Business Context and Reporting Period
International Tower Hill Mines Ltd. filed an unaudited Form 10-Q for the three months ended March 31, 2015. The British Columbia company was an exploration-stage mineral company with a 100% interest in the Livengood Gold Project in Alaska. It had no revenue-generating operations and was focused on acquiring, exploring and evaluating mineral properties.
The company had 116,313,638 common shares outstanding as of May 4, 2015. Financial statements were prepared under U.S. GAAP and reported in U.S. dollars.
Financial Performance and Position
| Metric | Q1 2015 | Comparable period or date |
|---|---|---|
| Revenue | No revenue | No revenue-generating operations |
| Net loss | $636,495 | Q1 2014: $3,510,319 loss |
| Loss per share | $0.01 | Q1 2014: $0.04 |
| Comprehensive loss | $1,672,073 | Q1 2014: $3,960,848 |
| Operating expenses | $1,555,106 | Q1 2014: $2,311,249 |
| Cash used in operating activities | $1,150,492 | Q1 2014: $2,054,686 |
| Cash and cash equivalents | $11,294,428 | December 31, 2014: $13,521,473 |
| Working capital | $11,013,768 | December 31, 2014: $12,614,361 |
| Total assets | $66,709,737 | December 31, 2014: $69,004,700 |
| Derivative liability | $14,500,000 | December 31, 2014: $14,700,000 |
There were no cash flows from financing or investing activities during the quarter. Capitalized acquisition costs remained $55,204,041. Total shareholders’ equity was $51,753,169 at March 31, 2015. The filing does not present a meaningful operating margin because the company had no revenue.
Material Changes Versus Prior Comparable Period
- Net loss improved by approximately $2.9 million, primarily because Q1 2014 included a $1.5 million unrealized derivative loss, whereas Q1 2015 included a $200,000 unrealized derivative gain.
- Operating expenses declined approximately 33%, reflecting lower mineral property exploration, wages and benefits, professional fees and share-based compensation.
- Exploration expenditures decreased to $401,330 from $615,162, mainly because less environmental baseline work was performed.
- Cash used in operating activities declined to $1,150,492 from $2,054,686. Cash decreased $2,227,045 during the quarter, including an approximately $1.1 million unfavorable foreign-exchange effect.
- Foreign-exchange gain increased to $702,255 from $284,129, while the company recorded a $1,027,199 translation loss in other comprehensive income.
- The company granted 2,105,200 stock options and recorded $269,712 of stock-based compensation, compared with 2,480,000 options and $618,582 of compensation expense in Q1 2014.
- There were no common-share issuances during the quarter.
Outlook, Risks, Contingencies and Unusual Items
Management was conducting multi-phase metallurgical, field and engineering work at Livengood to validate potentially higher calculated head grades and evaluate reductions in capital and operating costs. Planned work included optimization of gravity recovery, grind size, reagent consumption, leach retention time and recoveries by rock type. The company stated that potential cost savings and higher grades had not been validated and might not be realized.
The company anticipated spending approximately $10 million during fiscal 2015 on metallurgical work, project engineering, environmental baseline activities and general and administrative expenses. Management believed existing cash would fund the anticipated 2015 work plan and general and administrative costs through 2015 and well into 2016, but stated that significant additional financing would be required for continued operations, the January 2017 contingent payment and any mine development.
The derivative liability relates to a contingent purchase payment based on the five-year average gold price. It was estimated at $14.5 million at March 31, 2015 and is scheduled for payment in January 2017. The liability changes with gold-price estimates; the filing states that each $1 change in the average daily gold price changes the liability by $23,148.
Contractual obligations totaled $17,581,309, including the $14.5 million contingent payment, mineral property lease obligations, mining claim fees and office and equipment leases. The obligations exclude certain required work expenditures and potential royalties.
Principal risks include the absence of revenue, continuing operating losses, the need for additional financing, gold-price volatility, uncertainty regarding resource estimates and metallurgical results, permitting and environmental requirements, property-title risks, foreign-exchange exposure and the possibility that exploration assets will not support economically recoverable reserves. The company cautioned that Canadian resource classifications, including inferred resources, may not constitute SEC-compliant reserves or demonstrate economic viability.
Karl Hanneman became Chief Operating Officer on March 26, 2015. He holds an interest in AN Gold Mines, a recipient of part of the January 2017 contingent payment; the company stated that he was excluded from related discussions and that future arrangements would be subject to Audit Committee review. The filing also disclosed that former CFO Tom Yip was providing transitional consulting services while the company searched for a replacement.
Management reported effective disclosure controls and procedures as of March 31, 2015, with no material changes in internal control over financial reporting during the quarter. The company stated that it expects to remain a passive foreign investment company for U.S. federal income tax purposes.
Facts an Investor Should Verify
- Whether metallurgical testing confirms the reported higher head grades, recoveries and potential capital or operating cost reductions.
- The company’s ability to fund the approximately $10 million 2015 work program and operations beyond 2016 without dilutive or unfavorable financing.
- The valuation, funding source and final amount of the $14.5 million January 2017 contingent payment, which is sensitive to gold prices.
- The status of permitting, environmental baseline work and required mineral lease, claim and government payments.
- Whether the $55.2 million of capitalized acquisition costs remain recoverable through future development, profitable production or disposition.
- The economic viability of the Livengood Project and the distinction between Canadian mineral resources and SEC-compliant proven or probable reserves.
- The impact of foreign-exchange movements, gold prices and related-party considerations involving the COO’s interest in AN Gold Mines.