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EXHIBIT 3 IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) Table of Contents INTRODUCTION
    
    
    3FORWARD LOOKING STATEMENTS
    
    
    3CORPORATE STRATEGY & OUTLOOK
    
    
    5SELECTED FINANCIAL INFORMATION
    
    
    13SELECTED QUARTERLY DATA
    
    
    14EXECUTIVE SUMMARY  2004 YEAR
    
    
    15QUARTERLY ANALYSIS Q404 vs. Q403
    
    
    20REVIEW OF OPERATIONS
    
    
    21A) EXPLORATION
    
    
    21B) MINING OPERATIONS
    
    
    27C) DISCONTINUED OPERATIONS
    
    
    28D) ADMINISTRATIVE AND OTHER
    
    
    29CASH RESOURCES AND LIQUIDITY
    
    
    30CONTRACTUAL OBLIGATIONS
    
    
    32CRITICAL ACCOUNTING ESTIMATES
    
    
    32RISKS AND UNCERTAINTIES
    
    
    37RELATED-PARTY TRANSACTIONS
    
    
    41OFF-BALANCE SHEET ARRANGEMENTS
    
    
    43FINANCIAL INSTRUMENTS
    
    
    43QUALIFIED PERSONS
    
    
    43OVERSIGHT ROLE OF THE AUDIT COMMITTEE
    
    
    43MANAGEMENTS REPORT TO THE SHAREHOLDERS
    
    
    44REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
    
    
    45CONSOLIDATED FINANCIAL STATEMENTS
    
    
    46
 Page 2 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) INTRODUCTION This discussion and analysis of financial position and results of operations (MD&A) of
Ivanhoe Mines Ltd. should be read in conjunction with the audited consolidated financial statements
of Ivanhoe Mines Ltd. and the notes thereto for the year ended December 31, 2004. In this MD&A,
unless the context otherwise dictates, a reference to the Company refers to Ivanhoe Mines Ltd. and
a reference to Ivanhoe Mines refers to Ivanhoe Mines Ltd. together with its subsidiaries and joint
ventures. The effective date of this MD&A is March 21 , 2005. Additional information about the Company, including its Annual Information Form, is available
at www.sedar.com. FORWARD LOOKING STATEMENTS Except for statements of historical fact relating to Ivanhoe Mines, certain information
contained herein constitutes forward-looking statements within the meaning of Section 21E of the
United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States
Securities Act of 1933, as amended. Forward-looking statements include, but are not limited to,
statements concerning estimates of expected capital expenditures, statements relating to expected
future production and cash flows, statements relating to the continued advancement of Ivanhoe
Mines exploration, development and production projects, statements relating to the potential of
the Oyu Tolgoi Project, statements relating to target milling rates and other statements that are
not historical facts. When used in this document, the words such as
could, plan, estimate,
expect, intend, may, potential, should and similar expressions, are forward-looking
statements. Although Ivanhoe Mines believes that its expectations reflected in these
forward-looking statements are reasonable, such statements involve risks and uncertainties and no
assurance can be given that actual results will be consistent with these forward-looking
statements. Important factors that could cause actual results to differ from these forward-looking
statements include the potential that Ivanhoe Mines projects will experience technological and
mechanical problems, geological conditions in the deposits may not result in commercial levels of
mineral production, changes in product prices, changes in political conditions, changes in the
availability of project financing and other risks. Forward-looking statements are based on the
opinions and estimates of management at the date the statements are made, and are subject to a
variety of risks and uncertainties and other factors that could cause actual events or results to
differ materially from those projected in the forward-looking statements. The Company undertakes no
obligation to update forward-looking statements if circumstances or managements estimates or
opinions should change. The reader is cautioned not to place undue reliance on forward-looking
statements. This MD&A contains references to estimates of mineral resources. The estimation of resources is
inherently uncertain and involves subjective judgments about many relevant
factors. The accuracy of any such estimates is a function of the quantity and quality of available
data, and of Page 3 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) the assumptions made and judgments used in engineering and geological interpretation, which may
prove to be unreliable. There can be no assurance that these estimates of mineral resources will be
accurate or that such mineral resources can be mined or processed profitably. Mineral resources
that are not mineral reserves do not have demonstrated economic viability. Factors that could cause
actual results to differ materially include, but are not limited to, those set forth herein under
Risks and Uncertainties. Page 4 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) CORPORATE STRATEGY & OUTLOOK Ivanhoe Mines Ltd. is an international mining company currently focused on exploring and
developing a major discovery of copper and gold at its Oyu Tolgoi (Turquoise Hill) project in
southern Mongolia (the Oyu Tolgoi Project). Ivanhoe Mines operations also include the extraction
of copper from a 50% joint venture interest in the Monywa Copper Project in Myanmar. Since its inception in 1994, mineral exploration has been the Companys main focus of interest. In
2005, the Company intends to devote most of its management and financial resources to furthering
the exploration and development of the Oyu Tolgoi Project while at the same time continuing to
explore for minerals in other parts of Mongolia, Eastern Asia and Australia. High priority also
will be placed on fully understanding the extent, value and development potential of the
strategically located coal resources recently uncovered on Ivanhoe Mines exploration concessions
in southern Mongolia. In 2004, management expected to conclude the negotiations for its Stability Agreement with the
Government of Mongolia, which is necessary to provide long-term investment security to finance the
development of the Oyu Tolgoi Project. The life span of the Oyu Tolgoi Project is currently
estimated to exceed 40 years, so the completion and execution of a satisfactory Stability Agreement
that will crystallize such issues as taxes, power, labour, land use and water rights, is essential
to allow the Company to finance the development of the Oyu Tolgoi Project. Management has provided
a comprehensive briefing on the project to the Cabinet of the Mongolian government, in a public
forum. Discussions are ongoing and the Company is hopeful that the Stability Agreement will be
finalized and executed in 2005. Rather than wait for the approval of the Stability Agreement, which would provide certainty for
several key aspects required by a bankable feasibility study, the Company intends to release a
revised preliminary assessment report (the Oyu Tolgoi Integrated Development Plan), late in
Q205. Findings from the two engineering studies that were initiated in 2004, the open pit feasibility
study for the Southern Oyu deposits (which encompass the Southwest Oyu, South Oyu, Far South Oyu
and Central Oyu deposits) and the underground pre-feasibility study for the large-scale underground
block caving operation at the Hugo North deposit, will be integrated and combined within the
economics of the Integrated Development Plan. The plan will address the proven and probable
reserves at the Southwest Oyu deposit, the soon to be released independent estimate of indicated
resources at the Hugo North deposit and the inferred resources at the Hugo North and the Hugo South
deposits (the Hugo Dummett deposits). In managements view, the Integrated Development Plan will
present a more informative, overall picture of the future development of the Oyu Tolgoi Project,
especially given the recent exploration success in Hugo North and the expected 40 year mine life
under the current plan.
To bring the underground resources into a proven and probable category for feasibility purposes,
actual underground Page 5 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) development and characterization within the Hugo Dummett deposits is required. The exploration
shaft and subsequent horizontal development will accomplish this requirement. Oyu Tolgoi Project Resource delineation drilling at Oyu Tolgoi.In 2004, the Company spent a total of $98.2 million
in exploration, including $71.8 million on the Oyu Tolgoi Project. The Companys Southern Oyu
deposits appear to have been largely defined. In contrast, at the Hugo Dummett deposits, drilling
is ongoing and the Hugo North deposit remains open both at depth and to the north. The extent of
mineralization contained in the Hugo North deposit has yet to be established. In May and August of 2004, updated resource estimates, prepared by qualified independent geological
consultants, were announced by the Company. The Company anticipates releasing an updated,
independently prepared resource estimate for the Oyu Tolgoi Project in Q205. Southern Oyu resource estimate In August 2004, the Southern Oyu resource estimate included measured and indicated resources
totaling 1.06 billion tonnes grading 0.48% copper, and 0.36 grams per tonne (gpt) gold, plus
inferred mineral resources totalling 285 million tonnes grading 0.35% copper, and 0.23 gpt gold The measured and indicated resources were estimated using a 0.30% copper equivalent cut-off down
to 560 metres below surface and a 0.60% copper equivalent cut-off below a depth of 560 metres. In
addition to the measured and indicated resources, the Southern Oyu deposits inferred resources
were estimated to a maximum depth of 560 metres, using a 0.30% copper equivalent cut-off. The
August 2004 resources estimate is separate and in addition to the resource estimates for the Hugo
Dummett deposits released in May 2004. Hugo Dummett resource estimate In May 2004, the Hugo Dummett mineral resource was estimated to contain 1.16 billion tonnes of
inferred resource grading 1.29% copper, and 0.23 gpt gold. The inferred resource was determined
using a 0.60% copper equivalent cut-off grade. In H204, Ivanhoe Mines drilling efforts were concentrated on the Hugo North deposit, with an
infill and step-out drilling program designed to expand the existing inferred resource base and,
at the same time, upgrade a large percentage of the current inferred resource to the indicated
category. Initially, the step-out drilling program was expected to be completed in early 2005, but
additional drilling will be required throughout 2005 to define the ultimate extent of the Hugo
North deposit and establish the degree of continuity, if any, of mineralization from the Hugo
North deposit onto adjoining property held by Entrée Gold Inc. (Entrée). This infill drilling
program, designed to bring a large portion of the Hugo North deposit to the indicated category,
was completed in Page 6 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) March 2005. Shivee Tolgoi property On November 10, 2004, the Company closed an earn-in and equity participation agreement with Entrée
to explore and potentially develop approximately 40,000 hectares of Entrées Shivee Tolgoi
property. A portion of the southern property boundary of Shivee Tolgoi is contiguous to the Hugo
North deposits northern property boundary. By spending $35 million over eight years, including
$15 million in the first three years, the Company has the option to earn up to 80% in
mineralization deeper than 560 metres and up to 70% in mineralization above the 560-metre level. The Company also has the right to acquire all of Entrées surface rights on the Shivee Tolgoi
property by spending a minimum of $3 million in exploration expenditures in the first year and
sufficient condemnation drilling to ensure that there is no economic mineralization below the
surface of the areas directly affected. The Company acquired 4.6 million units of Entrée for Cdn$4.6 million. Each unit consists of one
Entrée common share and a warrant; each warrant entitles the holder to acquire, for a period of
two years, one common share of Entrée at Cdn$1.10 per share. Engineering and Development.The Company is focusing its engineering and metallurgical efforts on
preparing the Oyu Tolgoi Integrated Development Plan. The Integrated
Development Plan, expected to be released late in Q205, will combine the findings and economics of
the feasibility study for an open-pit operation on the Southern Oyu deposits and the
pre-feasibility study for a proposed underground mining operation in the Hugo North deposit. The
accelerated development of the Hugo North enlarged deposit is the prime focus of the Integrated
Development Plan and it represents a major change in development of the project recommended by the
Preliminary Assessment report released in February 2004. In January 2005, a 246-tonne bulk sample was collected from a 74-metre-deep shaft in the Southwest
Oyu deposit. The samples were shipped from the Oyu Tolgoi site in January 2005 and pilot-plant
trials on samples are expected to start in Q205 at an independent assay laboratory. The
development strategy for the project is based on developing production from open-pit operations
located within the Southern Oyu deposits and concurrently developing Hugo Dummetts underground
resources to bring underground operations on stream as soon as possible. The engineering for a 1,200-metre-deep exploration shaft was initiated in Q304, with the objective
being to provide underground access to the Hugo South and Hugo North deposits and permit, for the
purposes of the feasibility studies, further delineation and rock characterization of the
underground mineral resources. The construction of the exploration
shaft is expected to commence in Q205 and to be completed in early 2007; underground drifting
activities from the shaft are expected to take place during the later part of 2007 and in 2008. Page 7 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) Completion of a feasibility study on the Hugo North deposit is expected in late 2008. Assuming
timely completion of the Integrated Development Plan and the availability of project financing,
Ivanhoe Mines expects that initial commercial production from Oyu Tolgois Southern Oyu deposits
could commence in mid-2007, with some underground ore being milled in 2008 from Hugo Norths
development activity. Current estimates suggest that the development of the shallower Hugo South
deposit will lag that of Hugo North.These plans remain subject to change based on unforeseen
circumstances. There can be no assurance that a positive feasibility study or adequate project
financing can be obtained by the dates estimated above, or at all. Other Mongolian exploration activities.Ivanhoe Mines holds an extensive inventory of exploration
leases in Mongolia totalling approximately 11.8 million hectares. The Company believes that these
properties are prospective for gold and copper occurrences similar to its Oyu Tolgoi discovery, as
well as metallurgical and thermal coal deposits that would be in close proximity to Chinese
markets. In 2004, regional reconnaissance work, rock sampling, induced polarization surveys and
diamond drilling were carried out mainly on the Kharmagtai property, the Bronze Fox District and
the Nariin Sukhait property, a coal property located in the South Gobi Region of Mongolia. In
December 2004, the Company announced its intention to initiate the development of, what the Company
currently believes to be extensive coal deposits in the South Gobi Region of Mongolia. Following a
year-long evaluation of the coal-bearing basins in southern Mongolia, the Company has delineated
three major coal opportunities located on lands wholly controlled by Ivanhoe Mines. Ivanhoes current mapping, surface sampling and drilling to date have established that the Nariin
Sukhait coal mine, located approximately 40 kilometres from the Chinese border, is contained within
the most southerly coal basin. The Nariin Sukhait mine, a relatively small property operated by an
independent Mongolian-Chinese joint venture, adjoins and is completely surrounded by the Companys
existing large land holdings. In 2004, the Nariin Sukhait operation started mining an outcropping
seam with an estimated true thickness of approximately 60 metres. Current annual production for the
mine is estimated at 450,000 tonnes of coal and is expected to increase to 2 million tonnes per
year, upon completion of the construction of a 400 kilometre-long railway link on the Chinese side
of the border. In January 2005, the Company announced the start of a resource delineation drilling program to
determine the extent and quality of coal that might be located on Ivanhoe Mines property
surrounding the Nariin Sukhait mine. Strategic alternatives.The Company continues to assess strategic alternatives for the development
and financing of the Oyu Tolgoi Project. The Companys current plan is to aggressively advance the
development of the project while continuing to discuss financing options with various parties. Page 8 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) In this regard, the Company is in discussions with major Chinese mining and financial companies,
major Japanese mining and metal trading houses, other international mining companies and other
third parties capable of financing the project, with a view to selecting suitable strategic
partners to develop the Oyu Tolgoi Project and associated infrastructure. The Company believes that
significant advantages could be realized from the participation of strategic partners and continues
to assess opportunities, as they arise, to extend to one or more such partners a participating
interest in the project. The Company is not soliciting bids from potential partners and has not set
a deadline or target date for concluding any such agreement. Accordingly, there can be no assurance
that any ongoing or future discussions will result in an agreement with a strategic partner or that
the Company will pursue development of the Oyu Tolgoi Project with a strategic partner at all. Stability Agreement.Negotiations are continuing with the Mongolian government for a long-term
Stability Agreement. Through June 2004, the Company worked extensively with a formally designated
working group established by the government for the purpose of negotiating and drafting a Stability
Agreement. The agreement is expected to establish the critical terms and conditions that will apply
to the Oyu Tolgoi Project during its developmental and operational phases. The Company believes
that such an agreement will have a materially beneficial impact on its ability to obtain the
financing necessary to develop the project. The agreement is expected to provide for stabilization
of various matters within the parameters of existing Mongolian laws, including tax and fiscal
issues, as well as other matters involving cross-border and import/export issues, confirmation and
protection of appropriate mining, land and water licences, and development of critical
infrastructure  including the supply of power  necessary to carry out exploration, mining,
milling, processing and related activities over the life of the project. In February 2005, the senior management team provided an extensive briefing on the Oyu Tolgoi
Project to the Mongolian cabinet and interested government parties. The presentation was followed
by a more than one hour long question and answer session. Subsequent to this meeting, a media
briefing was organized by the government at which Ivanhoe Mines repeated the presentation to the
media and non-governmental organizations. Again this presentation was followed by a question and
answer session. These events received broad coverage in the Mongolian media. At present, it appears
that the Stability Agreement will be discussed again by the Cabinet of government before the end of
the first quarter of 2005. No assurances can be given as to when, or if, Ivanhoe Mines discussions
will culminate in a Stability Agreement, or that any such Stability Agreement will contain terms
and conditions that are, in all material respects, favourable to Ivanhoe Mines. The Stability Agreement under negotiation is designed to follow the framework of current Mongolian
laws. However, once this initial agreement is completed, the Company may, in the future, seek
additional agreements and assurances from the government pertaining to the Oyu
Tolgoi Project. Some of these agreements and assurances may involve matters beyond the parameters
of existing Mongolian law and, as such, may require formal action by the Mongolian Page 9 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) Parliament to amend current legislation or enact new legislation. However, no present assurance can
be provided that any such additional agreements and assurances will be available when requested by
Ivanhoe Mines, or at all. Monywa Copper Project.Assisted by higher copper prices, improved ore grades and higher copper
production, the S&K Mine is continuing to generate excellent results. The Company expects to
release in Q205 a two-step development plan that will combine the expansion of the existing
operations at the S&K Mine with the development of the Letpadaung deposit (the Monywa Copper
Project). This development plan is expected to be implemented over a period of five years
resulting in the Monywa Copper Projects overall copper cathode production capacity of 200,000
tonnes per year. In mid-October 2004, the mines annual copper cathode throughput capacity
increased to 39,000 tonnes (86 million pounds). All development costs were funded from the mines
internally generated cash flow.  1.
    The first step in the plan, which is subject to an expected 2006 upgrade of the mines
power supply to 40 megawatts, is expected to take the mines annual copper production from
39,000 tonnes to a projected rate of 50,000 tonnes (110 million pounds). This first step is
expected to be put in place in H106.2.
    The second step, which is subject to a power supply of between 60 and 80 megawatts
being made available, proposes to develop the nearby Letpadaung deposit over a four-year
period. The proposed development will consist of the construction of three SX/EW modules,
each with an annual capacity of 50,000 tonnes of copper cathode per year. Japanese, Korean
and Chinese companies have made written expressions of interest to provide financing to
fast-track the expansion of copper production for the Monywa Copper Project. Financing
discussions are ongoing between these companies and the management of the Monywa Copper
Project, although there are no assurances that satisfactory negotiations will be concluded. Bakyrchik Gold Project.Engineering assessment and testing work continues on a proposal to produce
up to 50,000 ounces of gold per year using a 150,000 to 200,000 tonnes per annum rotary kiln
process. In an effort to minimize the mining risks at the start of operations, Bakyrchik engineers
are assessing a plan to initially mine only from the surface by extending one of the existing open
pits. Financing for the development is expected to come either from an initial public offering of
equity securities by the Companys Bakyrchik subsidiary or some other form of third party
financing. There is no assurance that this financing initiative will be successful and lack of
financing could delay or indefinitely postpone development. Cloncurry Australia.In Q105, following the completion of a 1,600-metre diamond drill program to
test a 300-metre-wide by 400-metre-long magnetic anomaly on the Swan project, the Company announced
the discovery of a new deposit of a potentially significant iron oxide copper-gold mineralization.
The management of the Company believes that the area has Page 10 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) excellent potential to host large-scale, high-grade iron oxide copper and gold deposits similar to
the nearby Ernest Henry Mine, or the Olympic Dam Mine, in South Australia. In 2005, Ivanhoe Mines is planning to recommence diamond drilling to further delineate the extent
and grade of the underlying primary chalcocite and gold mineralization, and to conduct
metallurgical testing on the supergene material to determine the heap-leach parameters of the
near-surface, oxidized material. The Company has assembled a project development team, which
includes the general manager and chief metallurgist who recently worked at the S&K Mine in Myanmar,
to investigate the potential of quickly producing cathode copper from the supergene mineralization
at the Swan deposit. Asset rationalization.The Company is continuing to explore opportunities to rationalize non-core
assets and is considering several potential disposition alternatives involving the outright or
partial sale of non-core project interests, the formation of one or more joint ventures in respect
of certain non-core projects or other transactions that would dilute or eliminate the Companys
interest in, and relieve the Company of financial obligations in respect of, such non-core
projects. The Companys principal objectives are to generate, or otherwise preserve, cash and to
devote more managerial and financial resources to the Oyu Tolgoi Project. There can be no assurance
that any disposition of non-core assets presently under consideration will occur on a timely basis,
or at all. Pursuant to the Companys non-core asset disposal strategy, the Company sold its Savage
River Mine in February 2005. See Discontinued operations below. Discontinued operations.In February 2005, the Company sold its Savage River operations for $21.5
million in cash plus a series of contingent, escalating-scale annual payments based on sales and
prices of iron ore pellets over the next five years (the Deferred Cash Consideration). The 2004
benchmark price for iron ore pellets was set at $38.10 per tonne. The following table lists the
approximate Deferred Cash Consideration that may be received by the Company, based on the average
future benchmark prices over the next five years: Average benchmarkpellet prices over next
    
    
    Expected Deferred Cashfive years
    
    
    Consideration$40/tonne
    
    
    $ 18.0 million$60/tonne
    
    
    $ 85.5 million$70/tonne
    
    
    $117.0 million
 At the end of February 2005, a 71.5% increase in pellet prices for the April 2005 to March 2006
year was announced. Based on anticipated iron pellet prices of $65 per tonne and if the Savage Page 11 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) Rivers pellet production is maintained over the next five years, the Company expects to receive a
contingent payment of approximately $22.5 million by the end of March 2006 and an additional $79
million if iron pellet prices remain at this level for the next five years. Iron ore pellet prices
are volatile, so there are no assurances that the unit prices negotiated for 2005 will be
maintained over the next five years. Liquidity and future funding requirements.The Companys existing cash resources together with the
proceeds from the sale of the Savage River Mine, are expected to be sufficient to fund the
Companys current and planned activities into the third quarter of 2005. Following completion of a
feasibility study in respect of the Southern Oyu deposits, the Company expects to be in a position
to seek project financing to implement its initial open-pit development plans at the Oyu Tolgoi
Project. However, there can be no assurance that the Company will be able to obtain project
financing before its existing cash resources are expended. See Cash Resources and Liquidity. Since its inception, the Company has relied on capital markets (and in particular, equity markets)
to fund its exploration and other activities. If the Companys existing cash resources are
insufficient to fund all of the Companys planned activities, or if the Company is unable to obtain
project financing before its existing cash resources are expended, the Company will have to rely
upon equity markets or other sources of capital (from potential joint venture partners or through
other arrangements)  the availability of which cannot be assured to continue funding the
development of the Oyu Tolgoi Project. Capital markets are subject to significant volatilities and
uncertainties. There can be no assurance that Ivanhoe Mines undeveloped or partially developed projects can be
fully developed, in whole or in part, since factors beyond the Companys control may adversely
affect its access to funding or its ability to recruit third-party participants. Page 12 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) SELECTED FINANCIAL INFORMATION ($ in millions of U.S. dollars, except
per share information) Years ended December 31,2004
    
    
    2003
    
    
    2002CopperRevenue
    
    
    
    44.1
    
    
    
    22.9
    
    
    
    20.2Operating profit
    
    
    
    27.5
    
    
    
    5.0
    
    
    
    4.7Exploration expenses
    
    
    
    98.2
    
    
    
    68.0
    
    
    
    33.9General and administrative costs
    
    
    
    22.8
    
    
    
    17.4
    
    
    
    12.3Gain on sale of investments
    
    
    
    4.5
    
    
    
    4.6
    
    
    
    0.5Foreign exchange gain
    
    
    
    4.4
    
    
    
    12.4
    
    
    
    0.3Net (loss) from continuing operations
    
    
    
    (98.3
    )
    
    
    (68.3
    )
    
    
    (46.5
    )Net income (loss) from discontinued
operations
    
    
    
    8.6
    
    
    
    (4.7
    )
    
    
    15.5Net (loss)
    
    
    
    (89.6
    )
    
    
    (73.0
    )
    
    
    (31.0
    )Net income (loss) per shareContinuing operations
    
    
    ($
    0.35
    )
    
    ($
    0.28
    )
    
    ($
    0.24
    )Discontinued operations
    
    
    $
    0.03
    
    
    ($
    0.02
    )
    
    $
    0.08Total assets
    
    
    
    460.9
    
    
    
    455.7
    
    
    
    276.0Total long-term financial liabilities
(including current portion of long-term debt)
    
    
    
    8.9
    
    
    
    17.2
    
    
    
    24.2Continuing operationsCapital expenditures
    
    
    
    14.3
    
    
    
    50.0
    
    
    
    12.1Continuing operationsCopper cathode - 50% shareUnits sold
- tonnes
    
    
    
    15,730
    
    
    
    13,808
    
    
    
    13,875Units
produced - tonnes
    
    
    
    15,878
    
    
    
    13,935
    
    
    
    13,771Discontinued operationsUnits sold
- tonnes pellets
    
    
    
    2,118,197
    
    
    
    2,180,000
    
    
    
    2,269,773Average sale priceCopper
cathode - US$/pound
    
    
    $
    1.34
    
    
    $
    0.79
    
    
    $
    0.70
 Page 13 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) SELECTED QUARTERLY DATA ($ in millions of U.S. dollars, except per share
information) QUARTER ENDED
    
    

    
    Year EndedMar-31
    
    
    Jun-30
    
    

    Sep-30
    
    
    Dec-31
    
    
    

    Dec-312004CopperRevenue
    
    
    
    9.4
    
    
    
    10.8
    
    
    
    9.8
    
    
    
    14.1
    
    
    
    
    44.1Operating profit
    
    
    
    5.9
    
    
    
    6.9
    
    
    
    5.9
    
    
    
    8.8
    
    
    
    
    27.5General and administrative
    
    
    
    (5.4
    )
    
    
    (4.9
    )
    
    
    (5.9
    )
    
    
    (6.6
    )
    
    
    
    (22.8
    )Exploration expenses
    
    
    
    (20.7
    )
    
    
    (24.8
    )
    
    
    (28.4
    )
    
    
    (24.3
    )
    
    
    
    (98.2
    )Write-down of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.3
    )
    
    
    
    (5.3
    )Gain on sale of investments
    
    
    
    1.2
    
    
    
    3.3
    
    
    
    
    
    
    
    
    
    
    
    
    4.5Gain (loss) on foreign exchange
    
    
    
    (1.8
    )
    
    
    (1.4
    )
    
    
    4.2
    
    
    
    3.4
    
    
    
    
    4.4Net (loss) from continuing operations
    
    
    
    (23.5
    )
    
    
    (23.0
    )
    
    
    (25.3
    )
    
    
    (26.5
    )
    
    
    
    (98.3
    )Net income (loss) from discontinued operations
    
    
    
    (4.4
    )
    
    
    2.8
    
    
    
    0.5
    
    
    
    9.7
    
    
    
    
    8.6Net (loss)
    
    
    
    (27.9
    )
    
    
    (20.2
    )
    
    
    (24.8
    )
    
    
    (16.7
    )
    
    
    
    (89.6
    )Net income (loss) per shareContinuing operations
    
    
    ($
    0.08
    )
    
    ($
    0.08
    )
    
    ($
    0.09
    )
    
    ($
    0.10
    )
    
    
    ($
    0.35
    )Discontinued operations
    
    
    ($
    0.02
    )
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.04
    
    
    
    $
    0.03Total
    
    
    ($
    0.10
    )
    
    ($
    0.07
    )
    
    ($
    0.09
    )
    
    ($
    0.06
    )
    
    
    ($
    0.32
    )2003CopperRevenue
    
    
    
    4.6
    
    
    
    5.5
    
    
    
    6.0
    
    
    
    6.8
    
    
    
    
    22.9Operating profit (loss)
    
    
    
    1.2
    
    
    
    (2.7
    )
    
    
    2.0
    
    
    
    4.5
    
    
    
    
    5.0General and administrative
    
    
    
    (3.0
    )
    
    
    (3.3
    )
    
    
    (4.0
    )
    
    
    (7.1
    )
    
    
    
    (17.4
    )Exploration expenses
    
    
    
    (10.8
    )
    
    
    (15.2
    )
    
    
    (20.8
    )
    
    
    (21.2
    )
    
    
    
    (68.0
    )Write-down of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.2
    )
    
    
    
    (1.2
    )Gain on sale of investments
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.6Gain (loss) on foreign exchange
    
    
    
    2.6
    
    
    
    5.9
    
    
    
    (1.2
    )
    
    
    5.1
    
    
    
    
    12.4Net (loss) from continuing operations
    
    
    
    (7.9
    )
    
    
    (16.6
    )
    
    
    (27.3
    )
    
    
    (16.5
    )
    
    
    
    (68.3
    )Net income (loss) from discontinued operations
    
    
    
    (1.1
    )
    
    
    (3.1
    )
    
    
    0.3
    
    
    
    (0.8
    )
    
    
    
    (4.7
    )Net (loss)
    
    
    
    (9.0
    )
    
    
    (19.7
    )
    
    
    (27.0
    )
    
    
    (17.3
    )
    
    
    
    (73.0
    )Net income (loss) per shareContinuing operations
    
    
    ($
    0.04
    )
    
    ($
    0.07
    )
    
    ($
    0.11
    )
    
    ($
    0.06
    )
    
    
    ($
    0.28
    )Discontinued operations
    
    
    ($
    0.00
    )
    
    ($
    0.01
    )
    
    $
    0.00
    
    
    ($
    0.01
    )
    
    
    ($
    0.02
    )Total
    
    
    ($
    0.04
    )
    
    ($
    0.08
    )
    
    ($
    0.11
    )
    
    ($
    0.07
    )
    
    
    ($
    0.30
    )
 Page 14 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) EXECUTIVE SUMMARY  2004 YEAR The Company recorded a net loss of $89.6 million (or $0.32 per share) in 2004, compared to a
net loss of $73 million (or $0.30 per share) in 2003. Major factors in the 2004 results included an
operating profit from mining operations totalling $27.5 million and exploration expenses of $98.2
million. Exploration expenditures were primarily incurred on the Oyu Tolgoi (Turquoise Hill)
Project and other projects in Mongolia. The increase in exploration expenses is attributed to
Ivanhoes drilling activities on the Oyu Tolgoi Project, especially on the Hugo Dummett deposits,
and the engineering expenses related to the Integrated Development Plan that combines the findings
and economics from the open-pit feasibility study and the underground pre-feasibility study. Corporate  Ø
    In February 2005, the Company sold the Savage River operations for a guaranteed cash
payment of $21.5 million plus a series of contingent, escalating-scale annual payments
based on future pellet prices. The escalating-scale payments, made over a five-year
period, will begin in March 2006. The conclusion of negotiations between the two largest
iron ore producers and the Japanese steel mills was announced at the end of February 2005.
For the iron ore year starting on April 1, 2005, the iron ore pellet price benchmark of
$38.10 was increased by 71.5%, to approximately $65 per tonne. As a result of this
increase, the Company expects to receive cumulative payments totalling approximately $44
million by the end of March 2006. In addition, if the $65 a tonne benchmark price and
Savage Rivers pellet production are maintained over the next five years, the Company
expects to receive additional consideration totalling approximately $79 million.  Ø
    In December 2003, Ivanhoe purchased a $50 million one-year Treasury Bill issued by
the Government of Mongolia as part of the governments retirement of its Soviet-era debt
to the Russian Federation. Through a series of partial principal and interest payments,
the Treasury Bill was completely repaid by the end of 2004.  Ø
    In July 2004, the Company completed an equity financing by issuing 20 million common shares for gross proceeds of Cdn$140 million.  Ø
    On January 18, 2005, the common shares of the Company were listed on the New York
Stock Exchange under the new trading symbol IVN. The Company concurrently de-listed from
Nasdaq. The shares of the Company also have been listed on the Toronto Stock Exchange
since 1996. The listing on the Australian Stock Exchange is expected to terminate in
Q205.  Ø
    During 2004, the Company, with the assistance of its strategic financial advisors,
continued to evaluate alternatives for the development of financing of the Oyu Tolgoi
Project. Page 15 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  Ø
    During 2004, Ivanhoe Mines was engaged in ongoing discussions with several major,
Asia-based international mining finance institutions concerning project financing and
off-take arrangements in connection with the proposed development of the Oyu Tolgoi
Project.  Ø
    In November 2004, the Company announced a Cdn$4.6 million equity investment in
Entrée, as well as a $35 million earn-in participation agreement on Entrées mineral
interests, a portion of which is adjacent to the northern boundary of the Hugo North
deposit at Oyu Tolgoi. The agreement also granted the Company surface access rights on
Entrées property. Mongolia  Ø
    During 2004, Ivanhoe spent a total of $85.5 million on exploration and development of
its Mongolian copper and gold projects, most of which was invested in the Oyu Tolgoi
discovery. To date, Ivanhoe has expensed all exploration, development and engineering
costs related to its Mongolian projects. In March 2004, the discovery of the Hugo Dummett
deposits at Oyu Tolgoi was recognized as the most significant, recent mineral discovery in
the world during the annual conference of the Prospectors and Developers Association of
Canada, in Toronto.  Ø
    Resource studies  The Company released the results of a resource estimate for the Hugo Dummett deposits in
May 2004. The inferred resources were estimated using a 0.60% copper equivalent cut-off
grade.In August 2004, the Company released the results of a new independent resource estimate for
the Southern Oyu deposits. The measured and indicated resources were estimated using a
0.30% copper equivalent cut-off down to 560 metres below surface and 0.60% copper
equivalent cut-off below a depth of 560 metres. In addition to the measured and indicated
resources, the Southern Oyu deposits inferred resources were estimated to a maximum depth
of 560 metres using a 0.30% copper equivalent cut-off. The August 2004 resources estimate
is separate and in addition to the resource estimate for the Hugo Dummett deposits released
in May 2004. Page 16 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  The Company expects the release of an updated, independent resource estimate for the Oyu Tolgoi
Project in Q205. Million
    
    
    
    Copper
    
    
    
    Goldtonnes
    

    
    
    %
    
    
    
    (g/t)May 2004
resource estimate - Hugo Dummett depositsInferred
    
    
    
    1,160
    
    
    
    
    1.29
    
    
    
    
    0.23August 2004
resource estimate - Southern Oyu depositsMeasured and indicated
    
    
    
    1,061
    
    
    
    
    0.48
    
    
    
    
    0.36Inferred(1)
    
    
    
    285
    
    
    
    
    0.35
    
    
    
    
    0.23
   (1)
    
    Inferred resources are separate and in addition to the measured and
indicated resources figures.  Ø
    Engineering studies and development  In February 2004, Ivanhoe released an independently prepared Preliminary Assessment report
on the Oyu Tolgoi Project that confirmed its potential to become a new, long-life copper
and gold mine that could rank among the largest in the world. Ongoing engineering studies
initiated in 2004, following the release of this Preliminary Assessment report and drilling
results from the Hugo North deposit, have modified the development plans proposed by the
Preliminary Assessment report in a major way. See Exploration  Oyu Tolgoi Studies.
Electronic copies of the Preliminary Assessment report are available at www.sedar.com.In Q304, the Company announced its intention to complete and release, by late Q205, the
Integrated Development Plan, a study that will combine the findings and economics of two
studies, the Southern Oyu open pit feasibility study and the underground pre-feasibility
study on the Hugo North deposit. The feasibility study focused on a detailed, baseline
evaluation of initial facilities required to mine and process material from the
open-pittable resources contained in the Southern Oyu deposits at a nominal rate of 70,000
tonnes per day, and incremental throughput tonnages above this base.In January 2005, a 246-tonne bulk sample was shipped to an assay laboratory for pilot-plant
trials. In Q304, the Company initiated the engineering for the construction of a 1,200-meter-deep exploration shaft intended to provide underground access to the Hugo North and Hugo South deposits and permit delineation and
rock characterization of the underground mineral resources in the deposits. The
construction of the exploration shaft is expected to commence in Q205 and to be completed
in early 2007. Underground drifting activities from the shaft are expected to take place
during the later part of 2007 and during 2008. Page 17 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  Ø
    Stability agreement  Negotiations are continuing with a formally designated working group of the Mongolian
government for a long-term stability agreement. That agreement is expected to establish the
critical terms and conditions that will apply to the Oyu Tolgoi Project during its
development and operational phases. Although the stability agreement negotiations were
delayed by the June 2004 national elections in Mongolia, the Company expects to
successfully finalize these negotiations in 2005. Following the completion of the Stability
Agreement, the Company may seek additional agreements and assurances from the government
pertaining to the Oyu Tolgoi Project. Some of these agreements and assurances may involve
matters beyond the parameters of existing Mongolian law and, as such, may require formal
action by the Mongolian Parliament to amend current legislation or enact new legislation.  Ø
    Mongolia  Other projects  In December 2004, Ivanhoe Mines successfully traced a thick seam of coal onto property
100%-owned and controlled by the Company in the South Gobi Region of Mongolia,
approximately 40 kilometres north of the Mongolia-China border. Five core holes drilled by
Ivanhoe Mines intersected the same seam that is currently being mined by an independent
Mongolian-Chinese joint venture on a small licence area (the Nariin Sukhait Mine)
surrounded by Ivanhoes extensive land interests. The coal seam, one of five conformable
seams identified to date at Nariin Sukhait, has been mapped in outcrop and sub-crop
throughout a major coal basin that stretches a total of 120 kilometres east and west of the
mine, on ground controlled by Ivanhoe.In December 2004, the Company also announced that it had retained Citibank as its advisor
in broad-ranging discussions with various parties about the future of the Tavan Tolgoi coal
deposit, 140 kilometres northwest of the Oyu Tolgoi Project. The Company is exploring the
possibility of a joint development of the Tavan Tolgoi coal deposit in conjunction with the
development of the Oyu Tolgoi Project.In November 2004, the Companys exploration team discovered four significant, gold-rich copper porphyry targets in the newly named Bronze Fox District in southern
Mongolia. The discoveries are approximately 140 kilometres northeast of the Oyu Tolgoi
Project and 430 kilometres south-southeast of Ulaanbaatar.  Ø
    Inner Mongolia, China  Throughout 2004, Ivanhoe Mines continued its extensive reconnaissance programs to identify
high-priority targets based upon geologic models developed at Oyu Tolgoi and other
epithermal-style deposits. In January 2005, the Company was able to obtain the transfer of
six exploration licences into Ivanhoe Mines Yahao joint venture and a 30-year permanent
Business Licence. Ivanhoe Mines has the right to earn interests ranging from 80% to 90%
from mineral projects developed from the exploration and mining licences held by the Yahao
joint venture. Page 18 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  Ø
    Myanmar  The Companys share of net income from the Monywa Copper Project joint-venture in Myanmar
totalled $22.1 million in 2004, compared to a net profit of $2.1 million in 2003.
The S&K Mine produced 31,756 tonnes of copper cathode in 2004 (15,878 tonnes net to
Ivanhoe), an increase of approximately 14% over 2003. The average copper price received in
2004 was $1.34 a pound, compared to $0.79 a pound in 2003. Minegate cash costs in 2004 were
approximately 44 cents a pound. Copper production for 2005 is estimated to be 38,000 tonnes
at minegate cash costs of approximately 43 cents a pound. In 2004, the project received a
premium of approximately $60 per tonne of copper (three cents a pound) for its LME Grade A
quality. This premium was increased to $125 per tonne in 2005.  Ø
    Kazakhstan  During 2004, the Bakyrchik operation re-processed material from the tailings pond. Several
gravity tables were purchased and assembled in the second half of 2004 and 22,000 tonnes of
tailings material were processed in Q404. Engineering assessment and pilot test work
continued on a proposed 150,000- to 200,000-tonne per annum rotary kiln process designed to
yield annual gold production of up to 50,000 ounces of gold. In 2005, the Company is
planning to obtain funding from outside investors to finance Bakyrchiks expansion plans.  Ø
    Cloncurry Australia  In Q105 the Company announced the discovery of a new deposit of a potentially significant
iron oxide copper-gold mineralization at the Swan prospect. The new discovery, located 600
metres southwest of the former Mount Elliott gold and copper mine, has a 300-metre-wide by 400-metre-long magnetic anomaly signature. A total of
six diamond drill holes, one of which reached a depth of at least 350 metres below surface,
encountered chalcocite and gold mineralization. The mineralization is open-ended along
strike and to depth. The management of Ivanhoe Mines believes that the area has excellent
potential to host large-scale, high-grade iron oxide copper and gold deposits similar to
the nearby Ernest Henry Mine, or the Olympic Dam Mine, in South Australia.In 2005, Ivanhoe Mines is planning to recommence diamond drilling to further delineate the
extent and grade of the underlying primary chalcocite and gold mineralization, and to
conduct metallurgical testing on the supergene material to determine the heap-leach
parameters of the near-surface, oxidized material. The Company has assembled a project development
team, which includes the general manager and chief metallurgist who recently worked at the S&K Mine
in Myanmar, to investigate the potential of quickly producing cathode copper from the supergene
mineralization at the Swan deposit. Page 19 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) QUARTERLY ANALYSIS Q404 vs. Q403  Ø
    Revenue.In Q404, revenue from the S&K Mine increased by 107% over the same period in
2003. This increase was due to a 20% increase in tonnage sold and a 70% increase in copper
prices.Ø
    Operating profit.In Q404, total operating costs before inventory adjustments
increased by 20%, compared to the same period in 2003. The increase was mainly
attributable to a 17% increase in cathode production. In Q403, the total recoverable
metal contained in the heaps was adjusted upward, resulting in a significant one-time
reduction in operating costs for that quarter.Ø
    Exploration.Total exploration expenses in Q404 increased by approximately 15% over
the same period in 2003. Exploration expenditures were primarily incurred on the Oyu
Tolgoi Project and other projects in Mongolia. The increase in exploration expenses over
the last two years was a result of Ivanhoe Mines accelerated drilling activities on the
Oyu Tolgoi project, especially on the Hugo Dummett deposits, and the engineering costs
related to the Integrated Development Plan.Ø
    Administrative costs.Administrative costs in Q404 were slightly lower, but
consistent with expenditures in Q403.Ø
    Net income (loss) from discontinued operations.The Company announced the sale of the Savage River mine operations in February 2005 and consequently, the 2004 and
2003 operating results from the mine have been reclassified as net income (loss) from
discontinued operations.Income from the Savage River mine operations totalled $9.7 million in Q404, compared to a
loss of $0.8 million in Q403. During Q404, approximately one-third of total metal volumes
sold by the Savage River operations was set at spot-market rates at almost double the
normal contract price. In addition to the higher sales price received in Q404, gains
resulting from the foreign exchange hedge program put in place by the mine at the end of
Q304 also contributed to the higher earnings for the quarter.Ø
    Foreign exchange gain.In Q404, the Company maintained most of its cash resources in
Canadian dollars (Cdn$). The foreign exchange gain during the quarter was mainly
attributable to the strengthening of the Canadian dollar against the U.S. dollar. Page 20 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) REVIEW OF OPERATIONS A) EXPLORATION Exploration expenses in 2004 totalled $98.2 million, compared to $68.0 million in 2003. The
$30.2 million increase in costs was mainly due to the cost of engineering evaluation studies
initiated in 2004 on the Oyu Tolgoi Project and increased drilling and exploration activities on
the Oyu Tolgoi Project and other Mongolian properties. a) Oyu Tolgoi Project, Mongolia At the end of 2004, Ivanhoe Mines held four mining licences at
Oyu Tolgoi totalling approximately 24,000 hectares. Ivanhoe Mines also held directly, and
indirectly with Asia Gold Corp. (Asia Gold), a 51%-owned subsidiary of the Company, interests in
exploration licences covering approximately 11.8 million hectares. In 2004, Ivanhoe Mines spent
$85.5 million on its Mongolian properties. The main focus of exploration activities was the Oyu
Tolgoi project ($71.8 million), the Kharmagtai project ($2.5 million), the Bronze Fox District
($0.5 million), and licence holding fees and general reconnaissance projects ($10.7 million). In
2003, Ivanhoe Mines spent $59.5 million on its Mongolian properties.  i)
    Oyu Tolgoi Exploration.In February 2004, the Company released a Preliminary
Assessment report, referred to as the scoping study. The Preliminary Assessment report
included inferred resources that had not been sufficiently drilled to have economic
considerations applied to them to enable them to be used as the foundation necessary to develop a feasibility study.Drilling program (Southwest Oyu, South Oyu, Far South Oyu and Central Oyu deposits).
Following the release of the Preliminary Assessment report, an infill drilling program was
initiated on the Central Oyu, Southwest Oyu and South Oyu deposits with objective to
upgrade a significant portion of the open pit inferred resources to the measured and
indicated categories. The program was completed in July 2004. On August 18, 2004, a new
independent resource estimate was released by AMEC E&C Services Limited. The total measured
and indicated resource was estimated at 1.06 billion tonnes grading 0.47% copper and 0.36
grams of gold (g/t) per tonne. The cut-off grade used for this estimate was 0.30% copper
equivalent for resources up to 560 metres below surface and 0.60% copper equivalent for
resources at depths exceeding 560 metres. This resource estimate provided the Company with
an independently based foundation for the design and optimization of the open pits that
will form part of the feasibility study for the Southern Oyu deposits.Drilling program (Hugo Dummett deposits).In the second half of 2004, Ivanhoe Mines
drilling efforts were concentrated on the Hugo Dummett deposits to continue the infill
drilling and exploratory program designed to expand the existing inferred resource base.
The drilling programs main focus is to upgrade a large percentage of Page 21 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  the current inferred resource to the indicated category. The drilling program initially was
expected to be completed in early 2005, but additional drilling will be required throughout
2005 to cover the enlargement of the Hugo North deposit and establish the degree of
continuity, if any, of mineralization from Hugo North onto the adjoining Entrée property.The most recent resource estimate for the Hugo Dummett deposits completed in May 2004 included
inferred resources of 1,160 million tonnes grading 1.29% copper and 0.23 g/t gold, using a
0.60% copper equivalent cut-off grade. The May 2004 inferred resources estimate for the Hugo
Dummett deposits was separate and in addition to the previously mentioned resource estimate
for the Southern Oyu deposits. The Company expects to release an updated independent resource estimate in Q205.ii)
    Oyu Tolgoi StudiesScoping study.The Preliminary Assessment report released in February 2004 recommended a
two-stage approach to the development of the Oyu Tolgoi Project. The total capital cost for
the first stage was estimated at approximately $529 million.Feasibility study, Southern Oyu deposits.In Q304, the Company announced its intention to
complete and release, by late Q205, the Integrated Development Plan, a study that will
combine the findings and economics of two studies, the Southern Oyu open pit feasibility study
and the underground pre-feasibility study on the Hugo North deposit. The feasibility study
focused on a detailed baseline evaluation of initial facilities required to mine and process
material from the open-pittable resources contained in the Southern Oyu deposits at a nominal
rate of 70,000 tonnes per day, and incremental throughput tonnages above this base. In the
second half of 2004, the preliminary design of the processing facility was sufficiently
developed to enable equipment pricing to be obtained and to provide material take-offs for
estimating purposes. At the end of 2004, the Company had completed the preliminary design of
infrastructure, including the design of the water supply system, the design of tailings
storage facilities and the design of on-site support facilities, such as offices,
accommodations and workshops. Various studies aimed at optimizing the process flow sheet and
site layout were undertaken and the results will be used in the next phase of work to finalize
designs and estimates. Construction of the bulk sample shaft commenced in Q304 and the
shafts targeted depth of approximately 70 metres was reached in January 2005. Samples from
the shaft were extracted and shipped to the assay laboratory in January 2005, allowing
pilot-plant trials to commence in Q205.Pre-feasibility study, Hugo North deposit.In the second half of 2004, work on the
pre-feasibility study mainly focused on engineering and cost analysis related to the
underground block-cave mining of higher-grade sections of the Hugo North deposit at Page 22 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  rates up to 85,000 tonnes per day. Drilling during the second half of 2004 focused on infill
drilling of the initial production zone at Hugo North.The contract for a 1,200-metre exploration shaft and lateral developments that will provide
underground access to the Hugo South and Hugo North deposits was awarded to a major
international shaft-sinking firm in Q304. As part of the planning for construction of the
exploration shaft, long-lead items were identified and necessary orders, either to purchase or
manufacture the required equipment, were placed. During Q404, equipment for a quarry and batch plant was purchased and construction of
surface works is planned for early 2005. The geotechnical drilling program was completed
during Q404 and final analysis and recommendations are expected in early 2005.Water supplyThe investigation of reliable water resources for the Oyu Tolgoi Project has identified two
major sedimentary groundwater aquifers within 60 kilometres of the project site. The
hydrogeological investigations aimed at defining the water supply for Oyu Tolgoi and the
preparation of models to confirm the ability of the aquifers to provide the required water
supply were completed by the end of 2004.Metallurgical workBy the end of 2004, all samples for flotation testwork and testing of composites representing
time periods of production were completed for the Southwest Oyu and South Oyu deposits. Batch
flotation tests for the variability samples from the Southwest and South deposits were more
than two-thirds complete. To assess various marketing criteria, concentrate samples
representative of the first 10 years of production were obtained from a small flotation pilot
plant.iii)
    Shivee Tolgoi earn-in agreement with Entrée Gold Inc.On November 10, 2004, the
Company closed an earn-in and equity participation agreement with Entrée to explore and
potentially develop approximately 40,000 hectares of Entrées Shivee Tolgoi property. A
portion of the Shivee Tolgois southern property boundary is contiguous to Hugo North
deposits northern property boundary. By spending $35 million over eight years, including
$15 million in the first three years, the Company has the option to earn up to 80% in
mineralization deeper than 560 metres and up to 70% in mineralization above the 560-metre
level.The Company also has the right to acquire all of Entrées surface rights on the Shivee
Tolgoi property by spending a minimum of $3 million in exploration expenditures in the
first year and sufficient condemnation drilling to ensure that there is no economic
mineralization below the surface of the areas directly affected. Page 23 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  The Company acquired 4.6 million units of Entrée for Cdn$4.6 million. Each unit consists of one
Entrée common share and a warrant; each warrant entitles the holder to acquire, for a period of two
years, one common share of Entrée at Cdn$1.10 per share.  b)
    Other Mongolian copper/gold exploration projects.In 2004, regional reconnaissance
work, rock sampling, induced polarization surveys and diamond drilling was carried out,
mainly on the Kharmagtai property and the Bronze Fox District.c)
    Mongolian coal projects.In December 2004, the Company announced its intention to
initiate the development of, what the Company currently believes to be extensive coal
deposits in the South Gobi Region of Mongolia. Following a year-long evaluation of the
coal-bearing basins in southern Mongolia, the Company has delineated three major coal-bearing basins located on lands 100% controlled by Ivanhoe Mines.The Nariin Sukhait open pit mine, located within the most southerly basin and currently
being mined by an independent Mongolian-Chinese joint venture, started mining in 2004 on an
outcropping seam with an estimated true thickness of approximately 60 metres.
The Nariin Sukhait mining licences, located approximately 40 kilometres from the Chinese
border, are contained within a small area adjacent to and completely surrounded by property
controlled by Ivanhoe Mines. Current annual production for the mine is estimated at
approximately 450,000 tonnes of coal and is expected to increase to two million tonnes per
year upon completion of the construction of a 400-kilometre-long railway link on the
Chinese side of the border.Ivanhoes current mapping, surface sampling and drilling to date have established that the
bulk of the coal basin that contains the Nariin Sukhait mine is within Ivanhoe Mines
current exploration licences. In January 2005, the Company announced the start of a
resource delineation drilling program to determine the extent and quality of coal that
might be located on Ivanhoe Mines property surrounding the Nariin Sukhait mine.In December 2004, the Company also announced that it had retained Citibank as its advisor
in broad-ranging discussions with various parties about the future of the Tavan Tolgoi coal
deposit, located 140 kilometres northwest of the Oyu Tolgoi Project. The Company is
exploring the possibility of a joint development of the Tavan Tolgoi coal deposit in
conjunction with the development of the Oyu Tolgoi Project.d)
    Other  i)
    China: Jinshan Gold Mines Inc.Ivanhoe Mines is exploring for gold,
copper and platinum-group metals in several provinces of China through a series of
joint ventures with Jinshan Gold Mines Inc. (formerly Pacific Minerals Inc.)
(Jinshan). In Q304, Jinshan initiated a pilot test program for a large-scale,
heap-leach operation on its most advanced project, the 217 Gold Project in Inner
Mongolia. The Companys share of Jinshans exploration expenditures in 2004
totalled $1.9 million. At the end Page 24 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) of 2004, the
Company held 18.7 million common shares (38.5%) of Jinshan.  ii)
    Inner Mongolia, China: Ivanhoe Mines.Throughout 2004, Ivanhoe Mines continued its
extensive reconnaissance programs to identify high-priority targets based upon geologic
models developed at Oyu Tolgoi and other epithermal-style deposits. In January 2005, the
Chinese Ministry of Land & Resources authorized the transfer of six exploration licences
into Ivanhoe Mines Yahao joint venture. The joint venture also obtained from the Inner
Mongolia provincial government a 30-year permanent Business Licence. Ivanhoe Mines has the
right to earn interests ranging from 80% to 90% in mineral projects developed under the
exploration and mining licences held by the Yahao joint venture.The six exploration licences are evenly split among the following three projects: the
Siwumuchang gold-silver project, the Whu Zhu Er Ga Shun copper-gold project and the Ba Ri
Tu nan gold-silver project. Ivanhoe Mines also is maintaining its efforts to obtain
approval from the local government authorities for the transfer of various exploration
licences into the Oblaga joint venture. Inner Mongolia exploration expenditures in 2004
totalled approximately $3.0 million in exploration activities and $1.2 million in property
acquisition payments.iii)
    Cloncurry Australia.The Cloncurry leases cover an area of approximately 1,450 square
kilometres, located 160 kilometres southeast of Mount Isa in northwestern Queensland. The
areas surrounding the Cloncurry property are prospective for copper and gold, with
potential for other minerals, such as cobalt, lead, zinc and silver. The objective of the
exploration program in 2004 was to locate large, shallow mineral occurrences amenable to a
heap-leaching open pit operation. A 17-hole, 3,549-metre drilling program was completed at
Mt Doré in 2004 and a seven-hole, 1,071metre drilling program was completed in Q404 at
the Swan prospect. Progress was made during the year to establish relationships with indigenous title
claimants to advance exploration agreements on various exploration leases.
Expenditures in 2004 totalled approximately $4.8 million.In Q105 the Company announced the discovery of a new deposit of a potentially significant
iron oxide copper-gold mineralization at the Swan prospect. The new discovery, located 600
metres southwest of the former Mount Elliott gold and copper mine, has a 300-metre-wide by
400-metre-long magnetic anomaly signature. A total of six diamond drill holes, reaching a
depth of at least 350 metres below surface, encountered chalcocite and gold mineralization.
The mineralization is open-ended along strike and to depth. Ivanhoe Mines management believes that the area has excellent
potential to host large-scale, high-grade iron oxide copper and gold
deposits similar to the nearby Ernest Henry Mine, or the Olympic Dam Mine, in South
Australia. Page 25 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  In 2005, Ivanhoe Mines is planning to recommence diamond drilling to further delineate the
extent and grade of the underlying primary chalcocite and gold mineralization, and to
conduct metallurgical testing on the supergene material to determine the heap-leach
parameters of the near-surface, oxidized material. The Company has assembled a project
development team, which includes the general manager and chief metallurgist who recently
worked at the S&K Mine in Myanmar, to investigate the potential of quickly producing
cathode copper from the supergene mineralization at the Swan deposit.iv)
    Kazakhstan: Bakyrchik.In 2004, the Bakyrchik operation re-processed material from the
tailings pond. Based on favorable results, additional gravity tables were purchased and
assembled in Q404 and the initial 14,000 tonnes processed in Q304 was increased to 22,000
tonnes in Q404. Engineering assessment and pilot test work continued on a proposed 150,000- to
200,000-tonne-per-annum rotary kiln process designed to yield annual gold production of up to
50,000 ounces. Bakyrchik engineers also are assessing a proposal to mine gold by extending one
of the existing open pits.
A National Instrument 43-101 qualified report has been commissioned from a third party
engineering firm to evaluate this plan. If realized, the potential to start commercial
operations with surface ore rather than underground-mined ore would reduce the start-up risk of
the mining part of the project. Bakyrchik expenditures during 2004, including engineering,
assessment work and mine care and maintenance costs, totalled approximately $3.8 million (2003
 - $3.4 million). Summary of exploration expenditures by project: Years ended December 31,2004
    
    
    2003
    
    
    2002Total exploration expenditures-($000)
    
    
    98,174
    
    
    
    67,989
    
    
    
    33,934Percentage allocationMongolia
    
    
    87
    %
    
    
    87
    %
    
    
    81
    %China
    
    
    3
    %
    
    
    5
    %
    
    
    1
    %Myanmar
    
    
    3
    %
    
    
    4
    %
    
    
    7
    %Bulgaria
    
    
    1
    %
    
    
    
    
    
    
    Australia
    
    
    5
    %
    
    
    
    
    
    
    Korea
    
    
    
    
    
    
    3
    %
    
    
    8
    %Other
    
    
    1
    %
    
    
    1
    %
    
    
    3
    %100
    %
    
    
    100
    %
    
    
    100
    %
 Page 26 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) B) MINING OPERATIONS MONYWA COPPER PROJECT (S&K MINE), MYANMAR Year ended December 31,Total Operation
    
    

Companys 50% net share% Increase
    
    
    
    
    
    
    
    
    
    
    % Increase2004
    
    
    
    2003
    
    
    (decrease)
    
    
    
    2004
    
    
    
    2003
    
    
    (decrease)Total tonnes moved(1)
    
    Tonnes (000s)
    
    
    10,675
    
    
    
    18,527
    
    
    
    (42
    %)Tonnes of ore to heap
    
    Tonnes (000s)
    
    
    6,881
    
    
    
    8,767
    
    
    
    (22
    %)Ore grade
    
    CuCN %
    
    
    0.65
    %
    
    
    0.60
    %
    
    
    8
    %Strip ratio
    
    Waste/Ore
    
    
    0.45
    
    
    
    0.92
    
    
    
    (51
    %)Cathode production
    
    Tonnes
    
    
    31,756
    
    
    
    27,869
    
    
    
    14
    %
    
    
    15,878
    
    
    
    13,935
    
    
    
    14
    %Tonnage sold
    
    Tonnes
    
    
    31,460
    
    
    
    27,615
    
    
    
    14
    %
    
    
    15,730
    
    
    
    13,808
    
    
    
    14
    %Average sale price received
    
    $/pound
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1.34
    
    
    $
    0.79
    
    
    
    69
    %Sales
    
    $(000)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,091
    
    
    
    22,866
    
    
    
    93
    %Cost of operations
    
    $(000)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,412
    
    
    
    12,428
    
    
    
    (8
    %)Operating profit
    
    $(000)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,502
    
    
    

    4,954
    
    
    
    455
    %
   (1)
    
    Includes ore and waste material Copper prices on the London Metal Exchange averaged $1.30 per pound in 2004, compared to $0.81 per
pound in 2003. In 2004, the cash component of cost of operations increased by 16% ($1.8 million) over 2003. The
increase in costs was mainly attributable to increased unit power costs, higher commercial and
import taxes, increased chemical costs and higher road maintenance charges. This increase in costs
is net of a 49% reduction in equipment rental charges ($2.4 million), mainly attributable to lower
tonnage moved. Assisted by higher copper prices, improved ore grades and higher copper production, the S&K Mine is
continuing to generate excellent results. The Company expects to release in Q205 a two-step
development plan that combines the expansion of the existing operations at the S&K Mine with the
development of the Letpadaung deposit. This development plan is expected to be implemented over a
period of five years, resulting in the Monywa Copper Projects overall copper cathode production
capacity of 200,000 tonnes per year. In mid-October 2004, the mines annual copper cathode
throughput capacity increased to 39,000 tonnes (86 million pounds). All development costs were
funded from the mines internally generated cash flow.  1.
    The first step of the plan, which is subject to an expected 2006 upgrade of the
mines power supply to 40 megawatts, is expected to take annual copper production from the
S&K Mines deposit to a projected rate of 50,000 tonnes (110 million pounds). This first
step is expected to be put in place in H106. Page 27 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  2.
    The second step, which is subject to a power supply of between 60 and 80 megawatts
being made available, proposes to develop the Letpadaung deposit over a four year period.
The proposed development will consist of the construction of three SX/EW modules, each
with an annual capacity of 50,000 tonnes of copper cathode per year. Japanese, Korean and
Chinese companies have made written expressions of interest in providing financing to
fast-track the expansion of copper production from the S&K Mine and Letpadaung deposits.
Financing discussions are ongoing between these companies and the management of the Monywa
Copper Project, although there are no assurances that satisfactory negotiations will be
concluded. Each phase of the expansion is expected to be funded from internally generated cash flows. The
Monywa Copper Project also is considering external funding alternatives that would enable
accelerated expansion. See Corporate Strategy and Outlook  Monywa Copper Project. C) DISCONTINUED OPERATIONS SAVAGE RIVER MINE, TASMANIA Twelve month period ended December 31,PercentYear ended December 31,
    
    
    Increase2004
    
    
    2003
    
    
    (decrease)Total volumes moved(1)
    
    BCM (000 s)
    
    
    
    
    
    
    10,007
    
    
    
    (100
    %)Tonnes milled
    
    (000s)
    
    
    5,336
    
    
    
    5,308
    
    
    
    1
    %Strip ratio
    
    Tonnes waste/tonnes ore
    
    
    4.4
    
    
    
    5.5
    
    
    
    (21
    %)Concentrate production
    
    Tonnes (000s)
    
    
    2,106
    
    
    
    2,286
    
    
    
    (8
    %)Iron ore content
    
    Fe%
    
    
    29.9
    %
    
    
    32.6
    %
    
    
    (8
    %)Pellet production
    
    Tonnes
    
    
    2,102,863
    
    
    
    2,255,938
    
    
    
    (7
    %)Pellet sales
    
    Tonnes
    
    
    2,118,197
    
    
    
    2,180,000
    
    
    
    (3
    %)Sales
    
    $/tonne
    
    $
    40
    
    
    $
    31
    
    
    
    29
    %$(000)
    
    
    83,898
    
    
    
    66,833
    
    
    
    26
    %Cost of operations
    
    $(000)
    
    
    71,614
    
    
    
    63,480
    
    
    
    13
    %Operating profit (loss)
    
    $(000)
    
    
    7,915
    
    
    
    (1,952
    )
    
    
    506
    %Average foreign exchange rate
    
    US$/AUD$
    
    
    0.7370
    
    
    
    0.6529
    
    
    
    13
    %
   (1)
    
    Includes ore and waste material Net income from discontinued operations was approximately $8.6 million in 2004, compared to a net
loss of $4.7 million in 2004. The 29% increase in the unit sale price resulted from the 19%
increase in the approved pellet price for 2004, plus higher prices obtained in Q404 from the
pellet and concentrate sales negotiated at spot prices, which reached almost double the established
standard rate for the year. Net operating profit was affected by a 14% increase in operating costs,
mainly attributable to higher wages, electricity, fuel and gas charges. Page 28 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) On February 28, 2005, the Company completed of the sale of its total investment and loans to the
Savage River operations for two initial cash payments totalling $21.5 million, plus a series of
contingent, escalating-scale annual payments based on the annual pellet price. The escalating
payments will be made over five years, commencing March 2006. A 71.5% increase in the iron ore
price benchmark for the 2005 year was announced at the end of February 2005. Based on this expected
increase, the Company expects to receive by the end of March 2006, cumulative payments totalling
approximately $44.0 million. In addition, if the 2005 newly increased pellet price benchmark and
the Savage River pellet production are maintained over the following five years, the Company should
receive additional payments totalling approximately $79 million. Total pellet production for 2005
is estimated to be approximately 2.0 million tonnes. D) ADMINISTRATIVE AND OTHER General and administrative.The $5.4 million increase in General and Administrative
expenditures in 2004 was primarily due to a $2.8 million increase in stock-based compensation and
increases in wages and benefits, insurance, travel charges and legal expenses. Foreign exchange
gains. In 2004 and 2003, the Company maintained most of its cash resources in Canadian dollars. The
majority of the foreign exchange gains in 2004 and 2003 were attributable to the strengthening of
the Canadian dollar against the U.S. dollar. Gain on sale of investments.The $4.5 million gain on sale of investments in 2004 consists of a
$3.3 million gain from the sale of the Companys property interest located in Vietnam and a $1.2
million gain from the sale of the Resource Investment Trust share investment. The $4.6 million gain
on sale of an investment in 2003 resulted from the sale of the Companys shares of Emperor Mines
Limited. Share of loss on significantly influenced investees.At December 31, 2004, the Company held 38.5%
(2003 - 35.5%) of Jinshans common shares (see Review of
Operations  Exploration, Other-China: Jinshan Gold Mines Inc.), and consequently $2.0 million
(2003 -$2.3 million) of the $2.3 million (2003 - $2.4 million), represents the expensing by the
Company of its share of Jinshans net loss. Write down of assets.In 2004, the Company recorded a $5.3 million write-down reflecting an
impairment of a portion of Jinshans original underlying assets at the date of the Companys
investment in Jinshan. In 2003, following the sale of its Korean assets to Asia Gold, the Company
wrote down its investment in its Korean assets by $1.2 million. Dilution gain on investment in subsidiary. Starting in Q303, following the acquisition by the
Company of more than 50% of the outstanding common shares of Asia Gold, the financial results of
Asia Gold were consolidated in the Companys financial results. In 2003, a $4.2 million dilution
gain was recognized by the Company following Asia Golds initial public offering. Page 29 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) Share
Capital -At March 21, 2005, the Company had a total of 293.8 million common shares and the
following purchase warrants outstanding: Share purchase
    
    
    
    
    
    
    
    
    
    
    
    
    Total number ofwarrants outstanding
    
    
    Maturity date
    
    
    
    Exercise price
    
    
    
    shares to be issued7.125 million(1)
    
    
    December 19, 2005
    
    

Cdn$12.50 per  share
    
    
    7.125 million5.76 million(2)(3)
    
    
    February 15, 2006
    
    
    $8.68 per share
    
    
    0.576 million
   (1)
    
    Each warrant entitles the holder to acquire one common share.(2)
    
    Each 10 warrants entitle the holder to acquire one common share.(3)
    
    In 2005, the expiry date was extended from February, 2005 to February, 2006. At March 21, 2005, the Company had a total of approximately 8.8 million incentive stock options
outstanding, with a weighted average exercise price per share of Cdn$5.49. Each option is
exercisable to purchase a common share of the Company at prices ranging from Cdn$1.20 to Cdn$12.70
per share. CASH RESOURCES AND LIQUIDITY At December 31, 2004, consolidated working capital was $142.5 million, including cash of
$122.6 million, compared with working capital of $128.1 million and cash of $107.0
million at December 31, 2003. Operating activities.The $99.2 million in cash used in operating activities in 2004 was
primarily the result of $98.2 million in exploration expenditures. Investing activities.After repayment of the $50 million Mongolian Treasury Bill in Q404, a total
of $39.3 million in cash was used in investing activities in 2004. The main cash expenditures
included $8.2 million in sustaining capital expenditures on mining property, plant and equipment;
$5.4 million in non-producing mining plant and equipment on exploration projects, primarily located
in Mongolia and Australia, and $20.8 million on the acquisition of various mineral interests,
consisting mainly of the second $20.0 million installment of the $37.0 million purchase price for
the BHP royalty interest acquisition in Q403. Financing activities.Financing activities in 2004 consisted mainly of net proceeds totalling
$100.6 million from the 20.0 million common shares issued at a price of $5.32 (Cdn$7.00) per share
in July 2004, less $15.0 million of debt repayments by the S&K Mine ($7.5 million net to Ivanhoe
Mines). Page 30 of 87




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##### 



IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) The $100.6 million equity financing raised at the end of June 2004 allocated $90.9 million in
expenditures to the Oyu Tolgoi Project ($82.2 million) and to exploration activities on various
projects in China ($8.7 million). A total of approximately $58 million was spent or incurred in the
second half of 2004 on these various projects. Within the first four months of 2005, the Company
anticipates spending on these projects the remaining portion of the equity financing. The Companys
existing cash resources, together with the proceeds from the sale of the Savage River Mine, are
expected to be sufficient to fund the Companys current and planned activities into the third
quarter of 2005. Following completion of the Integrated Development Plan, the Company expects to be
in a position to seek project financing to implement its initial open-pit development plans at the
Southern Oyu deposits. However, there can be no assurance that the Company will be able to obtain project financing before
its existing cash resources are exhausted. Failure to generate sufficient funding from one or more
of these sources may require Ivanhoe Mines to delay, postpone or curtail certain of its planned
activities for the second half of 2005 and thereafter. Proceeds received from the sale of the Savage River mine will be used to supplement the funding of
the Companys ongoing activities at Oyu Tolgoi, although there can be no assurance that these
funds, if and when received, will be sufficient to meet all of the Companys funding requirements. The Company expects to fund additional planned expenditures for the second half of 2005 and beyond
from external sources, which may include debt or equity financing, proceeds from the sale of
existing non-core assets, third-party participation in one or more of the Companys projects, or a
combination thereof. There can be no assurance that the Company will be successful in generating
sufficient funds from any of these sources. Failure to generate sufficient funding from one or more
of these sources may require Ivanhoe Mines to delay, postpone or curtail certain of its planned
activities in 2005, and thereafter. Over the long term, the Company will need to obtain additional
funding for, or third-party participation in, its undeveloped or partially developed projects
(including the Oyu Tolgoi Project, the Companys other Mongolian exploration projects, its Chinese
and Australian exploration projects and the Bakyrchik project) to bring them into full production
(see Risks and Uncertainties - Additional Funding Requirements). Page 31 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) CONTRACTUAL OBLIGATIONS US$(000) Payments due in years ending December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010+
    
    
    
    TotalLong term debt(1)
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,500Operating leases(2)
    
    
    629
    
    
    
    349
    
    
    
    158
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    
    1,192Purchase obligations(2)
    
    
    13,934
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,934Other long-term obligations(3)
    
    
    432
    
    
    
    724
    
    
    
    432
    
    
    
    7,503
    
    
    
    
    
    
    
    9,739
    
    
    
    
    18,83022,495
    
    
    
    1,073
    
    
    
    590
    
    
    
    7,559
    
    
    
    
    
    
    
    9,739
    
    
    
    
    41,456ALLOCATIONS&K Mine
    
    
    8,187
    
    
    
    432
    
    
    
    432
    
    
    
    5,355
    
    
    
    
    
    
    
    
    
    
    
    
    14,406Mongolia
    
    
    13,763
    
    
    
    440
    
    
    
    148
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    14,401Bakyrchik
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,739
    
    
    
    
    9,739Cloncurry
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,148
    
    
    
    
    
    
    
    
    
    
    
    
    2,148Singapore
    
    
    172
    
    
    
    201
    
    
    
    10
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    389Vancouver
    
    
    373
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37322,495
    
    
    
    1,073
    
    
    
    590
    
    
    
    7,559
    
    
    
    
    
    
    
    9,739
    
    
    
    
    41,456
   (1)
    
    This amount is included in the Companys Consolidated Balance Sheet as at December 31,
2004 and excludes future interest payments.(2)
    
    These amounts mainly represent various long-term contracts that include commitments
for future operating payments under contracts for drilling, engineering, equipment
purchases, rentals and other arrangements.(3)
    
    Other long-term obligations mainly consist of deferred royalty payments and asset
retirement obligations. In 1997, the S&K Mine entered into an agreement for the sale of a guaranteed quantity of Grade A
Product (as defined in the agreement) from the mine to Marubeni Corporation, which is affiliated
with one of the lenders of the project financing. This agreement is expected to expire by the end
of 2005. CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting
principles in Canada requires companies to establish accounting policies and to make estimates that
affect both the amount and timing of the recording of assets, liabilities, revenues and expenses.
Some of these estimates require judgments about matters that are inherently uncertain. Page 32 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) A detailed summary of all of the Companys significant accounting policies and the estimates
derived therefrom is included in Note 2 to the annual Consolidated Financial Statements for the
year ended December 31, 2004. While all of the significant accounting policies are important to the
Companys consolidated financial statements, the following accounting policies and the estimates
derived therefrom, have been identified as being critical:  Ø
    Carrying Values of Mining Property, Plant and Equipment and Other Mineral Property
Interests;Ø
    Depletion and Depreciation of Property, Plant and Equipment;Ø
    Heap Inventory Valuation;Ø
    Asset Retirement Obligations;Ø
    Income Taxes. Carrying values of Mining Property, Plant and Equipment and Other Mineral Property Interests The Company undertakes a review, at least annually, to evaluate the carrying values of operating
mines and other mineral property interests. Preparation of a life-of-mines cash flow for each
remaining year is based on managements estimates of remaining mine reserves and grade, future
production and sale volumes, unit sales prices, future operating and capital costs and reclamation
costs to the end of mine life. For each mining project, the carrying value is compared to the
estimated future discounted cash flows and any excess is written down
against operations. The
estimates used by management are subject to various risks and uncertainties. It is reasonably
possible that changes in estimates could
occur which may affect the expected recoverability of the Companys investments in mining projects
and other mineral property interests. Depletion and Depreciation of Property, Plant and Equipment Mining property, plant and equipment comprise the largest component of Ivanhoe Mines assets
and, as such, the amortization of these assets has a significant effect on the Companys financial
statements. 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. The
mining plant and equipment and other capital assets 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 two to 15 years), as
appropriate. Capital projects in
progress are not depreciated until the capital asset has been put
into operation. The proven and
probable reserves are determined based on a professional evaluation using accepted international
standards for the assessment of mineral reserves. The assessment involves Page 33 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) the study of geological,
geophysical and economic data and the reliance on a number of assumptions. The estimates of the
reserves may change, based on additional knowledge gained subsequent to the initial assessment.
This may include additional data available from continuing exploration, results from the
reconciliation of actual mining production data against the original reserve estimates, or the
impact of economic factors such as changes in the price of commodities or the cost of components of
production. A change in the original estimate of reserves would result in a change in the rate of
depletion and depreciation of the related mining assets, or could result in impairment, resulting
in a write-down of the assets. Following the start of commercial production, some mining companies accounting policies are to
expense all costs of removing waste material. Many mining companies, including Ivanhoe Mines, have
adopted a different accounting policy whereby, for the entire mine life, the costs of removing
waste rock at open-pit mines, commonly referred to as stripping costs, are deferred. For Ivanhoe
Mines, mining costs associated with waste-rock removal are deferred or accrued, as appropriate, and
charged to operations on the basis of the average stripping ratio for each mine area. The average
stripping ratio is calculated as the ratio of the tonnes of waste material estimated to be mined to
the estimated recoverable tonnes of metals from that mine area. The policy of deferring stripping
costs results in the smoothing of costs of removing waste material over the life of the mine rather
than expensing those actual costs in the period incurred. The following is a summary of strip ratios for the S&K Mine (1): Actual
    
    
    2002
    
    
    
    0.732003
    
    
    
    0.922004
    
    
    
    0.45Forecast
    
    
    2005
    
    
    
    0.792006
    
    
    
    1.112007
    
    
    
    1.10Life of mine average
    
    
    0.97
   (1)
    
    The strip ratio is calculated using tonnes of waste mined over tonnes of ore
mined. Heap inventory valuation Ivanhoe Mines copper operations involve the process of stacking ore on heaps and extracting a
copper-bearing solution from the heaps using a continuous leaching process. The inventory
categorized as broken ore on leach pads represents the inventory cost of estimated recoverable
copper quantities contained in the heaps. It is not practical in a normal mine operation to obtain
direct measurements of these quantities of recoverable copper. Instead, remaining metal inventory
quantities are estimated indirectly by subtracting total copper production from the cumulative
estimate of recoverable copper stacked on the heaps. Page 34 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Stated in U.S. dollars except where noted) A decrease in the estimated copper quantities recoverable from the heaps would directly increase
the cost of copper production and decrease the value of broken ore on leach pads. Each month, the broken ore on leach pads is valued at the lower of the weighted average cost of
production and net realizable value. The monthly cost of production includes all costs related to
mining for the month, including allocated depreciation and depletion charges. All of this ore has
been classified as a current asset since, based on historical leaching data, the copper is expected
to be recovered within the next 12 months. The estimated units of copper on the leach pads are
based on the amount of ore placed on the pads, the expected recovery rates and actual production. Copper recovery rates are dependent on whether the ore is processed before it is stacked on the
heaps. Copper recoveries from crushed and agglomerated ore material are approximately 80% and the
leach cycle takes almost a year to complete. The leaching cycle for run-of-mine material 
unprocessed material deposited directly on the heaps  is much shorter, (approximately 160 days),
but the copper percentage recovery rate is normally lower and is
approximately 75 %. At December
31, 2004, the total amount of
recoverable metal contained in the heaps was estimated at approximately 31,700 tonnes of copper
(net 16,850 tonnes to Ivanhoe Mines), at a cost of approximately $631 per tonne, or $0.29 per pound
of copper. Ivanhoe Mines reviews the estimated units of copper on the heap-leach pads on a regular basis and,
where appropriate, revises its estimates of those quantities to recognize changes in the expected
recovery rates based on actual recoveries. Asset Retirement Obligations The Company has obligations for site restoration and decommissioning related to its mining
properties. The Company, using mine closure plans or other similar studies that outline the
requirements planned to be carried out, estimates the future obligations for mine closure
activities. Because the obligations are dependent on the laws and regulations of the countries in
which the mines operate, the requirements could change  resulting from amendments in those laws
and regulations relating to environmental protection and other legislation affecting resource
companies. Ivanhoe Mines recognizes liabilities for statutory, contractual or legal obligations associated
with the retirement of mining 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 the related asset and the cost is amortized as an expense over the
economic life of the asset using either the unit-of-production method or the straight-line method,
as appropriate. 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. Page 35 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) Because the estimate of obligations is based on future expectations in the determination of closure
provisions, management makes a number of assumptions and judgments. The closure provisions are more
uncertain the further into the future the mine closure activities are to be carried out. Actual
costs incurred in future periods in relation to the remediation of Companys existing assets could

differ materially from the $17.4 million undiscounted future value of Ivanhoe Mines estimated
asset retirement obligations at December 31, 2004. Income Taxes The Company must make significant estimates in respect of the provision for income taxes and the
composition of its future income tax assets and future income tax 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 which may, on resolution in the future, result in adjustments to the amount of future
income tax assets and future income tax liabilities, and those adjustments may be material to the
Ivanhoe Mines financial position and results of operations. Future income tax assets and liabilities are computed based on differences between the carrying
amounts of assets and liabilities on the balance sheet and their corresponding tax values, using
the enacted or substantially enacted, as applicable, income tax rates at each balance sheet date.
Future income tax assets also result from unused loss carry-forwards and other deductions. The
valuation of future income tax assets is reviewed quarterly and adjusted, if necessary, by use of a
valuation allowance to reflect the estimated realizable amount. The determination of the ability of the Company to utilize tax loss carry-forwards to offset future
income taxes payable requires management to exercise judgment and make assumptions about the future
performance of the Company. Management is required to assess whether the


 Company is more likely than not to be able to benefit from these tax losses. Changes in economic
conditions, metal prices and other factors could result in revisions to the estimates of the
benefits to be realized or the timing of utilizing the losses. Recent Accounting Pronouncements As part of its agenda, the Emerging Issues Task Force of the U.S. Financial Accounting Standards
Board is reviewing several accounting issues related to the mining industry. Should this result in
changes to U.S. Generally Accepted Accounting Principles (GAAP), Canadian GAAP may also be
changed in an effort to harmonize with U.S. GAAP. Page 36 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) RISKS AND UNCERTAINTIES Material risks and uncertainties affecting Ivanhoe Mines, their potential impact, and the
Companys principal risk management strategies, are as follows.  Ø
    Additional Funding Requirements- The further development and exploration of
the various mineral properties in which it holds interests depends upon Ivanhoe Mines
ability to obtain financing through joint ventures, debt financing, equity financing or
other means. Ivanhoe Mines must arrange significant project financing for development of
the Oyu Tolgoi Project. There can be no assurance that Ivanhoe Mines will be successful in
obtaining any required financing as and when needed. Depressed markets for precious and
base metals may make it difficult, or impossible, for Ivanhoe Mines to obtain debt
financing or equity financing on favorable terms, or at all. Ivanhoe Mines operates in a
region of the world that is prone to economic and political upheaval and certain mineral
properties held by Ivanhoe Mines are located in politically and economically unstable
countries, which may make it more difficult for Ivanhoe Mines to obtain debt financing from
project lenders. Failure to obtain additional financing on a timely basis may cause Ivanhoe
Mines to postpone its development plans, forfeit rights in some or all of its properties or
joint ventures, or reduce or terminate some or all of its operations.Ø
    Risks pertaining to Mongolia -Mongolia is, and for the foreseeable future is
expected to remain, the country in which Ivanhoe Mines concentrates most of its business
activities and financial resources. Since 1990, Mongolia has been in transition from state
socialism and a planned economy to a political democracy and a free market economy. Much
progress has been made in this transition, but much more progress remains to be made,
particularly with respect to the rule of law. Many laws have been enacted, but in many
instances they are neither understood nor enforced. For decades, Mongolians have looked to
politicians and bureaucrats as the sources of the law. This has changed in theory, but
often not in practice. With respect to most day-to-day activities in Mongolia, government
civil servants interpret, and often effectively make, the law. This situation is gradually
changing, but at a relatively slow pace. Laws may be applied in an inconsistent, arbitrary
and unfair manner and legal remedies may be uncertain, delayed or unavailable.Ivanhoe Mines current focus is the Oyu Tolgoi Project. Ivanhoe Mines is engaged in discussions
with a working group of Mongolian government representatives aimed at reaching a long-term
stability agreement establishing the critical terms and conditions that will apply to the Oyu
Tolgoi Project during its operational phase. Management believes that such an agreement (or lack
thereof) will have a material impact on Ivanhoe Mines ability to obtain the financing necessary
to develop the project. The stability Page 37 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  agreement that Ivanhoe
Mines is seeking from the Mongolian government is expected to address tax and fiscal issues,
as well as other matters, including cross-border and import/export issues and confirmation of
appropriate mining, land and water licence tenures and infrastructure necessary to carry out
all
exploration, mining, milling, processing and related activities over the life of the
project. No assurances can be given as to when, or if, Ivanhoe Mines discussions with the
Mongolian government working group will culminate in a stability agreement, or that any such
stability agreement will contain terms and conditions that are, in all material respects,
favourable to Ivanhoe Mines.Ø
    Uncertainties related to mineral resource estimates There is a degree of
uncertainty attributable to the calculation of mineral resources and corresponding grades
being mined or dedicated to future production. Until resources are actually mined and
processed, the quantity of resources and grades must be considered as estimates only. In
addition, the quantity and value of reserves or resources may vary, depending on metals
prices. Any material change in the quantity of resources, grades or stripping ratio may
affect the economic viability of Ivanhoe Mines properties. In addition, there can be no
assurance that metal recoveries in small-scale laboratory tests will be duplicated in
larger-scale tests under on-site conditions, or during production. Deferred Cash
Considerations expected to be received by the Company from the sale of the Savage River
mine are based both future iron pellet prices (see below) and on current estimated mineral
reserves and anticipated future annual production from the mine. There is no guarantee
that these mineral reserves and annual production estimates and the estimated Deferred
Cash Considerations will be realized. See Corporate Strategy and Outlook  Discontinued
Operations.Ø
    Metal price volatility Copper and iron-ore pellet prices are subject to volatile
price changes from a variety of factors, including international economic and political
trends, expectations of inflation, global and regional demand, currency-exchange
fluctuations, interest rates and global or regional consumption patterns, speculative
activities and increased production due to improved mining and production methods. The
supply of, and demand for, Ivanhoe Mines principal products  iron ore and copper  is
affected by various factors, including political events, economic conditions and
production costs.Unlike most metals, iron ores are not fungible commodities, as each is somewhat different
in composition and usage characteristics. The iron-ore market behaves like a product,
rather than a commodity, market, with zones of competition and zones of exclusion. The
market is one of direct customer-to-producer relationships, without middlemen, warehousing
or buffer stocks, speculators or futures market. The market is imperfect and oligopolistic.
Prices are not set by the market clearance principle, but to optimize returns to producers
within the constraint of the total market size. Iron ore pellet prices are negotiated once
a year and have risen sharply in recent years, increasing Page 38 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  approximately 10% in
2003, a further 19% in 2004 and a
recently announced 71% in 2005. In the past, iron ore pellet prices have suffered
significant declines and there is no guarantee that the current upward trend in pellet prices
will continue in the future In the second half of 2003, copper prices benefited from
speculative buying activity from hedge funds in anticipation of a global economic turnaround
that has yet to fully materialize. Chinas ever-expanding need to import various metals to
feed its buoyant economy also contributed to the sharp increase in prices in 2003 and 2004 for
copper and iron ore.Prior to 2003, many metal prices, when adjusted for inflation, were in a downward trend.
Although many analysts now forecast that metal prices are expected to increase in the near
future, there is no assurance that the 2003 and 2004 increases in metal prices represent a
turning point or a confirmation of a reversal of that previously established downward trend in
metal prices.Ivanhoe Mines did not hedge any metal sales or production in 2003 and 2004 and has no plans to
do so in 2005.Ø
    Operating risks Ivanhoe Mines faces a number of potential risks with respect to the
proposed expansion at the Monywa Copper Project, which includes the development of the
nearby Letpadaung deposit. Myanmars current power-generating ability is limited and there
can be no assurance that improvements to Myanmars national power system, sufficient to
furnish the additional required power for the planned expansion of the S&K
    Mine operations, will be made on a timely basis, or at all. If not, it may be necessary to
construct a local source of power, which may not be feasible or which may render the
project uneconomic.
The high-lift leach piles planned for the S&K Mine and the Letpadaung deposit carry
technical risks. These risks include geotechnical failure, chemical degradation of the heap
material, compaction and loss of permeability, lack of oxygen, excessive iron build-up and
excessive acid generation. Manifestation of these risks could adversely affect the level of
copper recoveries and increase operating costs.
Although Ivanhoe Mines believes that the material to be extracted from the Letpadaung
deposit will exhibit the same heap-leaching characteristics as the ore currently being
mined at the S&K Mine, this assumption cannot be confirmed prior to mining. Different
metallurgical characteristics in the Letpadaung deposit, if and to the extent they might
exist, could adversely affect the technical feasibility and economics of the S&K Mines
Letpadaung development plans.
Ivanhoe Mines conducts its operations in several countries through co-operative joint
ventures with government-controlled entities. While this connection benefits Ivanhoe Mines
in some respects, there is a substantial inequality with respect to the influence of the
parties with the applicable government. Governments in these countries hold a Page 39 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  substantial degree of
subjective control over the application and enforcement of laws and the conduct of business.
This inequality would become particularly detrimental if a business dispute arose between
joint venture parties. Ivanhoe Mines seeks to minimize this issue by including international
arbitration clauses in relevant agreements whenever possible and by maintaining positive
relations with its joint venture partners and local governments, but there can be no guarantee
that these measures will be sufficient to protect Ivanhoe Mines interest in these countries.Ø
    Economic Sanctions- In May, 1997, the United States government imposed economic
sanctions on Myanmar, banning new investments in Myanmar by any United States investor. In
August, 1997, the Canadian government imposed selective economic sanctions on Myanmar,
directed against imports and exports between Canada and Myanmar. These sanctions were
based on the United States and Canadian governments belief that the current government of
Myanmar has repressed opposition to the government. While the sanctions in their current
form do not affect the Companys investments in Myanmar, there can be no assurances that
the sanctions will not be broadened or that other countries will not adopt sanctions in
the future. The existence of United States sanctions may restrict the ability of United
States companies to participate in the Monywa Copper Project. It is not possible to assess
whether additional legislation will be enacted by the United States, Canada, the European
Union or elsewhere or, if enacted, will ultimately affect the Company or investment in the
Company.Ø
    Currency risks The bulk of the Companys activities are denominated in U.S.
currency. During the past two years, the Company invested most of its surplus funds in
cash instruments denominated in Canadian dollars. During most of that two-year period, the
Canadian dollar strengthened against the U.S. dollar, resulting in a foreign exchange gain
to the Company. There is no guarantee that the Canadian dollar will continue on this trend
in the future and a sudden weakening of the Canadian dollar vis-a-vis the U.S. dollar
could generate a significant foreign exchange loss to the Company.Ø
    Limited production history -The Company has paid no dividends on its common shares
since incorporation and does not anticipate doing so in the foreseeable future. To date,
the Company has not received any cash flow generated by the S&K Mine. All other
exploration and development projects of Ivanhoe Mines will need funding from the Company.
Ivanhoe Mines has a limited operating history and there can be no assurance of its ability
to operate its projects profitably. While Ivanhoe Mines may in the future generate
additional working capital through the operation, development, sale or possible
syndication of its properties, there is no assurance that Ivanhoe Mines will be capable of
producing positive cash flow on a consistent basis or that any such funds will be
available for exploration and development programs.Ø
    Uninsurable risks or self-insured risks Exploration, development and production
operations on mineral properties involve numerous risks, including
unexpected or Page 40 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted)  unusual geological operating conditions, rock bursts or slides, fires, floods, earthquakes
or other environmental occurrences, and political and social instability. It is not always
possible to obtain insurance against all such risks and the Company may decide not to
insure against certain risks as a result of high premiums or other reasons. Should such
liabilities arise, they could reduce or eliminate any further profitability and result in
increasing costs and a decline in the value of the securities of the Company. Ivanhoe Mines
does not maintain insurance against political or environmental risks. Also, because of the
recent major increases in insurance premiums and the inability to obtain full coverage, the
S&K Mine is self-insuring on a portion of the mine assets.Ø
    Extent of liability for previous environmental damage -Ivanhoe Mines has received
exemptions from liability from relevant governmental authorities for environmental damage
caused by previous mining operations at the S&K Mine and the Bakyrchik Project. There is a
risk, however, that, if an environmental accident occurred at those sites, it may be
difficult or impossible to assess the extent to which environmental damage was caused by
Ivanhoe Mines activities or the activities of previous operators.
    In that event, the indemnities could be ineffective and possibly worthless.Ø
    Limited customer base Substantially all of the Ivanhoe Mines production from the
S&K Mine is sold to a single Japanese buyer. If, for any reason, the S&K Mine was unable
to continue to sell its production to its existing buyer, economic sanctions against trade
with Myanmar may significantly reduce the number of potential alternative buyers. RELATED-PARTY TRANSACTIONS At the end of 2004 and 2003, the Companys discontinued operations owed approximately $5.1
million to Mr. Friedland. This debt originated as a result of the December 2000 acquisition, by the
Company, of the Savage River operation. Following the sale of the Savage River operations in
February 2005, repayment of this balance is contingent upon the Company receiving proceeds in
excess of approximately $111 million from the sale of the Savage River operations. The Company is a party to cost-sharing agreements with other companies in which Robert M.
Friedland, its Chairman and Chief Executive Officer, has a material, direct or indirect, beneficial
interest. Through these agreements, Ivanhoe Mines shares, on a cost-recovery basis, office space,
furnishings, equipment and communications facilities in
Vancouver, Singapore, Beijing and London, and an aircraft. Ivanhoe Mines also shares the costs of
employing administrative and non-executive management personnel in these offices. Page 41 of 87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) Companies in which the Company is a party to the cost-sharing agreement and Mr. Friedlands
ownership interest in each of them, are as follows: R.M. FriedlandsOwnershipCompany Name
    
    
    InterestIvanhoe Energy Inc.
    
    
    
    27.47
    %Ivanhoe Capital Corporation
    
    
    
    100.00
    %Ivanhoe Nickel & Platinum Ltd.
    
    
    
    50.06
    %
 The Companys related-party transactions also include transactions with Asia Gold Corp.,
(a 51.1%-owned subsidiary) and exploration expenditures incurred as part of several joint-venture
agreements with Jinshan Gold Mines Inc.(a 38.5%-owned, publicly listed company). The shared and other expenditures for the last two years were as follows: $(000)Years ended December 31,2004
    
    
    2003Exploration
    
    
    2,198
    
    
    
    1,768Legal
    
    
    468
    
    
    
    Office and administrative
    
    
    2,057
    
    
    
    1,834Salaries and benefits
    
    
    2,239
    
    
    
    1,372Travel (including aircraft rental)
    
    
    3,001
    
    
    
    2,6369,963
    
    
    
    7,610
 Accounts receivable and accounts payable of the Company at December 31, 2004, included $0.4
million and $3.3 million, respectively (December 31, 2003  $0.3 million and $0.3 million,
respectively), which were due from/to a company under common control or companies related by way of
directors in common. Page 42 of  87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) OFF-BALANCE SHEET ARRANGEMENTS In 2004, the Company did not have any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future effect on the results of operations or financial
condition of the Company, except for the call options discussed under Financial Instruments
below. FINANCIAL INSTRUMENTS In September 2004, in order to obtain some protection against the weakening of the U.S.
dollar, the management of the Savage River Mine negotiated a 12-month, $60 million call options
program, providing the mine with the option to buy the AUD$ equivalent of $5 million each month at
$0.7298 in 2004 and $0.7150 in 2005. Conversely for the same 12-month period, the mine is obliged
each month to buy the AUD$ equivalent of $5 million at $0.7298 in 2004 and $0.7150 in 2005 if the
AUD$ value at the end of any month is below $0.7030 in 2004 and $0.6866 in 2005. At December 31,
2004, these financial instruments were marked to market by the Savage River mine operations, which
resulted in an unrealized foreign exchange gain of approximately $3 million being included in the
net income from discontinued operations in 2004. QUALIFIED PERSONS Disclosure of a scientific or technical nature in this MD&A in respect of the Oyu Tolgoi
Project was prepared under the supervision of Charles P.N. Forster, an employee of Ivanhoe Mines
and a qualified person under National Instrument 43-101. Disclosure of a scientific or technical
nature in this MD&A in respect of the Monywa Copper Project was prepared by or under the
supervision of Mark Haywood, an employee of Ivanhoe Mines and a qualified person under National
Instrument 43-101. OVERSIGHT ROLE OF THE AUDIT COMMITTEE The Audit Committee reviews, with management and the external auditors, the Companys
quarterly MD&A and related consolidated financial statements and approves the release of such
information to shareholders. For each audit or quarterly review, the external auditors prepare a
report for members of the Audit Committee summarizing key areas, significant issues and material
internal control weaknesses encountered, if any. Page 43 of  87




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IVANHOE MINES LTD. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Stated in U.S. dollars except where noted) MANAGEMENTS REPORT TO THE SHAREHOLDERS The Consolidated Financial Statements and the managements discussion and analysis of
financial condition and results of operations (MD&A) are the responsibility of the management of
Ivanhoe Mines Ltd. These financial statements and the MD&A have been prepared in accordance with
accounting principles generally accepted in Canada and regulatory requirements, respectively, using
managements best estimates and judgment of all information available up to March 21, 2005. The Board of Directors is responsible for ensuring that management fulfills its responsibilities
for financial reporting and internal controls. The Audit Committee of the Board of Directors,
consisting solely of outside directors, meets regularly during the year with financial officers of
the Company and the external auditors to satisfy itself that management is properly discharging its
financial reporting responsibilities to the Directors who approve the consolidated financial
statements. These financial statements have, in managements opinion, been properly prepared within reasonable
limits of materiality and within the framework of the accounting policies summarized in Note 2 to
the Consolidated Financial Statements. The consolidated financial statements have been audited by Deloitte & Touche LLP, the independent
registered chartered accountants, in accordance with Canadian generally accepted auditing
standards. They have full and unrestricted access to the Audit Committee. R. M. Friedland
    
    P. MeredithChairman
    
    Chief Financial OfficerMarch 21, 2005Vancouver, BC Canada
 Page 44 of  87