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International Tower Hill's Economic Study Shows Livengood Is "Highly Leveraged" To Gold Price, Cost Reduction Review Continues

Jul. 24, 2013 5:07 PM ETTHM
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International Tower Hill Mines (TSE:ITH) (NYSE MKT:THM) has reported the results of a feasibility study for its Livengood gold project in Alaska that it says shows just how much the asset is highly leveraged to the gold price.

The economics, using a trailing three-year gold price of $1,500 an ounce, show a "minimal positive return", according to the company's statement released late Tuesday.

On a conference call Wednesday morning, CEO Don Ewigleben emphasized the "substantial" 20 million ounce size of the gold asset, and the favourable infrastructure and jurisdiction, saying that though the project is not economically feasibile in today's gold market, the company believes the project will be a "win" and economically viable in an "acceptable timeframe".

The chief executive said that gold prices are expected to go up again, as they had in the past. Until then, the company is focused on preserving the cash and its asset, and is continuing to pursue opportunities to reduce costs, as well as scenarios that would require less initial capex. The price of gold plummeted 23 per cent in the second quarter alone.

"We are not alone in recognizing the potential of the project, as we are in continuous discussions with possible joint venture and strategic alliance partners regarding funding the development," said Ewigleben on the call, adding that the sheer size of the project alone is enough to build interest, especially when combined with the good infrastructure and mining-friendly community.

The Livengood gold project is connected by an existing paved highway 70 miles northwest of the town of Fairbanks in Central Alaska, and is proximal to power in an active mining district that has been mined for gold since 1914.

Using a $1,500 an ounce gold price, net present value was calculated at negative $440 million at a 5 per cent discount rate, with a 1.7 per cent internal rate of return (IRR), and a payback period of 10.8 years. Initial capex was estimated at $2.79 billion, while sustaining capital was pegged at $667 million.

The company said "all-in" costs, which includes capex and operating costs, were calculated at $1,474 an ounce on an after tax basis for the 14-year life of the mine.

The economics are based on an operating scenario of a 100,000 ton per day project, producing eight million ounces of gold over 14 years, with anticipated average annual production of 698,500 ounces in the first five years.

The company notes that using gold prices of $1,700 an ounce, a price that is not too distant in memory, takes the economics of the project to a net present value of $336 million, and a 7.3 per cent IRR, with a payback period of 7.2 years. The numbers only improve as the gold price increases, according to a sensitivity analysis included with the feasibility study.

"The results of the feasibility study confirm that the Livengood project is a large, well proven resource that can significantly benefit from economies of scale to generate good economic returns," said Ewigleben in the statement.

International Tower Hill said that it believes capital costs can be reduced by looking at mill throughput and production schedules, as a lower mill throughput could boost head grades in early years. It added that there is an opportunity to also expand the in-pit resource through additional drilling.

"We will continue to review opportunities for cost reduction while we preserve cash and the asset while waiting for a better economic environment for gold and maintaining the usability of five years of data that have already been compiled," said the chief executive on the conference call this morning, focused on finding the most optimized program to get the gold out of the ground economically without compromising the resource.

He added that the company boasts one of the largest undeveloped gold resources in the world, as well as one of the most experienced and proven development teams in the industry, especially with Alaska's permitting process, with team members having worked at Fort Knox.

"There are multiple places where we believe we can save money," Ewigleben responded when asked on the call about its plans going forward, which he said included possible reduction in energy costs, as well as operating costs by reducing the amount of cyanide consumption and by mining less than 100,000 tons per day.

International Tower Hill has been in cash containment mode since the beginning of the year, and will continue to preserve cash to allow it to maintain the project well into 2015, according to the release. "We will also be maintaining the necessary environmental baseline activities to move the permitting process forward." At the end of the second quarter, it had about $19.9 million in cash on hand.

The company controls 100 per cent of the project, which holds an estimated 16 million ounces in the measured and indicated category, and other four million ounces in the inferred category, at a cut off grade of 0.3 grams per tonne.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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