International Tower Hill Mines Ltd. — Q2 2016 Form 10-Q Summary
Business context and reporting period
International Tower Hill Mines Ltd. is a British Columbia corporation in the exploration stage. It acquires, explores and evaluates mineral properties and controlled a 100% interest in the Livengood Gold Project in Alaska as of June 30, 2016. The filing covers the three and six months ended June 30, 2016; financial statements are unaudited and presented in U.S. dollars under U.S. GAAP.
The Company had 116,313,638 common shares outstanding as of June 30, 2016 and August 2, 2016. It has no revenue-generating operations.
Financial condition and key metrics
| Metric | Q2 2016 / June 30, 2016 | Comparable period / December 31, 2015 |
|---|---|---|
| Revenue | No revenue | No revenue |
| Net loss | $2.1 million for the quarter; $4.6 million year to date | $2.0 million and $2.7 million, respectively |
| Loss per share | $0.02 for the quarter; $0.04 year to date | $0.02 and $0.03, respectively |
| Operating expenses | $2.0 million for the quarter; $3.7 million year to date | $1.9 million and $3.4 million, respectively |
| Cash and cash equivalents | $2.9 million | $6.5 million at year-end 2015 |
| Working capital | Deficit of $11.9 million | $6.2 million surplus at year-end 2015 |
| Total assets | $58.5 million | $61.9 million at year-end 2015 |
| Total liabilities | $15.2 million | $14.4 million at year-end 2015 |
| Capitalized acquisition costs | $55.2 million | $55.2 million at year-end 2015 |
Cash used in operating activities was $3.9 million for the six months ended June 30, 2016, compared with $3.1 million in the comparable 2015 period. Cash decreased by $3.6 million during the first six months of 2016, ending at $2.9 million. There were no investing or financing cash flows in either comparative period.
Mineral property exploration expenditures were $1.2 million in the second quarter and $2.0 million year to date, compared with $0.8 million and $1.2 million, respectively, in 2015. No meaningful margin analysis is applicable because the Company has no operating revenue.
Material changes versus the prior comparable period
- Six-month net loss increased to $4.6 million from $2.7 million, primarily because of higher Livengood exploration costs, an $0.8 million unrealized derivative loss versus a $0.1 million gain, and a $0.1 million foreign exchange loss versus a $0.6 million gain.
- Second-quarter net loss was broadly stable at $2.1 million compared with $2.0 million, despite higher exploration spending, because foreign exchange results improved and other expense was lower.
- Six-month exploration spending increased by approximately $0.7 million, primarily due to a multi-phase metallurgical test program and continued environmental baseline studies.
- Consulting, professional fees, investor relations costs and stock-based compensation declined from the prior-year period as management reduced spending and granted no stock options during the first half of 2016.
- Cash declined approximately $3.6 million from year-end 2015, while the derivative liability was reclassified as current and increased from $13.9 million to $14.7 million.
- Share count and share capital were unchanged; no shares were issued during the first six months of 2016.
Guidance, outlook, risks and unusual items
Management stated that available funds were sufficient to complete the anticipated 2016 work plan, including ongoing test programs and engineering work, and to continue operations until at least June 30, 2017. The Company is advancing a Throughput Rationalization Study intended to evaluate engineering and metallurgical opportunities and potentially reduce future mine construction and operating costs.
The most significant liquidity issue is a derivative-linked additional purchase payment estimated at $14.7 million and due January 12, 2017. The amount is based on the five-year average gold price and is payable in connection with the 2011 acquisition of mining claims and related rights. The obligation significantly exceeds available cash. The Company expects to require substantial additional financing and is also considering a strategic alliance.
If the payment is not made, the Company has 30 days to cure the default. If it cannot cure the default, the underlying claims may be placed in trust for sale, with the Company potentially liable for any shortfall. Management believes sale proceeds would likely be sufficient, but this outcome is not assured.
The Company expects continued operating losses and has identified financing availability, gold prices, permitting, resource estimates, metallurgy and recovery, property title, lease obligations, environmental requirements, market conditions and the ability to maintain project rights as material risks. Failure to obtain financing could require reductions in discretionary project activities and creates substantial uncertainty regarding the Company’s ability to continue as a going concern.
Contractual obligations totaled $17.6 million, including the $14.7 million January 2017 payment, approximately $2.2 million of mineral property lease obligations and approximately $0.7 million of mining claim government fees. These amounts exclude required work expenditures and potential royalties other than annual minimum royalties.
The Company disclosed that it has been a passive foreign investment company for U.S. federal income tax purposes in recent years and expects to remain one. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the Company obtained financing or another funding arrangement sufficient to cover the $14.7 million payment due January 12, 2017.
- Subsequent fair-value changes in the derivative liability, which depend substantially on the projected average gold price.
- Cash burn, remaining liquidity and any resulting reductions in Livengood project activities.
- Results of the Throughput Rationalization Study and related metallurgical and engineering work.
- Progress toward permitting, environmental baseline work and any updated feasibility or economic assessment.
- The legal status and saleability of the claims that could be transferred or sold following a payment default.
- The distinction between Canadian mineral resource disclosures and SEC reserve standards, particularly for inferred resources, which the filing states may never become economically or legally mineable.