Turquoise Hill Announces Financial Results and Review of Operations for the First Quarter of 2016

VANCOUVER, BC--(Marketwired - May 05, 2016) - Turquoise Hill Resources today announced its financial results for the quarter ended March 31, 2016. All figures are in U.S. dollars unless otherwise stated.

HIGHLIGHTS

• Oyu Tolgoi achieved an excellent safety performance with an All Injury Frequency Rate of 0.21 per 200,000 hours worked for the three months ended March 31, 2016.
• Oyu Tolgoi recorded revenue of $422.7 million in Q1'16, an increase of 18.9% over Q4'15, reflecting higher gold prices partially offset by lower volumes of concentrate sales.
• Turquoise Hill generated operating cash flow before interest and taxes of $195.4 million during Q1'16.
• For Q1'16, Turquoise Hill reported income from continuing operations attributable to shareholders of $118.9 million.
• In Q1'16, concentrator throughput increased 3.1% over Q4'15 resulting in average throughput of approximately 106,000 tonnes per day for the quarter.
• Concentrate production in Q1'16 was consistent with Q4'15 resulting from increased throughput and strong copper grades.
• Copper production in Q1'16 reached a quarterly high increasing 0.5% over Q4'15.
• As expected, gold production in Q1'16 declined approximately 30% over Q4'15 due to lower grades and the near-completion of mining in phase 2 of the open pit.
• For Q1'16, Oyu Tolgoi's C1 costs were $0.02 per pound of copper and all-in sustaining costs were $0.62 per pound of copper.
• Given stronger-than-expected Q1'16 gold production Turquoise Hill has increased 2016 gold in concentrates guidance to 255,000 to 285,000 ounces from 210,000 to 260,000 ounces.
• Sales contracts have been signed for approximately 95% of Oyu Tolgoi's expected 2016 concentrate production.
• In Q1'16, the capital estimate of the 2016 feasibility study was completed.
• Turquoise Hill expects the notice to proceed decision for underground construction in Q2'16.
• In March 2016, Oyu Tolgoi surpassed 2.0 million tonnes of concentrate shipped.
• Turquoise Hill's cash and cash equivalents at March 31, 2016 were approximately $1.5 billion.

FINANCIAL RESULTS

In Q1'16, the Company recorded net income attributable to owners of Turquoise Hill of $118.9 million or $0.06 per share compared with net income of $96.2 million or $0.04 per share in Q1'15. Operating cash flows before interest and taxes in Q1'16 were $195.4 million compared with $105.3 million in Q1'15, reflecting continued production and delivery cost improvements and effective working capital management. Capital expenditure on property, plant and equipment was $55.9 million on a cash basis in Q1'16, attributed to both underground pre-start and sustaining capital activities.

Turquoise Hill's cash and cash equivalents at March 31, 2016 were approximately $1.5 billion.

OYU TOLGOI

The Oyu Tolgoi mine is approximately 550 kilometres south of Ulaanbaatar, Mongolia's capital city, and 80 kilometres north of the Mongolia-China border. Mineralization on the property consists of porphyry-style copper, gold, silver and molybdenum contained in a linear structural trend (the Oyu Tolgoi Trend) that has a strike length extending over 26 kilometres. Mineral resources have been identified in a series of deposits throughout this trend. They include, from south to north, the Heruga Deposit, the Southern Oyu deposits (Southwest Oyu, South Oyu, Wedge and Central Oyu) and the Hugo Dummett deposits (Hugo South, Hugo North and Hugo North Extension).

The Oyu Tolgoi mine has initially been developed as an open-pit operation. A copper concentrator plant, with related facilities and necessary infrastructure to support a nominal throughput of 100,000 tonnes of ore per day, has been constructed to process ore mined from the Southern Oyu open pit. Long term development plans for Oyu Tolgoi are based on a 95,000-tonne-per-day underground block-cave mine. In August 2013, development of the underground mine was suspended pending resolution of matters with the Government of Mongolia. On May 18, 2015, Turquoise Hill, the Government of Mongolia and Rio Tinto signed the Oyu Tolgoi Underground Mine Development and Financing Plan (Underground Plan), which addressed key outstanding shareholder matters and set out an agreed basis for the funding of the project. On December 14, 2015, Oyu Tolgoi signed a $4.4 billion project finance facility for underground development provided by a syndicate of international financial institutions, export credit agencies representing the governments of Canada, the United States and Australia and 15 commercial banks.

Q1'16 performance

Safety continues to be a major focus throughout Oyu Tolgoi's operations and the mine's management is committed to reducing risk and injury. Oyu Tolgoi achieved an excellent safety performance with an All Injury Frequency Rate of 0.21 per 200,000 hours worked for the three months ended March 31, 2016.

Key financial metrics for Q1'16 are as follows:

Revenue of $422.7 million in Q1'16 increased 18.9% over Q4'15 reflecting higher gold prices partially offset by lower volumes of copper-gold concentrate sales. First quarter concentrate sold of 213,100 tonnes decreased 9.8% over Q4'15 reflecting the impact of the Lunar New Year public holidays in Mongolia and China.

Production and delivery costs include primarily the cash costs in inventory sold as well as allocated mine administration costs. Depreciation and depletion includes the depreciation and depletion in inventory sold as well as any depreciation of assets used in the selling and delivery process, including the depreciation of capitalized production phase stripping costs. Q1'16 cost of sales were $207.9 million (Q1'15: $257.9 million) reflecting the beneficial impact of production and operating cost improvements, savings on external services and labour as well as lower depreciation and depletion per tonne of concentrate sold due to higher production volumes.

Capital expenditure, on a cash basis, for Q1'16 was $55.9 million (Q1'15: $24.3 million) attributed to both underground pre-start and sustaining activities of $22.5 million and $33.4 million respectively. Sustaining capital expenditure includes the tailings storage facility and deferred stripping.

Total cash operating costs at Oyu Tolgoi in Q1'16 were $191.8 million, reflecting production and operating cost improvements. The 5% royalty payable to the Government of Mongolia is reflected as a cash operating expense; deferred stripping costs are not included in cash operating expense. Oyu Tolgoi administrative costs were $27.7 million reflecting reductions to headcount and external services.

Oyu Tolgoi's C1 costs in Q1'16 were $0.02 per pound, compared with $0.88 per pound in Q4'15. The decrease was mainly due to favourable gold credits from higher prices and volumes, combined with cash cost reductions.

All-in sustaining costs in Q1'16 were $0.62 per pound, compared with $1.56 per pound in Q4'15. The decrease was mainly due to gold credits and cash cost improvements, and lower charge relating to provisions for non-current stockpiles.

Key operational metrics for Q1'16 are as follows:

In Q1'16, concentrator throughput increased 3.1% over Q4'15 resulting in average throughput of approximately 106,000 tonnes per day for the quarter, exceeding nameplate capacity of 100,000 tonnes per day. Concentrate production in Q1'16 remained high resulting from increased throughput and strong copper grades. Copper production in Q1'16 reached a quarterly high increasing 0.5% over Q4'15. As expected, gold production in Q1'16 declined approximately 30% over Q4'15 due to lower grades and the near-completion of mining in phase 2 of the open pit.

Preparation for underground development

Following the filing of revised schedules for the statutory feasibility study with the Mongolian Minerals Council in August 2015, pre-start activities began in parallel with completion of the capital estimate, which was finalized in Q1'16. Pre-start activities include ramp-up of the owners' and engineering, procurement and construction management teams, re-estimate activities, detailed engineering and early procurement for equipment and materials required for necessary critical works that are key enablers for recommencement of underground development mining activity. Tendering activities are in progress for major work packages to support the development schedule subject to a formal 'notice to proceed' approval by the boards of Turquoise Hill, Rio Tinto and Oyu Tolgoi (Notice to Proceed). Appointments to roles in the underground team are well underway, with key staff starting in Q1'16. Turquoise Hill expects the Notice to Proceed decision for underground construction in Q2'16.

Prior to suspending underground construction in August 2013, underground lateral development at Hugo North had advanced approximately 16 kilometres off Shaft #1. Sinking of Shaft #2, the primary operations access and initial production hoisting shaft, had reached a depth of 1,168 metres below surface, 91% of its final depth of 1,284 metres. The 96 metre-high Shaft #2 concrete headframe has been constructed. Sinking of Shaft #5, a dedicated exhaust ventilation shaft, had reached a depth of 208 metres, 17% of its final depth of 1,174 metres. Surface facilities, including offices, mine dry, and workshop, are in place to support initial pre-production development and construction.

Funding of Oyu Tolgoi by Turquoise Hill

In accordance with the Amended and Restated Shareholders' Agreement (ARSHA) dated June 8, 2011, Turquoise Hill has funded Oyu Tolgoi's cash requirements beyond internally generated cash flows by a combination of equity investment and shareholder debt.

For amounts funded by debt, Oyu Tolgoi must repay such amounts, including accrued interest, before it can pay common share dividends. At March 31, 2016, the aggregate outstanding balance of shareholder loans extended by subsidiaries of the Company to Oyu Tolgoi was $7.0 billion, including accrued interest of $0.9 billion. These loans bear interest at an effective annual rate of LIBOR plus 6.5%.

In accordance with the ARSHA, a subsidiary of the Company has funded the common share investments in Oyu Tolgoi on behalf of Erdenes. These funded amounts earn interest at an effective annual rate of LIBOR plus 6.5% and are repayable, by Erdenes to a subsidiary of the Company, via a pledge over Erdenes' share of Oyu Tolgoi common share dividends. Erdenes also has the right to reduce the outstanding balance by making cash payments at any time. As at March 31, 2016, the cumulative amount of such funding was $751.1 million, representing approximately 34% of invested common share equity; unrecognized interest on the funding amounted to $248.3 million.

Operational outlook

Given stronger-than-expected Q1'16 gold production reflecting the mine accessing more of the high-grade gold benches lower in phase 2 of the open pit, the Company has increased 2016 gold in concentrates guidance to 255,000 to 285,000 ounces from 210,000 to 260,000 ounces. Mining of the phase 2 gold core is expected to be complete in Q2'16. The Company continues to expect Oyu Tolgoi to produce 175,000 to 195,000 tonnes of copper in concentrates for 2016.

Sales contracts have been signed for approximately 95% of Oyu Tolgoi's expected 2016 concentrate production.

CORPORATE ACTIVITIES

Management change

In January 2016, Turquoise Hill announced the appointment of Brendan Lane as Vice President, Operations and Development effective February 1, 2016. Mr. Lane brings 25-years of industry experience including metallurgical, mine engineering and commercial roles at Rio Tinto, Anglo American and BHP Billiton.

NON-GAAP MEASURES

The Company presents and refers to the following measures (non-GAAP measures) which are not defined in IFRS. A description and calculation of these measures is given below, and may differ from equivalent measures provided by other issuers. These measures are presented in order to provide investors and other stakeholders with a greater understanding of performance and operations at Oyu Tolgoi.

Cash operating costs

The measure of cash operating costs excludes: depreciation and depletion; exploration and evaluation; charges for asset write-down (including write-down of materials and supplies inventory), and includes management services payments to Rio Tinto, and management services payments to Turquoise Hill which are eliminated in the consolidated financial statements of the Company.

C1 cash costs

C1 cash costs is a metric representing the cash cost per unit of extracting and processing the Company's principal metal product to a condition in which it may be delivered to customers, net of gold and silver credits from concentrates sold. It is provided in order to support peer group comparability and to provide investors and other stakeholders with useful information about the underlying cash costs of Oyu Tolgoi and the impact of gold and silver credits on the operations' cost structure. C1 cash costs are relevant to understanding the Company's operating profitability and ability to generate cash flow. When calculating costs associated with producing a pound of copper, the Company includes gold and silver revenue credits as the production cost is reduced as a result of selling these products.

Turquoise Hill's principal metal product is copper and C1 cash costs are reported for Oyu Tolgoi only.

All-in sustaining costs

All-in sustaining costs (AISC) is an extended cash based cost metric, providing further information on the aggregate cash, capital and overhead outlay per unit, and is intended to reflect the costs of producing the Company's principal metal product in both the short term and over the life-cycle of its operations; as a result, sustaining capital expenditure on a cash basis is included rather than depreciation. As the measure seeks to present a full cost of copper production associated with sustaining current operations, development project capital is not included. AISC allows Turquoise Hill to assess the ability of Oyu Tolgoi to support sustaining capital expenditures for future production from the generation of operating cash flows.

A reconciliation of total cash operating costs, C1 cash costs and all-in sustaining costs is provided below.

QUALIFIED PERSON

Disclosure of a scientific or technical nature in the MD&A in respect of the Oyu Tolgoi mine was prepared under the supervision of Bernard Peters Technical Director -- Mining OreWin Pty Ltd, B. Eng. (Mining), FAusIMM (201743), and Sharron Sylvester, Technical Director -- Geology, OreWin Pty Ltd, BSc (Geol.), RPGeo AIG (10125). Each of these individuals is a "qualified person" as that term is defined in National Instrument Standards of Disclosure for Mineral Projects (NI 43-101).

About Turquoise Hill Resources

Turquoise Hill Resources (NYSE: TRQ)(NASDAQ: TRQ)(TSX: TRQ) is an international mining company whose primary operation is its 66% interest in the Oyu Tolgoi copper-gold-silver mine in southern Mongolia.

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Forward-looking statements

Certain statements made herein, including statements relating to matters that are not historical facts and statements of the Company's beliefs, intentions and expectations about developments, results and events which will or may occur in the future, constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and "forward-looking statements" within the meaning of the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking information and statements relate to future events or future performance, reflect current expectations or beliefs regarding future events and are typically identified by words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "plan", "estimate", "will", "believe" and similar expressions suggesting future outcomes or statements regarding an outlook. These include, but are not limited to, statements respecting anticipated business activities, planned expenditures, corporate strategies and other statements that are not historical facts.

Forward-looking statements and information are made based upon certain assumptions and other important factors that, if untrue, could cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such statements or information. There can be no assurances that such statements or information will prove accurate. Such statements and information contained herein represent the Company's best judgment as of the date hereof based on information currently available. The Company does not assume any obligation to update any forward-looking statements or information or to conform these forward-looking statements or information to actual results, except as required by law.

Important factors that could cause actual results to differ from these forward-looking statements and information are included in the "Risk Factors" section of the Annual Information Form dated as of March 15, 2016 in respect of the year ended December 31, 2015.