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Nov. 12, 2019, 5:00 p.m. EST

Turquoise Hill announces financial results and review of operations for the third quarter of 2019

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MONTREAL, Nov. 12, 2019 (Canada NewsWire via COMTEX) -- Turquoise Hill Resources today announced its financial results for the period ended September 30, 2019. All figures are in U.S. dollars unless otherwise stated.

"Operationally, the third quarter of 2019 was another strong quarter for the Company from both a production and safety perspective. Our Oyu Tolgoi team has continued to maximize the production from the open pit and as a result, we have once again increased our 2019 gold production with the new target moving from 230,000 to 240,000 ounces," stated Ulf Quellmann, Turquoise Hill's Chief Executive Officer. "We also continued to build on our excellent safety track record as Oyu Tolgoi achieved another strong All Injury Frequency Rate of 0.18 per 200,000 hours worked during the nine months ended September 30, 2019. As you know, safety is a top priority for us and is at the heart of everything we do. Safely mining this deposit is central to who we are and is critical to our continued success."

"Turning to the Underground development, construction of Shaft 2 is now complete and has entered into the final stages of commissioning. The service hoist transports 300 people per cage cycle versus a maximum of 60 people per cage cycle through Shaft 1, and enables us to accelerate the underground development and monetize one of the best undeveloped ore bodies on the planet."

HIGHLIGHTS







        
            --  Our Oyu Tolgoi team has continued to maximize the production
                from the open pit and as a result, we have increased our 2019
                gold in concentrates production guidance to 240,000 ounces from
                230,000 ounces, while lowering our 2019 C1 copper cash cost
                range to $1.5 - $1.70 from $1.75 - $1.95 per pound of copper
                produced.
        
            --  Underground development progressed successfully during Q3'19,
                achieving 3.6 total equivalent kilometres, our best quarterly
                result to date.
        
            --  Since the restart of underground development, 28.0 total
                equivalent kilometres and 22.1 kilometres of lateral
                development has been completed. In September, a record 1,385m
                of lateral development metres were mined.
        
            --  The construction of Shaft 2 was completed in October and has
                entered the final stages of commissioning. The shaft uses the
                world's largest production hoist motor and can carry 300 people
                in the service hoist and lift 60 tonne skips in the production
                hoist. When operating at maximum capacity, the production hoist
                has the ability to lift 35,000 tonnes of material to the
                surface daily. This is a critical piece of infrastructure that
                also provides additional ventilation capacity and will enable
                the acceleration of underground development.
        
            --  Shafts 3 and 4 pre sink work is complete with both shafts at 80
                m below the shaft collar as of September 30, 2019. The sinking
                headframes and sinking stages for the Shafts are being
                assembled to enable the hard rock sinking to commence over the
                coming months.
        
            --  A decision has been made to retain a mid-access drive only on
                the apex level of the mine design of Panel 0. This is one of a
                number of integral decision points in narrowing options to
                complete the final P0 mine design, however it is too early to
                accurately determine the potential impact on the overall cost
                or schedule. Decisions on other key underground infrastructure
                such as the location of the ore passes and options for panel
                sequencing, and productivity will need to be completed before
                an update on the development capital or schedule can be
                provided.
        
            --  Revenue of $209.2 million in Q3'19 decreased 15.1% from $246.5
                million in Q3'18, reflecting the transition from mining Phase
                4A to lower grade Phase 4B and stockpiles.
        
            --  Income for the period was $45.1 million compared with income of
                $15.2 million in Q3'18 with the increase primarily due to
                additional deferred tax assets recognized in Q3'19 compared to
                Q3'18, partly offset by lower gross margin driven by the
                reduced revenue. Income attributable to owners of Turquoise
                Hill in Q3'19 was $71.7 million or $0.04 per share, compared
                with income of $53.2 million or $0.03 per share in Q3'18.
        
            --  Cost of sales was $2.44 per pound of copper sold, C1 cash costs
                were $2.14 per pound of copper produced, and all-in sustaining
                costs were $2.84 per pound of copper produced.
        
            --  Operating cash costs(1) of $175.1 million in Q3'19, decreased
                10.8% from $196.4 million in Q3'18. This was principally due to
                a decrease in mining and milling costs benefitting from cheaper
                fuel, lower freight costs and royalty costs driven by lower
                sales volumes and revenues.
        
            --  At the end of September 2019, Turquoise Hill has approximately
                $2.7 billion of available liquidity, split between remaining
                project finance proceeds of $1.1 billion and $1.6 billion cash
                and cash equivalents. We currently expect to have enough
                liquidity to fund our operations and underground development
                into Q1 2021.
        
            --  During Q3'19 underground development spend was $296.8 million,
                resulting in total project spend since January 1, 2016 of
                approximately $3.2 billion.
        
        
        








        
        
             __________________________
        
        
                         (1)
        
        
                        Please refer to Section -
                          NON-GAAP MEASURES - on page 19 of this MD&A for further
                          information.
        
        
        


OPERATIONAL OUTLOOK FOR 2019

2019 operational guidance for gold in concentrates has increased to 240,000 ounces from 230,000 ounces, while copper in concentrates remains in the 125,000 to 155,000 tonnes range. Open-pit operations are expected to continue to mine the lower grade Phase 4B ore and stockpiles through the remainder of 2019 with mill throughput expected to be approximately 40 million tonnes. Average copper mill head grades are also expected to be lower over the remainder of the year, however, the company remains on track to achieve the full year copper and increased gold production guidance.

Operating cash cost expectations for 2019 have decreased to approximately $800 million from an $800 million to $850 million range.

For 2019 underground development, we continue to expect capital expenditures of $1.1 billion to $1.2 billion. Capital expenditures for 2019 on a cash-basis for open-pit operations have decreased to a range of $140 million to $160 million from a range of $150 million to $180 million due to a lower capitalization of deferred stripping costs and the deferral of certain project costs and equipment purchases. Open-pit capital is mainly comprised of deferred stripping, equipment purchases, maintenance componentization and tailings storage facility construction. Underground development capital includes both expansion capital and VAT.

C1 cash costs are now expected to be between $1.50 to $1.70 per pound of copper produced due to the impact of the increase in the gold production guidance provided above, combined with the revised reduction in operating cash cost guidance. The previous 2019 C1 cash cost guidance of $1.75 to $1.95 per pound of copper produced had assumed the midpoint of expected 2019 copper and gold production ranges and a gold price of $1,281 per ounce. Looking at Q3'19 in isolation, C1 cash costs of $2.14 per pound of copper produced were above the full year expected range due to the impact of lower gold sales revenue driven by the 25,600 ounces of gold in concentrates produced in the third quarter of 2019 (against an expected full year production of up to 240,000 ounces).

OUR BUSINESS

Turquoise Hill is an international mining company focused on the operation and continued development of the Oyu Tolgoi copper-gold mine in Mongolia, which is the Company's principal and only material mineral resource property. Turquoise Hill's ownership of the Oyu Tolgoi mine is held through a 66% interest in Oyu Tolgoi LLC (Oyu Tolgoi); the remaining 34% interest is held by Erdenes Oyu Tolgoi LLC (Erdenes), a Mongolian state-owned entity.

The Oyu Tolgoi mine is located 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) of deposits distributed over a 12 km interval of a 25 km corridor of mineralization. Oyu Tolgoi has the potential to operate for over 100 years from five known mineralized deposits. The first of those (the Oyut deposit) was put into production as an open-pit operation in 2013. A second deposit, Hugo North (Lift One), is under development as an underground operation.

The copper concentrator plant, with related facilities and necessary infrastructure, was originally designed to process approximately 100,000 tonnes of ore per day from the Oyut open pit. However, since 2014, the concentrator has improved operating practices and gained experience, which has helped achieve a consistent throughput of over 105,000 tonnes per day. Concentrator throughput for 2019 is targeted at 110,000 tonnes per day and expected to be approximately 40 million tonnes for the year due to improvements in concentrator performance and ore characteristics.

At the end of Q3'19, Oyu Tolgoi had a total workforce (employees and contractors), including underground project construction, of approximately 14,500 of which 92% were Mongolians.

SELECTED FINANCIAL METRICS

Oyu Tolgoi Key Financial Metrics((1))







        
                                                                          Three months ended
             Nine months ended
        
        
        
                                                                                          3Q
                      3Q
             Change
             9 months
             9 months
             Change
                                                                                        2019                 2018                    2019          2018
        
               ($ in millions, unless otherwise noted)
        
            ---
        
        
        
        
               Revenue                                                                209.2                246.5     -15.1%        944.6         833.9        13.3%
        
        
        
               Income (loss) for the period                                            45.1                 15.2                 (586.4)        299.3
        
        
        
               Income (loss) attributable to owners of Turquoise Hill                  71.7                 53.2                 (263.5)        310.2
        
        
        
               Basic and diluted income (loss) per share attributable to               0.04                 0.03                  (0.13)         0.15
        
        
        
               owners of Turquoise Hill
        
        
        
               Revenue by metals in concentrates
        
        
        
               Copper                                                                 153.4                180.4     -15.0%        609.7         656.1        -7.1%
        
        
        
               Gold                                                                    52.4                 63.3     -17.2%        324.8         167.6        93.7%
        
        
        
               Silver                                                                   3.4                  2.9      17.2%         10.1          10.1         0.0%
        
        
        
               Cost of sales                                                          174.2                181.0      -3.8%        568.0         589.5        -3.6%
        
        
        
               Production and delivery costs                                          137.8                135.9       1.4%        433.9         424.6         2.2%
        
        
        
               Depreciation and depletion                                              34.9                 45.2     -22.8%        134.1         164.9       -18.7%
        
        
        
               Capital expenditure on cash basis                                      329.2                328.8       0.1%        989.4         932.6         6.1%
        
        
        
               Underground                                                            296.8                304.8      -2.6%        885.2         866.5         2.2%
        
        
        
               Open pit(2)                                                             32.4                 24.0      35.0%        104.2          66.0        57.9%
        
        
        
               Royalties                                                               11.1                 15.5     -28.4%         51.5          50.7         1.6%
        
        
        
               Operating cash costs(3)                                                175.1                196.4     -10.8%        579.9         574.8         0.9%
        
        
        
               Unit costs ($)
        
        
        
               Cost of sales (per pound of copper sold)                                2.44                 2.28       7.0%         2.19          2.30        -4.3%
        
        
        
               C1 (per pound of copper produced)(3)                                    2.14                 1.65      29.7%         1.12          1.71       -34.5%
        
        
        
               All-in sustaining (per pound of copper produced)(3)                     2.84                 2.29      24.0%         1.82          2.26       -19.5%
        
        
        
               Mining costs (per tonne of material mined)(3)                           1.87                 2.18     -14.2%         2.00          2.07        -3.4%
        
        
        
               Milling costs (per tonne of ore treated)(3)                             6.92                 7.38      -6.2%         7.03          7.19        -2.2%
        
        
        
               G&A costs (per tonne of ore treated)                                    2.97                 3.43     -13.4%         3.23          2.52        28.2%
        
        
        
               Cash generated from operating activities                                 6.1                 76.2     -92.0%        141.9         143.9        -1.4%
        
        
        
        
        
               Cash generated from (used in) operating activities before             (13.1)                52.5    -125.0%        299.4         216.9        38.0%
        
        
        
               interest and tax
        
        
        
        
        
               Interest paid                                                            2.5                  0.1      2400%        220.8         130.9        68.7%
        
        
        
               Total assets                                                          12,787               13,223      -3.3%       12,787        13,223        -3.3%
        
        
        
               Total non-current financial liabilities                                4,411                4,344       1.6%        4,411         4,344         1.6%
        
        
        








        
        
        
        
        
                        (1)              Any financial information in
                                                       this MD&A should be reviewed in
                                                       conjunction with the Company's
                                                       consolidated financial
                                                       statements or condensed interim
                                                       consolidated financial
                                                       statements for the reporting
                                                       periods indicated.
        
        
        
        
                        (2)              Open-pit capital expenditure
                                                       includes both sustaining and
                                                       non-underground development
                                                       activities.
        
        
        
        
                        (3)              Please refer to NON-GAAP
                                                       MEASURES - on page 19 of this
                                                       MD&A for further information.
        
        
        


Q3'19 vs Q3'18







        
            --  Revenue of $209.2 million decreased 15.1% from $246.5 million
                primarily due to both the expected 66.8% decrease in gold
                production and the 28.0% decrease in copper production. The
                decreased production and a 5% decrease in copper price was
                partly offset by a 22% increase in the average gold price in
                the period.
        
            --  Income for the period was $45.1 million compared with income of
                $15.2 million in Q3'18. This was primarily due to $53 million
                of additional deferred tax assets recognized in Q3'19 compared
                to Q3'18, partly offset by a $30.5 million lower gross margin
                driven by the reduced revenue.
        
            --  Cost of sales of $174.2 million decreased 3.8% from $181.0
                million reflecting lower volumes of concentrates sold, partly
                offset by the impact of increased unit cost of sales per pound
                of copper sold.
        
            --  Unit cost of sales of $2.44 per pound of copper sold increased
                7.0% from $2.28 reflecting lower average mill head grades and
                recoveries impacted by transitioning to the lower grade Phase
                4B ore.
        
            --  Capital expenditure on a cash basis of $329.2 million compared
                to $328.8 million in Q3'18, comprised of $296.8 million
                attributed to the underground project and $32.4 million to
                open-pit activities.
        
            --  Total operating cash costs((2)) of $175.1 million decreased
                10.8% from $196.4 million principally due to decrease mining
                and milling costs benefitting from cheaper fuel, lower freight
                costs and royalty costs driven by lower sales volumes and
                revenue, partially offset by increased power study costs.
                Operating cash costs include the 5% royalty payable to the
                Government of Mongolia and exclude deferred stripping costs.
        
            --  Oyu Tolgoi's C1 cash costs((3)) of $2.14 per pound of copper
                produced increased 29.7% from $1.65 mainly reflecting the
                impact of lower copper production.
        
            --  All-in sustaining costs((4)) of $2.84 increased 24.0% from
                $2.29. Similar to the C1 cash costs, the increase was primarily
                due to a reduction in copper production, partly offset by lower
                royalty costs resulting from the lower sales revenue in Q3'19
                versus Q3'18.
        
            --  Mining costs((5)) of $1.87 per tonne of material mined
                decreased 14.2% from $2.18 per tonne of material mined. The
                decrease was due to higher material mined driven by increased
                truck payload together with lower fuel prices, partially offset
                by higher tire costs associated with increased cycle time as
                the open pit deepens.
        
            --  Milling costs((6)) of $6.92 of ore treated decreased 6.2% from
                $7.38 of ore treated mainly due to lower maintenance service
                costs and cost savings in major plant shutdowns.
        
            --  G&A costs per tonne of ore treated of $2.97 per tonne of ore
                treated decreased 13.4% from $3.43 per tonne of ore treated due
                to lower administrative expenses partly offset by increased
                power study costs.
        
            --  Cash generated from operating activities of $6.1 million
                decreased 92% from $76.2 million primarily reflecting the
                impact of lower sales revenue and movements in working capital.
        
        
        


At the end of September 2019, Turquoise Hill has approximately $2.7 billion of available liquidity, split between remaining project finance proceeds of $1.1 billion and $1.6 billion cash and cash equivalents. Turquoise Hill's cash and cash equivalents were unchanged from December 31, 2018 and down 6.7% from $1.7 billion at September 30, 2018.







        
        
             __________________________
        
        
        
        
                        (2)           Please refer to the
                                           section NON-GAAP
                                           MEASURES - on page 19 of
                                           this MD&A for further
                                           information.
        
        
        
        
                        (3)           Please refer to the
                                           section NON-GAAP
                                           MEASURES - on page 19 of
                                           this MD&A for further
                                           information.
        
        
        
        
                        4              Please refer to the
                                           section NON-GAAP
                                           MEASURES - on page 19 of
                                           this MD&A for further
                                           information.
        
        
        
        
                        5              Please refer to the
                                           section NON-GAAP
                                           MEASURES - on page 19 of
                                           this MD&A for further
                                           information.
        
        
        
        
                        6              Please refer to the
                                           section NON-GAAP
                                           MEASURES - on page 19 of
                                           this MD&A for further
                                           information.
        
        
        


OYU TOLGOI

Safety performance

Underground development by its nature increases specific levels of safety risk and reinforces why safety is Oyu Tolgoi's main priority. The mine's management is committed to reducing risk and injury. Oyu Tolgoi achieved a strong All Injury Frequency Rate of 0.18 per 200,000 hours worked for the nine months ended September 30, 2019. In addition, there are other safety metrics that are common in the mining industry, utilized by Oyu Tolgoi to continuously monitor safety performance.

Q3'19 open-pit operations performance

Oyu Tolgoi Production Data All data represents full production and sales on a 100% basis







        
                                                    Three months ended Nine months ended
        
        
        
                                                                    3Q
                      3Q
             Change
             9 months
             9 months
             Change
                                                                  2019               2018                    2019          2018
        
        
        
        
        
        
             Open pit material mined ('000 tonnes)             24,844             22,523      10.3%       73,195        68,446         6.9%
        
        
        
             Ore treated ('000 tonnes)                         10,040              9,652         4%       29,689        29,377         1.1%
        
        
        
             Average mill head grades:
        
        
        
             Copper (%)                                         0.37               0.51     -27.4%         0.46          0.50          -8%
        
        
        
             Gold (g/t)                                          0.14               0.38     -63.2%         0.34          0.29        17.2%
        
        
        
             Silver (g/t)                                        1.03               1.19     -13.5%         1.16          1.22        -4.9%
        
        
        
             Concentrates produced ('000 tonnes)                131.3              179.8       -27%        522.1         535.9        -2.6%
        
        
        
             Average concentrate grade (% Cu)                    21.7               21.9      -0.9%         21.7          21.9        -0.9%
        
        
        
             Production of metals in concentrates:
        
        
        
             Copper ('000 tonnes)                                28.4               39.4       -28%        113.4         117.6        -3.6%
        
        
        
             Gold ('000 ounces)                                  25.6                 77     -66.8%        217.5           169        28.7%
        
        
        
             Silver ('000 ounces)                                 191                230       -17%        676.8           676         0.1%
        
        
        
             Concentrates sold ('000 tonnes)                      157              171.9      -8.7%        567.2         555.0         2.2%
        
        
        
             Sales of metals in concentrates:
        
        
        
             Copper ('000 tonnes)                                32.4               36.0       -10%        117.6         116.4           1%
        
        
        
             Gold ('000 ounces)                                  35.4                 55     -35.6%        248.9           137        81.7%
        
        
        
             Silver ('000 ounces)                                 207                201        -3%        652.2           657        -0.7%
        
        
        
             Metal recovery (%)
        
        
        
             Copper                                              75.1               80.9      -7.2%         80.3          80.1         0.2%
        
        
        
             Gold                                                54.7               64.7     -15.5%         66.2          61.2         8.2%
        
        
        
             Silver                                                56               62.8     -10.8%         59.6          58.4         2.1%
        
        
        


Copper production in Q3'19 decreased 27.8% over Q3'18 due to decreased head grade. Gold production in Q3'19 decreased 66.8% over Q3'18 due to decreased head grade. Mill throughput in Q3'19 increased 4% year over year and decreased 3.4% sequentially.

Underground development

As previously announced on July 15(th), improved information with respect to rock mass and geotechnical data modelling has confirmed that there are stability risks associated with components of the Feasibility Study 2016 mine design. Preliminary estimates indicate that sustainable first production could be delayed by 16 to 30 months compared with the Q1'21 estimate in the original feasibility study guidance in 2016, and the development capital spend for the project may increase by $1.2 billion to $1.9 billion over the $5.3 billion previously disclosed.

To address these risks, a number of refinements are under review to determine the final mine design, and the first of the key decisions that has been made is to retain a mid-access drive only on the apex level of the mine design of Panel 0.

A mid-access drive is essentially a horizontal tunnel that cuts transversely across the mine footprint and allows us to develop both north and south within the ore body and accelerate the time to first sustainable production. Although the ground conditions do not enable us to incorporate the mid-access drive on all three levels of the underground, the inclusion on the apex level will have a positive impact on the schedule.

This is an integral step towards completing the final mine design, however it is too early to accurately determine the potential impact on the cost or schedule. Decisions on productivity levels and key underground infrastructure such as the location and design of the ore passes and options for panel sequencing, will need to be completed before an update on the development capital or schedule can be finalized.

Decisions regarding the sequencing of the first panel of mining, Panel 0, productivity inputs and ore pass locations continue and are expected to be completed by April 2020. The resulting Pre-Feasibility Study designs being detailed to Feasibility Study standard, then scheduled and costed to form the Definitive Estimate are due in the second half of 2020. In the interim, underground development continues and we look forward to providing the market with any updates to the schedule and development capital spend as and when available.

Construction of Shaft 2 was completed and the service hoist was successfully commissioned in October. This is a 10 metre diameter shaft sunk to approximately 1.3 kilometers below the surface. The shaft uses the world's largest production hoist motor able to lift 60 tonnes and can carry 300 people in the service hoist. When operating at maximum capacity, the production hoist has the ability to lift 35,000 tonnes of material to the surface daily.

Commissioning of the production hoist continues with over 2,700 tonnes of rock successfully hoisted to surface. We continue to work with the regulatory agencies to complete the permitting of the production hoist.

The Load out conveyor and Shaft 2 integrated materials handling system is fully commissioned. This will enable ore to be conveyed to the concentrator as soon as the production hoist system is commissioned. The Shaft 2 production and logistics capability is a key enabler of increased underground development and construction of critical underground infrastructure such as the Primary Crusher 1 and the material handling systems that support the start of production ramp-up.

Other key infrastructure components completed during Q3'19 include the central heating plant, the shaft 2 jaw crusher system and the Shaft 2 surface discharge conveyor.

Shaft 3 pre-assembly of headframe modules commenced during the third quarter while Shaft 4 vertical assembly of the sinking stage was completed, along with the commencement of stage fit-out. Primary Crusher 1 civil works are ongoing with the team successfully constructing the 8 metres of wall at the underside of the surge bin.

Lateral underground development in Q3'19 has accelerated. Extensive focus on productivity gains on the most critical development areas over the past five months has reaped substantial improvements. Underground development progressed 3.6 total equivalent kilometres amd 3.2 lateral kilometres during the quarter. Since the restart of underground development, 28.0 total equivalent kilometres and 22.1 kilometres of lateral development have been completed. The following table provides a breakdown of the various components of completed development since project restart:







        
                  Year
        
             Total
        
             Lateral
        
              Mass
                               Equivalent        Development          Excavation
                               Kilometres        (kilometres)      ('000 metres(1))
        
            ---
        
        
        
             2016                1.6                  1.5                    3.0
        
            ---
        
        
        
             2017                6.1                  4.8                   31.7
        
            ---
        
        
        
             2018               10.3                  7.9                   59.5
        
            ---
        
                  Q1'19               3.2                  2.3                   21.4
        
            ---
        
                  Q2'19               3.2                  2.4                   19.3
        
            ---
        
                  Q3'19               3.6                  3.2                   11.4
        
            ---
        
                  Total              28.0                 22.1                  146.3
        
            ---
        
        








        
        
        
        
                      Notes:
        
        
        
                      1.                      Totals may not match due
                                                to rounding.
        
        
        


Oyu Tolgoi spent $296.8 million on underground development during Q3'19. Total underground project spend from January 1, 2016 to September 30, 2019 was approximately $3.2 billion. Underground project spend on a cash basis includes expansion capital, VAT and capitalized management services payment and excludes capitalized interest. In addition, Oyu Tolgoi had further capital commitments((7)) of $0.8 billion as of September 30, 2019. Since the restart of project development, Oyu Tolgoi has committed over $2.83 billion to Mongolian vendors and contractors.







        
        
             __________________________
        
        
        
        
                        7             Please refer to the section NON-GAAP MEASURES on page 19 of
                                          this MD&A for further information.
        
        
        


FUNDING OF OYU TOLGOI LLC BY TURQUOISE HILL

In accordance with ARSHA, Turquoise Hill has funded Oyu Tolgoi LLC's cash requirements beyond internally generated cash flows by a combination of equity investment and shareholder debt.

For amounts funded by debt, Oyu Tolgoi LLC must repay such amounts, including accrued interest, before it can pay common share dividends. As of September 30, 2019, the aggregate outstanding balance of shareholder loans extended by subsidiaries of the Company to Oyu Tolgoi LLC was $5.7 billion, including accrued interest of $1.1 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 LLC on behalf of state-owned 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 LLC common share dividends. Erdenes also has the right to reduce the outstanding balance by making cash payments at any time. As of September 30, 2019, the cumulative amount of such funding was $1.2 billion, representing 34% of invested common share equity, with unrecognized interest on the funding amounting to $0.6 billion.

At the end of September 2019, Turquoise Hill has approximately $2.7 billion of available liquidity, split between remaining project finance proceeds of $1.1 billion, which are drawn and currently deposited with Rio Tinto, and $1.6 billion of cash and cash equivalents. In addition, we expect to generate free cash flow at our existing open pit operations, which will also be available to help fund the underground development.

Turquoise Hill currently expects to have enough liquidity to fund its operations and underground development including progression of a Tavan Tolgoi-based power plant, into Q1 2021. Taking into consideration the estimated impacts of recently announced increases to underground development capital, as well as delays to first sustainable production, the Company expects to need significant incremental financing to sustain its underground development and construction of a Tavan Tolgoi-based power plant beyond this timeframe. As has been previously noted, Turquoise Hill and Oyu Tolgoi LLC have the option to raise additional external financing subject to required approvals, to assist in funding development going forward, including during underground commissioning and ramp up. Important variables impacting the ultimate amount of additional financing required include: the amount of incremental underground development and power plant capital needed, timing of sustainable first production and its resulting cash flows, on-going debt service costs and timing of principal repayments drawn on the project finance facility and the amount of cash flow that can be generated from open-pit operations. The Company will have greater clarity on its incremental funding requirement as the Definitive Estimate progresses; however, preliminarily estimates indicate significant incremental financing will be required above the $2.7 billion in liquidity currently available.

As the work to complete the Definitive Estimate progresses, Turquoise Hill continues to evaluate the impact of the estimated increases to underground capital expenditure as well as delays to sustainable first production, and the other important variable discussed above, on its cash flows, liquidity and financing projections and will update the market in due course. Further, while progression of the Definitive Estimate will continue to clarify the Company's funding requirements, Turquoise Hill has put forward a proposal to Rio Tinto as to how best to source incremental funding necessary to progress underground development over and above its $2.7 billion of available liquidity.

Oyu Tolgoi Mine Power Supply

Oyu Tolgoi LLC is obliged under the 2009 Oyu Tolgoi Investment Agreement (Investment Agreement) to secure a long-term domestic source of power for the Oyu Tolgoi mine. The Power Source Framework Agreement (PSFA) entered into between Oyu Tolgoi LLC and the Government of Mongolia on December 31, 2018 provides a binding framework and pathway for the construction of a Tavan Tolgoi-based power solution for the Oyu Tolgoi mine by June 30, 2023. The power plant would be majority owned by Oyu Tolgoi LLC and situated close to the Tavan Tolgoi coal mining district located approximately 150 kilometres from the Oyu Tolgoi mine.

The PSFA specifies target dates for milestones to be achieved through mutual cooperation between Oyu Tolgoi LLC and the Government of Mongolia, several of which have now passed. Oyu Tolgoi LLC is currently seeking to agree to adjustments to the milestone timetable in the PSFA with the Government of Mongolia and continues to progress the project by finalizing the feasibility study (including cost estimates), negotiating with contractors and other third parties, and advancing commercial documentation. Oyu Tolgoi LLC has shared certain preliminary cost estimates for the project with Turquoise Hill and the Government of Mongolia, and Turquoise Hill, with the assistance of advisors, has commenced its own internal processes to independently review and validate the cost estimates.

Oyu Tolgoi LLC is at an advanced stage with a competitive tender process to award a "turnkey" engineering, procurement and construction (EPC) contract for construction of the project. The timing of any award and commencement of construction will depend upon the outcome of the on-going PSFA milestone timetable and related discussions with the Government of Mongolia.

It is necessary for Oyu Tolgoi LLC to complete a feasibility study for the power station and conclude negotiation of commercial documents, and for Turquoise Hill to complete its review, to finalize estimates of the expected cost of the power project and the amount of Oyu Tolgoi LLC's related funding requirement. There is a provision under Oyu Tolgoi LLC's existing project finance documentation that permits, subject to certain conditions, an increase of Oyu Tolgoi LLC's senior debt cap to permit additional borrowings in connection with an expansion facility, such as the proposed Tavan Tolgoi-based power plant project.

Oyu Tolgoi tax assessment

On January 16, 2018, Turquoise Hill announced that Oyu Tolgoi had received and was evaluating a tax assessment for approximately $155 million from the Mongolian Tax Authority (MTA) relating to an audit on taxes imposed and paid by Oyu Tolgoi LLC between 2013 and 2015. In January 2018, Oyu Tolgoi paid an amount of approximately $4.8 million to settle unpaid taxes, fines and penalties for accepted items.

Following engagement with the MTA, Oyu Tolgoi was advised that the MTA could not resolve Oyu Tolgoi's objections to the tax assessment. Accordingly, on March 15, 2018, Oyu Tolgoi issued a notice of dispute to the Government under the Investment Agreement and on April 13, 2018, Oyu Tolgoi submitted a claim to the Mongolian Administrative Court. The Administrative Court had suspended the processing of the case for an indefinite period based on procedural uncertainty in relation to the tax assessment disputes. The Administrative Court has now reopened the case on the tax dispute and has resumed court proceedings.

Chapter 14 of the Investment Agreement sets out a dispute resolution process. The issuance of a notice of dispute is the first step in the dispute resolution process and includes a 60-working-day negotiation period. The parties were unable to reach a resolution during the 60-working-day period; however, the parties have continued discussions in an attempt to resolve the dispute in good faith. Should Oyu Tolgoi not be able to reach an agreement with the Government of Mongolia before the court renders a decision, the next step would be to formally commence the dispute resolution proceedings under the international arbitration process.

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