UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-30586

Ivanhoe Energy Inc.

(Exact name of registrant as specified in its charter)

Yukon, Canada		98-0372413
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

654-999 Canada Place
Vancouver, BC, Canada V6C 3E1
(604) 688-8323
(Address and telephone number of the registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As at April 29, 2011, Ivanhoe Energy Inc. had 343,970,158 Common Shares outstanding with no par value.

 

 

TABLE OF CONTENTS

PART I
ITEM 1: Financial Statements
Unaudited Condensed Consolidated Statements of Financial Position			3
Unaudited Condensed Consolidated Statements of Loss and Comprehensive Loss			4
Unaudited Condensed Consolidated Statements of Changes in Equity			5
Unaudited Condensed Consolidated Statements of Cash Flows			6
Notes to the Unaudited Condensed Consolidated Financial Statements			7
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
ITEM 4: Controls and Procedures			44
PART II
ITEM 1: Legal Proceedings			44
ITEM 6: Exhibits			45
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

IVANHOE ENERGY INC.

				March 31,				December 31,				January 1,
(US$000s)		Notes		2011				2010				2010
Assets
Current Assets
Cash and cash equivalents		5			80,798				68,317				24,362
Accounts receivable					6,508				6,359				5,021
Note receivable					234				264				225
Prepaid and other					2,061				2,859				771
					89,601				77,799				30,379
Intangible		6			284,149				273,568				207,750
Property, plant and equipment		7			42,731				40,618				41,983
Long term receivables					2,584				2,433				839
					419,065				394,418				280,951
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable and accrued liabilities					24,702				21,482				10,779
Debt		8			40,985				39,832				—
Derivative financial instruments		9, 10			4,211				8,447				13,023
Income taxes					351				—				530
Decommissioning costs		11			—				—				753
					70,249				69,761				25,085
Long term debt		8			—				—				36,934
Long term provisions		11			3,031				3,008				2,187
Deferred income taxes					21,730				21,165				22,336
					95,010				93,934				86,542
Shareholders’ Equity
Share capital		13			585,664				550,562				422,322
Contributed surplus		14			22,736				23,141				18,724
Accumulated deficit					(284,345	)			(273,219	)			(246,637	)
					324,055				300,484				194,409
					419,065				394,418				280,951
Nature of operations and going concern		1

(See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements)

IVANHOE ENERGY INC.

Condensed Consolidated Statements of Loss and Comprehensive Loss

				Three Months Ended March 31,
(US$000s, except share and per share amounts)		Note		2011				2010
Revenue
Oil					8,119				5,330
Interest					67				19
					8,186				5,349
Expenses
Operating		18			4,523				3,454
Exploration and evaluation		6			—				606
General and administrative					13,417				8,432
Depletion and depreciation		7			1,831				1,537
Foreign currency exchange gain					(225	)			(4,187	)
Derivative instruments (gain) loss		9, 10			(1,129	)			2,057
Interest					8				4
					18,425				11,903
Loss before income taxes					(10,239	)			(6,554	)
Provision for income taxes
Current					(322	)			(79	)
Deferred					(565	)			(172	)
					(887	)			(251	)
Net loss and comprehensive loss					(11,126	)			(6,805	)
Net loss per common share, basic and diluted					(0.03	)			(0.02	)
Weighted average number of common shares
Basic and diluted (000s)					338,403				307,233

(See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements)

IVANHOE ENERGY INC.

				Share Capital
				Shares								Contributed				Accumulated
(US$000s, except share amounts)		Note		(000s)				Amount				Surplus				Deficit				Total
Balance January 1, 2010					282,559				422,322				18,724				(246,637	)			194,409
Net loss and comprehensive loss					—				—				—				(6,805	)			(6,805	)
Shares issued for cash, net of share issue costs					50,000				122,322				—				—				122,322
Shares issued for services					280				799				—				—				799
Exercise of stock options		14			912				3,518				(1,887	)			—				1,631
Exercise of purchase warrants					2				9				—				—				9
Share-based compensation expense		14			—				—				1,223				—				1,223
Balance March 31, 2010					333,753				548,970				18,060				(253,442	)			313,588

				Share Capital
				Shares								Contributed				Accumulated
(US$000s, except share amounts)		Note		(000s)				Amount				Surplus				Deficit				Total
Balance January 1, 2011					334,365				550,562				23,141				(273,219	)			300,484
Net loss and comprehensive loss					—				—				—				(11,126	)			(11,126	)
Exercise of stock options		14			947				4,055				(2,181	)			—				1,874
Exercise of purchase warrants					8,621				31,047				—				—				31,047
Share-based compensation expense		14			—				—				1,776				—				1,776
Balance March 31, 2011					343,933				585,664				22,736				(284,345	)			324,055

(See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements)

IVANHOE ENERGY INC.

				Three Months Ended March 31,
(US$000s)		Note		2011				2010
Operating Activities
Net loss					(11,126	)			(6,805	)
Items not requiring use of cash
Depletion and depreciation		7			1,831				1,537
Share-based compensation expense		14			1,776				1,223
Unrealized (gain) loss on derivative instruments		9, 10			(1,129	)			2,057
Unrealized foreign currency exchange gain					(227	)			(4,373	)
Deferred income tax expense					565				172
Exploration and evaluation expense		6			—				606
Other					6				192
Decommissioning costs settled					—				(58	)
Changes in non-cash working capital items		19			1,796				18
Net cash used in operating activities					(6,508	)			(5,431	)
Investing Activities
Intangible expenditures					(10,364	)			(23,082	)
Property, plant and equipment expenditures					(3,949	)			(818	)
Long term receivables					(147	)			(348	)
Changes in non-cash working capital items		19			2,475				880
Net cash used in investing activities					(11,985	)			(23,368	)
Financing Activities
Shares and warrants issued on private placements, net of share issue costs					—				136,321
Proceeds from exercise of options and warrants		10, 14			29,814				1,636
Changes in non-cash working capital items		19			(19	)			—
Net cash provided by financing activities					29,795				137,957
Foreign exchange gain on cash and cash equivalents held in a foreign currency					1,179				5,715
Increase in cash and cash equivalents, for the period					12,481				114,873
Cash and cash equivalents, beginning of period					68,317				24,362
Cash and cash equivalents, end of period					80,798				139,235

(See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements)

IVANHOE ENERGY INC.

(tabular amounts in US$000s, except share and per share amounts)

1. NATURE OF OPERATIONS AND GOING CONCERN

Ivanhoe Energy Inc. (the “Company” or “Ivanhoe”) is a publicly listed company incorporated in Canada, with limited liability under the legislation of the Yukon. Ivanhoe’s common shares are listed on the Toronto Stock Exchange (“TSX”) and the NASDAQ Stock Market (“NASDAQ”). The head office, principal address and registered and records office of the Company are located at 999 Canada Place, Suite 654, Vancouver, British Columbia, V6C 3E1.

Ivanhoe is an independent international heavy oil development and production company focused on pursuing long term growth in its reserves and production. Ivanhoe plans to utilize advanced technologies, such as its HTL^TM technology, that are designed to significantly improve recovery of heavy oil resources. In addition, the Company seeks to expand its reserve base and production through conventional exploration and production of oil and gas.

The March 31, 2011 unaudited condensed consolidated interim financial statements (“Financial Statements”) have been prepared using International Financial Reporting Standards (“IFRS”) applicable to a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they become due and assumes that Ivanhoe will be able to meet its obligations and continue operations for at least its next fiscal year. Realization values may be substantially different from carrying values as shown and these Financial Statements do not give effect to adjustments that may be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. Such adjustments could be material.

At March 31, 2011, Ivanhoe had an accumulated deficit of $284.3 million and working capital of $23.6 million excluding derivative financial liabilities. In the first three months of 2011, cash used in operating activities was $6.5 million and the Company expects to incur further losses in the development of its business. Continuing as a going concern is dependent upon attaining future profitable operations to repay liabilities arising in the normal course of operations and accessing additional capital to develop the Company’s properties. Ivanhoe intends to finance its future funding requirements through a combination of strategic investors and/or public and private debt and equity markets, either at a parent company level or at the project level. There is no assurance that Ivanhoe will be able to obtain such financing on favorable terms, if at all. Without access to additional financing or other cash generating activities in 2012, there is significant doubt that the Company will be able to continue as a going concern.

The March 31, 2011 Financial Statements were approved by the Board of Directors and authorized for issue on April 28, 2011.

The Financial Statements are presented in US dollars and all values are rounded to the nearest thousand dollars except where otherwise indicated.

2. BASIS OF PRESENTATION

2.1 Statement of Compliance

The Financial Statements have been prepared in accordance with IAS 34, “Interim Financial Reporting” (“IAS 34”), using accounting policies consistent with IFRS as issued by the International Accounting Standards Board (“IASB”) that the Company expects to adopt in its consolidated financial statements for the year ending December 31, 2011. The Financial Statements are not subject to qualification relating to the application of IFRS as issued by the IASB.

As these are the Company’s first set of Financial Statements in accordance with IFRS, the Company’s disclosures exceed the minimum requirements under IAS 34. The Company elected to exceed the minimum requirements in order to present the Company’s accounting policies in accordance with IFRS and the additional disclosures required under IFRS, which also highlight the changes from the Company’s 2010 annual consolidated financial statements prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).

2.2 Basis of Presentation

The Company adopted IFRS on January 1, 2011, with a transition date of January 1, 2010. Comparative financial information has been restated to comply with IFRS as detailed in Note 23.

The Financial Statements have been prepared on an historical cost basis, except financial instruments, which are measured at fair value as explained in accounting policies set out in Note 3.

3. SIGNIFICANT ACCOUNTING POLICIES

3.1 Basis of Consolidation

The Financial Statements incorporate the financial statements of the Company, its subsidiaries, all of which are wholly owned, and special purpose entities that are controlled by the Company. All intercompany balances, transactions, income and expenses are eliminated on consolidation. The consolidated accounts are prepared using uniform accounting policies.

Certain of the Company’s exploration and development activities are conducted jointly with others. The Financial Statements reflect only the Company’s proportionate interest in such activities.

3.2 Foreign Currency Translation

The Company’s reporting currency and the functional currency of its operations is the US dollar, as this is the principal currency of the economic environments in which it operates.

Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect on the date of the statement of financial position. Non-monetary assets and liabilities, as well as operating transactions, are translated at the exchange rate prevailing at the time of the transaction. Translation gains and losses are reflected in earnings.

3.3 Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, deposits at banks, short term highly liquid investments with original maturities of three months or less and restricted cash balances that are of a short term nature.

3.4 Intangible Assets

i. Technology Assets

The Company’s HTL^TM technology license (“Technology Assets”) is measured at cost and classified as an intangible asset. Amortization of the Technology Assets will commence when the technology is available for use in field operations.

ii. Exploration and Evaluation Assets

Costs of exploring for, and evaluating, oil and gas properties are initially capitalized as intangible exploration and evaluation assets (“E&E assets”). Costs may include license fees, technical studies, seismic programs, exploratory drilling and directly attributable general and administrative costs.

If E&E assets result in sufficient proved reserves to justify commercial production and technical feasibility can be established, the assets will be tested for impairment and reclassified as property, plant and equipment. If E&E assets result in sufficient reserves to justify commercial production, but those reserves cannot be classified as proved, the assets will be tested for impairment and continue to be capitalized as intangible assets as long as progress is being made to assess the reserves and economic viability of the well and/or related project. If sufficient reserves cannot be established, the corresponding E&E assets are charged to exploration and evaluation expense (“E&E expense”).

E&E assets which may be attributable to a broad exploration area, such as license fees, technical studies or seismic programs, will be reclassified to PP&E or charged to E&E expense to best reflect the nature of the assets. Costs incurred prior to establishing the legal right to explore an area are charged to E&E expense as incurred.

3.5 Property, Plant and Equipment

i. Oil and Gas Property and Equipment

Property, plant and equipment (“PP&E”) are reported at cost less accumulated depletion, depreciation and accumulated impairment losses. PP&E includes the purchase price, reclassified E&E assets, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and decommissioning costs. Interest on borrowings incurred to finance qualifying PP&E is capitalized until the asset is capable of fulfilling its intended use.

PP&E is depleted using the unit-of-production method based on proved plus probable reserves, taking into account associated future development costs. For purposes of these calculations, production and reserves of natural gas are converted to barrels on an energy equivalent basis at a ratio of six thousand cubic feet of natural gas for one barrel of oil. Depletion rates are updated annually unless there is a material change in circumstances, in which case they would be updated more frequently.

ii. Other Assets

Furniture and equipment are depreciated on a straight-line basis over the estimated useful life of the respective assets, at rates ranging from three to five years. The Feedstock Testing Facility (“FTF”) is depreciated over its expected economic life of 20 years.

3.6 Impairment

The Company periodically assesses tangible and intangible assets or groups of assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Individual assets are grouped into cash generating units for impairment purposes at the lowest level at which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets.

If indicators of impairment exist, the recoverable amount of the asset group is estimated. An asset group’s recoverable amount is the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where the carrying amount of an asset group exceeds its recoverable amount, the asset group is considered impaired and is written down to its recoverable amount.

Previously recognized impairment losses are reversed if there has been a change in the estimates used to determine the asset group’s recoverable amount. If that is the case, the carrying amount of the asset group is increased to its revised recoverable amount which cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized in prior periods. Such a reversal is recognized in earnings. Subsequent to a reversal of impairment, the depletion or depreciation expense is adjusted in future periods to allocate the asset group’s revised carrying amount, less any residual value, over its remaining useful life.

3.7 Decommissioning Provision

The Company recognizes a provision for decommissioning costs when it has an obligation to dismantle and remove its PP&E or restore the site on which it is located. The provision is estimated as the present value of the expected future expenditures, determined in accordance with local conditions and requirements, discounted at a risk free rate. A corresponding amount is added to the carrying value of the related asset and is amortized as an expense over the economic life of the asset. The carrying amount of the provision is increased for the passage of time and adjusted for changes to the current market-based discount rate, amount and/or timing of the underlying cash flows needed to settle the obligation. Actual decommissioning costs incurred reduce the obligation. Any difference between the recorded decommissioning provision and the actual costs incurred is recorded as a gain or loss in the settlement period.

3.8 Provisions and Contingencies

Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. When it is appropriate to discount a provision, the increase in the provision due to passage of time is recognized as interest expense.

3.9 Financial Assets

Financial assets are classified as i) loans and receivables, ii) available-for-sale, iii) financial assets at fair value through profit or loss or iv) as held-to-maturity. Ivanhoe determines the classification of its financial assets at initial recognition. Financial assets are recognized initially at fair value and subsequent measurement depends upon their classification.

i. Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortized cost using the effective interest rate method if the time value of money is significant. Gains and losses are recognized in income when the loans and receivables are derecognized or impaired, as well as through the amortization process. The Company’s cash and cash equivalents, accounts receivable, note receivable and long term receivables are classified as loans and receivables.

ii. Available-for-Sale

Available-for-sale financial assets are non-derivative financial assets that are not classified as loans and receivables. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses recognized within other comprehensive income. Accumulated changes in fair value are recorded as a separate component of equity until the investment is derecognized or impaired. The Company does not currently have any financial assets classified as available-for-sale.

iii. Financial Assets at Fair Value through Profit or Loss

Financial assets are classified as fair value through profit or loss (“FVTPL”) when the financial asset is held for trading or it is designated as FVTPL. Financial assets classified as FVTPL are measured at fair value with unrealized gains and losses recognized through earnings. The Company does not currently have any financial assets classified at fair value through earnings.

iv. Held-to-Maturity

Investments are recognized on a trade date basis and are initially measured at fair value, including transaction costs. The Company does not currently have any financial assets classified as held-to-maturity.

v. Impairment

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each period end. Financial assets are impaired when there is evidence that the estimated future cash flows of the investment have been impacted. For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the financial asset’s original effective interest rate.

The carrying amount of all financial assets, excluding accounts receivables, is directly reduced by the impairment loss. The carrying amount of accounts receivable is reduced through the use of an allowance account. Subsequent recoveries of amounts previously written off are recorded against the allowance account. Changes in the carrying amount of the allowance account are recognized in the results of operations.

With the exception of available-for-sale equity instruments, which are revalued through other comprehensive income, if, in a subsequent period, the amount of the impairment loss decreases and the decrease relates to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through the earnings. On the date of impairment reversal, the carrying amount of the financial asset cannot exceed its amortized cost had impairment not been recognized.

vi. Derecognition

Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership.

3.10 Financial Liabilities

Financial liabilities are classified as i) financial liabilities at FVTPL or ii) as other financial liabilities measured at amortized cost. Ivanhoe determines the classification of its financial liabilities at initial recognition. The measurement of financial liabilities depends on their classification.

i. Financial Liabilities at Fair Value through Profit or Loss

Financial liabilities classified as FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as FVTPL. Derivatives, including separated embedded derivatives, are also classified as FVTPL. Fair value changes on financial liabilities classified as FVTPL are recognized through earnings. The Company’s derivative financial instruments are classified as financial liabilities at FVTPL.

ii. Other Financial Liabilities

Financial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest rate method. The Company’s accounts payable and accrued liabilities, debt and long term obligation are classified as other financial liabilities.

3.11 Oil and Gas Revenue

Sales of oil and gas are recognized when the risks and rewards of ownership pass to the buyer, collection is reasonably assured and the price is reasonably determinable. Oil and gas revenue represents the Company’s share and is recorded net of royalty payments to governments and other mineral interest owners.

3.12 Income Tax

Income tax expense represents the sum of tax currently payable and deferred tax.

i. Current income tax

Income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to, the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the date of the statement of financial position.

ii. Deferred income tax

Deferred income tax is provided, using the liability method, on temporary differences at the date of the statement of financial position between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, except:

•

where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit or loss; and

•

in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilized except:

•

where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

•

in respect of deductible temporary differences associated with investments in subsidiaries, jointly controlled entities and associates, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each date of the statement of financial position and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each date of the statement of financial position and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is expected to be realized or the liability is expected to be settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the date of the statement of financial position.

Deferred income tax relating to items recognized directly in equity is recognized in equity and not in earnings.

Deferred income tax assets and deferred income tax liabilities are offset if, and only if, a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend to either settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

3.13 Borrowing Costs

For qualifying assets, interest on borrowings incurred to finance E&E assets and PP&E is capitalized until the asset is capable of fulfilling its intended use. Capitalized borrowing costs cannot exceed the actual interest and financing costs incurred. All other interest and financing costs are recognized in earnings in the period in which they are incurred.

3.14 Share-Based Payments

Equity settled share-based payments in the form of stock options granted to directors, employees and those providing similar services to Ivanhoe and its subsidiaries are measured at fair value on the grant date and expensed on a graded basis over the vesting period of each annual installment. The cumulative expense for equity settled transactions incorporates a forfeiture rate to reflect the Company’s best estimate of the number of equity instruments that will ultimately vest.

No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition which are treated as vesting irrespective of whether or not the market condition is satisfied provided that all other performance and/or service conditions are satisfied.

Compensation expenses are recognized at fair value determined at the grant date when shares are issued from the stock bonus plan. The employee share purchase portion of the plan has not yet been activated.

3.15 Income or Loss per Common Share

Basic net income or loss per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share amounts are calculated based on net income divided by dilutive common shares. Dilutive common shares are arrived at by adding weighted average common shares to common shares issuable on conversion of options or purchase warrants assuming that proceeds received from the exercise of in-the-money stock options and purchase warrants are used to purchase common shares at the average market price. Dilution from the Company’s convertible debt is considered using the “if converted” method.

3.16 Standards and Interpretations Issued But Not Yet Adopted

i. IFRS 9 Financial Instruments

As part of the IASB’s project to replace IAS 39 “Financial Instruments: Recognition and Measurement” in November 2009, the IASB issued the first phase of IFRS 9 “Financial Instruments” dealing with the classification and measurement of financial assets. In October 2010, the IASB updated IFRS 9 by incorporating requirements for the accounting for financial liabilities. The new standard is effective for annual periods beginning on or after January 1, 2013, with transitional arrangements depending upon the date of initial application. Ivanhoe has not yet decided the date of initial application for the Company and has not yet completed its evaluation of the effect of adoption.

There are no other standards or interpretations in issue but not yet adopted that are anticipated to have a material effect on the reported income or net assets of the Company.

4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINITY

The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions in certain circumstances that affect reported amounts. The most sensitive estimates affecting the Financial Statements are in the areas set out below. Actual results may differ from these estimates.

4.1 Critical Judgments in Applying Accounting Policies

i. E&E Assets

E&E assets are initially capitalized as intangible assets and reclassified as PP&E when sufficient reserves to justify commercial production are established. E&E assets that result in sufficient reserves to justify commercial production, but which cannot be classified as proved, continue to be capitalized as intangible assets as long as progress is being made to assess the reserves and economic viability of the well and/or related project. If sufficient reserves cannot be established, the corresponding E&E assets are charged to E&E expense.

Management must determine if E&E assets, which have not yet resulted in the discovery of proved reserves, should continue to be capitalized or charged to E&E expense. When making this determination, management considers factors such as the Company’s drilling results, planned exploration and development activities, the financial capacity of the Company to further develop the property, the ability to use the Company’s HTL™ technology in certain projects, lease expiries, market conditions and technical recommendations from its exploration staff.

ii. Impairment

a. Property, Plant and Equipment

Ivanhoe annually evaluates its oil and gas assets or groups of assets for impairment or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Among other things, an impairment may be triggered by falling oil and gas prices, a significant negative revision to reserve estimates, the inability to use the Company’s HTL™ technology in certain projects, changes in capital costs or the inability to raise sufficient financial resources to further develop the property. Cash flow estimates for the Company’s impairment assessments require significant assumptions about future prices and costs, production, reserves, discount rates and potential benefits from the application of its HTL™ technology.

b. Technology Assets

The Company’s Technology Assets consist of an exclusive, irrevocable license to deploy its HTL™ technology. Ivanhoe annually reviews the Technology Assets for impairment or if an adverse event or change occurs. Indicators of adverse events could include HTL™ patent expiries, advancements of new technologies or the inability to successfully commercialize the HTL™ technology. The impairment of the Technology Assets requires management to make assumptions about competitive technological developments, the successful commercialization of the Company’s HTL™ technology and future cash flows from the HTL™ technology.

4.2 Key Sources of Estimation Uncertainty

i. Oil and Gas Reserves

The process of estimating quantities of reserves is inherently uncertain and complex. It requires significant judgment and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing development activities and production becomes available and as economic conditions impacting oil and gas prices and costs change. Such revisions could be upwards or downwards. Reserve estimates have a material impact on depletion and the Company’s impairment evaluations, which in turn have a material impact on earnings.

Total proved and probable reserves estimates are used to determine rates that are used in the unit-of-production depletion calculations. In the first three months of 2011, depletion expense of $1.6 million was recorded. If proved and probable reserves estimates changed by 10%, the Company’s depletion and depreciation expense would have changed by approximately $0.2 million, assuming all other variables remained constant.

The recoverable value of the Company’s oil and gas PP&E is calculated based on future net cash flows from proved plus probable reserves, discounted at a pre-tax rate that includes risks specific to the asset. A 1% increase in the discount rate and a 5% decrease in the forward pricing used in the calculation of cash flows from proved plus probable reserves as at March 31, 2011, would not impair the Company’s development projects.

ii. HTL™ Technology

Future cash flows from HTL™ technology is a key source of estimation uncertainty as it requires management to make assumptions about the successful commercialization of the HTL™ technology and competitive technological developments. Success in commercializing the HTL™ technology in the oil and gas industry depends on the Company’s ability to economically design, construct and operate commercial-scale plants and a variety of other factors. Ivanhoe expects that technological advances in the processes and procedures for upgrading heavy oil and bitumen into lighter, less viscous products will continue to progress. It is possible that those advances could cause the HTL™ technology to become uncompetitive or obsolete.

iii. Decommissioning Provisions

The Company recognizes a provision for decommissioning costs when it has an obligation to dismantle and remove its PP&E or restore the site on which it is located. Decommissioning activities generally occur many years in the future and precise abandonment requirements and techniques are uncertain at the time the decommissioning liability is recorded. Removal technologies and associated costs are constantly changing, as well as political, environmental, legal, safety and public expectations. Consequently, estimated decommissioning provisions are a key source of estimation uncertainty.

iv. Option Pricing Models

The Company uses the Black Scholes option pricing model to calculate the fair value of the convertible portion of the convertible promissory note, stock options granted to directors, officers, employees and service providers and the derivative financial liabilities. Option pricing models require the input of highly subjective assumptions regarding the expected volatility. Changes in assumptions can materially affect the estimated fair value, and therefore, the existing models do not necessarily provide precise measure of fair value.

v. Subsidiary Option

In January 2010, one of the Company’s subsidiaries granted a private investor an option (the “Subsidiary Option”) to acquire an equity interest in the subsidiary representing 20% of the subsidiary’s currently issued share capital (16.67% of the enlarged share capital immediately following the exercise of the Subsidiary Option) for Cdn$25.0 million. If the Subsidiary Option is exercised, Cdn$25 million of existing inter-corporate indebtedness owed by the subsidiary to the Company (through an intermediate subsidiary) will be converted into additional common shares of the subsidiary, thereby diluting the private investor’s equity interest to 14.286%. The fair value of the Subsidiary Option, calculated using the Black Scholes option pricing model, used an estimated share value and assumed the volatility to be similar to Ivanhoe.

vi. Deferred Income Taxes

Ivanhoe operates in a specialized industry in several tax jurisdictions. As a result, income is subject to various rates of taxation. The breadth of the Company’s operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating the taxes it will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, uncertain tax positions and resolution of disputes arising from federal, provincial, state and local tax audits. The resolution of these uncertainties and the associated final taxes may result in adjustments to the Company’s tax assets and tax liabilities.

5. CASH AND CASH EQUIVALENTS

		March 31,				December 31,				January 1,
		2011				2010				2010
Cash at banks and on hand			56,805				10,147				6,797
Term deposits			23,470				57,670				—
Money market accounts			—				—				14,715
Restricted cash			523				500				2,850
			80,798				68,317				24,362

Restricted cash includes funds pledged as security for a letter of credit with a short term maturity and cash held in escrow.

6. INTANGIBLE ASSETS

		Exploration and Evaluation Assets
										Latin								HTLTM				Total Intangible
		Asia				Canada				America				Total				Technology				Assets
Cost
Balance January 1, 2010			14,411				94,431				6,755				115,597				92,153				207,750
Additions during the period			27,261				29,324				17,704				74,289				—				74,289
Exploration and evaluation expense			(3,537	)			—				(4,934	)			(8,471	)			—				(8,471	)
Balance December 31, 2010			38,135				123,755				19,525				181,415				92,153				273,568
Additions during the period			6,499				2,756				1,326				10,581				—				10,581
Balance March 31, 2011			44,634				126,511				20,851				191,996				92,153				284,149

Amortization of the HTL^TM technology has not commenced and its carrying value had not been impaired since it was acquired in 2005.

In the three months ended March 31, 2011, $0.7 million (year ended December 31, 2010 — $2.1 million) in employee benefits directly attributable to E&E assets were capitalized.

7. PROPERTY, PLANT AND EQUIPMENT

		Oil and Gas Property and Equipment
										Latin								Other				Total
		Asia				Canada				America				Total				Assets				PP&E
Cost
Balance January 1, 2010			31,816				—				—				31,816				11,373				43,189
Additions during the period			4,123				—				—				4,123				1,648				5,771
Disposals			—				—				—				—				(12	)			(12	)
Balance December 31, 2010			35,939				—				—				35,939				13,009				48,948
Additions during the period			3,530				—				—				3,530				419				3,949
Disposals			—				—				—				—				(5	)			(5	)
Balance March 31, 2011			39,469				—				—				39,469				13,423				52,892
Accumulated Depreciation
Balance January 1, 2010			—				—				—				—				1,206				1,206
Depletion and depreciation for the period			6,196				—				—				6,196				934				7,130
Disposals			—				—				—				—				(6	)			(6	)
Balance December 31, 2010			6,196				—				—				6,196				2,134				8,330
Depletion and depreciation for the period			1,576				—				—				1,576				256				1,832
Disposals			—				—				—				—				(1	)			(1	)
Balance March 31, 2011			7,772				—				—				7,772				2,389				10,161
Net Book Value
As at January 1, 2010			31,816				—				—				31,816				10,167				41,983
As at December 31, 2010			29,743				—				—				29,743				10,875				40,618
As at March 31, 2011			31,697				—				—				31,697				11,034				42,731

Oil and Gas Property and Equipment

In the three months ended March 31, 2011, nil (year ended December 31, 2010 — $0.1 million) in employee benefits directly attributable to PP&E were capitalized.

Other Assets

Other assets includes the Company’s FTF at the Southwest Research Institute in San Antonio, Texas, and general furniture and fixtures.

8. DEBT

		March 31,				December 31,				January 1,
		2011				2010				2010
Convertible note			41,178				40,217				38,005
Unamortized discount			(193	)			(385	)			(1,071	)
Carrying amount			40,985				39,832				36,934

In connection with the acquisition of the Tamarack leases in July 2008 from Talisman Energy Canada (“Talisman”), the Company issued a Cdn$40.0 million convertible promissory note (the “Convertible Note”) which matures in July 2011. Interest at the prime rate plus 2% is calculated daily and is payable semi-annually. The outstanding principal amount is convertible, at Talisman’s option, into a maximum of 12,779,552 Ivanhoe common shares at Cdn$3.13 per common share. The interest rate on the Convertible Note at March 31, 2011 was 5.00% (December 31, 2010 — 5.00%, January 1, 2010 — 4.25%).

Financial instruments with an exercise price denominated in a currency other than the Company’s functional currency are accounted for as derivatives. The Convertible Note is therefore considered to be a hybrid instrument with the embedded convertible component recognized as a derivative financial instrument (refer to Note 9 and 10) and the liability component recorded as debt.

The Company’s obligations under the Convertible Note are secured by a first fixed charge and security interest in favor of Talisman against the acquired Talisman leases and the related assets acquired by the Company pursuant to the Talisman lease acquisition.

In the three months ended March 31, 2011, $0.7 million (three months ended March 31, 2010 — $0.6 million, year ended December 31, 2010 — $2.5 million) of interest from the Convertible Note was capitalized to E&E assets. No interest from the Convertible Note was recorded as interest expense in the three months ended March 31, 2011 (year ended December 31, 2010 — nil).

9. FINANCIAL INSTRUMENTS

9.1 Fair Value of Financial Instruments Measured at Amortized Cost

Except as detailed below, the fair value of the Company’s financial instruments recognized at amortized cost approximates their carrying value due to the demand nature or short term maturity of these instruments.

		March 31,				December 31,				January 1,
		2011				2010				2010
Debt
Carrying Amount			40,985				39,832				36,934
Fair Value			40,189				40,193				35,950

The fair value of the liability component of the Convertible Note was estimated using a discounted cash flow calculation, assuming redemption in July 2011 and an interest rate of 5.0% at March 31, 2011 (December 31, 2010 — 5.0%).

9.2 Financial Instruments Measured at Fair Value Through Profit and Loss

The Company classifies its financial instruments according to the fair value hierarchy outlined in IFRS 7, “Financial Instruments: Disclosures,” as described below:

•

Level 1 — using quoted prices in active markets for identical assets or liabilities.

•

Level 2 — using inputs for the asset or liability, other than quoted prices, that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices).

•

Level 3 — using inputs for the asset or liability that are not based on observable market data, such as prices based on internal models or other valuation methods.

The following table presents the Company’s derivative financial instruments measured at FVTPL:

		Level 1				Level 2								Level 3
		2006				2009 & 2010				Convertible								Total
		Purchase				Purchase				Component				Subsidiary				Fair
		Warrants				Warrants				of Debt				Option				Value
Balance January 1, 2010			7,582				667				4,774				—				13,023
Issuance of purchase warrants			—				13,999				—				—				13,999
Exercise of purchase warrants			(3	)			—				—				—				(3	)
Derivative gains through profit and loss			(1,964	)			(13,050	)			(3,558	)			—				(18,572	)
Balance December 31, 2010			5,615				1,616				1,216				—				8,447
Exercise of purchase warrants			(2	)			(3,107	)			—				—				(3,109	)
Expiration of purchase warrants through profit and loss			—				(1,477	)			—				—				(1,477	)
Derivative (gains) losses through profit and loss			(3,267	)			2,968				(537	)			1,186				350
Balance March 31, 2011			2,346				—				679				1,186				4,211

The gain on derivative instruments of $1.1 million for the three months ended March 31, 2011, (three months ended March 31, 2010 — $2.1 million, year ended December 31, 2010 — $18.6 million) originated from the expiration and revaluation of derivative financial instruments measured at FVTPL.

Where the instrument is quoted in an active market, the movement in fair value due to credit risk is calculated as the change in fair value that is not attributable to changes in market risk. Where the instrument is not quoted in an active market, the fair value is calculated using a valuation technique that incorporates credit risk by discounting the cash flows using a credit-adjusted rate which reflects the level at which the Company could issue similar instruments at the reporting date. The amount of change in the fair value, during the period and cumulatively, of designated financial liabilities through FVTPL that is attributable to changes in credit risk is determined to be nil.

9.3 Risks Arising from Financial Instruments

In the normal course of operations, the Company is exposed to market risks resulting from movements in commodity prices, foreign currency exchange rates and interest rates, which may result in fluctuations in the fair value or future cash flows of its financial instruments.

i. Commodity Price Risks

Commodity price risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to the changes in market commodity prices. Oil prices and quality differentials are influenced by worldwide factors such as OPEC actions, political events and supply and demand fundamentals. The Company may periodically use different types of derivative instruments to manage its exposure to price volatility. However, no hedging contracts were in place in the first three months of 2011.

ii. Foreign Currency Exchange Rate Risk

Ivanhoe is exposed to foreign currency exchange rate risk as a result of incurring capital expenditures and operating costs in currencies other than the US dollar. A substantial portion of the Company’s activities are transacted in, or referenced to, US dollars, including oil sales in Asia, capital spending in Ecuador and ongoing FTF operations. A portion of transactions are in other currencies, such as Dagang operating costs paid in Chinese renminbi, Tamarack exploration activities funded in Canadian dollars and the purchase warrants exercised in 2011. The Company has not entered into any foreign currency derivatives to date in 2011, nor does the Company anticipate using foreign currency derivatives in the remainder of the year. To help reduce the Company’s exposure to foreign currency exchange rate risk, the Company seeks to hold assets and liabilities denominated in the same currency when appropriate.

The following table shows the Company’s exposure to foreign currency exchange rate risk on its net loss and comprehensive loss for March 31, 2011, assuming reasonably possible changes in the relevant foreign currency. This analysis assumes all other variables remain constant.

		Change From a 10%				Change From a 10%
(Increase) Decrease in Net Loss and Comprehensive Loss		Increase or Weakening				Decrease or Strengthening
Chinese renminbi			605				(740	)
Canadian dollar			(1,715	)			2,040

iii. Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates. Interest rate risk arises from interest-bearing borrowings which have a variable interest rate. The Company’s net loss and accumulated deficit would not have been impacted by an interest rate change in the first quarter of 2011 as interest on the Company’s debt related to the Convertible Note is capitalized.

iv. Credit Risk

Ivanhoe is exposed to credit risk with respect to its cash and cash equivalents, accounts receivable, note receivable and long term receivables. The Company’s maximum exposure to credit risk at March 31, 2011, is represented by the carrying amount of these non-derivative financial assets.

The Company believes its exposure to credit risk related to cash and cash equivalents is minimal due to the quality of the financial institutions where the funds are held and the nature of the deposit instruments. Most of the Company’s credit exposures are with counterparties in the energy industry and are therefore exposed to normal industry credit risks. Ivanhoe manages its credit risk by entering into sales contracts only with established entities.

Currently, all of the Company’s oil production is sold to one national oil corporation. As a result, 92% of the outstanding accounts receivable balance at March 31, 2011 (December 31, 2010 — 85%, January 1, 2010 — 94%) is due from a national oil corporation. Long term receivables are composed of value-added tax receivable amounts from Ecuador and will be recoverable upon commencement of commercial operations. Ivanhoe considers the risk of default on these items to be low due to the Company’s ongoing operations in China and Ecuador.

		March 31,				December 31,				January 1,
		2011				2010				2010
Accounts receivable — current			6,508				6,329				5,004
Accounts receivable — over 90 days			—				30				17
			6,508				6,359				5,021

v. Liquidity Risk

Liquidity risk is the risk that suitable sources of funding for the Company’s business activities may not be available. Since cash flows from existing operations are insufficient to fund future capital expenditures, Ivanhoe intends to finance future capital projects with a combination of strategic investors and/or public and private debt and equity markets, either at a parent company level or at the project level or from the sale of existing assets. There is no assurance that the Company will be able to obtain such financing on favorable terms, if at all.

The contractual maturity of the fixed and floating rate derivative and non-derivative financial liabilities are shown in the table below. The amounts presented represent the future undiscounted principal and interest cash flows and therefore may not equate to the values presented in the statement of financial position.

		Less than
As at March 31, 2011		1 year
Derivative financial liabilities
Purchase warrants			2,346
Convertible component of note			679
Subsidiary option			1,186
Non-derivative financial liabilities
Accounts payable and accrued liabilities			24,702
Debt and interest			42,285

10. DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s derivative financial instruments are comprised of common share purchase warrants and the convertible component of the Convertible Note.

10.1 Purchase Warrants

The following table reflects the changes in the Company’s purchase warrants outstanding:

		Purchase				Shares
(000s)		Warrants				Issuable
Balance January 1, 2010			12,135				12,135
Private placements			12,500				12,500
Exercised			(2	)			(2	)
Balance December 31, 2010			24,633				24,633
Exercised			(8,620	)			(8,620	)
Expired			(4,619	)			(4,619	)
Balance March 31, 2011			11,394				11,394

At March 31, 2011, the purchase warrants issued in 2006 remained exercisable:

Price Per

Exercise

Cash Value on

Special

Outstanding(1)

Fair Value

Price Per

Exercise

Valuation

Year of Issue

Warrant

(000s)

($US000s)

Expiry Date

Share

($US000s)

Method

2006

US$2.23

11,394

2,346

May 2011

Cdn$2.93

(2)

34,365

Quoted Market Price

At December 31, 2010, the following purchase warrants were exercisable:

Price Per

Exercise

Cash Value on

Special

Outstanding(1)

Fair Value

Price Per

Exercise

Valuation

Year of Issue

Warrant

(000s)

($US000s)

Expiry Date

Share

($US000s)

Method

2006

US$2.23

11,398

5,615

May 2011

Cdn$2.93

(2)

33,577

Quoted Market Price

2009

N/A

735

11

Feb 2011

Cdn$4.05

2,993

Black-Scholes

2010

Cdn$3.00

10,417

1,326

Feb 2011

Cdn$3.16

33,095

Black-Scholes

2010

Cdn$3.00

2,083

279

Feb 2011

Cdn$3.16

6,619

Black-Scholes

24,633

7,231

76,284

At December 31, 2010, the fair value of the purchase warrants issued in 2009 and 2010 was calculated using a weighted average risk-free interest rate of 1.0%, a dividend yield of 0.0%, a weighted average volatility factor of 66.6% and an expected life of two months. If the volatility used to fair value the purchase warrants decreased by 10%, the fair value would decrease by $0.4 million. Increasing the volatility by 10% would have had the opposite, but approximately equal, impact.

10.2 Convertible Note

The Company issued a Cdn$40.0 million Convertible Note, as described in Note 8. The outstanding principal amount is convertible, at Talisman’s option, into common shares of the Company. The fair value of the convertible component was $0.7 million at March 31, 2011 (December 31, 2010 — $1.2 million), calculated with the Black Scholes valuation method using a weighted average risk-free interest rate of 1.0%, a dividend yield of 0.0%, a weighted average volatility factor of 30% and an expected life of approximately three months.

If the volatility used to fair value the convertible component decreased by 10%, the fair value would decrease by $0.5 million. Increasing the volatility by 10% would increase the fair value by $0.6 million.

10.3 Subsidiary Option

In January 2010, one of the Company’s subsidiaries granted a private investor an option (the “Subsidiary Option”) to acquire an equity interest in the subsidiary representing 20% of the subsidiary’s currently issued share capital (16.67% of the enlarged share capital immediately following the exercise of the Subsidiary Option) for Cdn$25.0 million. If the Subsidiary Option is exercised, Cdn$25 million of existing inter-corporate indebtedness owed by the subsidiary to the Company (through an intermediate subsidiary) will be converted into additional common shares of the subsidiary, thereby diluting the private investor’s equity interest to 14.286%. The Subsidiary Option is valid for one year and did not become exercisable until the first quarter of 2011. The option was determined to have a nominal value on the date of grant.

The fair value of the Subsidiary Option as at March 31, 2011, was calculated using the Black Scholes valuation method using an estimated share value of $19.69, an exercise price of $30.00 per share, a risk-free interest rate of 1.4%, a dividend yield of 0.0%, an expected life of approximately one year and an estimated volatility of 55.8%, which is similar to Ivanhoe.

If the estimated volatility used to fair value the Subsidiary Option increased by 10%, the fair value would increase by $0.5 million. Decreasing the volatility by 10% would have had the opposite, but approximately equal, impact.

11. LONG TERM PROVISIONS

		March 31,				December 31,
		2011				2010
Decommissioning provision
Balance, beginning of period			1,108				1,040
Liabilities incurred			—				642
Liabilities settled			—				(179	)
Revisions in cash flow estimates			—				(488	)
Unwinding of discount			8				23
Change in discount rates			15				70
Balance, end of period			1,131				1,108
Long term obligation			1,900				1,900
			3,031				3,008

11.1 Decommissioning Provision

The decommissioning provision represents the present value of decommissioning costs related to oil and gas properties in Canada, the FTF, and oil and gas properties in Ecuador, which are expected to be incurred in 2013, 2029 and 2038 respectively. The Company records a provision for the estimated future cost of decommissioning oil and gas properties and the FTF on a discounted basis. The provision for the costs of decommissioning these oil and gas properties and the FTF at the end of their economic lives has been estimated, at current prices or long term assumptions, depending on the expected timing of the activity, and discounted using a time value of money rate of 1.7% to 3.6% at March 31, 2011 (December 31, 2010 — 2.0% to 3.7%).

11.2 Long term obligation

As part of a 2005 merger agreement, the Company assumed an obligation to pay $1.9 million in the event, and at such time that, the sale of units incorporating the HTL^TM technology for petroleum applications reach a total of $100.0 million.

12. COMMITMENTS AND CONTINGENCIES

12.1 Income Taxes

The Company has an uncertain tax position in China related to when it is entitled to take tax deductions on capitalized development costs that are amortized on a straight-line basis. To the extent that there is a different interpretation in the timing of the deductibility of development costs, this could potentially result in an increase in the current tax expense of $0.9 million.

The Company has an uncertain tax position related to the calculation of a gain on the consideration received from two farm-out transactions. To the extent that the calculation of the gain is interpreted differently and the amounts are subject to withholding tax, there would be an additional current tax expense of approximately $0.7 million.

No amounts have been recorded in the Financial Statements related to the above mentioned uncertain tax positions as management has determined the likelihood of an unfavorable outcome to the Company to be low.

12.2 Operating Lease Arrangements

In the three months ended March 31, 2011, the Company expended $0.5 million (three months ended March 31, 2010 — $0.5 million) on operating leases relating to the rental of office space, which expire between May 2011 and December 2013.

At March 31, 2011, future net minimum payments for operating leases were:

Remainder of 2011			1,372
2012-2013			1,153
			2,525

12.3 Other

The Company may be required to make a Cdn$15.0 million cash payment to Talisman upon receiving government and other approvals necessary to develop the northern border of one of the Tamarack leases.

Occasionally, Ivanhoe enters into consulting agreements whereby a success fee may be payable if and when either a definitive agreement is signed or certain other contractual milestones are met. Under these agreements, the consultant may receive cash, common shares, stock options or some combination thereof.

From time to time, Ivanhoe is involved in litigation or has claims brought against it in the normal course of business. Management is currently not aware of any claims that would materially affect the reported financial position or results of operations.

13. SHARE CAPITAL

Authorized		Unlimited common shares with no par value Unlimited preferred shares with no par value
Issued and Outstanding		343,932,658 common shares (December 31, 2010 — 334,365,482) Nil preferred shares (December 31, 2010 — nil)

See the unaudited Condensed Consolidated Statements of Changes in Equity for the change in common shares issued in the three months ended March 31, 2011 and 2010.

14. SHARE-BASED PAYMENTS

The Company has an equity-settled incentive plan under which it may i) grant stock options to directors and eligible employees to purchase common shares, ii) issue common shares to directors and eligible employees as bonus awards, and iii) issue common shares under a share purchase plan for eligible employees. The total number of common shares that may be issued under this plan cannot exceed 7% of the Company’s issued and outstanding common shares. The share purchase plan has not yet been activated.

Stock options are issued at the weighted-average trading price for the five days immediately preceding the award and are conditional on continuing employment. Expiration and vesting periods are set at the discretion of the Board of Directors, but typically vest over three to four years and expire five to ten years from the date of issue.

The weighted average fair value of stock options granted during the three months ended March 31, 2011 was Cdn$2.28 (three months ended March 31, 2010 — Cdn$2.80) per option at the grant date using the Black Scholes option pricing model. The weighted average assumptions used for the calculation were:

Three months ended March 31,		2011				2010
Expected life (in years)			6.3				5.1
Volatility (1)			74.4	%			77.5	%
Dividend yield			—				—
Risk-free rate			2.9	%			3.0	%
Estimated forfeiture rate			2.9	%			2.1	%

The Company’s stock-based compensation related to option awards were classified as general and administrative or operating expenses in earnings. In the three months ended March 31, 2011, nil (three months ended March 31, 2010 — $0.8 million) of share-based payments was capitalized to intangible exploration and evaluation assets.

Details of transactions under the share options plan are as follows:

		March 31, 2011								December 31, 2010
		Number of				Weighted Average				Number of				Weighted Average
		Stock Options				Exercise Price				Stock Options				Exercise Price
		(000s)				(Cdn$)				(000s)				(Cdn$)
Outstanding, beginning of period			16,927				2.24				15,013				2.27
Granted			50				3.44				6,041				2.56
Exercised			(1,480	)			2.41				(2,743	)			2.28
Expired			—				—				(635	)			2.60
Forfeited			(1	)			2.30				(749	)			2.64
Outstanding, end of period			15,496				2.21				16,927				2.24
Exercisable, end of period			6,478				2.06				7,324				2.19

The weighted average share price at the date of exercise for share options exercised during the period was Cdn$3.30.

The following table summarizes information in respect of stock options outstanding and exercisable at March 31, 2011:

						Weighted Average
						Remaining				Weighted Average
		Outstanding				Contractual Life				Exercise Price
Range of Exercise Prices (Cdn$)		(000s)				(years)				(Cdn$)
1.51 to 2.06			5,788				2.5				1.71
2.15 to 2.71			7,535				4.8				2.33
2.77 to 3.44			2,173				4.9				3.16
			15,496				3.9				2.21

15. RETIREMENT PLANS

In 2001, the Company adopted a defined contribution retirement or thrift plan (“401(k) Plan”) to assist US employees in providing for retirement or other future financial needs. Employees’ contributions (up to the maximum allowed by US tax laws) are matched 100% by the Company. Payments are also made to a state managed plan for employees in China.

For the three months ended March 31, 2011, the Company paid $0.2 million for retirement plan contributions (three months ended March 31, 2010 — $0.2 million).

16. SEGMENT INFORMATION

Ivanhoe’s organizational structure reflects its various operating activities and the geographic areas in which it operates. Oil and gas operations are divided into three geographic segments: Asia, Canada and Latin America. Asian operations capture the Company’s oil production in Dagang and Daqing and exploration at Zitong in China as well as exploration in Mongolia. The Canadian segment comprises activities from Ivanhoe’s oil sands development project at Tamarack in Alberta, Canada. Latin America consists of exploration and development of Block 20 in Ecuador.

The Technology Development area captures costs incurred to develop, enhance and identify improvements in the application of the Company’s HTL™ technology. The Corporate area consists of costs that are not directly allocable to operating projects, such as executive officers, corporate financings and other general corporate activities.

In prior years, the Company’s business development activities were included in a combined Business and Technology Development segment. The comparative information below has been restated to reclassify business development activities to the Corporate segment.

The accounting policies of the segments are the same as the Company’s accounting policies described in Note 3. Segment results include transactions between business segments. Corporate activities undertaken on behalf of a segment are allocated at cost. Oil revenue is classified according to the geographic location of the production. Segment liabilities include intercompany balances.

The following tables present the Company’s segment information, capital investments and identifiable assets and liabilities.

										Latin				Technology
Three months ended March 31, 2011		Asia				Canada				America				Development				Corporate				Total
Revenue
Oil(1)			8,119				—				—				—				—				8,119
Interest			1				—				—				—				66				67
			8,120				—				—				—				66				8,186
Expenses
Operating			3,310				—				—				1,213				—				4,523
Exploration and evaluation			—				—				—				—				—				—
General and administrative			2,772				1,306				1,680				510				7,149				13,417
Depletion and depreciation			1,605				2				23				132				69				1,831
Foreign currency exchange gain			(10	)			(3	)			—				—				(212	)			(225	)
Derivative instruments (gain) loss			1,186				—				—				—				(2,315	)			(1,129	)
Interest			—				2				4				2				—				8
			8,863				1,307				1,707				1,857				4,691				18,425
Loss before income taxes			(743	)			(1,307	)			(1,707	)			(1,857	)			(4,625	)			(10,239	)
(Provision for) recovery of income taxes
Current			(264	)			—				—				—				(58	)			(322	)
Deferred			(1,165	)			—				—				(391	)			991				(565	)
			(1,429	)			—				—				(391	)			933				(887	)
Net loss and comprehensive loss			(2,172	)			(1,307	)			(1,707	)			(2,248	)			(3,692	)			(11,126	)
Capital investments — Intangible			6,499				2,539				1,326				—				—				10,364
Capital investments — Property, plant and equipment			3,546				—				62				341				—				3,949
As at March 31, 2011
Assets(2)			91,835				126,708				28,042				102,092				70,388				419,065
Liabilities(3)			123,714				135,402				45,434				79,189				(288,729	)			95,010
As at December 31, 2010
Assets(2)			85,273				123,890				24,392				101,899				58,964				394,418
Liabilities(3)			114,980				131,277				42,162				76,747				(271,232	)			93,934
As at January 1, 2010
Assets(2)			57,528				94,594				7,778				101,893				19,158				280,951
Liabilities(3)			81,047				98,262				13,145				56,909				(162,821	)			86,542