Business Context and Reporting Period
International Tower Hill Mines Ltd. filed its Form 10-K for the fiscal year ended December 31, 2017, including fourth-quarter results. The Canadian exploration-stage company controls 100% of the Livengood Gold Project in Alaska and has not commenced commercial mining or generated operating revenue. The filing was audited under U.S. GAAP and signed March 16, 2018.
The Company’s activities focused on metallurgical testing, engineering, environmental baseline work and optimization of the Livengood project. No material exploration drilling was completed in 2017.
Financial Results and Liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Net loss | $(6.43) million | $(7.19) million |
| Net loss per share | $(0.04) | $(0.06) |
| Cash used in operating activities | $(5.83) million | $(6.36) million |
| Cash and cash equivalents | $2.24 million | $22.47 million |
| Working capital | $1.99 million | $7.59 million |
| Total assets | $57.65 million | $77.90 million |
| Total liabilities | $0.43 million | $15.08 million |
| Shareholders’ equity | $57.22 million | $62.82 million |
Fourth-quarter net loss was $1.38 million, compared with $1.11 million in the fourth quarter of 2016. Quarterly loss fluctuations were principally attributable to operating costs and, in 2016, changes in the valuation of the derivative liability.
Total operating expenses were $6.12 million, broadly consistent with $6.11 million in 2016. Mineral property exploration expense declined to $2.45 million from $2.65 million. Share-based compensation increased to $443,556 from $108,526, primarily due to deferred share units and options issued during 2017. Foreign-exchange loss was $364,188.
The Company has no debt reported in the filing. Its $14.69 million derivative liability related to the Livengood property acquisition was fully paid on January 12, 2017, leaving no remaining liability. Capitalized acquisition costs were $55.20 million and represented most of total assets.
Cash decreased by $20.22 million during 2017. Operating activities used $5.83 million and the derivative settlement used $14.69 million; there were no cash flows from investing activities. The Company had no internally generated operating cash flow and relies on equity financing and other potential strategic financing.
Material Changes Versus the Prior Comparable Period
- Net loss improved by $758,571, or approximately 11%, primarily because 2017 had no derivative revaluation loss, compared with a $794,169 unrealized derivative loss in 2016.
- Cash and working capital fell sharply following the $14.69 million derivative settlement and approximately $5.9 million of project and operating expenditures.
- Mineral property expenditures decreased approximately $202,000 as the Company limited field activity and emphasized environmental baseline work and metallurgical testing.
- Share-based compensation increased by approximately $335,000 following the adoption of a deferred share unit plan and the grant of 250,000 CEO stock options.
- The Company issued 206,024 shares to former CEO Thomas Irwin in July 2017 in satisfaction of a $99,492 obligation. Shares outstanding increased modestly to 162,392,996 at year-end.
- Management transitioned in January 2017: Karl Hanneman became CEO while retaining COO responsibilities, and Thomas Irwin became a part-time senior advisor and later a director.
Project Outlook, Risks and Unusual Items
Optimization work identified a potential 52,600-ton-per-day project producing approximately 6.8 million ounces of gold over 23 years. Relative to the September 2013 feasibility configuration, management estimated a 34% reduction in capital costs to $1.84 billion, a 28% reduction in process operating costs to $7.48 per ton and all-in costs of $1,247 per ounce. These figures are preliminary project estimates and are not a production commitment.
The April 2017 pre-feasibility study reported proven reserves of 378 million tonnes at 0.71 g/t and probable reserves of 14 million tonnes at 0.72 g/t, based on a $1,250-per-ounce gold price. The report stated that the project generated only a minimal positive return at that price; management also stated that the project was not commercially viable at the gold price prevailing in March 2018. Mineral resources and reserves are reported under Canadian standards and may not be directly comparable with SEC Industry Guide 7 disclosures.
For 2018, the Board approved a $5.1 million budget for additional metallurgical work, flowsheet refinement and environmental baseline activities. Management also planned to reduce corporate overhead, including a 50% reduction in the CEO’s salary and reductions in board compensation and staffing. Management estimated future project general and administrative costs could decline to approximately $2.5 million annually.
On March 13, 2018, after year-end, the Company issued 24 million shares at $0.50 per share for gross proceeds of $12 million. Proceeds were intended for optimization studies, environmental work and working capital. The Company also remains open to a strategic alliance or other financing alternatives.
The principal risks are the absence of revenue and commercial production, continued losses, substantial future capital requirements, dependence on gold prices, uncertainty regarding resource estimates and metallurgy, permitting and environmental requirements, title and surface-access risks, lease and claim-maintenance obligations, foreign-exchange exposure and potential shareholder dilution. Management stated that additional financing will be required to advance the project and any future mine development.
The Company believes it was likely a passive foreign investment company for U.S. federal income tax purposes in 2017, which may create adverse tax consequences for U.S. shareholders. The filing reported no material pending legal proceedings, no material environmental rehabilitation provision and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Verify the current economic conclusions, assumptions and sensitivity analysis in the April 2017 technical report, particularly the gold-price assumptions and the project’s limited economic viability.
- Reconcile the Company’s post-year-end $12 million equity financing with its cash runway, 2018 budget and expected financing needs beyond 2018.
- Assess whether metallurgical and engineering optimization can support a revised feasibility study and materially improve project economics.
- Review future permitting requirements, including the anticipated NEPA Environmental Impact Statement and related federal and Alaska approvals.
- Confirm mineral resource and reserve classifications under applicable U.S. and Canadian reporting standards, especially the uncertainty associated with inferred resources.
- Monitor potential dilution from future equity financings, stock options and deferred share units.
- Evaluate exposure to gold-price volatility, foreign-exchange movements, project cost escalation and the Company’s ability to maintain mineral leases and claims.