International Tower Hill: Picking Up the Pace

by: David Zurbuchen

International Tower Hill Mines (NYSEMKT:THM) recently announced up to C$105.4 million in equity financings in a serious attempt to pick up the pace at the Livengood project in Alaska. It's not that things have been progressing slowly -- the project went from early stage exploratory drilling in 2007 to preliminary economic assessment earlier this year. That is quite an accomplishment and management rightfully expected the market to recognize the progress.

Well, after many months of little traction in the share price, they finally gave up trying to go at it alone out of frustration at the lack of attention. Although moderately dilutive, the proposed financing will ensure that the money is there to take the project through feasibility and, perhaps just as importantly, that brokers like Cannacord will be on board to help spread the Livengood story to the market going forward.

The story is certainly a solid one. In an announcement last month, the company revealed that a staged heap-leach-only option at Livengood may generate a 7.5% discounted NPV of well over US$1 billion at current gold prices along with an IRR of over 50% based on an initial capital budget of US$638 million. Project development might be possible in an accelerated timeframe due to the property consisting of leased private and State of Alaska Mental Health Trust lands, the presence of nearby infrastructure and a straightforward (open pit heap leach) mining plan.

The company is also contemplating a combined large mill and heap leach operation, which is the scenario we assume in our detailed comparative analysis found below. Although this mining option is more sensitive to lower gold prices due to the significant capital cost of building a mill and tailings impoundment, initial capital expenditures are similar to the heap-leach-only option and would allow for the possibility of funding the expansion through cash flow. The large mill and heap leach mining scenario leads to a calculated NPV of over $2 billion at the current gold price and would see Livengood produce an average 833,000 ounces of gold per year, making it larger than either Detour Lake or Canadian Malartic — the flagship assets of multi-billion dollar market darlings Detour Gold (OTCPK:DRGDF) and Osisko Mining (OSKFF.PK).

Besides the eventual recognition that should come from a positive feasibility study and mine development, International Tower Hill continues to conduct an aggressive exploration program designed to expand the Livengood deposit even further. This effort is being ignored by the market for now, but should the company successfully translate drilled meters to resource tonnage to longer mine life, a substantial near-term upward revaluation in the share price seems inevitable.

Peer Group Comparison

The following series of comparative valuation charts (click to enlarge) illustrate International Tower Hill's relative positioning among a chosen peer group of gold developers.

The above chart illustrates production profile on a gold-equivalent basis. The terminal year represents the average annual production once mines are in operation for the period 2012 and beyond. The stacked gold coins represent the companies that were recently bought out: Brett Resources (PINK:BBRRF) was purchased by Osisko, Terrane Metals by Thompson Creek Metals (TC), and Continental Minerals (OTC:KMKCF) by Jinchuan Group.

Capital cost figures represent remaining capex to be spent, which results in artificially low capex figures for both Great Basin Gold (NYSEMKT:GBG) and Osisko since they have both already spent hundreds of millions of dollars on their respective projects. Also, both Great Basin and Osisko's production figures represent combined production from 2 projects, Hollister and Burnstone for Great Basin and Canadian Malartic and Hammond Reef for Osisko. All the other companies have only one development asset that is in an advanced stage of development.

The above chart clearly shows that Osisko with Canadian Malartic and Hammond Reef (which is estimated at 350,000 ounces of annual gold production starting in 2015) is joined by International Tower Hill and Chesapeake Gold as the Big 3 monster junior gold development projects. In the case of Chesapeake, however, there is the distinct disadvantage of a significantly higher capital cost compared to peers.

The above chart provides 3 data points. The blue bars represent the weighted average mine life of each company's combined operations (since most of the companies have only one development project, you can basically ignore the "weighted average" part). The green line tells us roughly when we should expect the company to brings its mine(s) online -- with its 2015 startup estimate, International Tower Hill's Livengood is one of the last to come online but this would still be a fast pace of development for a mine of this size. Finally, the red line represents an estimate of the production mid-point, which is another way to visually compare project longevity.

The above chart illustrates different valuation measures based primarily around a company's gold-equivalent resource, adjusted for assumed metallurgical recoveries.

Osisko is obviously trading at a significant premium to peers. There are reasons for this (e.g. funds have been raised, permits received, production expected in 2011) but we would argue that at such a valuation level there is very little room for error, and even if everything goes smoothly the upside appears limited to gains resulting from a higher gold price.

On the opposite end of the valuation spectrum we have Continental Minerals, recently sold to a Chinese mining conglomerate for cash at an extremely low valuation. Terrane looks to have been acquired on the cheap as well, but this is a bit deceptive since our valuation includes the Berg project, which is a less advanced molybdenum-copper project that nevertheless makes up about 50% of the company's resource base.

International Tower Hill appears to have room for revaluation to the upside.

The above chart illustrates the total gold-equivalent resource size and grade of each company's projects. With the exception of Great Basin, as a result of its high-grade Hollister project, resource grades are generally similar at 1 gram per tonne gold equivalent or below. Resource size doesn't necessarily tell the whole story because some projects have more of the resources within the pit limits. Indeed, this is one of the more positive aspects of the Livengood project.

The above chart shows distribution of resource base by commodity, revealing the copper-heavy nature of Continental and Terrane and possibly explaining why those two have the lowest valuation among the peer group. International Tower Hill's 100% gold profile can't hurt, and if the company decides to move forward with the project on its own, we should eventually see a premium valuation similar to Detour and Osisko. The last thing we want to see is an $8 all cash offer with gold above $1,300 per ounce!

In the above chart we can see that International Tower Hill is trading in a similar range where Terrane and Brett were acquired, but we think that the 500,000+ ounces per year production profile of the Livengood project should generate a significantly-higher premium in the event of a buyout.

We round out our peer comparison analysis with the above chart illustrating a valuation range for each company based on a discounted cash flow calculation of each company's development projects at various metal prices. As you can see, the three takeover targets did not receive full value for their shares -- not even close. It could be argued that Terrane and Continental Minerals are different animals since copper makes up the bulk of their anticipated future revenue, but even Brett let go of its independence with 80% base case upside still on the table in exchange for shares of Osisko, which currently looks overvalued on a peer comparative basis.

All things considered, a $10 buyout of International Tower Hill would look opportunistic but not without precedent. Hopefully the recent financing and storytelling support from the brokers will help the company realize its full value, which is closer to $18 although that would probably require the company to move Livengood into production on its own. Since management has already indicated that they are not interested in building or operating a mine, we are left with a buyout target somewhere between $10 and $18 per share.

Disclosure: Author is long THM and GBG

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