International Tower Hill Mines Ltd. — Q1 2014 Form 10-Q Summary
Business context and reporting period
International Tower Hill Mines Ltd. is a British Columbia exploration-stage company with a 100% interest in the Livengood Gold Project in Alaska. The company has no revenue-generating operations and had not commenced commercial production as of March 31, 2014. This unaudited Form 10-Q covers the three months ended March 31, 2014, with comparison to the three months ended March 31, 2013. The company had 98,068,638 common shares outstanding.
Financial condition and key metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | None | None | No operating revenue |
| Net loss | $(3.51) million | $(4.06) million | Loss narrowed by approximately $0.55 million |
| Loss per share | $(0.04) | $(0.04) | No change |
| Operating expenses | $2.31 million | $6.00 million | Decreased by approximately $3.68 million |
| Cash used in operating activities | $2.05 million | $4.94 million | Use decreased by approximately $2.89 million |
| Cash and cash equivalents at period-end | $11.38 million | $24.68 million | Prior-year comparative period balance was higher |
| Working capital | $10.86 million | Not clearly provided in the filing for Q1 2013 | From $12.70 million at Dec. 31, 2013 |
Gross margin and operating margin are not meaningful because the company has no revenue. Comprehensive loss was $3.96 million in Q1 2014, compared with $4.62 million in Q1 2013. Total assets were $66.91 million at March 31, 2014, including $55.20 million of capitalized acquisition costs. Total liabilities were $17.08 million, including a $16.30 million derivative liability. The filing does not report conventional interest-bearing debt.
Material changes versus the prior comparable period
- Mineral property exploration expenditures fell to $615,162 from $2.79 million, primarily because the 2013 feasibility study had been completed and 2014 activities focused on environmental baseline work and project optimization.
- Wages and benefits declined to $1.25 million from $1.88 million. Full-time staff was reduced by approximately 30% effective January 1, 2014.
- Share-based compensation declined to $618,582 from $1.58 million, despite the grant of 2.48 million stock options in Q1 2014 versus 613,000 in Q1 2013.
- Other expense was $1.20 million versus other income of $1.93 million in the prior period, principally because the derivative liability generated a $1.50 million unrealized loss in Q1 2014 versus a $1.50 million unrealized gain in Q1 2013.
- The derivative liability increased from $14.80 million at December 31, 2013 to $16.30 million at March 31, 2014. Its value is tied to the average gold price and is expected to be payable in December 2016, subject to revaluation.
- No shares were issued and no financing cash flows occurred during Q1 2014.
Cash flow, liquidity, outlook, and risks
Cash declined by approximately $2.55 million during the quarter to $11.38 million. Management expected existing cash to fund non-discretionary Livengood activities and anticipated general and administrative costs through fiscal 2014 and well into 2015. The company expected to spend approximately $8 million during fiscal 2014 on environmental baseline activities, project optimization and required corporate matters; approximately $1.4 million had been spent on these activities by March 31, 2014.
Management stated that significant additional financing will be required for continued post-feasibility activities, permitting and any future mine development. The company was seeking a strategic alliance and evaluating other financing options, but there was no assurance that financing would be available on acceptable terms. If financing cannot be obtained, discretionary activities may need to be reduced.
The 2013 feasibility study indicated only a minimal positive return at a gold price of $1,500 per ounce. Management disclosed that the project was not commercially viable at the reported gold price of approximately $1,281 per ounce on May 2, 2014, although the company was evaluating mine-plan changes and cost-reduction opportunities. No production decision had been made.
Contractual obligations totaled approximately $19.54 million, including $16.30 million associated with the contingent Livengood property purchase payment, $2.46 million of mineral property lease obligations, $534,660 of mining claim government fees and $249,214 of office and equipment lease obligations. The schedule excludes certain required work expenditures and potential royalties.
Principal risks include the absence of revenue and production, dependence on gold prices, the need for substantial additional financing, uncertainty of resource estimates and project economics, permitting and environmental requirements, title and surface-access risks, potential forfeiture of mineral interests if obligations are not met, foreign-exchange exposure, and possible dilution from future equity financings. The company also stated that it expects to be a passive foreign investment company for U.S. tax purposes. Disclosure controls and procedures were assessed as effective as of March 31, 2014, with no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Livengood Gold Project can become economically viable at prevailing or forecast gold prices after proposed optimization efforts.
- The company’s ability to secure strategic-partner or other financing before cash resources become insufficient.
- The valuation, payment terms and future remeasurement sensitivity of the $16.30 million derivative liability.
- Whether environmental baseline work and required lease, claim and permitting expenditures will remain within the stated cash plan.
- The reliability and regulatory comparability of Livengood resource estimates, particularly inferred resources, which are not demonstrated to have economic viability.
- Potential dilution from future equity issuances and the effect of gold-price, foreign-exchange and permitting changes on liquidity and project value.