International Tower Hill Mines Ltd. — Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
International Tower Hill Mines Ltd. is a British Columbia, Canada exploration-stage company focused on acquiring, exploring and evaluating mineral properties. The company controls a 100% interest in the Livengood Gold Project in Alaska and had no producing properties or operating revenue during the quarter and nine months ended September 30, 2013.
The unaudited interim financial statements were prepared under U.S. GAAP. The company had 98,068,638 common shares outstanding as of November 5, 2013.
Financial Condition and Key Metrics
| Metric | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 |
|---|---|---|
| Revenue | None | None |
| Net loss | $4.1 million | $8.8 million |
| Loss per share | $0.04 | $0.09 |
| Operating expenses | $3.9 million | $14.9 million |
| Mineral property exploration expense | $1.6 million | $6.9 million |
| Cash used in operating activities | Not separately provided | $12.7 million |
| Cash and cash equivalents | Not applicable | $16.6 million at September 30, 2013 |
| Working capital | Not applicable | $16.2 million at September 30, 2013 |
Total assets were $72.6 million, including $55.2 million of capitalized acquisition costs associated with the Livengood project. Total liabilities were $17.8 million, including a $16.7 million derivative liability related to a contingent property acquisition payment. The company reported no long-term debt or loan obligations.
Cash declined by $13.6 million from $30.2 million at December 31, 2012, primarily because of Livengood project expenditures and feasibility-study activities. There were no financing cash flows during the first nine months of 2013, compared with $29.2 million of net financing cash inflows in the comparable 2012 period.
Margins and operating profitability are not meaningful because the company had no revenue and remained in the exploration stage.
Material Changes Versus the Prior Comparable Period
- Third-quarter net loss decreased to $4.1 million from $25.0 million in Q3 2012; nine-month net loss decreased to $8.8 million from $49.4 million.
- Mineral property expenditures fell to $1.6 million in the quarter and $6.9 million for nine months, compared with $13.4 million and $30.4 million, respectively, in the prior-year periods. The company completed major exploration and drilling programs in 2012 and shifted toward feasibility, metallurgical, process-engineering and environmental work.
- Share-based compensation declined to $0.9 million in Q3 and $3.7 million for nine months, compared with $4.2 million and $7.2 million, respectively, in 2012.
- The nine-month results included a $5.7 million unrealized gain from revaluing the derivative liability, compared with a $4.3 million unrealized loss in the prior-year period. The liability decreased from $22.4 million at December 31, 2012 to $16.7 million at September 30, 2013.
- The company recognized a $0.3 million impairment of available-for-sale securities during the first nine months of 2013.
- Capitalized acquisition costs remained unchanged at $55.2 million, with no additions during the nine-month period.
Outlook, Management Commentary, Risks and Contingencies
The company announced the Livengood feasibility-study results in July 2013 and filed the related technical report in September. Using a trailing three-year gold price of $1,500 per ounce, the study indicated an after-tax internal rate of return of 1.7%, described by management as a minimal positive return. The filing states that the project was not commercially viable at the gold price of $1,307 per ounce reported on November 5, 2013.
Management is evaluating potential improvements, including mine modeling and production scheduling, mill throughput and project scale, additional metallurgical testing, resource expansion drilling, improved recovery, and reductions in reagent, energy and capital costs. The company planned to continue essential environmental baseline work and other activities needed to support future permitting while limiting discretionary spending.
The company expects to incur losses for the foreseeable future. Management stated that existing cash was expected to fund non-discretionary Livengood activities and anticipated general and administrative costs through fiscal 2014 and well into 2015. However, significant additional financing will be required for post-feasibility activities, permitting and any mine development. The company was pursuing a strategic alliance with a larger mining entity and considering other financing alternatives.
- A contingent payment of $16.7 million is scheduled for December 2016, subject to revaluation based on future gold prices. The liability changes by approximately $23,148 for each $1 change in the relevant average gold price.
- Total disclosed contractual obligations were $20.1 million, including the contingent property payment, mineral leases, government fees and office and equipment leases. The schedule excludes required work expenditures and potential production royalties.
- Failure to make required lease payments, government fees or work expenditures could result in the loss or forfeiture of mineral property interests.
- The project requires regulatory and environmental permits, including the NEPA process. Delays, additional requirements or unfavorable environmental outcomes could increase costs or prevent development.
- Project economics are highly sensitive to gold prices, resource estimates, metallurgical recoveries, capital and operating costs, permitting, title and surface-access issues, and availability of financing.
- The company stated that it has been a passive foreign investment company, or PFIC, for U.S. federal income tax purposes in recent years and expects to continue to be a PFIC.
- Disclosure controls and procedures were deemed effective as of September 30, 2013, and no material changes in internal control over financial reporting were reported.
Most Important Facts for Investors to Verify
- Whether the Livengood Gold Project can achieve acceptable economics at prevailing and forecast gold prices after the feasibility study showed only a 1.7% after-tax IRR at $1,500 per ounce.
- The company’s remaining cash runway, future annual spending and timing and terms of any required equity financing, strategic alliance or other funding.
- The valuation, payment terms and gold-price sensitivity of the $16.7 million derivative liability due in 2016.
- Whether proposed cost reductions, metallurgical improvements, resource expansion and project-scaling opportunities materially improve project economics.
- The status and cost of environmental baseline work, permitting and potential NEPA-related requirements.
- The validity and continuity of mineral leases, unpatented claims, title and required surface-access rights.
- The distinction between Canadian mineral-resource disclosures and SEC reserve standards, particularly the uncertainty associated with inferred resources.
- Potential shareholder dilution from future equity issuances and outstanding stock options; 6.7 million options were outstanding at September 30, 2013.