Business Context and Reporting Period
International Tower Hill Mines Ltd. filed its Form 10-K for the fiscal year ended December 31, 2016, with quarterly information for the fourth quarter. The British Columbia company is an exploration-stage mineral company focused exclusively on the 100%-controlled Livengood Gold Project in Alaska. It had not commenced mining or commercial production and generated no operating revenue.
The October 2016 pre-feasibility study contemplated a 52,600-ton-per-day operation producing 6.8 million ounces of gold over 23 years. The study estimated 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.
Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No operating revenue |
| Net loss | $(7.19) million | $(4.81) million | Loss increased $2.38 million |
| Net loss per share | $(0.06) | $(0.04) | Higher loss per share |
| Operating expenses | $6.11 million | $6.45 million | Decreased $0.34 million |
| Cash used in operating activities | $(6.36) million | $(5.34) million | Use increased $1.03 million |
| Cash and cash equivalents | $22.47 million | $6.49 million | Increased $15.97 million |
| Working capital | $7.59 million | $6.17 million | Increased $1.42 million |
| Total assets | $77.90 million | $61.92 million | Increased $15.98 million |
| Total liabilities | $15.08 million | $14.42 million | Increased $0.67 million |
Because the company had no revenue or production, gross margin, operating margin and net margin are not meaningful. The company reported no conventional debt. Its $14.69 million derivative liability related to a contingent property-acquisition payment was classified as current at year-end and paid in full on January 12, 2017.
Fourth-quarter 2016 net loss was $1.11 million, compared with $1.12 million in the fourth quarter of 2015. The company reported $21.87 million of net financing cash inflow in 2016 and no investing cash flow.
Material Changes Versus Prior Comparable Period
- The company completed a December 2016 private placement of 45,833,334 common shares at $0.48 per share, generating $22.0 million of gross proceeds and $21.87 million of net financing cash flow. Shares outstanding increased from 116.3 million to 162.2 million.
- Operating expenses declined 5% year over year, primarily because of lower share-based compensation, wages and benefits, consulting fees and professional fees. Mineral property exploration costs increased to $2.65 million from $2.38 million.
- The net loss increased largely because 2016 included a $794,169 unrealized derivative loss and a $340,551 foreign-exchange loss, compared with an $800,000 derivative gain and $990,690 foreign-exchange gain in 2015.
- The October 2016 study reduced estimated capital costs by 34%, or $950 million, to $1.84 billion, reduced process operating costs by 28% to $7.48 per ton, and reduced estimated all-in costs to $1,247 per ounce compared with the September 2013 feasibility study.
- No material exploration drilling was completed in 2014, 2015 or 2016; 2016 activities focused on environmental baseline work, metallurgical testing and engineering optimization.
Guidance, Outlook, Risks and Unusual Items
The board approved a 2017 budget of $6.3 million. Planned work includes improving the resource block model, evaluating alternative production schedules, conducting metallurgical testing and optimizing the processing flowsheet and recovery assumptions. Preliminary work indicated potential net present value benefits of up to $280 million from block-model improvements and $100 million from recovery improvements, but management stated that these benefits are not assured.
Management believed year-end cash was sufficient to complete the anticipated 2017 work program and general and administrative costs through 2017. The company expects continued losses and will require significant additional financing to advance permitting, development and any future mine construction. Potential sources include equity financing, debt and a strategic alliance.
- The October 2016 study indicated only a minimal positive return at a $1,250-per-ounce gold price; management stated the project was not commercially viable at the gold price prevailing in March 2017.
- The project requires substantial additional capital beyond the $22.0 million 2016 placement, including estimated project capital costs of $1.84 billion under the October 2016 study.
- Development depends on future engineering, metallurgical results, permitting and environmental review, including a required federal Environmental Impact Statement under NEPA.
- Resource and reserve estimates are subject to geological, metallurgical, price and operating assumptions and are reported under Canadian standards that are not directly comparable with SEC Industry Guide 7 standards. Inferred resources do not demonstrate economic viability.
- Key risks include gold-price volatility, financing availability, dilution, permitting and environmental requirements, title and surface-access issues, lease and claim-maintenance obligations, seasonal Alaska operations, foreign-exchange exposure and execution risk.
- The Toronto Stock Exchange had commenced a remedial delisting review following the company’s reliance on a financial-hardship exemption for the December 2016 placement. The filing did not provide the final outcome.
- The company believed it was likely a passive foreign investment company for U.S. tax purposes in 2016, potentially creating adverse tax consequences for U.S. shareholders.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor expressed an unqualified opinion on the financial statements but did not attest to internal control effectiveness.
Facts an Investor Should Verify
- Whether the $6.3 million 2017 work program produces measurable improvements in recovery, the resource model, project economics and net present value.
- The current gold-price sensitivity of the Livengood project, including whether the project remains economically viable after updated costs, recoveries and permitting assumptions.
- The company’s cash balance after the $14.69 million derivative payment made in January 2017 and the expected cash runway beyond 2017.
- The terms, dilution effects and governance rights associated with the December 2016 placement, including the holdings of Paulson, Tocqueville and AngloGold.
- The outcome of the TSX delisting review and the company’s continued eligibility for its exchange listings.
- The reconciliation of Canadian NI 43-101 resource and reserve disclosures with U.S. reporting requirements and the underlying technical report and sensitivity analyses.