##### 



EXHIBIT 2 (INVANHOE LOGO) www.ivanhoemines.com IVANHOE MINES LTD. FINANCIAL STATEMENTS December 31, 2005
and 2004




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##### 



(DELOITTTE LOGO)
    
    Deloitte & Touche LLP 
2800  1055 Dunsmuir Street
4 Bentall Centre
P.O. Box 49279
Vancouver BC V7X 1P4
Canada
Tel: (604) 669-4466
Fax: (604) 685-0395
www.deloitte.ca
 Report of Independent Registered Chartered Accountants
 
     
 Comment by Independent Registered Chartered Accountants on Canada-United States of America
Reporting Difference
  
 - 55 -




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##### 



IVANHOE MINES LTD.
Consolidated Balance Sheets
(Stated in thousands of U.S. dollars)
 December 31,2005
    
    
    2004ASSETSCURRENTCash and cash equivalents (Note 5)
    
    $
    101,681
    
    
    $
    112,478Accounts receivable (Note 6)
    
    
    33,350
    
    
    
    6,552Inventories
    
    
    3,547
    
    
    
    2,192Prepaid expenses
    
    
    6,353
    
    
    
    1,196Other current assets (Note 7)
    
    
    3,286
    
    
    
    3,000Current assets of discontinued operations (Note 3)
    
    
    
    
    
    
    36,636TOTAL CURRENT ASSETS
    
    
    148,217
    
    
    
    162,054INVESTMENT IN JOINT VENTURE (Note 4)
    
    
    139,874
    
    
    
    126,911LONG-TERM INVESTMENTS (Note 8)
    
    
    18,417
    
    
    
    19,160PROPERTY, PLANT AND EQUIPMENT (Note 9)
    
    
    85,706
    
    
    
    54,434DEFERRED INCOME TAXES (Note 13)
    
    
    171
    
    
    
    318OTHER ASSETS (Note 10)
    
    
    4,394
    
    
    
    3,764NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS (Note 3)
    
    
    
    
    
    
    9,627TOTAL ASSETS
    
    $
    396,779
    
    
    $
    376,268LIABILITIESCURRENTAccounts payable and accrued liabilities (Note 11)
    
    $
    20,594
    
    
    $
    14,412Current liabilities of discontinued operations (Note 3)
    
    
    
    
    
    
    14,082TOTAL CURRENT LIABILITIES
    
    
    20,594
    
    
    
    28,494LOANS PAYABLE TO RELATED PARTIES (Note 12)
    
    
    5,088
    
    
    
    5,088DEFERRED INCOME TAXES (Note 13)
    
    
    315
    
    
    
    476ASSET RETIREMENT OBLIGATIONS (Note 14)
    
    
    6,231
    
    
    
    5,267NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS (Note 3)
    
    
    
    
    
    
    26,380TOTAL LIABILITIES
    
    
    32,228
    
    
    
    65,705MINORITY INTERESTS (Note 15)
    
    
    8,928
    
    
    
    3,713COMMITMENTS AND CONTINGENCIES (NOTE 21)SHAREHOLDERS EQUITYSHARE CAPITAL (Note 16)AuthorizedUnlimited number of preferred shares without par valueUnlimited number of common shares without par valueIssued and outstanding315,900,668 (2004 -292,870,998) common shares
    
    
    994,442
    
    
    
    868,606ADDITIONAL PAID-IN CAPITAL
    
    
    25,174
    
    
    
    16,283ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 17)
    
    
    6,711
    
    
    
    2,879DEFICIT
    
    
    (670,704
    )
    
    
    (580,918
    )TOTAL SHAREHOLDERS EQUITY
    
    
    355,623
    
    
    
    306,850TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS EQUITY
    
    $
    396,779
    
    
    $
    376,268
 APPROVED BY THE BOARD:-s- J. Weatherall
    

-s- K. ThygesenJ. Weatherall, Director
    
    K. Thygesen, Director
  - 56 -




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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 31,2005
    
    
    2004OPERATING EXPENSESExploration
    
    $
    (127,165
    )
    
    $
    (98,174
    )General and administrative
    
    
    (23,825
    )
    
    
    (22,202
    )Interest
    
    
    (354
    )
    
    
    (309
    )Depreciation
    
    
    (2,558
    )
    
    
    (2,027
    )Mining property care and maintenance costs (Note 9 (a))
    
    
    (3,706
    )
    
    
    (3,755
    )Write-down of carrying values of property, plant and equipment
    
    
    (609
    )
    
    
    (142
    )OPERATING LOSS
    
    
    (158,217
    )
    
    
    (126,609
    )OTHER INCOME (EXPENSES)Share of income from joint venture (Note 4)
    
    
    23,036
    
    
    
    21,416Interest income
    
    
    3,421
    
    
    
    3,126Foreign exchange gains
    
    
    7,751
    
    
    
    4,631Share of loss of significantly influenced investees (Note 8 (a) and (b))
    
    
    (2,651
    )
    
    
    (2,315
    )Gain on sale of long-term investments (Note 8 (c) and (e))
    
    
    115
    
    
    
    4,523Write-down of carrying values of long-term investments (Note 8 (a) and (c))
    
    
    (1,438
    )
    
    
    (5,277
    )LOSS BEFORE TAXES AND OTHER ITEMS
    
    
    (127,983
    )
    
    
    (100,505
    )Provision for income and capital taxes (Note 13)
    
    
    (433
    )
    
    
    (588
    )Minority interests (Note 15)
    
    
    2,714
    
    
    
    2,103NET LOSS FROM CONTINUING OPERATIONS
    
    
    (125,702
    )
    
    
    (98,990
    )NET INCOME AND GAIN ON SALE FROM DISCONTINUED OPERATIONS (Note 3)
    
    
    35,916
    
    
    
    4,449NET LOSS
    
    
    (89,786
    )
    
    
    (94,541
    )BASIC AND DILUTED (LOSS) EARNINGS PER SHARE FROMCONTINUING OPERATIONS
    
    $
    (0.41
    )
    
    $
    (0.35
    )DISCONTINUED OPERATIONS
    
    
    0.12
    
    
    
    0.01$
    (0.29
    )
    
    $
    (0.34
    )WEIGHTED AVERAGE NUMBER OF SHARESOUTSTANDING (000s)
    
    
    305,160
    
    
    
    281,640
  - 57 -




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##### 



IVANHOE MINES LTD.
Consolidated Statements of Shareholders Equity
(Stated in thousands of U.S. dollars, except for share amounts)
 AccumulatedShare Capital
    
    
    
    
    
    
    Additional
    
    
    OtherNumber
    
    
    
    
    
    
    Special
    
    
    Paid-In
    
    
    Comprehensiveof Shares
    
    
    Amount
    
    
    Warrants
    
    
    Capital
    
    
    Income
    
    
    Deficit
    
    
    TotalBalances, December 31, 2003
    
    
    265,440,052
    
    
    $
    714,359
    
    
    $
    49,975
    
    
    $
    10,658
    
    
    $
    1,587
    
    
    $
    (478,749
    )
    
    $
    297,830Effect of accounting change (Note 2 (i))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,628
    )
    
    
    (7,628
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94,541
    )
    
    
    (94,541
    )Other comprehensive income (Note 17):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,292
    
    
    
    
    
    
    
    1,292Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93,249
    )Shares issued for:Private placements, net of issue costs of $5,765
    
    
    20,000,000
    
    
    
    100,593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,593Exercise of special warrants
    
    
    5,760,000
    
    
    
    49,975
    
    
    
    (49,975
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    1,502,554
    
    
    
    2,233
    
    
    
    
    
    
    
    (892
    )
    
    
    
    
    
    
    
    
    
    
    1,341Exercise of share purchase warrants
    
    
    25,000
    
    
    
    244
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    244Share purchase plan
    
    
    17,019
    
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Consulting fees
    
    
    126,373
    
    
    
    1,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,100Stock compensation charged to operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,517
    
    
    
    
    
    
    
    
    
    
    
    6,517Balances, 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 17):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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 19 (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
    )
    
    $
    355,623
  - 58 -




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##### 



IVANHOE MINES LTD.
Consolidated Statements of Cash Flows
(Stated in thousands of U.S. dollars)
 Years ended December 31,2005
    
    
    2004OPERATING ACTIVITIESNet loss from continuing operations
    
    $
    (125,702
    )
    
    $
    (98,990
    )Items not involving use of cashDepreciation
    
    
    2,558
    
    
    
    2,027Stock based compensation
    
    
    7,714
    
    
    
    6,517Accretion expense
    
    
    354
    
    
    
    286Non-cash exploration expense recovery (Note 8 (a))
    
    
    
    
    
    
    (3,248
    )Unrealized foreign exchange gains
    
    
    (7,691
    )
    
    
    (5,443
    )Share of income from joint venture, net of cash distribution
    
    
    (13,036
    )
    
    
    (21,416
    )Share of loss of significantly influenced investees
    
    
    2,651
    
    
    
    2,315Gain on sale of long-term investments (Note 8 (c) and (e))
    
    
    (115
    )
    
    
    (4,523
    )Write-down of carrying value of long-term investments (Note 8 (a) and (c))
    
    
    1,438
    
    
    
    5,277Deferred income taxes
    
    
    (15
    )
    
    
    246Minority interests
    
    
    (2,714
    )
    
    
    (2,103
    )Write-down of carrying values of property, plant and equipment
    
    
    609
    
    
    
    142Loss on sale of property, plant and equipment
    
    
    
    
    
    
    197Net change in non-cash operating working capital items (Note 19 (a))
    
    
    (1,756
    )
    
    
    (3,174
    )Cash used in operating activities of continuing operations
    
    
    (135,705
    )
    
    
    (121,890
    )Cash provided by operating activities of discontinued operations
    
    
    2,592
    
    
    
    3,150Cash used in operating activities
    
    
    (133,113
    )
    
    
    (118,740
    )INVESTING ACTIVITIESProceeds from sale of discontinued operations
    
    
    15,000
    
    
    
    Redemption of investments
    
    
    
    
    
    
    50,000Purchase of long-term investments
    
    
    (6,310
    )
    
    
    (3,846
    )Purchase of subsidiary, net of cash acquired of $15,414
    
    
    12,022
    
    
    
    Proceeds from sale of long-term investments
    
    
    4,539
    
    
    
    2,461Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    2,720Expenditures on property, plant and equipment
    
    
    (32,180
    )
    
    
    (27,846
    )Expenditures on other assets
    
    
    (794
    )
    
    
    Other
    
    
    (2,007
    )
    
    
    (6,226
    )Cash (used in) provided by investing activities of continuing operations
    
    
    (9,730
    )
    
    
    17,263Cash used in investing activities of discontinued operations
    
    
    (502
    )
    
    
    (4,657
    )Cash (used in) provided by investing activities
    
    
    (10,232
    )
    
    
    12,606FINANCING ACTIVITIESIssue of share capital
    
    
    123,639
    
    
    
    102,280Minority interests investment in subsidiary
    
    
    1,104
    
    
    
    Cash provided by financing activities of continuing operations
    
    
    124,743
    
    
    
    102,280Cash (used in) provided by financing activities of discontinued operations
    
    
    (37
    )
    
    
    5,431Cash provided by financing activities
    
    
    124,706
    
    
    
    107,711EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    7,842
    
    
    
    5,385NET CASH (OUTFLOW) INFLOW
    
    
    (10,797
    )
    
    
    6,962CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    112,478
    
    
    
    105,516CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    101,681
    
    
    $
    112,478CASH AND CASH EQUIVALENTS IS COMPRISED OF:Cash on hand and demand deposits
    
    $
    33,240
    
    
    $
    33,796Short-term money market instruments
    
    
    68,441
    
    
    
    78,682$
    101,681
    
    
    $
    112,478
   - 59 -




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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 the Canada (Canadian GAAP) as explained in Note 23. 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 Ltd
(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 (53% owned). Prior to this the investment in Jinshan was accounted
for using the equity method.Ivanhoe Mines investment in Asia Gold Corp. (Asia Gold) (B.C., Canada) (47% owned)
remains consolidated at December 2005 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.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.
 - 60 -




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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, 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.
 - 61 -




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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.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.
 
 - 62 -




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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.
 - 63 -




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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 costsOn March 30, 2005, the FASB ratified the consensus of the Emerging Issues Task Force
(EITF) Issue 04-6 that stripping costs incurred during the production phase of a mine
are variable production costs that should be included in the costs of the inventory
produced during the period that the stripping costs are incurred. Commencing in the
first quarter of 2005, Ivanhoe Mines changed its accounting policy with respect to
stripping costs to comply with the consensus reached by the EITF. This change has been
applied retrospectively by restating prior period financial statements. In 2004 and
prior years, Ivanhoe Mines deferred or accrued stripping costs incurred during
production, as appropriate, and charged these costs to operations on the basis of the
estimated average stripping ratio for each mine area. The effect of this change was to
increase the deficit at January 1, 2004 by $7,628,000, to increase the net loss for the
year ended December 31, 2004 by $7,889,000 ($0.03 per share) and to decrease assets of
discontinued operations and investment in joint venture at December 31, 2004 by
$13,973,000 and $1,544,000, respectively. The impact on the year ended December 31,
2005 was to decrease the net loss for the year by $186,000 ($0.00 per share) and to
increase assets of discontinued operations and decrease investment in joint venture at
December 31, 2005 by $887,000 and $701,000, respectively.
 (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 from the sale of metals 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.
 - 64 -




---



##### 



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 16. The Company records compensation expense using the fair value based method
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation.
Accordingly, 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 and Special Warrants 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, 2005 and
2004.Details of potentially dilutive shares excluded from the loss per share calculation due
to antidilution:
 December 31,2005
    
    
    2004Options
    
    
    7,416,700
    
    
    
    9,890,942Share purchase warrants
    
    
    576,000
    
    
    
    7,701,000Total potentially dilutive shares
    
    
    7,992,700
    
    
    
    17,591,942
 - 65 -




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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)
 (o)
    
    Comparative figuresCertain of the comparative figures have been reclassified to conform with the
presentation as at and for the year ended December 31, 2005. In particular, the assets
and liabilities of ABM Mining Limited (ABM) (owner of the Savage River Project) as at
December 31, 2004, and its results of operations and cash flows for the year then ended
(Note 3), have been classified as discontinued operations. Accounting for stripping
costs has also been retrospectively adjusted (Note 2 (i)).
 (p)
    
    Recent accounting pronouncementsRecently issued United States accounting pronouncements have been outlined below.
Ivanhoe Mines believes the new standards issued by the U.S. FASB will not have a
material impact on the Company.In March 2005, the Emerging Issues Committee issued EITF 04-3, Mining Assets 
Impairment and Business Combinations, which states that an entity should include Value
Beyond Proven and Probable Reserves and Resources (VBPP) in the value allocated to
mining assets in a purchase price allocation to the extent that a market participant
would include VBPP in determining the fair value of the asset. EITF 04-3 also states
that an entity should include the effects of anticipated fluctuations in the future
market price of minerals in determining the fair value of mining assets in a purchase
price allocation in a manner that is consistent with the expectations of marketplace
participants. In addition, EITF 04-3 states that an entity should include the cash
flows associated with VBPP as well as the effects of anticipated fluctuations in the
market price of minerals in estimates of future cash flows (both undiscounted and
discounted) used for determining whether a mining asset is impaired. The Companys
current accounting policy complies with EITF 04-3.In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1 
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. This FSP addresses the determination as to when an investment is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. This FSP also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in this FSP FAS 115-1 and FAS 124-1 is
applicable to reporting periods beginning after December 15, 2005. Management does not
expect the adoption of this FSP to have a material effect on the Companys consolidated
financial position and results of operations.
 - 66 -




---



##### 



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)
 (p)
    
    Recent accounting pronouncements (Continued)In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment, which replaces
SFAS No. 123, Accounting for Stock-Based Compensation. In March 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 107  Share-Based Payment,
which provides interpretive guidance related to SFAS No. 123 (R). SFAS No. 123 (R)
requires compensation costs related to share-based payment transactions to be recognized
in the financial statements. With limited exceptions, the amount of compensation cost is
measured based on the grant-date fair value of the equity or liability instruments
issued. SFAS No. 123 (R) requires liability awards to be re-measured each reporting
period and compensation costs to be recognized over the period that an employee provides
service in exchange for the award. Management plans to adopt this statement on the
modified prospective basis beginning January 1, 2006, and does not expect adoption of
this statement to have a material effect on the Companys consolidated financial position
and results of operations.In October 2005, the FASB issued FASB Staff Position SFAS No. 123 (R)-2, Practical
Accommodation to the Application of Grant Date as Defined in SFAS No. 123 (R). FSP 123
(R)-2 provides guidance on the application of grant date as defined in SFAS No. 123 (R).
In accordance with this standard a grant date of an award exists if (i) the award is a
unilateral grant and (ii) the key terms and conditions of the award are expected to be
communicated to an individual recipient within a relatively short time period from the
date of approval. The Company will adopt this standard when it adopts SFAS No. 123 (R),
and does not anticipate that the implementation of this statement will have a significant
impact on its results of operations.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion 20 and FASB Statement 3. This Statement changes the
requirements for the accounting for and reporting of a change in accounting principle and
applies to all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. The Statement is effective for
accounting changes made in fiscal years beginning after December 15, 2005. Management
does not expect the adoption of this Statement to have a material effect on the Companys
consolidated financial position and results of operations.
 - 67 -




---



##### 



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)
 (p)
    
    Recent accounting pronouncements (Continued)In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an
amendment of APB Opinion 29. This Statement amends Opinion 29 to eliminate the exception
for non-monetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The Statement is effective
for fiscal periods beginning after June 15, 2005. Management does not expect the adoption
of this Statement to have a material effect on the Companys consolidated financial
position and results of operations.In November 2005, the FASB concluded that in their proposed Accounting for Uncertain Tax
Positions  an Interpretation of FASB Statement No. 109, a benefit recognition model
with a two-step approach would be used, with a more-likely-than-not recognition criterion
and a best estimate measure attribute. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is
more-likely-than-not, based solely on the technical merits, that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the appropriate amount of the benefit to recognize,
which will be measured using the best estimate of the amount that will be sustained. The
tax position should be derecognized when it is no longer more-likely-than-not of being
sustained. In January 2006, the FASB concluded that the final Interpretation will be
effective as of the beginning of the first annual period beginning after December 31,
2006. The Company is currently evaluating the implications of this Interpretation.In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements No. 133 and 140. This Statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement
133 to Beneficial Interests in Securitized Financial Assets. This Statement:
 
 
 
 
 
 - 68 -




---



##### 



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)
 (p)
    
    Recent accounting pronouncements (Continued)This Statement is effective for all financial instruments acquired or issued after the
beginning of fiscal years that begin after September 15, 2006. The Company is currently
evaluating the implications of this Statement.
 3.
    
    DISCONTINUED OPERATIONSIn November 2004, the Company adopted a plan to dispose of the Savage River Iron Ore Project
(the Project). This decision was part of the Companys plan to rationalize its non-core
assets as it focuses on the Oyu Tolgoi project in Mongolia. In February 2005, Ivanhoe Mines
sold the Project for two initial payments totalling $21.5 million, plus a series of
contingent, annual payments based on annual iron ore pellet tonnes sold and an escalating
price formula based on the prevailing annual Nibrasco/JSM pellet price.Ivanhoe Mines received the first initial payment of $15.0 million on February 28, 2005. The
second payment of $6.5 million plus an additional $0.2 million in interest was received on
January 31, 2006.The future payments will be received over five years commencing March 2006. These payments
will be calculated at an initial rate of $1.00 per tonne of iron ore pellets sold if the
annual benchmark pellet price exceeds $30 per tonne, and will escalate to a maximum of $16.50
per tonne of iron ore pellets sold if the annual price exceeds $80 per tonne. Based on the
tonnes of iron ore sold during the nine months ended December 31, 2005, and the escalating
price formula, an amount of $20.2 million has been accrued as receivable.At February 28, 2005, the net book value of the Project was $11.2 million. Therefore, the
total income recognized in 2005 reduced the net book value to $nil and resulted in the excess
of $30.5 million being included in operations during the year.At December 31, 2005, Ivanhoe Mines had a total of $26.9 million included in accounts
receivable related to the disposition of the Project. The amount was comprised of the second
initial payment and related interest of $6.7 million and the contingent income accrual of
$20.2 million.
 - 69 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 3.
    
    DISCONTINUED OPERATIONS (Continued)
 Years ended December 31,2005
    
    
    2004ASSETSCurrentCash and cash equivalents
    
    $
    
    
    
    $
    7,432Accounts receivable
    
    
    
    
    
    
    3,985Inventories
    
    
    
    
    
    
    21,295Prepaid expenses
    
    
    
    
    
    
    882Other current assets
    
    
    
    
    
    
    3,042Current assets of discontinued operations
    
    
    
    
    
    
    36,636Property, plant and equipment
    
    
    
    
    
    
    5,889Other assets
    
    
    
    
    
    
    3,738Non-current assets of discontinued operations
    
    
    
    
    
    
    9,627Total assets of discontinued operations
    
    $
    
    
    
    $
    46,263LIABILITIESCurrentAccounts payable and accrued liabilities
    
    $
    
    
    
    $
    13,870Current portion of long-term debt
    
    
    
    
    
    
    212Current liabilities of discontinued operations
    
    
    
    
    
    
    14,082Long-term debt (non-recourse to the Company)
    
    
    
    
    
    
    13,025Deferred income taxes
    
    
    
    
    
    
    2,078Other liabilities
    
    
    
    
    
    
    11,277Non-current liabilities of discontinued operations
    
    
    
    
    
    
    26,380Total liabilities of discontinued operations
    
    $
    
    
    
    $
    40,462
 - 70 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 3.
    
    DISCONTINUED OPERATIONS (Continued)The following table presents summarized financial information related to discontinued
operations:
 Years ended December 31,2005(1)
    
    
    2004REVENUE
    
    $
    18,031
    
    
    $
    83,898COST OF OPERATIONS
    
    
    (11,965
    )
    
    
    (78,778
    )DEPRECIATION AND DEPLETION
    
    
    
    
    
    
    (1,395
    )OPERATING PROFIT
    
    
    6,066
    
    
    
    3,725EXPENSESGeneral and administrative
    
    
    (195
    )
    
    
    (1,425
    )Interest expense
    
    
    (203
    )
    
    
    (1,021
    )INCOME BEFORE THE FOLLOWING
    
    
    5,668
    
    
    
    1,279Interest income
    
    
    16
    
    
    
    308Foreign exchange (losses) gains
    
    
    (285
    )
    
    
    3,745INCOME BEFORE INCOME TAXES
    
    
    5,399
    
    
    
    5,332Recovery of (provision for) income and capital taxes
    
    
    7
    
    
    
    (883
    )NET INCOME
    
    
    5,406
    
    
    
    4,449Contingent income
    
    
    20,243
    
    
    
    Gain on sale of ABM
    
    
    10,267
    
    
    
    NET INCOME AND GAIN ON SALE
FROM DISCONTINUED OPERATIONS
    
    $
    35,916
    
    
    $
    4,449
 
 (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. - 71 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 4.
    
    INVESTMENT IN JOINT VENTUREIvanhoe Mines has a 50% interest in JVCo, a joint venture formed to develop open-pit copper
mining operations at Monywa in the Union of Myanmar. JVCo completed construction of a
mining complex in 1998 to develop the Sabetaung and Kyisintaung (S&K) deposits within the
Monywa Copper Project. Commercial production from those deposits commenced during the first
quarter of 1999.In early 2005, the Company announced its intention to expand, in a series of incremental
steps, the mines production capacity to a target of 200,000 tonnes per annum. At that
time, mining equipment was ordered to increase the annual copper cathode capacity to 50,000
tonnes per annum by mid-2006 as part of the expansion program.In the fourth quarter of 2005 and the first quarter of 2006, several circumstances occurred
that may potentially have a negative impact on the operations of the mine for 2006 and
future years.Firstly, the economic sanctions imposed against Myanmar by the United States have started to
seriously impact the mines ability to function in a normal way. In the fourth quarter of
2005, both the mines insurance broker and the off-shore banking institution terminated
their relationship with the mine on account of these sanctions. Although the mine had in
excess of $40 million in off-shore bank accounts at December 31, 2005, the operations of the
mine were shut-down in March 2006. The mine is expected to resume operations shortly when
additional fuel, required to operate mining equipment, and chemicals required for the
leaching and electrowinning process, become available. The management of the S&K Mine has
established a new banking relationship with an off-shore institution.Secondly, the mine has not yet been able to obtain from the Myanmar authorities the
necessary import permits for its previously ordered mining equipment. The equipment is
currently off-shore, awaiting approval for delivery. The Company does not know if or when
import permits will be granted for the importation of this equipment. The Company has
received recent oral assurances from its joint venture partner that the necessary
documentation is nearing finalization. The increase in mining capacity is crucial to allow
waste stripping for the Sabetaung deposit and ultimately for the future development of the
Kysingtaung and Letpadaung deposits. Without a substantial increase in mining capacity,
these two deposits cannot be economically developed. The drop in copper grades at the
Sabetaung pit, combined with the mines potential inability to obtain the necessary
importing permits resulted in significant decreases in copper cathode production in the
fourth quarter of 2005.
 - 72 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 4.
    
    INVESTMENT IN JOINT VENTURE (CONTINUED)Thirdly, in the third quarter of 2005, the Company reported its difference of opinion with
certain Myanmar tax authorities on a commercial tax issue involving the imposition of an 8%
commercial tax on all export sales of JVCo. In the fourth quarter of 2005, Ivanhoe Mines was
unable to satisfactorily resolve this issue. The Companys management 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 nature. The imposition of such a commercial tax, equivalent to
an additional 8% royalty, would have a significant negative impact on future cash flows and
any future development plans for the S&K Mine. The commercial tax is being claimed
retroactively to January 1, 2003, on all export copper sales. If the Myanmar governments
position on this issue prevails, the joint ventures estimated commercial tax liability at
December 31, 2005 would total approximately $22.4 million (net $11.2 million to the Company).
The Company is seeking a written legal opinion from the Attorney General of Myanmar on the
applicability of this tax and the Company has received certain assurances that the ruling may
be favorable.The Company is also concerned about the timely approvals for the expansion of the Letpadaung
deposit. To date, the expansion of the deposit has been neither approved nor denied by the
Government of Myanmar.The Company reviews the carrying value of its assets whenever events or changes in
circumstances indicate that the carrying value of an asset might have been impaired. The
Company intends to engage in discussions with its joint venture partner and with the relevant
Myanmar government authorities with a view to satisfactorily resolving these issues. If
these issues cannot be satisfactorily resolved in a timely manner, the Company may, as part
of a future review of the carrying value of its assets, be required to reflect a significant
impairment of, and reduce on its financial statements, the carrying value of its investment
in the S&K Mine.The following table summarizes Ivanhoe Mines investment in JVCo:
 December 31,2005
    
    
    2004Balance, at beginning of year
    
    $
    126,911
    
    
    $
    105,425Share of income from JVCo
    
    
    23,036
    
    
    
    21,416Cash distribution
    
    
    (10,000
    )
    
    
    Other
    
    
    (73
    )
    
    
    70Balance, at end of year
    
    $
    139,874
    
    
    $
    126,911
 - 73 -




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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)
 4.
    
    INVESTMENT IN JOINT VENTURE (CONTINUED)The following tables summarize Ivanhoe Mines 50% share of the financial position and results
of operations of JVCo for the years ending December 31, 2005 and 2004.
 December 31,2005
    
    
    2004Cash and cash equivalents
    
    $
    22,843
    
    
    $
    10,099Accounts receivable
    
    
    11,364
    
    
    
    3,734Inventories
    
    
    16,754
    
    
    
    13,313Prepaid expenses
    
    
    1,558
    
    
    
    1,800Other current assets
    
    
    
    
    
    
    117Property, plant and equipment
    
    
    128,405
    
    
    
    130,869Deferred income tax assets
    
    
    432
    
    
    
    464Other assets
    
    
    1,585
    
    
    
    1,569Accounts payable and accrued liabilities
    
    
    (14,784
    )
    
    
    (10,349
    )Current portion of long-term debt
    
    
    
    
    
    
    (7,500
    )Deferred income tax liabilities
    
    
    (11,321
    )
    
    
    (11,429
    )Other liabilities
    
    
    (16,962
    )
    
    
    (5,776
    )Share of Net Assets of JVCo
    
    $
    139,874
    
    
    $
    126,911
 Years ended December 31,2005
    
    
    2004Revenue
    
    $
    65,801
    
    
    $
    44,091Cost of operations
    
    
    (17,768
    )
    
    
    (12,137
    )Depreciation and depletion
    
    
    (5,657
    )
    
    
    (5,177
    )Operating profit
    
    
    42,376
    
    
    
    26,777Other income / (expense)
    
    
    (19,340
    )
    
    
    (5,361
    )Share of Income of JVCo
    
    $
    23,036
    
    
    $
    21,416Cash flowsFrom operating activities
    
    $
    24,805
    
    
    $
    25,207For investing activities
    
    
    (4,561
    )
    
    
    (9,086
    )For financing activities
    
    
    (7,500
    )
    
    
    (7,500
    )$
    12,744
    
    
    $
    8,621
 - 74 -




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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)
 5.
    
    CASH AND CASH EQUIVALENTSCash and cash equivalents at December 31, 2005, included Asia Golds and Jinshans cash and
cash equivalent balances of $3.1 million and $15.4 million, respectively (2004  $8.2
million and $nil), which were not available for Ivanhoe Mines general corporate purposes.
 6.
    
    ACCOUNTS RECEIVABLE
 December 31,2005
    
    
    2004Contingent income (Note 3)
    
    $
    20,243
    
    
    $
    Proceeds from sale of Project (Note 3)
    
    
    6,500
    
    
    
    Refundable taxes
    
    
    4,423
    
    
    
    4,576Related parties (Note 18 (b))
    
    
    451
    
    
    
    414Accrued interest
    
    
    340
    
    
    
    134Other
    
    
    1,393
    
    
    
    1,428$
    33,350
    
    
    $
    6,552
 7.
    
    OTHER CURRENT ASSETS
 December 31,2005
    
    
    2004Loan receivable
    
    $
    3,000
    
    
    $
    3,000Restricted cash
    
    
    286
    
    
    
    $
    3,286
    
    
    $
    3,000
 In December 2004, Ivanhoe Mines loaned Lepanto Consolidated Mining Company (Lepanto) $3.0
million, which bore interest at 3.0% per annum. In December 2005, Ivanhoe Mines and Lepanto
renegotiated the terms of the loan. The loan now matures in 2006 and bears interest at 6.0%
per annum. During 2005, Ivanhoe Mines received $0.1 million in interest income from
Lepanto.In March 2006, Ivanhoe Mines received a loan and interest repayment of $1.04 million from
Lepanto.
 - 75 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 8.
    
    LONG-TERM INVESTMENTS
 December 31, 2005
    
    December 31, 2004Equity
    
    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)
    
    
    N/a
    
    
    
    N/a
    
    
    
    N/a
    
    
    
    N/a
    
    
    
    38.5
    %
    
    $
    5,024
    
    
    
    N/a
    
    
    $
    5,024Investments available-for-sale:Intec Ltd.(b)
    
    
    12.5
    %
    
    $
    1,446
    
    
    $
    1,331
    
    
    $
    2,777
    
    
    
    12.8
    %
    
    $
    1,446
    
    
    $
    1,469
    
    
    $
    2,915Olympus Pacific Minerals Inc.(c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19.6
    %
    
    
    5,862
    
    
    
    (293
    )
    
    
    5,569Entrée Gold Inc.(d)
    
    
    15.0
    %
    
    
    10,157
    
    
    
    5,380
    
    
    
    15,537
    
    
    
    9.0
    %
    
    
    3,846
    
    
    
    1,703
    
    
    
    5,549Other
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    103$
    11,706
    
    
    $
    6,711
    
    
    $
    18,417
    
    
    
    
    
    
    $
    11,257
    
    
    $
    2,879
    
    
    $
    14,136$
    11,706
    
    
    $
    6,711
    
    
    $
    18,417
    
    
    
    
    
    
    $
    16,281
    
    
    $
    2,879
    
    
    $
    19,160
 (a)
    
    In 2004, Ivanhoe Mines and Jinshan restructured their participating arrangements in
respect of certain joint ventures. In consideration for the transaction, Jinshan
issued to Ivanhoe Mines 2.5 million common shares with a fair value of $3,248,000.
This amount was included in operations as a recovery of prior exploration expenses.In November 2005, Ivanhoe Mines and Jinshan further restructured these participating
arrangements to simplify Jinshans corporate structure. Ivanhoe Mines 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 now holds approximately 53% of the issued and
outstanding common shares of Jinshan, thereby making Jinshan a controlled
subsidiary, requiring consolidation.During 2005 and up to the date that it acquired control, Ivanhoe Mines recorded a
$2,651,000 (2004  $1,974,000) equity loss on this investment. In 2004, Ivanhoe
Mines recorded an impairment provision of $5,277,000 based on an assessment of the
underlying book value of Jinshans net assets.
 (b)
    
    In the fourth quarter of 2004, Ivanhoe Mines interest in Intec Ltd. (Intec)
was decreased to 12.8% as a result of the issuance of additional shares by Intec. As a
result, Ivanhoe Mines ceased equity accounting for its investment in Intec. During
2004, Ivanhoe Mines recorded a $341,000 equity loss on this investment.
 - 76 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 8.
    
    LONG-TERM INVESTMENTS (Continued)
 (c)
    
    During 2004, the Company sold its 32.6% interest in New Vietnam Mining Corp.
(B.V.I.) (NVM) in exchange for shares of Olympus Pacific Minerals Inc. (Olympus),
representing a 10.7% equity interest, with a fair value of $3,275,000. The interest
in NVM had been fully written down in prior years, thereby resulting in a pre-tax gain
of $3,275,000 being recognized in operations.In March 2005, the share price of 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.
 (d)
    
    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, 2005, and if not exercised will expire in July 2007.
 (e)
    
    During 2004, the Company sold its investment in Resource Investment Trust,
generating proceeds of $2,461,000. This transaction resulted in a pre-tax gain of
$1,248,000 being recognized in operations.
 - 77 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 9.
    
    PROPERTY, PLANT AND EQUIPMENT
 December 31,2005
    
    2004Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedDepletion and
    
    
    
    
    
    
    
    
    
    Depletion andDepreciation,
    
    
    
    
    
    
    
    
    
    Depreciation,Including
    
    Net Book
    
    
    
    
    
    Including
    
    Net BookCost
    
    Write-downs
    
    Value
    
    Cost
    
    Write-downs
    
    ValueMining properties
Bakyrchik Mining Venture,
Kazakhstan (a)
    
    $
    87,541
    
    
    $
    (87,541
    )
    
    $
    
    
    
    $
    87,541
    
    
    $
    (87,541
    )
    
    $
    Mining plant and equipment
Bakyrchik Mining Venture,
Kazakhstan (a)
    
    $
    3,107
    
    
    $
    (3,107
    )
    
    $
    
    
    
    $
    3,107
    
    
    $
    (3,107
    )
    
    $
    Other mineral property interestsOyu Tolgoi, Mongolia (b)
    
    $
    43,562
    
    
    $
    (6,244
    )
    
    $
    37,318
    
    
    $
    43,097
    
    
    $
    (6,185
    )
    
    $
    36,912Cloncurry, Australia (c)
    
    
    6,293
    
    
    
    (1,185
    )
    
    
    5,108
    
    
    
    6,293
    
    
    
    (696
    )
    
    
    5,597Other exploration projects
    
    
    1,530
    
    
    
    (115
    )
    
    
    1,415
    
    
    
    1,594
    
    
    
    (308
    )
    
    
    1,286$
    51,385
    
    
    $
    (7,544
    )
    
    $
    43,841
    
    
    $
    50,984
    
    
    $
    (7,189
    )
    
    $
    43,795Other capital assetsOyu Tolgoi, Mongolia (b)
    
    $
    14,334
    
    
    $
    (3,326
    )
    
    $
    11,008
    
    
    $
    6,121
    
    
    $
    (1,701
    )
    
    $
    4,420Cloncurry, Australia (c)
    
    
    1,833
    
    
    
    (174
    )
    
    
    1,659
    
    
    
    2,399
    
    
    
    (143
    )
    
    
    2,256Other exploration projects
    
    
    2,961
    
    
    
    (1,122
    )
    
    
    1,839
    
    
    
    1,385
    
    
    
    (936
    )
    
    
    449$
    19,128
    
    
    $
    (4,622
    )
    
    $
    14,506
    
    
    $
    9,905
    
    
    $
    (2,780
    )
    
    $
    7,125Capital works in progressOyu Tolgoi, Mongolia (b)
    
    $
    22,939
    
    
    $
    
    
    
    $
    22,939
    
    
    $
    1,784
    
    
    $
    
    
    
    $
    1,784Bakyrchik Mining Venture,
Kazakhstan (a)
    
    
    4,420
    
    
    
    
    
    
    
    4,420
    
    
    
    1,730
    
    
    
    
    
    
    
    1,730$
    27,359
    
    
    $
    
    
    
    $
    27,359
    
    
    $
    3,514
    
    
    $
    
    
    
    $
    3,514$
    188,520
    
    
    $
    (102,814
    )
    
    $
    85,706
    
    
    $
    155,051
    
    
    $
    (100,617
    )
    
    $
    54,434
 (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, 2005 consisted mainly of surface assets
being constructed for the exploration shaft at Oyu Tolgoi ($21.4 million).(c)
    
    Ivanhoe Mines owns certain copper-gold and uranium mining and exploration
leases in Queensland, Australia.
 - 78 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 10.
    
    OTHER ASSETS
 December 31,2005
    
    
    2004Advances to suppliers
    
    $
    1,711
    
    
    $
    917Environmental bond (Queensland, Australia)
    
    
    2,683
    
    
    
    2,847$
    4,394
    
    
    $
    3,764
 11.
    
    ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 December 31,2005
    
    
    2004Accounts payable
    
    $
    11,902
    
    
    $
    10,970Payroll and other employee related payables
    
    
    546
    
    
    
    157Accrued construction costs
    
    
    7,044
    
    
    
    Amounts payable to related parties (Note 18 (b))
    
    
    1,102
    
    
    
    3,285$
    20,594
    
    
    $
    14,412
 12.
    
    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 $111,055,000 from the sale of
the Savage River Project. At December 31, 2005, $15.0 million has been received from the
sale with a further $26.7 million accrued as receivable (Note 3 and 6).
 - 79 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 13.
    
    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 31,2005
    
    
    2004Deferred income taxes
    
    $
    (15
    )
    
    $
    246Capital taxes
    
    
    448
    
    
    
    342$
    433
    
    
    $
    588
 Deferred income tax assets and liabilities for continuing operations at December 31, 2005 and
2004 arise from the following:
 December 31,2005
    
    
    2004Deferred income tax assetsLong-term investments
    
    $
    279
    
    
    $
    2,441Loss carry-forwards
    
    
    133,562
    
    
    
    86,691Other
    
    
    10,107
    
    
    
    10,978143,948
    
    
    
    100,110Valuation allowance
    
    
    (143,777
    )
    
    
    (99,792
    )Net deferred income tax assets
    
    
    171
    
    
    
    318Deferred income tax liabilities
Property, plant and equipment
    
    
    315
    
    
    
    476315
    
    
    
    476Deferred income tax liabilities, net
    
    $
    144
    
    
    $
    158
 - 80 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 13.
    
    INCOME TAXES (Continued)A reconciliation of the provision for income and capital taxes for continuing operations is
as follows:
 Years ended December 31,2005
    
    
    2004Recovery of income taxes based on the combinedCanadian federal and provincial statutory tax
rates of 34.9% in 2005 and 35.6% in 2004
applied to the loss before taxes and other items
    
    $
    44,666
    
    
    $
    35,780(Deduct) addLower foreign tax rates
    
    
    (7,109
    )
    
    
    (734
    )Tax benefit of losses not recognized
    
    
    (34,703
    )
    
    
    (33,831
    )Change in valuation allowance for deferred
income tax assets
    
    
    (147
    )
    
    
    749Capital taxes
    
    
    (448
    )
    
    
    (342
    )Other, including non-deductible expenses
    
    
    (2,692
    )
    
    
    (2,210
    )Provision for income and capital taxes
    
    $
    (433
    )
    
    $
    (588
    )
 At December 31, 2005, Ivanhoe Mines had deductible temporary differences aggregating
approximately $24,554,000 and 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.
    
    $
    124,078
    
    
    $
    106,780
    
    
    2006 to 2012Australia
    
    
    A
    
    
    $
    8,349
    
    
    $
    6,118
    
    
    (a)Mongolia
    
    Mongolian Tugrik
    
    
    316,819,140
    
    
    $
    282,370
    
    
    (b)Kazakhstan
    
    Kazakhstan Tenge
    
    
    11,354,394
    
    
    $
    84,958
    
    
    2006 to 2012Capital losses:Canada
    
    Cdn.
    
    $
    90,210
    
    
    $
    77,633
    
    
    (c)
  
 (a)
    
    These losses are carried forward indefinitely, subject to continuity of ownership
and business tests.(b)
    
    These losses are carried forward indefinitely 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. - 81 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 13.
    
    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.
 14.
    
    ASSET RETIREMENT OBLIGATIONS
 December 31,2005
    
    
    2004Balance, beginning of year
    
    $
    5,267
    
    
    $
    4,709Increase in obligations for:Amounts incurred
    
    
    610
    
    
    
    660Amounts extinguished on disposal of
mineral property interests
    
    
    
    
    
    
    (388
    )Accretion expense
    
    
    354
    
    
    
    286Balance, end of year
    
    $
    6,231
    
    
    $
    5,267
 The total undiscounted amount of estimated cash flows required to settle the obligations is
$20,458,000 (2004- $12,179,000), which has been discounted using credit adjusted risk free
rates ranging from 5.6% to 8.4%. All reclamation obligations are not expected to be paid for
several years and will be funded from Ivanhoe Mines cash balances at the time of mine
closures.
 15.
    
    MINORITY INTERESTSAt December 31, 2005 and 2004, there were minority interests in the BMV, Asia Gold and
Jinshan. Currently, losses applicable to the minority interest in the BMV are being
allocated to Ivanhoe Mines since those losses exceed the minority interest in the net assets
of the BMV.The minority interests are comprised of the following:
 December 31,2005
    
    
    2004Balance, beginning of year
    
    $
    3,713
    
    
    $
    5,816Minority interests share of loss of Asia Gold
    
    
    (2,714
    )
    
    
    (2,103
    )Increase in minority interest arising from
share issuances by Asia Gold
    
    
    582
    
    
    
    Initial interest arising from acquisition of
Jinshan in December 2005
    
    
    7,347
    
    
    
    Balance, end of year
    
    $
    8,928
    
    
    $
    3,713
 - 82 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 16.
    
    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, which vest over a period of years, 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. 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.
  - 83 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 16.
    
    SHARE CAPITAL (Continued)
 (a)
    
    Equity Incentive Plan (Continued)A summary of stock option activity and information concerning outstanding and
exercisable options at December 31, 2005 is as follows:
 Options OutstandingOptions
    
    
    Number of
    
    
    WeightedAvailable
    
    
    Common
    
    
    Averagefor Grant
    
    
    Shares
    
    
    Exercise Price(Expressed inCanadian dollars)Balances, December 31, 2003
    
    
    3,215,126
    
    
    
    8,589,894
    
    
    
    3.26Options granted
    
    
    (3,089,000
    )
    
    
    3,089,000
    
    
    
    7.91Options exercised
    
    
    
    
    
    
    (1,665,952
    )
    
    
    1.58Options cancelled
    
    
    122,000
    
    
    
    (122,000
    )
    
    
    2.93Shares issued for consulting fees
    
    
    (126,373
    )
    
    
    
    
    
    
    Shares issued under share
purchase plan
    
    
    (17,019
    )
    
    
    
    
    
    
    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
    
    
    $
    7.27
   - 84 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 16.
    
    SHARE CAPITAL (Continued)
 (b)
    
    Equity Incentive Plan (Continued)The following table summarizes information concerning outstanding and exercisable
options at December 31, 2005:
 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
    
    
    
    
    
    
    Canadianddollars)
    
    
    
    
    
    
    
    
    
    dollars)
    
    
    
    
    
    
    dollars)$1.20 to $3.50
    
    
    2,002,200
    
    
    
    1.54
    
    
    $
    2.75
    
    
    
    1,645,300
    
    
    $
    2.64$3.51 to $6.75
    
    
    293,500
    
    
    
    2.67
    
    
    
    6.75
    
    
    
    181,500
    
    
    
    6.75$6.76 to $7.69
    
    
    1,051,000
    
    
    
    3.26
    
    
    
    7.46
    
    
    
    471,330
    
    
    
    7.37$7.70 to $8.20
    
    
    1,430,000
    
    
    
    6.78
    
    
    
    7.91
    
    
    
    572,000
    
    
    
    7.91$8.21 to $8.99
    
    
    1,140,000
    
    
    
    4.09
    
    
    
    8.62
    
    
    
    295,000
    
    
    
    8.63$9.00 to $10.51
    
    
    500,000
    
    
    
    4.26
    
    
    
    9.56
    
    
    
    75,000
    
    
    
    9.67$10.52 to $12.70
    
    
    1,000,000
    
    
    
    7.84
    
    
    
    12.70
    
    
    
    750,000
    
    
    
    12.707,416,700
    
    
    
    4.26
    
    
    $
    7.27
    
    
    
    3,990,130
    
    
    $
    6.61
  2005
    
    
    2004Risk-free interest rate
    
    
    3.76
    %
    
    
    4.29
    %Expected life
    
    5.0 years
    
    6.6 yearsExpected volatility
    
    
    61
    %
    
    
    64
    %Expected dividends
    
    $Nil
    
    $Nil
 (c)
    
    Share Purchase WarrantsAt December 31, 2005, the Company had 5,760,000 share purchase warrants outstanding
that were issued in 2004. These warrants entitle 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.
 - 85 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 17.
    
    ACCUMULATED OTHER COMPREHENSIVE INCOME
 December 31,2005
    
    
    2004Balance, beginning of year
    
    $
    2,879
    
    
    $
    1,587Other comprehensive income for the year:Changes in fair value of long-term investments
    
    
    3,539
    
    
    
    2,124Reclassification for losses (gains) recorded in
earnings
    
    
    293
    
    
    
    (1,025
    )Other comprehensive income before tax:
    
    
    3,832
    
    
    
    1,099Income tax recovery related to other
comprehensive income
    
    
    
    
    
    
    193Other comprehensive income, net of tax:
    
    
    3,832
    
    
    
    1,292Balance, end of year
    
    $
    6,711
    
    
    $
    2,879
 18
    
    OTHER RELATED PARTY TRANSACTIONS
 (a)
    
    Ivanhoe Mines incurred the following expenses, primarily on
a cost recovery basis, with an officer of Ivanhoe Mines, a company subject to
significant influence by Ivanhoe Mines, or with companies related by way of
directors or shareholders in common:
 Years ended December 31,2005
    
    
    2004Exploration
    
    $
    1,122
    
    
    $
    2,198Legal
    
    
    823
    
    
    
    468Office and administrative
    
    
    2,216
    
    
    
    2,057Salaries and benefits
    
    
    2,904
    
    
    
    2,239Travel (including aircraft rental)
    
    
    3,421
    
    
    
    3,001$
    10,486
    
    
    $
    9,963
  (b)
    
    Accounts receivable and accounts payable at December 31, 2005, included $451,000
and $1,102,000, respectively (December 31, 2004  $414,000 and $3,285,000,
respectively), which were due from/to a company under common control or companies
related by way of directors in common.
 - 86 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 19.
    
    CASH FLOW INFORMATION
 (a)
    
    Net change in non-cash operating working capital items
 Years ended December 31,2005
    
    
    2004(Increase) decrease in:Accounts receivable
    
    $
    522
    
    
    $
    (3,254
    )Inventories
    
    
    (1,355
    )
    
    
    (1,689
    )Prepaid expenses
    
    
    (5,132
    )
    
    
    (795
    )Other current assets
    
    
    
    
    
    
    (1,010
    )Increase in:Accounts payable and accrued liabilities
    
    
    4,209
    
    
    
    3,574$
    (1,756)
    
    
    $
    (3,174)
 (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 31,2005
    
    
    2004Investing activities:Acquisition of property, plant and equipment
    
    $
    440
    
    
    $
    
 (c)
    
    Other supplementary information
 Years ended December 31,2005
    
    
    2004Interest paid
    
    $
    
    
    
    $
    Income taxes paid
    
    $
    448
    
    
    $
    342
 - 87 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 20.
    
    SEGMENT DISCLOSURESIvanhoe Mines has one operating segment; its exploration division with projects located
primarily in Mongolia. The iron ore division located in Australia was sold in February 2005
and has been reported as discontinued operations (Note 3).
 Year ended
    
    ExplorationDecember 31, 2005
    
    Division
    
    
    Corporate
    
    
    ConsolidatedOperating expensesExploration
    
    $
    (127,165
    )
    
    $
    
    
    
    
    (127,165
    )General and administrative
    
    
    
    
    
    
    (23,825
    )
    
    
    (23,825
    )Interest
    
    
    (124
    )
    
    
    (230
    )
    
    
    (354
    )Depreciation
    
    
    (2,516
    )
    
    
    (42
    )
    
    
    (2,558
    )Mining property care and maintenance costs
    
    
    
    
    
    
    (3,706
    )
    
    
    (3,706
    )Write-down of carrying values of property, plant
and equipment
    
    
    (442
    )
    
    
    (167
    )
    
    
    (609
    )Operating loss
    
    
    (130,247
    )
    
    
    (27,970
    )
    
    
    (158,217
    )Other income (expenses)Share of income from joint venture
    
    
    
    
    
    
    23,036
    
    
    
    23,036Interest income
    
    
    294
    
    
    
    3,127
    
    
    
    3,421Foreign exchange losses (gains)
    
    
    (157
    )
    
    
    7,908
    
    
    
    7,751Share of loss of significantly influenced investees
    
    
    
    
    
    
    (2,651
    )
    
    
    (2,651
    )Gain on sale of long-term investments
    
    
    
    
    
    
    115
    
    
    
    115Write-down of carrying value of long-term investments
    
    
    
    
    
    
    (1,438
    )
    
    
    (1,438
    )Loss before taxes and other items
    
    
    (130,110
    )
    
    
    2,127
    
    
    
    (127,983
    )Provision for income and capital taxes
    
    
    (205
    )
    
    
    (228
    )
    
    
    (433
    )Minority interests
    
    
    2,714
    
    
    
    
    
    
    
    2,714Net loss from continuing operations
    
    $
    (127,601
    )
    
    $
    1,899
    
    
    $
    (125,702
    )Expenditures on property, plant and equipment
    
    $
    29,754
    
    
    $
    2,866
    
    
    $
    32,620Total assetsContinuing operations
    
    $
    124,919
    
    
    $
    271,860
    
    
    $
    396,779Discontinued operations
    
    
    
    
    
    
    
    
    
    
    $
    124,919
    
    
    $
    271,860
    
    
    $
    396,779
 - 88 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 20.
    
    SEGMENT DISCLOSURES (Continued)
 Year ended
    
    ExplorationDecember 31, 2004
    
    Division
    
    
    Corporate
    
    
    ConsolidatedOperating expensesExploration
    
    $
    (98,174
    )
    
    $
    
    
    
    
    (98,174
    )General and administrative
    
    
    
    
    
    
    (22,202
    )
    
    
    (22,202
    )Interest
    
    
    (134
    )
    
    
    (175
    )
    
    
    (309
    )Depreciation
    
    
    (2,002
    )
    
    
    (25
    )
    
    
    (2,027
    )Mining property care and maintenance costs
    
    
    
    
    
    
    (3,755
    )
    
    
    (3,755
    )Write-down of carrying values of property, plant
and equipment
    
    
    
    
    
    
    (142
    )
    
    
    (142
    )Operating loss
    
    
    (100,310
    )
    
    
    (26,299
    )
    
    
    (126,609
    )Other income (expenses)Share of income from joint venture
    
    
    
    
    
    
    21,416
    
    
    
    21,416Interest income
    
    
    232
    
    
    
    2,894
    
    
    
    3,126Foreign exchange gains
    
    
    48
    
    
    
    4,583
    
    
    
    4,631Share of loss of significantly influenced investees
    
    
    
    
    
    
    (2,315
    )
    
    
    (2,315
    )Gain on sale of long-term investments
    
    
    
    
    
    
    4,523
    
    
    
    4,523Write-down of carrying value of long-term investments
    
    
    
    
    
    
    (5,277
    )
    
    
    (5,277
    )Loss before taxes and other items
    
    
    (100,030
    )
    
    
    (475
    )
    
    
    (100,505
    )Provision for income and capital taxes
    
    
    (184
    )
    
    
    (404
    )
    
    
    (588
    )Minority interests
    
    
    2,103
    
    
    
    
    
    
    
    2,103Net loss from continuing operations
    
    $
    (98,111
    )
    
    $
    (879
    )
    
    $
    (98,990
    )Expenditures on property, plant and equipment
    
    $
    6,039
    
    
    $
    1,807
    
    
    $
    7,846Total assetsContinuing operations
    
    $
    84,242
    
    
    $
    245,763
    
    
    $
    330,005Discontinued operations
    
    
    
    
    
    
    46,263
    
    
    
    46,263$
    84,242
    
    
    $
    292,026
    
    
    $
    376,268
 - 89 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 20.
    
    SEGMENT DISCLOSURES (Continued)
 December 31,2005
    
    
    2004Property, plant and equipment at the end of the year:Mongolia
    
    $
    71,666
    
    
    $
    43,308Inner Mongolia, China
    
    
    2,459
    
    
    
    1,293Australia
    
    
    6,767
    
    
    
    7,853Kazakhstan
    
    
    4,419
    
    
    
    1,730Canada
    
    
    131
    
    
    
    144Other
    
    
    264
    
    
    
    106$
    85,706
    
    
    $
    54,434
 21.
    
    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:
 2006
    
    $
    16,3452007
    
    
    2,4062008
    
    
    8832009 onwards
    
    
    $
    19,634
 - 90 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 22.
    
    DISCLOSURES REGARDING FINANCIAL INSTRUMENTS
 (a)
    
    The estimated fair value of Ivanhoe Mines financial instruments was as follows:
 December 31,2005
    
    
    2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCash
    
    $
    101,681
    
    
    $
    101,681
    
    
    $
    112,478
    
    
    $
    112,478Accounts receivable
    
    
    33,350
    
    
    
    33,350
    
    
    
    6,552
    
    
    
    6,552Other current assets
    
    
    3,286
    
    
    
    3,286
    
    
    
    3,000
    
    
    
    3,000Current
assets of discontinued operations (Note 3)
    
    
    
    
    
    
    
    
    
    
    36,636
    
    
    
    36,636Long-term investments
    
    
    18,417
    
    
    
    18,417
    
    
    
    19,160
    
    
    
    24,404Accounts payable and accrued liabilities
    
    
    20,594
    
    
    
    20,594
    
    
    
    14,412
    
    
    
    14,412Current
liabilities of discontinued operations (Note 3)
    
    
    
    
    
    
    
    
    
    
    14,082
    
    
    
    14,082Loans payable to related parties
    
    
    5,088
    
    
    
    3,733
    
    
    
    5,088
    
    
    
    3,393
   (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.
 - 91 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
  Consolidated Balance Sheets
 December 31,2005
    
    
    2004Total assets in accordance with U.S. GAAP
    
    $
    396,779
    
    
    $
    376,268Reverse equity accounting for investment in joint venture (a)
    
    
    43,067
    
    
    
    35,054Increase in fair value of the Savage River Project assets
acquired (b)
    
    
    
    
    
    
    5,634Adjustment arising from reversal of write-down of the
Savage River Project (c)
    
    
    
    
    
    
    14,058Reversal of amortization of other mineral property interests (d)
    
    
    6,329
    
    
    
    6,521Adjustment to carrying value of long-term investments (e)
    
    
    (6,711
    )
    
    
    (2,879
    )Total assets in accordance with Canadian GAAP
    
    $
    439,464
    
    
    $
    434,656Total liabilities in accordance with U.S. GAAP
    
    $
    32,228
    
    
    $
    65,705Reverse equity accounting for investment in joint venture (a)
    
    
    43,067
    
    
    
    35,054Income tax effect of U.S. GAAP adjustments for:Amortization of other mineral property interests (d)
    
    
    882
    
    
    
    882Total liabilities in accordance with Canadian GAAP
    
    $
    76,177
    
    
    $
    101,641Total minority interests in accordance with U.S.
and Canadian GAAP
    
    $
    8,928
    
    
    $
    3,713Total shareholders equity in accordance with U.S. GAAP
    
    $
    355,623
    
    
    $
    306,850Increase in fair value of shares issued to acquire ABM (b)
    
    
    
    
    
    
    4,930(Increase) decrease in the deficit for:Amortization of deferred stock compensation (b)
    
    
    
    
    
    
    704Adjustment arising from write-down of the Savage River
Project (c)
    
    
    
    
    
    
    14,058Amortization of other mineral property interests (d)
    
    
    5,447
    
    
    
    5,639Other comprehensive income (f)
    
    
    (6,711
    )
    
    
    (2,879
    )Total shareholders equity in accordance with Canadian GAAP
    
    $
    354,359
    
    
    $
    329,302
 - 92 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)
 Consolidated Statements of Operations
 Years ended December 31,2005
    
    
    2004Net (loss) from continuing operations in accordance with U.S. GAAP
    
    $
    (125,702
    )
    
    $
    (98,990
    )Dilution gain on issuance of shares by a subsidiary (i)
    
    
    3,012
    
    
    
    Net (loss) from continuing operations in accordance with
Canadian GAAP
    
    $
    (122,690
    )
    
    $
    (98,990
    )Net income from discontinued operations in accordance
with U.S. GAAP
    
    $
    35,916
    
    
    $
    4,449Adjustment arising from write-down of the Savage River Project (c)
    
    
    
    
    
    
    (2,974
    )Write-down of other mineral property interests (d)
    
    
    (192
    )
    
    
    Gain on sale of Savage River Project (h)
    
    
    (19,692
    )
    
    
    Net income from discontinued operations in accordance
with Canadian GAAP
    
    $
    16,032
    
    
    $
    1,475Net (loss) in accordance with Canadian GAAP
    
    $
    (106,658
    )
    
    $
    (97,515
    )Weighted-average number of shares outstanding under
Canadian GAAP (in thousands)
    
    
    305,160
    
    
    
    281,640Basic and diluted (loss) earnings per share in accordance with
Canadian GAAP from:Continuing operations
    
    $
    (0.40
    )
    
    $
    (0.35
    )Discontinued operations
    
    
    0.05
    
    
    
    $
    (0.35
    )
    
    $
    (0.35
    )
  December 31,2005
    
    
    2004Share capital
    
    $
    999,372
    
    
    $
    873,536Additional paid-in capital
    
    
    17,952
    
    
    
    12,073Deficit
    
    
    (662,965
    )
    
    
    (556,307
    )$
    354,359
    
    
    $
    329,302
 - 93 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)
 Consolidated Statements of Cash Flows
 Years ended December 31,2005
    
    
    2004Cash used in operating activities in accordance with
U.S. GAAP
    
    $
    (133,113
    )
    
    $
    (118,740
    )Reverse equity accounting for investment in
joint venture (a)
    
    
    24,805
    
    
    
    25,207Cash used in operating activities in accordance with
Canadian GAAP
    
    
    (108,308
    )
    
    
    (93,533
    )Cash (used in) provided by investing activities in accordance
with U.S. GAAP
    
    
    (10,232
    )
    
    
    12,606Reverse equity accounting for investment in
joint venture (a)
    
    
    (4,561
    )
    
    
    (9,086
    )Cash (used in) provided by investing activities in
accordance with Canadian GAAP
    
    
    (14,793
    )
    
    
    3,520Cash provided by (used in) financing activities in
accordance with U.S. GAAP
    
    
    124,706
    
    
    
    107,711Reverse equity accounting for investment in
joint venture (a)
    
    
    (7,500
    )
    
    
    (7,500
    )Cash provided by financing activities in accordance
with Canadian GAAP
    
    
    117,206
    
    
    
    100,211Effect of exchange rate changes on cash
    
    
    7,842
    
    
    
    5,385Net cash inflow in accordance with Canadian GAAP
    
    
    1,947
    
    
    
    15,583Cash, beginning of year in accordance with Canadian GAAP
    
    
    122,577
    
    
    
    106,994Cash, end of year in accordance with Canadian GAAP
    
    $
    124,524
    
    
    $
    122,577
 - 94 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
 (a)
    
    Investment in Joint VentureUnder 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 the 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 included in the
corresponding line items of Ivanhoe Mines financial statements. All intercompany
balances and transactions would be eliminated. Note 4 discloses the asset,
liabilities, revenues and expenses of JVCo that would have been included in the
corresponding line items on Ivanhoe Mines financial statements had Canadian GAAP
been applied.(b)
    
    Acquisition of ABMUnder U.S. GAAP, the fair value of the shares issued in 2000 to effect the
acquisition of ABM were measured at the date the acquisition was announced and the
terms agreed to, whereas, under Canadian GAAP, the shares issued would have been
measured at the
transaction date. This difference would have resulted in the cost of the
acquisition under Canadian GAAP being $4,930,000 higher than under U.S. GAAP.Under U.S. GAAP, the Company included in the cost of the acquisition of ABM the
intrinsic value of the unvested options granted by the Company in 2000 as
consideration for the acquisition of all of the outstanding stock options of ABM.
Under U.S. GAAP, the deferred stock compensation was recognized as a compensation
cost over the remaining future vesting period of the options. Under Canadian GAAP,
the Company would have included in the cost of acquisition of ABM the $1,750,000
fair value of the stock options. This difference would have resulted in the cost of
the acquisition in 2000 under Canadian GAAP being $704,000 higher than under U.S.
GAAP.ABM was sold in February 2005 (Note 3).
 - 95 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
 (c)
    
    Impairment of long-lived assetsUnder U.S. GAAP, impairment charges are recorded based on the discounted, estimated
future net cash flows, whereas, under Canadian GAAP, impairment charges on
long-lived assets in 2002 and prior years were recorded as the excess of their
carrying amount over their recoverable amount, which was determined based on the
undiscounted estimated future net cash flows.Under U.S. GAAP, the Savage River Project was fully written off as at December 31,
2002. However, under Canadian GAAP only an $18 million write-down would have been
taken. In 2003, additional amounts capitalized under U.S. GAAP were written off;
however, these would have been capitalized under Canadian GAAP. As a result, under
Canadian GAAP, these assets would need to be depreciated and depleted. In 2005,
additional depreciation recorded under Canadian GAAP was $nil (2004: $2,974,000).(d)
    
    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.
 - 96 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 23. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Continued)
 (e)
    
    Long-term investmentsUnder U.S. GAAP, portfolio investments are classified as available-for-sale
securities, which are carried at market value. The resulting unrealized gains or
losses are included in the determination of comprehensive income, net of income
taxes where applicable. Under Canadian GAAP, these investments would be carried at
their original cost less provisions for impairment.(f)
    
    Other comprehensive incomeU.S. GAAP requires that a statement of comprehensive income be displayed with the
same prominence as other financial statements and that the aggregate amount of
comprehensive income, excluding the deficit, be disclosed separately in
shareholders equity. Comprehensive income, which incorporates the net loss,
includes all changes in shareholders equity during a period except those resulting
from investments by, and distributions to, owners. Under Canadian GAAP, companies
do not report comprehensive income or loss.(g)
    
    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 any effect on the financial position or
results of operations of the Company for the years ended December 31, 2005 and 2004.(h)
    
    Gain on Sale of ABMUnder U.S. GAAP, the net book value of ABM when it was sold in February 2005 was
$11.2 million, whereas under Canadian GAAP the carrying value was $30.9 million.
During 2005, total proceeds from the sale were $41.7 million, representing cash
instalments including interest of $21.5 million, plus escalating payments of $20.2
million. Therefore, under Canadian GAAP the gain on sale was $19.7 million less
than under U.S. GAAP.
 - 97 -




---



##### 



IVANHOE MINES LTD.
Notes to the Consolidated Financial Statements
(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands)
 23.
    
    DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Continued)
 (i)
    
    Dilution gain on investment in subsidiaryUnder U.S. GAAP the $3.0 million 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 2005.(j)
    
    Recently released Canadian accounting standardsIn January 2005, the CICA issued Section 1530, Comprehensive Income, Section 3251,
Equity, Section 3855, Financial Instruments  Recognition and Measurement, and
Section 3865, Hedges. The new standards increase harmonization with US GAAP and
will require the following measures:Financial assets will be classified as held-to-maturity, held-for-trading or
available-for-sale. Held-to-maturity classification will be restricted to fixed
maturity instruments that the Company intends, and is able, to hold to maturity and
will be accounted for at amortized cost. Held-for-trading instruments will be
recorded at fair value, with realized and unrealized gains and losses reported in net
income. Available-for-sale financial assets will be recorded at fair value, with
unrealized gains and losses reported in a new category in shareholders equity, called
other comprehensive income.Derivatives will be classified as held-for-trading unless designated as hedging
instruments. All derivatives, including embedded derivatives that must be separately
accounted for, will be recorded at fair value on the Condensed Consolidated Balance
Sheet. For derivatives that hedge the changes in fair value of an asset or liability,
changes in the derivatives fair value will be reported in net income and
substantially offset by changes in the fair value of the hedged asset or liability
attributable to the risk being hedged. For derivatives that hedge variability in cash
flows, the effective portion of the changes in the derivatives fair value will be
initially recognized in other comprehensive income and the ineffectiveness will be
recorded in net income. The amounts temporarily recorded in other comprehensive
income subsequently will be reclassified to net income in the periods net income is
affected by the variability in the cash flows of the hedged item.The guidance will apply for interim and annual financial statements relating to fiscal
years beginning on or after October 1, 2006. Earlier adoption is permitted only as of
the beginning of a fiscal year. The Company will adopt these new standards on January
1, 2006.
 
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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)
 24.
    
    SUBSEQUENT EVENTSOn March 29, 2006, Ivanhoe Mines announced that it had entered into a financing that consists
of 16 million common shares at a price of $8.77 per common share (Cdn$10.28), representing an
aggregate amount of $140.3 million (Cdn$164.5 million). Ivanhoe Mines has granted the
underwriters an option, exercisable at the issue price for a period of 30 days following the
closing of this offering, to purchase up to an additional 15% of the issue size, representing
2,400,000 common shares. Closing is expected on or about April 25, 2006.
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