International Tower Hill Mines Ltd. — Q2 2014 Form 10-Q Summary
Business context and reporting period
International Tower Hill Mines Ltd. is a British Columbia exploration-stage company focused on acquiring, exploring and evaluating mineral properties. It controls a 100% interest in the Livengood Gold Project in Alaska and had no producing properties or operating revenue. The filing covers the quarter and six months ended June 30, 2014; amounts are in U.S. dollars and the interim financial statements are unaudited.
Financial position and operating metrics
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Revenue | None | None |
| Net loss | $1.43 million | $4.94 million |
| Loss per share | $0.01 | $0.05 |
| Comprehensive loss | $1.13 million | $5.09 million |
| Mineral property exploration expense | $0.78 million | $1.40 million |
- Cash and cash equivalents were $9.26 million at June 30, 2014, down from $13.93 million at December 31, 2013. Working capital was $9.23 million, compared with $12.70 million at year-end.
- Total assets were $64.95 million, including $55.20 million of capitalized acquisition costs related to the Livengood Project.
- Total liabilities were $15.95 million, including a $15.50 million derivative liability tied to a contingent Livengood property purchase payment. The liability is expected to be payable in December 2016 and is revalued based on gold-price assumptions.
- Shareholders’ equity was $48.99 million. The company had 98,068,638 common shares outstanding and issued no shares during the first six months.
- Cash used in operating activities was $4.50 million for the first six months, versus $9.05 million in the prior-year period. No cash was provided by financing activities.
- The company has no operating margins or debt-based financing to report because it has no revenue-generating operations. Its principal funding source historically has been equity financing.
Material changes versus the prior comparable period
- Second-quarter net loss increased to $1.43 million from $0.64 million, primarily because the prior-year period benefited from a larger $4.2 million unrealized derivative gain versus a $0.8 million gain in 2014, as well as a 2014 foreign-exchange loss.
- Six-month net loss increased to $4.94 million from $4.71 million. The change reflected a $0.7 million unrealized derivative loss in 2014 versus a $5.7 million gain in 2013, partly offset by substantially lower operating and exploration spending.
- Six-month mineral property expenditures declined to $1.40 million from $5.25 million after completion of the 2013 feasibility study and a shift toward essential environmental work and project optimization.
- Six-month stock-based compensation declined to $0.91 million from $2.75 million, although the company granted 2.48 million options during the period compared with 613,000 in the prior-year period.
- Full-time staff was reduced by approximately 30% effective January 1, 2014 as part of the spending-reduction program.
- The derivative liability increased from $14.80 million at December 31, 2013 to $15.50 million at June 30, 2014, based on an estimated average gold price of $1,391 per ounce versus $1,360.
Guidance, outlook, management commentary and risks
- Management was reviewing mine-plan, metallurgical, power-supply, camp and stockpile-management alternatives intended to reduce costs or improve project economics. Environmental baseline work continued to support future permitting.
- The company expected to spend approximately $8 million during fiscal 2014 on environmental baseline activities, project optimization and general and administrative requirements; approximately $3.9 million had been spent by June 30.
- Management believed existing cash would fund non-discretionary Livengood activities and anticipated general and administrative costs through 2014 and well into 2015, but stated that significant additional financing would be required for further permitting, development or mine construction.
- The company was considering a strategic alliance and other financing alternatives. If additional financing cannot be obtained, discretionary Livengood activities may need to be reduced after 2014.
- The 2013 feasibility study indicated only a minimal positive return at a gold price of $1,500 per ounce; management stated that the project was not commercially viable at the gold price of approximately $1,291 per ounce reported as of August 4, 2014.
- Key risks include gold-price volatility, inability to obtain financing, permitting and environmental delays, uncertain resource estimates and metallurgy, title and surface-access issues, lease and claim-maintenance obligations, foreign-exchange exposure, and potential dilution from future equity financings.
- Contractual obligations totaled $18.36 million, including the $15.50 million contingent property payment, mineral-property lease obligations, mining-claim fees, and office and equipment leases. Required work expenditures and potential royalties were excluded from this total.
- The company disclosed that it expected to remain a passive foreign investment company for U.S. federal income-tax purposes, which may result in adverse tax consequences for U.S. holders.
Most important facts for investors to verify
- Whether the Livengood Gold Project can be economically improved or become viable at prevailing and projected gold prices.
- The timing, valuation and funding of the $15.50 million contingent property payment due in December 2016.
- The company’s ability to obtain additional financing or a strategic partner before cash resources are depleted.
- The assumptions supporting the project’s resource estimates, feasibility study, metallurgy, mine plan and permitting schedule.
- Whether required lease payments, claim fees, work commitments and environmental obligations can be maintained without forfeiting property rights.
- The effect of future equity issuance and stock-option activity on shareholder dilution.