Condensed Interim Consolidated Financial Statements - Form 6-K

Condensed Interim Consolidated Financial Statements

June 30, 2022

(Unaudited)

TURQUOISE HILL RESOURCES LTD.

Consolidated Statements of Income

(Stated in thousands of U.S. dollars, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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TURQUOISE HILL RESOURCES LTD.

Consolidated Statements of Comprehensive Income

(Stated in thousands of U.S. dollars)

(Unaudited)

(a) No tax charges and no credits arose on items recognized as other comprehensive income or loss in 2022 (2021: nil).

The accompanying notes are an integral part of these consolidated financial statements.

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TURQUOISE HILL RESOURCES LTD.

Consolidated Statements of Cash Flows

(Stated in thousands of U.S. dollars)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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TURQUOISE HILL RESOURCES LTD.

Consolidated Balance Sheets

(Stated in thousands of U.S. dollars)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

The financial statements were approved by the directors on August 4, 2022 and signed on their behalf by:

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TURQUOISE HILL RESOURCES LTD.

Consolidated Statements of Equity

(Stated in thousands of U.S. dollars)

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

Rio Tinto plc is the ultimate parent company and indirectly owned a 50.8% majority interest in Turquoise Hill Resources Ltd. ("Turquoise Hill") as at June 30, 2022. On March 13, 2022 Turquoise Hill received an unsolicited non-binding proposal from Rio Tinto to acquire the approximately 49.2 per cent of the outstanding shares of Turquoise Hill held by its minority shareholders ("The Proposal"). Turquoise Hill's board of directors has formed a Special Committee of independent directors to review and consider The Proposal.

Turquoise Hill, together with its subsidiaries (collectively referred to as "the Company"), is an international mining company focused principally on the operation and further development of the Oyu Tolgoi copper-gold mine in Southern Mongolia. Turquoise Hill's head office is located at 1 Place Ville Marie, Suite 3680, Montreal, Quebec, Canada, H3B 3P2. Turquoise Hill's registered office is located at 300-204 Black Street, Whitehorse, Yukon, Canada, Y1A 2M9.

Turquoise Hill has its primary listing in Canada on the Toronto Stock Exchange and a secondary listing in the U.S. on the New York Stock Exchange.

The condensed interim consolidated financial statements of Turquoise Hill were authorized for issue in accordance with a directors' resolution on August 4, 2022.

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due.

As at June 30, 2022, the Company had $0.5 billion of available liquidity, consisting of consolidated cash and cash equivalents. The Company's current liabilities exceeded current assets by $451.7 million at June 30, 2022. In addition to obligations in current liabilities, in the next 12 months, the Company has non-cancellable obligations related to power commitments of $64.0 million. The Company's short-term cash flow forecasts indicate that additional financing will be required to fund its planned activities. In addition to the Company's liquidity position and cash flow generated from operations, the Company plans to access sources of funding that form part of the Second Amended and Restated Heads of Agreement ("Funding HOA") that was signed between the Company and Rio Tinto on May 18, 2022.

The Funding HOA amends the comprehensive funding arrangement, signed between the Company and Rio Tinto on January 25, 2022 to among other things, provide a plan to address the Company's near-term estimated funding requirements. The Funding HOA provides the Company with access to an immediately available early short-term secured advance of up to $400 million. Under the agreement, the Company expects to complete an initial equity offering of at least $650 million before December 31, 2022. The $400 million early short-term secured advance is then expected to be repaid from the proceeds of this equity offering. The Company then expects to draw on a further $300 million short-term secured advance provided for in the Funding HOA. The Company also expects to complete a re-profiling of $723.3 million in principal repayments, which are currently scheduled for repayment in December 2022 and June 2023 under its existing project finance borrowings and which are reported in current liabilities at June 30, 2022.

The timing of sustainable production is trending earlier in the first half of 2023. On achievement of sustainable production the Company expects to access the other sources of funding available under the Funding HOA, first by accessing either the remaining $450 million available from a co-lending by a member of the Rio Tinto Group to Oyu Tolgoi LLC ("Oyu Tolgoi") or additional senior supplemental debt of up to $500 million. The Company continues to review its near-term plans and continues to take steps to achieve operating efficiencies to maximize cash flows from its operations.

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

The Company's short-term cash flow forecasts reflect a lessening of the impact of the COVID-19 pandemic. During the three months ended June 30, 2022, COVID-19 cases identified at Oyu Tolgoi have continued at low levels. Following the recent relaxation of COVID-19 government-initiated restrictions in Mongolia, OT LLC has progressively restarted work on underground project facilities with workforce numbers approaching full capacity and onsite concentrate inventory levels have returned to target levels. The Force Majeure declared by Oyu Tolgoi LLC to project lenders in March 2020 and the Force Majeure declared by Oyu Tolgoi LLC to customers in March 2021 have now been lifted. Short-term cash flow forecasts reflect the latest estimates of capital and operating costs that are aligned with the revised 2022 outlook for capital and operating activity.

Sensitivity analyses are performed over these estimates including the impact of estimated commodity prices on cash receipts.

The short-term cash forecasts incorporate the plans that the Company will access additional sources of funding as contemplated in the Funding HOA. The Company believes that with implementation of the funding plan under the Funding HOA it has sufficient liquidity to meet its minimum obligations for a period of at least 12 months from the balance sheet date, and to meet requirements of the Company, including its operations and capital expenditures, over the same period.

These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. These condensed interim consolidated financial statements are compliant with IAS 34 and do not include all of the information required for full annual financial statements.

These condensed interim consolidated financial statements should be read in conjunction with the Company's annual consolidated financial statements for the year ended December 31, 2021.

The preparation of consolidated financial statements in accordance with IFRS often requires management to make estimates about, and apply assumptions or subjective judgement to, future events and other matters that affect the reported amounts of the Company's assets, liabilities, revenues, expenses and related disclosures. Assumptions, estimates and judgements are based on historical experience, expectations, current trends and other factors that management believes to be relevant at the time the Company's consolidated financial statements are prepared.

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

As part of the preparation of these interim consolidated financial statements, the Company assessed whether there was any change in circumstances that may lead to a material impact on the areas of judgement and estimation uncertainty that the Company disclosed in its annual consolidated financial statements for the year ended December 31, 2021. The assessment for the six months ended June 30, 2022 included any potential impact on the Company's areas of judgement and estimation uncertainty arising from the ongoing impact of COVID-19. The Company's assessment also considered the potential impact of milestones achieved in underground development, including firing of the first drawbell on June 17, 2022 as well as the on-going implementation of the Funding HOA and the efforts of the Special Committee established to consider The Proposal. The Company also considered completion of the 2022 Cost and Schedule update for the underground project. As previously reported, the underground development capital cost forecast increased from $6.75 billion to $7.1 billion.

As at June 30, 2022 and giving consideration for events that took place before the authorization date for the issuance of these condensed interim consolidated financial statements, the Company concluded that there were no events or transactions that materially impacted the areas of judgement and estimation uncertainty included within its annual consolidated financial statements for the year ended December 31, 2021 that could affect the reported amounts of the Company's assets, liabilities, revenues, expenses and related disclosures.

On May 14, 2020, the IASB published a narrow scope amendment to IAS 16 Property, Plant and Equipment - Proceeds before Intended Use ("IAS 16 amendment"). This amendment prohibits entities from deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while the Company is preparing the asset for its intended use. Instead, sales proceeds and the cost of producing these items will be recognized in profit or loss in the Consolidated Statement of Income. The amendment applies retrospectively, but only to items of property, plant and equipment made available for use on or after the beginning of the earliest period presented in the financial statements. The amendment is effective for annual reporting periods beginning on or after January 1, 2022, with earlier application permitted.

The Company adopted the amendment on January 1, 2022 and, accordingly, the information presented for 2021 has been restated. On initial application, $20.7 million of net proceeds from the sale of Oyu Tolgoi underground ore concentrate prior to January 1, 2021 was transferred from capital work in progress to deficit. At June 30, 2021 a further $9.0 million (December 31, 2021 -$54.8 million) of net proceeds from the sale of Oyu Tolgoi underground ore concentrate was transferred from capital work in progress to deficit related to sales and cost of sales during the period.

Revenue and cost of sales associated with Oyu Tolgoi underground ore concentrate that was sold during the three and six months ended June 30, 2021 was $12.0 million and $2.9 million, respectively.

The following tables show the changes to Consolidated Statements of Income, Comprehensive Income and Cash Flows for the three and six months ended June 30, 2021 and the consolidated balance sheet as at January 1, 2021, June 30, 2021 and December 31, 2021, upon adoption of the IAS 16 amendment:

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

The following is the Company's new accounting policy for Property, Plant and Equipment under IAS16:

Property, plant and equipment are recorded at cost, less accumulated depletion and depreciation and accumulated impairment losses. The cost of property, plant and equipment includes the estimated close down and restoration costs associated with the asset.

Once an undeveloped mining project has been established as commercially viable, including that it has established proven and probable reserves and approval to mine by governmental authorities has been given, expenditure (including qualifying exploration and evaluation costs) other than on land, buildings, plant and equipment is capitalized under "Mineral property interests." Ore reserves may be declared for an undeveloped mining project before its commercial viability has been fully determined and approval to mine has been given. Evaluation costs may be capitalized during the period between declaration of reserves and approval to mine as further work is undertaken in order to refine the development case to maximize the project's return.

Project development expenditures, including costs to acquire and construct buildings and equipment are capitalized under "Capital works in progress" provided that the project has been established as commercially viable. Capital works in progress are not categorized as mineral property interests, mining plant and equipment or other capital assets until the capital asset is in the condition and location necessary for its intended use. Sales of concentrate, and associated costs of producing concentrate, during the commissioning of a project are recognized in the Consolidated Statement of Income.

Development costs incurred after the commencement of production are capitalized to the extent they are expected to give rise to a future economic benefit. Borrowing costs related to construction or development of a qualifying asset are capitalized until the point when substantially all the activities that are necessary to make the asset ready for its intended use are complete. Where funds have been borrowed specifically to finance an asset, the amount capitalized is the actual interest on borrowings incurred, net of any returns on invested funds. Where the funds used to finance an asset form part of general borrowings, the amount capitalized is calculated using a weighted average of rates applicable to relevant general borrowings of the Company during the period.

A number of other new standards, and amendments to standards and interpretations, are effective as of January 1, 2022. None of these had a material effect on the consolidated financial statements of the Company. These include:

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12) are targeted amendments to IAS 12 Income Taxes. The amendments narrow the scope of the initial recognition exemption so that it does not apply to transactions that give rise to equal and offsetting temporary differences, such as lease and decommissioning obligations. As a result, companies may need to recognise a deferred tax asset and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision. This amendment is effective for the Company's annual reporting period beginning January 1, 2023, with early adoption permitted. The Company is in the process of assessing the impact of the adoption of this amendment.

A number of other new standards, and amendments to standards and interpretations, are effective as of January 1, 2023. The Company is in the process of assessing the impacts of these new standards which include:

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

Revenue by geographic destination is based on the ultimate country of destination, if known. If the destination of the concentrate sold through traders is not known, then revenue is allocated to the location of the concentrate at the time when revenue is recognized. During the three months ended June 30, 2022 and 2021, principally all of Oyu Tolgoi's revenue arose from concentrate sales to customers in China and revenue from individual customers in excess of 10% of Oyu Tolgoi's revenue was $86.2 million and $53.8 million (June 30, 2021 - $70.7 million, $60.4 million, $35.5 million, $35.4 million, and $31.5 million).

Substantially all long-lived assets of the Oyu Tolgoi segment, other than financial instruments and deferred tax assets, are located in Mongolia.

Revenue and cost of sales associated with underground concentrate that was sold during the three months ended June 30, 2022 were $31.4 million and $6.6 million respectively (June 30, 2021 - $12.0 million and $2.9 million).

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

Revenue by geographic destination is based on the ultimate country of destination, if known. If the destination of the concentrate sold through traders is not known, then revenue is allocated to the location of the concentrate at the time when revenue is recognized. During the six months ended June 30, 2022 and 2021, principally all of Oyu Tolgoi's revenue arose from concentrate sales to customers in China and revenue from individual customers in excess of 10% of Oyu Tolgoi's revenue was $145.5 million, $143.4 million, $130.2 million, and $86.1 million (June 30, 2021 - $137.4 million, $124.9 million, $122.2 million, and $114.3 million).

Substantially all long-lived assets of the Oyu Tolgoi segment, other than financial instruments and deferred tax assets, are located in Mongolia.

Revenue and cost of sales associated with underground concentrate that was sold during the six months ended June 30, 2022 were $45.0 million and $10.1 million respectively (June 30, 2021 - $12.0 million and $2.9 million).

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)

During the three and six months ended June 30, 2022, $219.4 million (2021 - $85.5 million) and $394.4 million (2021 - $241.2 million) of inventory was charged to cost of sales (Note 5).

During the three and six months ended June 30, 2022, net reversals of $0.1 million (2021 - net write down charges of $1.5 million) and net write down charges of $0.2 million (2021 - net reversals of $3.6 million) were recognized in the consolidated statement of income relating to inventory write off and movement in provisions against carrying value.

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TURQUOISE HILL RESOURCES LTD.

Notes to the condensed interim consolidated financial statements

(Stated in U.S. dollars unless otherwise noted; tabular amounts in thousands unless otherwise noted)

(Unaudited)