International Tower Hill Mines Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013; filed July 31, 2013. ITH is a British Columbia exploration-stage company with a 100% interest in the Livengood Gold Project in Alaska. The company had no producing properties or operating revenue.
Business Context and Project Status
ITH’s activities focused on advancing the Livengood Gold Project through feasibility, metallurgical, process-engineering, geotechnical and environmental-baseline work. The feasibility study was announced July 23, 2013, after quarter-end. At a $1,500 per ounce gold price, the study indicated a 1.7% after-tax IRR and negative $440 million after-tax NPV at a 5% discount rate, demonstrating limited economic robustness at that price.
- Planned operation: 100,000 tons per day open-pit mine with a 14-year operating life.
- Estimated life-of-mine production: approximately 8.1 million ounces of gold; average annual production of approximately 577,600 ounces.
- Estimated initial capital: $2.79 billion; sustaining capital: $893 million; reclamation costs: $353 million.
- Estimated after-tax all-in cost: $1,474 per ounce.
- Proven and probable reserves reported at the $1,500 per ounce price assumption: approximately 10.1 million ounces.
Financial Metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Net loss | $0.6 million | $12.9 million | $4.7 million | $24.4 million |
| Loss per share | $0.01 | $0.15 | $0.05 | $0.28 |
| Cash used in operating activities | Not separately provided | Not separately provided | $9.1 million | $23.5 million |
Margins are not meaningful because the company had no revenue. Six-month operating expenses declined to $11.1 million from $24.7 million, primarily because mineral property expenditures fell to $5.2 million from $17.0 million. The six-month loss benefited from a $5.7 million unrealized gain on the derivative liability, compared with a $0.3 million unrealized loss in the prior-year period.
Financial Position, Liquidity and Obligations
- Cash and cash equivalents were $19.9 million at June 30, 2013, down from $30.2 million at December 31, 2012.
- Working capital was $19.0 million, compared with $27.7 million at year-end 2012.
- Total assets were $76.0 million, including $55.2 million of capitalized acquisition costs.
- Total liabilities were $18.4 million, including a $16.7 million derivative liability. The company reported no other long-term debt or loan obligations.
- Cash used in operations was $9.1 million for the first six months; there were no financing cash flows and no investing cash flows during the period.
- Management expected existing cash to fund non-discretionary project activities and anticipated general and administrative costs through fiscal 2014, but stated that significant additional financing would be required for post-feasibility work, permitting and any mine development.
Material Changes Versus the Prior Comparable Period
- Six-month net loss improved by $19.6 million, from $24.4 million to $4.7 million.
- Quarterly net loss improved by $12.3 million, from $12.9 million to $0.6 million.
- Mineral property expenditures declined 69% for the six-month period and 79% for the quarter as drilling and exploration programs were completed and work shifted toward feasibility and environmental activities.
- Wages and benefits declined because of lower severance costs and reduced personnel; consulting expense also decreased for the six-month period.
- The derivative liability declined from $22.4 million to $16.7 million, producing a $5.7 million non-cash gain. The valuation used an estimated five-year average gold price of $1,441 per ounce at June 30, versus $1,688 at December 31, 2012.
- Shares outstanding remained 98,068,638. Contributed surplus increased by $2.7 million, primarily from stock-based compensation.
Guidance, Outlook and Risks
Management revised 2013 activities to limit spending to essential work in response to lower gold prices. Priorities included completing the feasibility study, environmental baseline work and corporate and compliance obligations. ITH continued to seek a strategic alliance with a larger mining company to help fund future development.
- The project is highly sensitive to gold prices: at $1,600 per ounce, projected after-tax NPV was negative $50 million and IRR was 4.6%; at $1,700 per ounce, NPV was $336 million and IRR was 7.3%.
- Permitting, including the National Environmental Policy Act process, remains necessary before construction. Timing of any construction decision was uncertain.
- Project execution risks include permafrost conditions, construction and liner-placement requirements, infrastructure scale, weather, permitting delays, labor and cost escalation, metallurgical performance and recovery rates.
- Resources and reserves are estimates subject to changes in geology, grades, recovery, mining assumptions and gold prices. Inferred resources do not demonstrate economic viability and may never convert to reserves.
- Failure to obtain financing could require further reductions in discretionary activities and could delay or prevent permitting, development or maintenance of property interests.
- Mineral leases and claims require scheduled payments, fees and work commitments. Total contractual obligations were approximately $19.9 million, including the $16.7 million contingent property payment scheduled for 2016 and subject to revaluation.
- The company identified foreign-exchange, interest-rate, marketable-securities and gold-price risks. A $1 change in the average gold price was estimated to change the derivative liability by $23,148.
Most Important Facts to Verify
- Whether the Livengood feasibility-study economics remain supportable at current and forecast gold prices, particularly the negative NPV at $1,500 per ounce.
- Availability and terms of future financing or a strategic alliance sufficient to fund permitting and the approximately $2.79 billion initial capital requirement.
- Progress, timing and conditions of required federal, state and environmental permits.
- Reliability of the reported reserve estimates, including conversion of resources, metallurgical recoveries and expected production volumes.
- Future revaluation and settlement terms of the $16.7 million derivative liability tied to the average gold price.
- Liquidity runway relative to ongoing cash burn, lease and claim-maintenance obligations, and the company’s stated need for significant additional capital.
- Potential dilution from future equity financings and outstanding options; 7.6 million options were outstanding at June 30, 2013.