Cost of sales was $56.8 million in Q2'13, compared to $24.1 million in Q2'12. Cost of sales comprises the direct cash costs of product sold, mine administration cash costs of product sold, inventory write-downs, equipment depreciation, depletion of mineral properties and share-based compensation expense. In Q2'13, cost of sales included $11.5 million of inventory write-downs (Q2'12: $7.9 million). The increase in cost of sales from Q2'12, excluding inventory write-downs, was primarily due to higher sales volumes.
In Q2'13, Inova incurred exploration and evaluation expenses of $6.3 million (Q2'12: $24.0 million) and other operating expenses of $2.8 million (Q2'12: $6.7 million). The Q2'13 reduction in expenditures from Q2'12 was a result of cost savings identified by the strategic review released in August 2012.
In Q2'13, Inova continued to explore its extensive and prospective leases in the Cloncurry region, north-western Queensland.
Due to decreases in commodity prices and increases in mining costs, Turquoise Hill conducted an impairment analysis whereby the carrying value of the Osborne copper-gold operation's asset group was assessed. The asset group's recoverable amount was based on estimated future cash flows that assume the depletion of the Osborne copper-gold operation's three underground mines - Kulthor, Osborne and Starra 276 - will continue until the end of 2016. Since the carrying value of the asset group was determined to be higher than its recoverable amount, an impairment loss of $26.7 million, based on discounted estimated future cash flows associated with value beyond proven and probable reserves, was recorded during Q2'13. The estimates and assumptions incorporated in the impairment analysis are subject to certain risks and uncertainties which may materially affect the future net cash flows expected to be generated.
Osborne copper-gold operation
During Q2'13, Inova mined 365,149 tonnes of ore from the Osborne copper-gold operation's three underground mines - Kulthor, Osborne and Starra 276. In 2013, Inova expects to mine between 1.4 million and 1.6 million tonnes of ore from these three mines.
Inova completed the development of the Starra 276 underground mine in February 2013. Mine production continued to ramp up during Q2'13 with the month of June 2013 recording over 59,000 tonnes of ore produced, the expected monthly mining rate from Starra 276.
In Q2'13, the Osborne copper-gold operation milled 393,251 tonnes of ore. Recovery rates averaged 85.7% for copper and 63.7% for gold, and the plant produced 21,801 dry metric tonnes of concentrate containing 5,451 tonnes of copper. A process improvement program was instigated to improve processing performance and recovery rates with the Starra 276 ore in the mill feed blend. Recoveries of copper and gold continued to improve during Q2'13, with June 2013 recovery rates of 88.2% for copper and 69.6% for gold. During Q2'13, gold production, in both concentrate and dore, totalled 6,459 ounces.
Merlin Molybdenum-Rhenium Project
The value engineering work program that aimed to enhance the Merlin project's economics was finalized during Q2'13. The outcome from the work program supported the view that Merlin has the potential to be a low cost primary producer of molybdenum and rhenium and thus supports the continuation of further optimization work. This work is planned to lead ultimately to the output of a revised feasibility study. Inova also plans to source a strategic partner for the project.
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