Business Context and Reporting Period
International Tower Hill Mines Ltd. filed its Form 10-K for the fiscal year ended December 31, 2014. The company is an exploration-stage mineral company focused exclusively on the Livengood Gold Project in Alaska, which it controls 100%. The project was not in production, and the company had no operating revenue.
- Livengood resources: 731 million measured tonnes at 0.61 g/t, 71 million indicated tonnes at 0.56 g/t, and 266 million inferred tonnes at 0.52 g/t, using a 0.3 g/t cut-off.
- The September 2013 feasibility study reported 434 million tonnes of proven reserves and 20 million tonnes of probable reserves, based on a $1,500-per-ounce gold price.
- Management stated that the project was not commercially viable at the gold price prevailing at the filing date.
Financial Results and Key Metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Operating revenue | None | None |
| Net loss | $7.8 million | $9.9 million |
| Basic and diluted loss per share | $0.08 | $0.10 |
| Cash used in operating activities | $6.8 million | $14.8 million |
| Cash and cash equivalents | $13.5 million | $13.9 million |
| Working capital | $12.6 million | $12.7 million |
| Total assets | $69.0 million | $69.5 million |
| Total liabilities | $15.8 million | $16.3 million |
| Shareholders’ equity | $53.2 million | $53.2 million |
No meaningful revenue or operating margin was reported because the company has not commenced mining or commercial production. Total operating expenses were $8.4 million, including $2.6 million of mineral property exploration expense, $3.9 million of wages and benefits, and $1.3 million of share-based compensation.
- Operating cash outflow decreased to $6.8 million from $14.8 million, primarily because project activity was lower than in 2013.
- Financing provided $7.3 million in net cash through a December 2014 private placement of 18.245 million shares at C$0.46 per share.
- Capitalized acquisition costs were $55.2 million, substantially unchanged from 2013.
- The company had no conventional interest-bearing debt disclosed. It reported a $14.7 million derivative liability tied to a contingent land-purchase payment due in January 2017.
- The derivative liability is based on the five-year average gold price and changes by approximately $23,148 for each $1 change in that average price.
Material Changes Versus the Prior Comparable Period
- Net loss improved by approximately $2.1 million, or 21%, from 2013.
- Mineral property exploration expense declined from $8.2 million to $2.6 million as the company shifted from feasibility-study work toward project optimization and environmental baseline activities.
- Share-based compensation declined from $3.6 million to $1.3 million.
- Other income fell substantially, from $8.3 million to $0.6 million, primarily because the derivative revaluation gain declined from $7.6 million to $0.1 million.
- Cash declined by approximately $0.4 million despite the equity financing, reflecting project expenditures and an approximately $0.9 million foreign-exchange impact.
- Shares outstanding increased from 98.1 million to 116.3 million, resulting in dilution for existing shareholders.
- Chief Financial Officer Tom Yip resigned effective December 31, 2014 and agreed to provide three to six months of transitional consulting services.
Guidance, Outlook, Risks and Unusual Items
Management expected to spend approximately $10 million during fiscal 2015, including general and administrative expenses, on metallurgical testing, engineering, environmental baseline work, water-supply alternatives and project optimization. The company expected existing cash to fund the 2015 work plan and anticipated general and administrative costs through 2015 and well into 2016, but stated that significant additional financing would be required thereafter.
- The 2015 metallurgical program is intended to validate potentially higher head grades and optimize gravity recovery, grind size, power consumption, reagent use, leach retention time and recoveries by rock type.
- Management cautioned that identified cost savings, higher grades and process improvements may not be realized.
- The September 2013 study generated only a minimal positive return at $1,500 per ounce of gold; the project was not commercially viable at the prevailing gold price.
- The $14.7 million contingent land payment due in January 2017 significantly exceeds available cash resources. Failure to finance the payment could allow vendors to enforce security over the purchased claims and potentially jeopardize the company’s rights to them.
- Future development depends on additional equity, debt, a joint venture or strategic alliance financing. Failure to obtain financing could delay or prevent exploration, permitting or development and raises uncertainty regarding continuation of operations.
- Future development requires extensive federal and state permitting, including an Environmental Impact Statement under NEPA. The company held permits for current exploration activities.
- Gold-price volatility, resource and reserve estimation uncertainty, metallurgy, permitting, environmental obligations, title and access risks, foreign-exchange exposure and seasonal Alaskan operating conditions are material risks.
- The company believed it was likely a passive foreign investment company for U.S. federal income tax purposes in 2014, potentially creating adverse tax consequences for U.S. shareholders.
Most Important Facts for Investors to Verify
- Confirm current gold-price assumptions and whether optimization work has materially improved the project’s economics relative to the September 2013 feasibility study.
- Verify the status, valuation methodology and January 2017 funding plan for the $14.7 million contingent land-purchase liability.
- Review cash burn, the approximately $10 million 2015 spending plan and the timing and terms of required future financing.
- Assess the quality and classification of Livengood resources and reserves, noting that Canadian resource categories, particularly inferred resources, may not be comparable to SEC standards.
- Evaluate dilution from the 2014 private placement and outstanding stock options.
- Monitor metallurgical test results, permitting progress, environmental baseline work and any strategic-partner discussions.
- Review the company’s PFIC status and related U.S. shareholder tax implications.