ivanhoe Mines also has deductible temporary differences and unused tax losses in certain
other foreign jurisdictions that are not disclosed above, as it is currently highly unlikely
that these items will be utilized.13.
    
    ASSET RETIREMENT OBLIGATIONS
 December 31,2006
    
    
    2005Balance, beginning of year
    
    $
    6,231
    
    
    $
    5,267(Decrease) increase in obligations for:Changes in estimates
    
    
    (485
    )
    
    
    651Foreign exchange
    
    
    149
    
    
    
    (41
    )Accretion expense
    
    
    458
    
    
    
    354Balance, end of year
    
    $
    6,353
    
    
    $
    6,231
 The total undiscounted amount of estimated cash flows required to settle the obligations is
$19,841,000 (2005  $20,458,000), which has been discounted using credit adjusted risk free
rates ranging from 7.6% to 8.2%. The majority of reclamation obligations are not expected to
be paid for several years and will be funded from Ivanhoe Mines cash balances and
environmental bonds restricted for the purpose of settling asset retirement obligations (Note
9).14.
    
    MINORITY INTERESTSAt December 31, 2006 there were minority interests in BMV and Asia Gold. Jinshan ceased
being consolidated on August 31, 2006 (Note 7(a)).Currently, losses applicable to the minority interests in BMV and Asia Gold are being
allocated to Ivanhoe Mines since those losses exceed the minority interests in the net assets
of BMV and Asia Gold.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 14.
    
    MINORITY INTERESTS (Continued)
 Minority InterestsAsia Gold
    
    Jinshan
    
    BMV
    
    TotalBalances, December 31, 2004
    
    $
    3,713
    
    
    $
    
    
    
    $
    
    
    
    $
    3,713Minority interests share of loss
    
    
    (2,714
    )
    
    
    
    
    
    
    
    
    
    
    (2,714
    )Increase in minority interest arising
from share issuances by subsidiary
    
    
    582
    
    
    
    
    
    
    
    
    
    
    
    582Initial interest arising from acquisition of
Jinshan in December 2005
    
    
    
    
    
    
    7,347
    
    
    
    
    
    
    
    7,347Balances, December 31, 2005
    
    $
    1,581
    
    
    $
    7,347
    
    
    $
    
    
    
    $
    8,928Minority interests share of loss
    
    
    (2,063
    )
    
    
    (1,306
    )
    
    
    
    
    
    
    (3,369
    )Increase in minority interest arising
from share issuances by subsidiary
    
    
    482
    
    
    
    5,388
    
    
    
    
    
    
    
    5,870Commencement of equity accounting
for investment in Jinshan
    
    
    
    
    
    
    (11,429
    )
    
    
    
    
    
    
    (11,429
    )Balance, December 31, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 15.
    
    SHARE CAPITAL
 (a)
    
    Equity Incentive PlanThe Company has an Employees and Directors Equity Incentive Plan (the Equity
Incentive Plan), which includes three components: (i) a Share Option Plan; (ii) a Share
Bonus Plan; and (iii) a Share Purchase Plan.
 (i)
    
    The Share Option Plan authorizes the Board of Directors of the Company
to grant options to directors and employees of Ivanhoe Mines to acquire Common
Shares of the Company at a price based on the weighted average trading price of the
Common Shares for the five days preceding the date of the grant. Options vest over
four years and have five year contractual terms unless otherwise determined from
time to time by the Board of Directors, on the recommendation of the Compensation
and Benefits Committee. The Share Option Plan also provides that these options
may, upon approval of the Board of Directors, be converted into stock appreciation
rights.(ii)
    
    The Share Bonus Plan permits the Board of Directors of the Company to
authorize the issuance, from time to time, of Common Shares of the Company to
employees of the Company and its affiliates.(iii)
    
    The Share Purchase Plan entitles each eligible employee of Ivanhoe
Mines to contribute up to seven percent of each employees annual basic salary in
semi-monthly instalments. At the end of each calendar quarter, each employee
participating in the Share Purchase Plan is issued Common Shares of the Company
equal to 1.5 times the aggregate amount contributed by the participant, based on
the weighted average trading price of the Common Shares during the preceding three
months.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 15.
    
    SHARE CAPITAL (Continued)
 (a)
    
    Equity Incentive Plan (Continued)The Company is authorized to issue a maximum of 32,000,000 Common Shares pursuant to the
Equity Incentive Plan. At December 31, 2006, an aggregate of 2,961,648 Common Shares
were available for future grants of awards under the plan.Under SFAS No. 123 (R), the value of each option award is estimated on the date of grant
using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model
requires the input of subjective assumptions, including the expected term of the option
award and stock price volatility. The expected term of options granted is derived from
historical data on employee exercise and post-vesting employment termination behaviour.
Expected volatility is based on the historical volatility of the Companys stock. These
estimates involve inherent uncertainties and the application of management judgment. In
addition, the Company is required to estimate the expected forfeiture rate and only
recognize expense for those options expected to vest. As a result, if other assumptions
had been used, the recorded stock-based compensation expense could have been materially
different from that reported.The weighted average grant-date fair value of stock options granted during 2006 and 2005
was Cdn$4.31 and Cdn$4.95, respectively. The fair value of these options was determined
using a Black-Scholes option pricing model, recognizing forfeitures as they occur, using
the following weighted average assumptions:
 2006
    
    
    2005Risk-free interest rate
    
    
    4.12
    %
    
    
    3.76
    %Expected life
    
    3.3 years
    
    
    5.0 yearsExpected volatility
    
    
    50
    %
    
    
    61
    %Expected dividends
    
    $
    Nil
    
    
    $
    Nil




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 15.
    
    SHARE CAPITAL (Continued)
 (a)
    
    Equity Incentive Plan (Continued)A summary of stock option activity and information concerning outstanding and
exercisable options at December 31, 2006 is as follows:
 Options OutstandingOptions
    
    Number of
    
    WeightedAvailable
    
    Common
    
    Averagefor Grant
    
    Shares
    
    Exercise Price(Expressed inCanadian dollars)Balances, December 31, 2004
    
    
    104,734
    
    
    
    9,890,942
    
    
    $
    5.02Increase in amount authorized
    
    
    9,000,000
    
    
    
    
    
    
    
    Options granted
    
    
    (1,125,000
    )
    
    
    1,125,000
    
    
    
    8.86Options exercised
    
    
    
    
    
    
    (3,256,542
    )
    
    
    1.48Options cancelled
    
    
    342,700
    
    
    
    (342,700
    )
    
    
    2.41Shares issued under share
purchase plan
    
    
    (16,498
    )
    
    
    
    
    
    
    Balances, December 31, 2005
    
    
    8,305,936
    
    
    
    7,416,700
    
    
    $
    7.27Increase in amount authorized
    
    
    3,000,000
    
    
    
    
    
    
    
    Options granted
    
    
    (8,519,000
    )
    
    
    8,519,000
    
    
    
    9.39Options exercised
    
    
    
    
    
    
    (1,964,966
    )
    
    
    4.28Options cancelled
    
    
    326,300
    
    
    
    (326,300
    )
    
    
    8.80Bonus shares
    
    
    (124,657
    )
    
    
    
    
    
    
    Shares issued under share
purchase plan
    
    
    (26,931
    )
    
    
    
    
    
    
    Balances, December 31, 2006
    
    
    2,961,648
    
    
    
    13,644,434
    
    
    $
    8.99
 At December 31, 2006, the U.S. dollar equivalent of the weighted average exercise price
was $7.70 (December 31, 2005  $6.26).The total intrinsic value of options exercised during the years ended December 31, 2006
and 2005 was $9.1 million and $19.9 million, respectively.As at December 31, 2006, options vested and expected to vest totalled 13,644,434
(December 31, 2005  7,416,700) and had an aggregate intrinsic value of $29.4 million
(December 31, 2005  $6.9 million).




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 15.
    
    SHARE CAPITAL (Continued)
 (a)
    
    Equity Incentive Plan (Continued)The following table summarizes information concerning outstanding and exercisable
options at December 31, 2006:
 Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageExercise
    
    Number
    
    Remaining
    
    Exercise Price
    
    Number
    
    Exercise PricePrices
    
    Outstanding
    
    Life (in years)
    
    Per Share
    
    Exercisable
    
    Per Share(Expressed in
    
    
    
    
    
    
    
    
    
    (Expressed in
    
    
    
    
    
    (Expressed inCanadian
    
    
    
    
    
    
    
    
    
    Canadian
    
    
    
    
    
    Canadiandollars)
    
    
    
    
    
    
    
    
    
    dollars)
    
    
    
    
    
    dollars)$3.25 to $3.50
    
    
    667,100
    
    
    
    1.26
    
    
    $
    3.29
    
    
    
    607,100
    
    
    $
    3.29$3.51 to $6.75
    
    
    253,500
    
    
    
    1.66
    
    
    
    6.75
    
    
    
    197,500
    
    
    
    6.75$6.76 to $7.69
    
    
    1,433,334
    
    
    
    3.41
    
    
    
    7.23
    
    
    
    467,400
    
    
    
    7.29$7.70 to $8.20
    
    
    2,015,500
    
    
    
    5.46
    
    
    
    7.90
    
    
    
    989,500
    
    
    
    7.87$8.21 to $8.99
    
    
    940,000
    
    
    
    3.09
    
    
    
    8.65
    
    
    
    370,000
    
    
    
    8.66$9.00 to $10.27
    
    
    6,995,000
    
    
    
    6.03
    
    
    
    9.72
    
    
    
    2,863,500
    
    
    
    9.72$10.28 to $12.70
    
    
    1,340,000
    
    
    
    6.21
    
    
    
    12.22
    
    
    
    1,055,500
    
    
    
    12.6013,644,434
    
    
    
    5.17
    
    
    $
    8.99
    
    
    
    6,550,500
    
    
    $
    8.98
 As at December 31, 2006 there was $21.5 million of total unrecognized compensation cost
related to unvested stock options. This cost is expected to be recognized over a
weighted-average period of approximately 1.69 years.As at December 31, 2006 the aggregate intrinsic value for fully vested stock options was
$14.1 million (December 31, 2005  $5.9 million).(b)
    
    Rio Tinto PlacementOn October 18, 2006, Ivanhoe Mines and Rio Tinto announced that they had reached an
agreement to form a strategic partnership whereby Rio Tinto would invest in Ivanhoe
Mines and form a joint Ivanhoe Mines  Rio Tinto Technical Committee, to engineer,
construct and operate Ivanhoe Miness Oyu Tolgoi project in Mongolia.On October 27, 2006, Rio Tinto completed the first private placement tranche under the
agreement consisting of approximately 37.1 million shares at a price of $8.18 per share,
for proceeds totalling $303.4 million.The agreement provides for Rio Tinto to make investments in the equity of Ivanhoe Mines,
under defined conditions, totalling approximately $1.5 billion. Ivanhoe Mines has agreed
to use at least 90% of the proceeds received from Rio Tinto to finance the development
of Oyu Tolgoi.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 15.
    
    SHARE CAPITAL (Continued)
 (b)
    
    Rio Tinto Placement (Continued)Rio Tinto will take up a second tranche private placement following the satisfactory
conclusion of an Investment Agreement between Ivanhoe Mines and the Mongolian
Government. Rio Tinto has the option to exercise the second tranche earlier. This
second tranche consists of approximately 46.3 million shares at a subscription price of
$8.38 per share, for proceeds totalling $388.0 million.In addition to the two private placements, Rio Tinto has been granted approximately
92.0 million warrants, divided into two series. The lives of these warrants are
determined by the date an approved Investment Agreement for the Oyu Tolgoi Project is
reached with the Mongolian government. The Warrant Determination Date within the
warrant terms presented below is the earlier of the date an approved Investment
Agreement is reached or October 27, 2009:The 46,026,522 Series A Warrants are non-transferable. Each warrant entitles Rio Tinto
to purchase one Common Share of the Company at a price of:
 (i)
    
    $8.38 during the period commencing November 30, 2006 and
ending 180 days following the Warrant Determination Date; and(ii)
    
    $8.54 during the period commencing 181 days after the Warrant
Determination Date and ending 365 days after the Warrant Determination Date.
 The 46,026,522 Series B Warrants are non-transferable. Each warrant entitles Rio Tinto
to purchase one Common Share of the Company at a price of:
 (i)
    
    $8.38 during the period commencing November 30, 2006 and
ending 180 days following the Warrant Determination Date;(ii)
    
    $8.54 during the period commencing 181 days after the Warrant
Determination Date and ending 365 days after the Warrant Determination Date;(iii)
    
    $8.88 during the period commencing 366 days after the
Warrant Determination Date and ending 545 days after the Warrant Determination
Date; and(iv)
    
    $9.02 during the period commencing 546 days after the Warrant
Determination Date and ending 725 days after the Warrant Determination Date.
 Ivanhoe Mines has recorded an amount of $23.1 million in shareholders equity,
attributable to the fair value of the Rio Tinto share purchase warrants and second
tranche share issuance commitment.(c)
    
    Share Purchase WarrantsAt December 31, 2006, the Company had 5,760,000 share purchase warrants outstanding
that were issued in 2004. These warrants entitled the holder to acquire one-tenth of a
common share of the Company at any time on or before February 15, 2007, at a price of
$8.68 per common share. On February 13, 2007, 28,600 of the share purchase warrants
were exercised with the remaining 5,731,400 warrants expiring unexercised.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 16.
    
    ACCUMULATED OTHER COMPREHENSIVE INCOME
 December 31,2006
    
    
    2005Balance, beginning of year
    
    $
    6,711
    
    
    $
    2,879Other comprehensive income for the year:Changes in fair value of long-term investments
    
    
    7,534
    
    
    
    3,539Reclassification for (gains) losses recorded in
earnings
    
    
    (1,012
    )
    
    
    293Other comprehensive income before tax:
    
    
    6,522
    
    
    
    3,832Income tax recovery related to other
comprehensive income
    
    
    
    
    
    
    Other comprehensive income, net of tax:
    
    
    6,522
    
    
    
    3,832Balance, end of year
    
    $
    13,233
    
    
    $
    6,711
 17.
    
    OTHER RELATED PARTY TRANSACTIONSThe following tables summarize related party expenses incurred by Ivanhoe Mines, primarily on
a cost-recovery basis, with an officer of a subsidiary of Ivanhoe Mines, a company subject to
significant influence by Ivanhoe Mines, a company affiliated with Ivanhoe Mines, or with
companies related by way of directors or shareholders in common. The tables summarize the
transactions with related parties and the types of expenditures incurred with related
parties:
 Years ended December 31,2006
    
    
    2005Global Mining Management Corporation (a)
    
    $
    7,015
    
    
    $
    4,169Ivanhoe Capital Aviation LLC (b)
    
    
    3,840
    
    
    
    3,421Fognani & Faught, PLLC (c)
    
    
    1,394
    
    
    
    823Jinshan Gold Mines Inc. (d)
    
    
    
    
    
    
    1,122Ivanhoe Capital Pte. Ltd. (e)
    
    
    78
    
    
    
    60Ivanhoe Capital Services Ltd. (f)
    
    
    743
    
    
    
    755Ivanhoe Energy Inc. (g)
    
    
    
    
    
    
    175$
    13,070
    
    
    $
    10,525




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 17.
    
    OTHER RELATED PARTY TRANSACTIONS (Continued)
 Years ended December 31,2006
    
    
    2005Exploration
    
    $
    
    
    
    $
    1,122Legal
    
    
    1,394
    
    
    
    823Office and administrative
    
    
    2,306
    
    
    
    2,216Salaries and benefits
    
    
    5,530
    
    
    
    2,943Travel (including aircraft rental)
    
    
    3,840
    
    
    
    3,421$
    13,070
    
    
    $
    10,525
 The above noted transactions were in the normal course of operations and were measured at the
exchange amount, which is the amount of consideration established and agreed to by the
related parties.Accounts receivable and accounts payable at December 31, 2006, included $319,000 and
$1,419,000, respectively (December 31, 2005  $451,000 and $1,102,000, respectively), which
were due from/to a company under common control, a company affiliated with Ivanhoe Mines, or
companies related by way of directors in common.
 (a)
    
    Global Mining Management Corporation (Global) is a private company based in
Vancouver owned equally by seven companies, one of which is Ivanhoe Mines. Global has a
director in common with the Company. Global provides administration, accounting, and
other office services to the Company on a cost-recovery basis.(b)
    
    Ivanhoe Capital Aviation LLC (Aviation) is a private company 100% owned by the
Companys Chairman. Aviation operates an aircraft which is rented by the Company on a
cost-recovery basis.(c)
    
    An officer of a subsidiary of Ivanhoe Mines is a partner with Fognani & Faught,
PLLC, a legal firm which provides legal services to Ivanhoe Mines.(d)
    
    During 2005, the Company incurred exploration expenditures as part of several
joint-venture agreements with Jinshan.(e)
    
    Ivanhoe Capital Pte. Ltd. (Ivanhoe Capital) is a private company 100% owned by
the Companys Chairman. Ivanhoe Capital provides for administration, accounting, and
other office services in Singapore and London on a cost-recovery basis.(f)
    
    Ivanhoe Capital Services Ltd. (Services) is a private company 100% owned by the
Companys Chairman. Services provides for salaries associated with certain employees of
the Company located in Singapore on a cost-recovery basis.(g)
    
    Ivanhoe Energy Inc. (Ivanhoe Energy) is a public company in which the Companys
Chairman has a significant interest and holds the position of Deputy Chairman. During
2005 Ivanhoe Energy provided administration and other office services in Beijing on a
cost-recovery basis.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 18.
    
    CASH FLOW INFORMATION
 (a)
    
    Net change in non-cash operating working capital items
 Years ended December 31,2006
    
    
    2005(Increase) decrease in:Accounts receivable
    
    $
    (10,729
    )
    
    $
    522Inventories
    
    
    (1,766
    )
    
    
    (1,355
    )Prepaid expenses
    
    
    (2,025
    )
    
    
    (5,132
    )Other current assets
    
    
    3,000
    
    
    
    Increase in:Accounts payable and accrued liabilities
    
    
    17,309
    
    
    
    4,209$
    5,789
    
    
    $
    (1,756
    )
 (b)
    
    Supplementary information regarding other non-cash transactionsThe non-cash investing and financing activities relating to continuing operations not
already disclosed in the Consolidated Statement of Shareholders Equity or the
Consolidated Statements of Cash Flows were as follows:
 Years ended December 31,2006
    
    
    2005Investing activities:Acquisition of property, plant and equipment
    
    $
    
    
    
    $
    440
 (c)
    
    Other supplementary information
 Years ended December 31,2006
    
    
    2005Interest paid
    
    $
    
    
    
    $
    Income taxes paid
    
    $
    670
    
    
    $
    448




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 19.
    
    SEGMENT DISCLOSURESIvanhoe Mines has one operating segment; its exploration division with projects located
primarily in Mongolia.
 December 31,2006
    
    
    2005Property, plant and equipment at the end of the year:Mongolia
    
    $
    87,509
    
    
    $
    71,666Inner Mongolia, China
    
    
    1,408
    
    
    
    2,459Australia
    
    
    7,555
    
    
    
    6,767Kazakhstan
    
    
    4,776
    
    
    
    4,419Canada
    
    
    203
    
    
    
    131Other
    
    
    543
    
    
    
    264$
    101,994
    
    
    $
    85,706
 20.
    
    COMMITMENTS AND CONTINGENCIESIvanhoe Mines has, in the normal course of its business, entered into various long-term
contracts, which include commitments for future operating payments under contracts for
drilling, engineering, equipment rentals and other arrangements as follows:
 2007
    
    $
    118,0842008
    
    
    8372009
    
    
    1372010 onwards
    
    
    9$
    119,067




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 21.
    
    DISCLOSURES REGARDING FINANCIAL INSTRUMENTS
 (a)
    
    The estimated fair value of Ivanhoe Mines financial instruments was as follows:
 December 31,2006
    
    2005Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueCash
    
    $
    363,572
    
    
    $
    363,572
    
    
    $
    101,681
    
    
    $
    101,681Accounts receivable
    
    
    24,739
    
    
    
    24,739
    
    
    
    33,350
    
    
    
    33,350Other current assets
    
    
    286
    
    
    
    286
    
    
    
    3,286
    
    
    
    3,286Long-term investments
    
    
    36,879
    
    
    
    36,879
    
    
    
    18,417
    
    
    
    18,417Accounts payable and
accrued liabilities
    
    
    37,201
    
    
    
    37,201
    
    
    
    20,594
    
    
    
    20,594Loans payable to related parties
    
    
    5,088
    
    
    
    4,106
    
    
    
    5,088
    
    
    
    3,733
 The fair value of Ivanhoe Mines long-term investments was determined by reference to
published market quotations, which may not be reflective of future values.The fair value of loans payable to related parties was estimated by discounting future
payments to their present value.The fair value of Ivanhoe Mines remaining financial instruments was estimated to
approximate their carrying value, due primarily to the immediate or short-term
maturity of these financial instruments.(b)
    
    Ivanhoe Mines is exposed to credit risk with respect to its accounts receivable.
The significant concentrations of credit risk are situated in Mongolia and Australia.
Ivanhoe Mines does not mitigate the balance of this risk in light of the credit
worthiness of its major debtors.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 22.
    
    DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLESAs indicated in Note 2, these consolidated financial statements have been prepared in
accordance with U.S. GAAP, which, in the case of the Company, conform in all material
respects with Canadian GAAP, except as set forth below.Consolidated Balance Sheets
 December 31,2006
    
    
    2005Total assets in accordance with U.S. GAAP
    
    $
    703,159
    
    
    $
    396,779Reverse equity accounting for investment held for sale (a)
    
    
    71,202
    
    
    
    43,067Reversal of amortization of other mineral property interests (b)
    
    
    6,329
    
    
    
    6,329Adjustment to carrying value of long-term investments (c)
    
    
    
    
    
    
    (6,711
    )Total assets in accordance with Canadian GAAP
    
    $
    780,690
    
    
    $
    439,464Total liabilities in accordance with U.S. GAAP
    
    $
    49,302
    
    
    $
    32,228Reverse equity accounting for investment held for sale (a)
    
    
    71,202
    
    
    
    43,067Income tax effect of U.S. GAAP adjustments for:Reversal of amortization of other mineral property interests (b)
    
    
    882
    
    
    
    882Total liabilities in accordance with Canadian GAAP
    
    $
    121,386
    
    
    $
    76,177Total minority interests in accordance with U.S.
and Canadian GAAP
    
    $
    
    
    
    $
    8,928Total shareholders equity in accordance with U.S. GAAP
    
    $
    653,857
    
    
    $
    355,623Decrease in the deficit for:Reversal of amortization of other mineral property interests (b)
    
    
    5,447
    
    
    
    5,447Other comprehensive income (c)
    
    
    
    
    
    
    (6,711
    )Total shareholders equity in accordance with Canadian GAAP
    
    $
    659,304
    
    
    $
    354,359




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 22.
    
    DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
 Years ended December 31,2006
    
    
    2005Net (loss) from continuing operations in accordance with U.S. GAAP
    
    $
    (218,279
    )
    
    $
    (125,702
    )Dilution gain on issuance of shares by a subsidiary (d)
    
    
    6,288
    
    
    
    3,012Share of income from investment held for sale (a)
    
    
    (18,471
    )
    
    
    (23,036
    )Net (loss) from continuing operations in accordance with
Canadian GAAP
    
    $
    (230,462
    )
    
    $
    (145,726
    )Net income from discontinued operations in accordance
with U.S. GAAP
    
    $
    19,622
    
    
    $
    35,916Share of income from investment held for sale (a)
    
    
    18,471
    
    
    
    23,036Write-down of other mineral property interests (b)
    
    
    
    
    
    
    (192
    )Gain on sale of Savage River Project (e)
    
    
    
    
    
    
    (19,692
    )Net income from discontinued operations in accordance
with Canadian GAAP
    
    $
    38,093
    
    
    $
    39,068Net (loss) in accordance with Canadian GAAP
    
    $
    (192,369
    )
    
    $
    (106,658
    )Weighted-average number of shares outstanding under
Canadian GAAP (in thousands)
    
    
    336,128
    
    
    
    305,160Basic and diluted (loss) earnings per share in accordance with
Canadian GAAP from:Continuing operations
    
    $
    (0.68
    )
    
    $
    (0.48
    )Discontinued operations
    
    
    0.11
    
    
    
    0.13$
    (0.57
    )
    
    $
    (0.35
    )
 Under Canadian GAAP, the components of shareholders equity would be as follows:
 December 31,2006
    
    
    2005Share capital
    
    $
    1,466,969
    
    
    $
    999,372Share purchase warrants and share issuance commitment
    
    
    23,062
    
    
    
    Additional paid-in capital
    
    
    33,792
    
    
    
    17,952Accumulated other comprehensive income (c)
    
    
    13,233
    
    
    
    Deficit
    
    
    (877,752
    )
    
    
    (662,965
    )$
    659,304
    
    
    $
    354,359




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 22.
    
    DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)Consolidated Statements of Cash Flows
 Years ended December 31,2006
    
    
    2005Cash used in operating activities in accordance
with U.S. GAAP
    
    $
    (210,679
    )
    
    $
    (133,113
    )Reverse equity accounting for investment held for sale (a)
    
    
    55,278
    
    
    
    24,805Cash used in operating activities in accordance
with Canadian GAAP
    
    
    (155,401
    )
    
    
    (108,308
    )Cash used in investing activities in accordance
with U.S. GAAP
    
    
    (1,016
    )
    
    
    (10,232
    )Reverse equity accounting for investment held for sale (a)
    
    
    (20,659
    )
    
    
    (4,561
    )Cash used in investing activities in accordance
with Canadian GAAP
    
    
    (21,675
    )
    
    
    (14,793
    )Cash provided by financing activities in accordance
with U.S. GAAP
    
    
    473,589
    
    
    
    124,706Reverse equity accounting for investment held for sale (a)
    
    
    
    
    
    
    (7,500
    )Cash provided by financing activities in accordance
with Canadian GAAP
    
    
    473,589
    
    
    
    117,206Effect of exchange rate changes on cash
    
    
    (3
    )
    
    
    7,842Net cash inflow in accordance with Canadian GAAP
    
    
    296,510
    
    
    
    1,947Cash, beginning of year in accordance with Canadian GAAP
    
    
    124,524
    
    
    
    122,577Cash, end of year in accordance with Canadian GAAP
    
    $
    421,034
    
    
    $
    124,524




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 22.
    
    DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)
 (a)
    
    Investment held for saleUnder U.S. GAAP, Ivanhoe Mines has accounted for its joint venture interest in JVCo
(Note 4) using the equity method. Under Canadian GAAP, interests in joint ventures
are accounted for on a proportionate consolidation basis.Under Canadian GAAP, the carrying amount of Ivanhoe Mines investment and its share
of equity of JVCo is eliminated. Ivanhoe Mines proportionate share of each line
item of JVCos assets, liabilities, revenue and expenses is reported as discontinued
operations within Ivanhoe Mines financial statements in accordance with CICA 3475,
Disposal of Long-Lived Assets and Discontinued Operations. All intercompany
balances and transactions would be eliminated. Note 4 discloses the assets and
liabilities of JVCo that would have been disclosed as held for sale and the revenues
and expenses of JVCo that would have been included as discontinued operations within
Ivanhoe Mines financial statements had Canadian GAAP been applied.(b)
    
    Other mineral property interestsUnder U.S. GAAP, where the mineral property interests are, at the date of
acquisition, without economically recoverable reserves, these costs are generally
considered to be exploration costs that are expensed as incurred. Under Canadian
GAAP, the costs of the acquisition of mineral property interests are capitalized.In accordance with EITF 04-02, Whether Mining Rights are Tangible or Intangible
Assets, the Company classifies its mineral exploration licenses as tangible assets
and there is no difference between Canadian and U.S. GAAP. Prior to January 2004,
the costs of acquisition of Ivanhoe Mines mineral exploration licenses were
classified as intangible assets under U.S. GAAP and amortized over the term of the
licenses. As a result, for Canadian GAAP purposes, the $6,329,000, net of deferred
income taxes of $882,000, in amortization or write-offs of other mineral property
interests under U.S. GAAP needs to be reversed.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 22.
    
    DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)
 (c)
    
    Financial instrumentsOn January 1, 2006, the Company adopted CICA Section 1530, Comprehensive Income,
Section 3855, Financial Instruments  Recognition and Measurement, Section 3861,
Financial Instruments  Disclosure and Presentation and Section 3865, Hedges.
These new standards increased harmonization between U.S. and Canadian GAAP.Under U.S. and Canadian GAAP, portfolio investments are classified as
available-for-sale securities, which are carried at market value (Note 7). The
resulting unrealized gains or losses are included in the determination of
comprehensive income, net of income taxes where applicable. Prior to adopting
Sections 3855 and 1530, these investments were carried at their original cost less
provisions for impairment under Canadian GAAP. Upon adoption, the Company recorded a
retroactive balance representing the unrealized gains on available-for-sale securities
of $6,711,000 at January 1, 2006. Available-for-sale securities generated
comprehensive income of $6,522,000 under both Canadian and U.S. GAAP for the year
ended December 31, 2006.(d)
    
    Dilution gain on investment in subsidiaryUnder U.S. GAAP the $6,288,000 (2005  $3,012,000) dilution gain on investment in a
subsidiary was accounted for as part of additional paid-in capital. Under Canadian
GAAP, the dilution gain would have been included in the net loss for the year.(e)
    
    Gain on sale of Savage River ProjectUnder U.S. GAAP, the net book value of the Savage River Project when it was sold in
February 2005 was $11,200,000, whereas under Canadian GAAP the carrying value was
$30,900,000. During 2005, total proceeds from the sale were $41,700,000,
representing cash instalments including interest of $21,500,000, plus escalating
payments of $20,200,000. Therefore, under Canadian GAAP the gain on sale was
$19,700,000 less than under U.S. GAAP.(f)
    
    Income taxesUnder U.S. GAAP, deferred income taxes are calculated based on enacted tax rates
applicable to future years. Under Canadian GAAP, future income taxes are calculated
based on enacted or substantively enacted tax rates applicable to future years. This
difference in GAAP did not have a material effect on the financial position or results
of operations of the Company for the years ended December 31, 2006 and 2005.




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 22.
    
    DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
 (g)
    
    Recently released Canadian accounting standardsThere are no recently issued Canadian accounting standards which have not yet been
adopted by the Company and would be expected to have a material impact on the
Companys financial position and results of operations.