Business Context and Reporting Period
International Tower Hill Mines Ltd. is a British Columbia, Canada exploration-stage mining company focused on the 100%-owned Livengood Gold Project in Alaska. The unaudited Form 10-Q covers the three months ended March 31, 2013, with comparative results for March 31, 2012. The company had 98,068,638 common shares outstanding as of May 6, 2013 and had not commenced commercial production.
During the quarter, the company continued feasibility-study activities, including metallurgical testing, geotechnical and infrastructure drilling, environmental baseline work, engineering, and analysis of alternative processing and mine-plan concepts.
Financial Metrics
| Metric | Q1 2013 | Comparable Period or Date |
|---|---|---|
| Revenue | No operating revenue | No operating revenue in Q1 2012 |
| Net loss | $4.1 million | $11.4 million in Q1 2012 |
| Loss per share | $0.04 | $0.13 in Q1 2012 |
| Operating expenses | $6.0 million | $9.2 million in Q1 2012 |
| Mineral property exploration expenditures | $2.8 million | $5.1 million in Q1 2012 |
| Cash used in operating activities | $4.9 million | $13.8 million in Q1 2012 |
| Cash and cash equivalents | $24.7 million | $30.2 million at December 31, 2012 |
| Working capital | $23.1 million | $27.7 million at December 31, 2012 |
| Total assets | $80.8 million | $86.7 million at December 31, 2012 |
| Total liabilities | $23.3 million | $26.1 million at December 31, 2012 |
| Derivative liability | $20.9 million | $22.4 million at December 31, 2012 |
| Shareholders’ equity | $57.5 million | $60.5 million at December 31, 2012 |
Margins and operating profitability are not meaningful because the company has no revenue-generating operations. The company reported no cash financing or investing activity during Q1 2013. It has no other long-term debt or loan obligations, but its derivative liability represents a contingent payment obligation tied to the average gold price.
Material Changes Versus the Prior Comparable Period
- Net loss decreased by approximately $7.4 million, primarily because exploration spending declined and the derivative liability generated a $1.5 million unrealized gain, compared with a $2.4 million unrealized loss in Q1 2012.
- Mineral property exploration expenditures declined by approximately $2.3 million as the company completed current exploration and drilling programs and shifted toward feasibility-study work.
- Wages and benefits decreased, excluding stock-based compensation, because of reduced personnel. Consulting costs also declined excluding stock-based compensation.
- Cash used in operating activities improved by approximately $8.8 million, although cash declined by $5.5 million during the quarter to $24.7 million.
- No shares were issued during the quarter. The company granted 613,000 stock options and recognized $1.6 million of stock-based compensation.
- The derivative liability declined by $1.5 million to $20.9 million, reflecting a lower estimated average gold price. The liability is sensitive to gold-price assumptions.
Guidance, Outlook, Risks and Unusual Items
Management expected the feasibility study to be completed in mid-2013. The company revised its 2013 work program in response to lower gold prices, limiting spending primarily to base-case feasibility-study engineering, environmental baseline work, permitting documentation, corporate activities, and compliance matters. Management was evaluating alternative mill and heap-leach concepts and potential stockpile strategies to improve project economics.
Management stated that existing cash was expected to fund non-discretionary Livengood activities and anticipated general and administrative costs through fiscal 2014, and that the third-quarter 2012 financing was expected to fund planned 2013 activities and feasibility-study completion. However, significant additional financing will be required for post-feasibility activities, permitting, development, and any mine construction. Management was considering a strategic alliance and other financing alternatives.
- The company has no operating revenue and expects continued losses for the foreseeable future.
- The Livengood Project remains in the exploration stage; mineral resources are not mineral reserves and do not demonstrate economic viability. The filing cautions that Canadian resource disclosures, including inferred resources, may not be comparable with U.S. SEC reserve disclosures.
- Future project economics depend materially on gold prices, recovery rates, capital and operating costs, permitting, financing, infrastructure, environmental requirements, and the accuracy of resource estimates.
- Failure to obtain financing could require reductions in discretionary activities and could delay or prevent feasibility, permitting, development, or production.
- Contractual obligations totaled approximately $23.9 million, including $20.9 million related to the Livengood property purchase payable in December 2016, $2.4 million of mineral property lease obligations, $0.5 million of mining claim government fees, and $0.1 million of office and equipment leases. The property-purchase amount will be revalued each reporting period.
- Title to certain claims and leases may be subject to defects or challenges, and failure to make required payments or expenditures could result in loss of property interests.
- The company identified exposure to interest-rate, Canadian-dollar foreign-exchange, marketable-security, and gold-price risks. A $1 change in the average gold price would change the derivative liability by approximately $23,148.
- The company stated that it was likely a passive foreign investment company for U.S. federal income-tax purposes, which may create adverse tax consequences for U.S. holders.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2013, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the feasibility study was completed on the targeted mid-2013 schedule and the resulting capital, operating, recovery, and permitting assumptions.
- Whether gold prices and updated price assumptions support economic viability and the $20.9 million contingent property payment.
- The company’s cash-burn rate, remaining liquidity, and timing and terms of required additional financing or a strategic alliance.
- Whether Livengood resources can be converted into SEC-compliant reserves and ultimately support a production decision.
- The status of environmental baseline work, permitting, surface access, mineral-title verification, and lease-maintenance obligations.
- The potential dilution from the 8,993,000 outstanding stock options and any future equity financing.