A GOLDEN OPPORTUNITY 2016 Annual Report
TABLE OF CONTENTS Chief Executive Officer Overview 2 Message from the Chairman 4 Livengood Mining District: A Rich History 6 Environmental Stewardship 8 Mineral Reserves and Resources 10 Corporate Information 12 Financial Statements and MD&A Insert The State of Alaska selected the Livengood Mining District for its mineral potential as part of Alaska's land entitlement received from the federal government after statehood in 1958. During the well-documented 1985 public land use planning process, the State of Alaska identifi ed mining as the highest priority surface use for the Livengood area. Prudhoe Bay Additionally, the Alaska Mental Health Trust Authority (AMHTA), a state agency charged with Red Dog generating revenue to pay for ALASKA mental health services for Alaskans, later selected the LIVENGOOD Livengood area so that royalty Fort Knox revenue from future production Fairbanks would support mental health needs. Pogo Usibelli Thus this combination of the historic mining district at Livengood, the State Anchorage land planning process that prioritizes the area for mining, and the AMHTA ownership Kensington means that the Livengood Gold Juneau Project is well positioned to secure Greens Creek Bristol Bay permitting and development support from key stakeholders. Producing Mines 100mi 200 km COVER PHOTO: Looking northwest toward Money Knob, the core of the Livengood Gold Project.
Largest Gold-Only Reserve in North America Not Wholly Owned by a Major PROVEN & PROBABLE RESERVES (m oz) 10 6 Millions 5 AU - Oz 4 2 Millions Ounces 0 (Pretivm) (Centerra) (Argonaut) (Victoria) Gold) Lake Gold) (ITH) (Midas) (TMAC) Courageous (Sabina) Livengood (Seabridge) (New (New Bay Brucejack Hardrock River Blackwater Stibnite Gulch River Hope MaginoDublin Back Rainy Sources: ITH April 2017 NI 43-101 and public documents. "We believe the Livengood Gold Project's impressive size and favorable location give it strategic value." -Marcelo Kim, ITH Chairman
CHIEF EXECUTIVE OFFICER OVERVIEW Karl Hanneman was named Chief Executive Officer on February 1, 2017. He joined ITH as Livengood Project Manager in May 2010 and most recently served as Chief Operating Officer. He was born and raised in Fairbanks, Alaska, and graduated from the University of Alaska with a B.S. degree in mining engineering. A veteran of Alaska's mining industry, he spent 20 years as a small mine operator and worked for Teck for 12 years, first as Alaska Regional Manager during development of the Pogo Gold Mine and, later, as Director of Corporate Affairs supporting both Pogo and the Red Dog Mine in Northwest Alaska. It is with gratitude that I take this opportunity to mine, now owned by Kinross, which has produced 7 reach out to you as a shareholder of International million ounces with an exemplary environmental record Tower Hill Mines Ltd. (ITH) to share my perspective on from an operation very similar to what we envision at our company's unique and exciting Livengood Gold Livengood. Environmental Manager Denise Herzog Project. ITH controls an incredible gold asset with key contributed greatly to the successful environmental attributes of size, favorable jurisdiction, and proximity baseline collection and permitting of the Pogo Gold to infrastructure. Managed by an experienced Alaska Mine, which has now produced more than 3.5 million team, ITH offers a compelling, highly leveraged gold ounces and also has an exemplary environmental record. investment with a vibrant future. For 2017, the ITH Board has budgeted $6.3 million to Within this annual report, we will provide some insight implement the initial recommendations coming from on the gold market and our project from our newly our 2016 work. These elements include improving the appointed Chairman, Marcelo Kim, give some color precision of the geologic models and block models on the history of the Livengood Mining District since used for production scheduling, as well as several gold was discovered there in 1914, offer thoughts from Environmental Manager Denise Herzog about our phases of metallurgical work to better define the critical commitment to environmental stewardship, and include operating variables of pH, dissolved oxygen, grind the Management Discussion and Analysis (MD&A) from size, and recovery. This work will contribute to our the 2016 10-K report. continued efforts to improve the financial performance of the project. With 783 drill holes helping to define the 9.0 million ounce reserve described in our April 2017 NI-43-101 The ITH team is committed to designing and building report, the quality and size of our gold asset is well a gold mine at Livengood that will contribute greatly documented. But perhaps less well known is the fact to the quality of life in our community and in Alaska. that our location in the Livengood Mining District offers Although we have a demonstrated record of success unique proximity in Alaska to major infrastructure, that helps us earn support, we will not rest on our which will greatly ease the costs and risks of future laurels. We must remain focused on optimizing, development at Livengood. permitting, and operating the Livengood Gold Project from now through eventual closure so that it succeeds I would like to emphasize that we understand the importance of earning the trust and support of on all levels - economically, environmentally, and the Alaska community. After I joined ITH in 2010, socially. Our deep roots in the community demand I asked other industry experts with deep roots in nothing less. the community who share this conviction to come alongside to create a team of professionals with known credibility. Tom Irwin, our most recent CEO and now Senior Advisor, was instrumental in the permitting, development, and early day operation of the Fort Knox Karl Hanneman, CEO
ITH - Impressive Leverage to Gold Price $6,000 ITH - Impressive Leverage to Gold Price AFTER-TAX NPV (US$) After Tax NPV @5% ($M) After Tax NPV @0% ($M) million) $5,000 6,000 $6,000 AFTER-TAX NPV (US$) AFTER-TAX NPV (US$) After Tax NPV @5% ($M) After Tax NPV @0% ($M) Meaningful million) $4,000 $5,000 After Tax NPV @5% ($M) After Tax NPV @0% ($M) $5,000 )/share $20 Meaningful -Tax, $US $4,000 $3,000 4,000 $15 (After )/share $20 $US $20 $ -Tax, US$ $10 -Tax, $2,000 3,000 NPV@5%(After $15 - $3,000 $15 NPV(After US$ US$ -Tax, $5 $10 $1,000 2,000 - NPV@5%(After $10 $2,000 NPV $Project $5 $5 $1,000 $-$1,000 $(5) $- $-$1,250 $1,400 $1,500 $1,600 $1,700 $1,800 $2,000 $2,500 Project $(1,000)$- $- Gold Price (US$/oz) $(5) $(5) $1,250 $1,400 $1,500 $1,600 $1,700 $1,800 $2,000 $2,500 $1,250 $1,400 $1,500 $1,600 $1,700 $1,800 $2,000 $2,500 * $(1,000) Gold Price Change 9% 17% 25% 33% 40% 56% 95% Current $(1,000) Gold Price (US$/oz) NPV (5%)/Market Cap N/A 95%Gold Price (US$/oz) 424% 747% 1,054% 1,648% 3,078% % Upside to NPV (0%)/Market Cap 889% 1,473% 2,054% 2,626% 3,165% 4,210% 6,734% *Gold price of $1,282/oz and ITH market capitalization fixed at $84M (both as of April 20, 2017). Based on financial model used in April 2017 NI 43-101 Based on financial model used in April 2017 NI 43-101 Based on financial model used in April 2017 NI 43-101 The potential for gold prices to increase creates significant upside to the Livengood Project economics and ITH share price. 3
MESSAGE FROM THE CHAIRMAN Marcelo Kim was selected as ITH Board Chair in December of 2016. Mr. Kim has been a Partner at Paulson & Co. Inc. since 2011, where he oversees natural resource investments, specializing in gold, base metals, bulk commodities, and oil & gas. Prior to that, commencing in 2009, he was a generalist analyst covering event arbitrage investment opportunities across broad sectors and capital structures. He currently serves on the board of Midas Gold Corp. He is a graduate of Yale University, where he received a BA in Economics with honors. 2016 was a year marked by extraordinary volatility than 300%, something that has been unprecedented and uncertainty. Amidst a backdrop of weak global in this country's monetary history. Today, as a result of economic growth, low worldwide interest rates, and excessive regulation on the financial industry, over $2 changing tides in the world's political environment, trillion of that money is sitting as bank excess reserves the gold price ended up nearly 9%, which was a far cry at the Federal Reserve and hasn't been lent out. Under from the near 30% peak increase reached in July. ITH's normal conditions, one would have expected that shares were even more volatile, rising nearly 600% printed money to flow into the economy and for that before settling to end the year up a respectable 179%. to have led to high levels of inflation. However, this has This demonstrates the extraordinary leverage that not happened due to a breakdown in the monetary the Livengood Gold Project has to a rising gold price transmission mechanism, with the money multiplier and the potential for investors to recognize that falling by more than 60% over that period. However, the embedded value. new administration seems to be focused on promoting a pro-lending growth strategy. If they are successful Despite this volatility, the ITH team was able to deliver in deregulating the banking industry, leading to more a steady set of results that have set the company on credit creation and lending, there is a good chance for a continued path toward one day becoming one of the $2 trillion powder keg to catch fire, which would North America's largest gold mines. Of these, two are lead to higher levels of inflation than we have today. particularly noteworthy. First, the company released the Under those circumstances, gold prices could rise results of a pre-feasibility study in September which meaningfully, eclipsing the rise that we saw in continued to de-risk several technical aspects of the 2009-2011. project and showed significant economic improvements Amidst a backdrop of conditions that could see higher for the mine as compared to the 2013 study, driving gold prices, ITH offers a compelling investment case. down the after-tax cash flow break-even gold price The Livengood asset is the largest undeveloped gold-by more than $250/oz to $1,231/oz. (ITH April 2017 NI only reserve and resource in North America that is not 43-101). Second, by the end of the year, the company wholly owned by a major mining company. was able to secure financing to make the land payment in January 2017 that secured a site that could be The 9 million ounce reserve is substantial - the used for the project's tailings facility. This removed a total number of ounces discovered by the industry severe market overhang on the company and provided collectively in 2014 and 2015 totals only 7.7 million significantly enhanced flexibility for the Livengood ounces. This lack of discovery puts the size of the project. This progress was all due to the diligent work of Livengood project in context from an industry all the hardworking people at ITH, and I commend every perspective, and also highlights its strategic value one of them for that great effort. (see page 5 chart). Before discussing the exciting opportunity that lies In a time when the mining industry's goal posts are ahead for the company, it is worth contextualizing the constantly being moved, having sanctity of title for macroeconomic picture in the US and what that could company assets has intangible, but significant, value. mean for the future gold price. Since September 2008, Furthermore, Alaska is a highly endowed mining the monetary base in the US has increased by more jurisdiction that hosts some of the world's most mineral- 4
ITH - Impressive Leverage to Gold Price $ 6,000 Gold Discoveries In the future, once we have carefullyAFTER-TAXconsideredNPV (US$) all 200 1990-2015 technical aspects and haveAfter TaxmoreNPV @5%fully($M) engagedAfter Tax NPVwith@0% ($M)the $ 5,000 community and the regulatory agencies on a proposed project configuration, we will be in a position to make 150 a decision to$4,000start the permitting process. In this regard, the fact that most of the land on the Livengood property is owned $3,000 by the Alaska Mental Health Trust Authority and that the State of Alaska designated the 100 land for primary surface use as mineral development Millions Ounces gives usNPV (After - Tax, $ US million) an advantage $2,000 that almost no other company in Alaska or the U.S. has. The project already benefits from management's$1,000 successful track record with 50 mining projects in Alaska, and work will continue with extensive environmental baseline work and local $- community engagement so that one day the company can receive its permit $1,250 while $1,400 still $1,500 maintaining $1,600 $1,700 the $1,800 highest $2,000 $2,500 0 environmental$(1,000)standards. 1990 1995 2000 2005 2010 2015 Gold Price (US$/oz) The Livengood Gold Project could help revitalize Source: SNL Metals & Mining Alaska's economy, which has been adversely affected by the downturn in hydrocarbon prices. The potential rich mines, including Fort Knox (35 air miles away benefits are significant: the mine could potentially from our project), Pogo, and Red Dog. Our proximity employ up to 350 Based Alaskans, on financial invest model used $2.7 in April billion 2017 NI of 43-101 capital to Fairbanks is another distinct advantage - being over the life of the project as estimated in the 2016 PFS, only 70 highway miles away precludes us from having and pay substantial amounts in taxes and royalties to to maintain a camp during operation and allows us to the State of Alaska as well as the Alaska Mental Health have easy access to electric grid power, skilled miners, Trust Authority. While considerable work remains to and mining and other support vendors in the greater be done before those benefits are tangible, ITH is well Fairbanks area that already service both the Fort Knox on its path, and is committed to working with all of its and Pogo mines. stakeholders to create one of North America's premier gold mines. To that extent, I would like to thank all of Combining all of these favorable factors results in a mine the stakeholders of ITH - all of the employees of the that breaks even on an undiscounted basis at $1,231/oz, company, the company's contractors, the board, the very close to the current spot gold price, and requires a local communities, and the government and its interests very modest increase in gold price to $1,441/oz to break - and look forward to updating you soon. even using a 5% discount rate. Significantly, the project exhibits impressive leverage to higher gold prices. If Respectfully, gold prices were to rise to $1,600/oz, the after-tax cash flows from the project would be $1.8 billion, while the 5% NPV rises to $442 million. If gold prices rise to $2,000/ oz, the after-tax project cash flows increase to $3.6 Marcelo Kim billion, while the 5% NPV goes up to $1.5 billion (see Chairman page 3 chart). In early 2017, the board approved management's $6.3 million budget to further work on project cost reduction and de-risking the project, with the guiding principle that the best investment for ITH to make today is in exploring solutions to improve on the project's already strong fundamentals. This year's focus is on the metallurgical recoveries and the geologic model. 5
LIVENGOOD MINING DISTRICT: A RICH HISTORY Gold was fi rst discovered Homestake, Occidental in the gravels of Petroleum, AMAX, Placer Livengood Creek in 1914 Dome, Cambior Inc., and (Brooks, 1916) and led AngloGold Ashanti (USA) to the founding of the Exploration Inc. (AGA). Town of Livengood. In 2006, ITH acquired the Subsequently, more than Livengood Gold Project 500,000 ounces of placer from AGA. gold have been produced. From 1914 through the Fairbanks has had a long 1990s, the primary focus relationship with Livengood was placer operations, since the town began which continue to the as a mining community present day. in the early part of the Photo courtesy of Audrey Parker and Gladys Parker-Blood Collection century. During the 1930s, Historically, prospectors Livengood petitioned the considered Money Knob territorial road commission Livengood Placers, Inc., Yuba Dredge, circa 1950s and the associated of Alaska to build a road ridgeline the source of the to its mining district. The placer gold. Dozer trench prospecting in the 1950s was town's eff orts succeeded, and now the Elliott Highway carried out for lode type mineralization in the vicinity of is a paved year-round road adjacent to the Project. Money Knob. However, no significant lode production It connects to the Dalton Highway at Livengood, has occurred to date. continuing north to Prudhoe Bay and west to Minto and Manley. A number of Fairbanks families today still claim Since the 1970s, the property has been prospected their roots in Livengood. and explored by several companies, including Excerpts from Audrey Parker's book on Livengood: The miners were optimistic about Livengood's future early on as expressed by Conradt in his November 1914 statement to the Fairbanks Daily News-Miner: "Tolovana looks better to me now than the Fairbanks District did when I landed in 1902." Within a month of the discovery-claim recording, constant streams of men headed into the district despite the harsh winter conditions of interior Alaska in November. It was estimated that over 200 men were prospecting in the area by early December 1914. By then, "most everything was staked." At its peak, Livengood had a population of 3,000. Fairbanks Daily News Miner, November 24, 1914 and January 25, 1937 6
Courtesy Audrey Parker, the Fairbanks Pioneer Museum and the Hudson Collection Ted and Harriet Hudson at their placer gold mine on Olive Creek in the Livengood Mining District in 1939. The Hudsons were among the founders of Livengood, a once-thriving town of 3,000 people. 7
ENVIRONMENTAL STEWARDSHIP ITH's Environmental Manager Denise Herzog grew up in and, later, worked for the U.S. Bureau of Land the mining industry. Her family ran a small placer mine Management, Fairbanks District Offce as the in Southcentral Alaska. It's where she fell in love with Supervisory Mining Engineer. Denise's work contributed mining and developed strong ties to the environment. to the environmental baseline monitoring program at the Teck-Pogo Mine Project in Interior Alaska, which Denise holds M.S. and B.S. degrees in Geological started gold production in 2006. Engineering from the University of Alaska - Fairbanks and has over 25 years of extensive experience in mining Getting a chance to build a mine from the earliest and environmental engineering in Alaska, including baseline data collection into an operating mine is why project work on Pogo, Donlin Creek, Pebble, Lucky Shot, Denise joined ITH. She shares some thoughts about the Nixon Fork, MAN Alaska, and True North. project below. She started her career at the U.S. Bureau of Mines, Alaska Field Operations Center as a Mining Engineer "Environmental baseline studies were initiated as an early counterpart to ITH's exploration work that began in 2006. Like the drilling program which quickly expanded as the resource grew in size, the environmental program quickly evolved into a multifaceted program that has included the characterization of wetlands, fish and aquatics, groundwater, surface water, meteorology, noise, cultural resources, geochemistry, and wildlife. Our Alaskan staff is committed to sound scientific data collection, stakeholder participation, and project designs that will minimize and mitigate our potential impacts on the present and future environment. "One of the most important aspects of our environmental planning is understanding water flow and water quality. ITH has been conducting hydrological studies in the project area for several years. This data is being applied to water balance Denise Herzog conducts fieldwork on the project site. models that will help design mining facilities that can withstand severe storm events during construction, "Our Alaskan staff is committed to sound scientific mining, and closure. The tailings management facility data collection, stakeholder participation, and project is being designed to safely contain tailings and process water through the use of a geosynthetic design that will minimize and mitigate our potential liner that will help protect the local groundwater impacts on the present and future environment." and surface water quality. "The project will require numerous federal and State of Alaska permits and authorizations with the National Environmental Policy Act (NEPA) guiding the process. From the earliest permitting stages, ITH will engage stakeholders early and often throughout the entire life of the project. With this approach to thoughtful project planning, the project has an excellent chance of enriching the lives of many Alaskans while maintaining a strong commitment to the environment." Denise Herzog, Environmental Manager 8
"Our team is committed to designing and building a gold mine at Livengood that adheres to the highest environmental standards." -Karl Hanneman, CEO 9
MINERAL RESERVES & RESOURCES* The current resource estimate for the Project (effective as of August 26, 2016) is based on the statistical analysis of data from 783 drill holes, totaling 717,435 ft (218,674 m), within a model area covering 3.1 miff (7.9 kmff). The three-dimensional geology was modeled and has been used to constrain the resource model. The current mineral resource model is based on drilling that remains current as of this report. Reserve Estimate - Classification Tonnes (Mt) Au (g/t) Contained Au (000's) Proven 377.65 0.71 8,620.43 Probable 14.01 0.72 352.86 Total Proven and Probable (P&P) 391.66 0.71 8,973.29 Resource Estimate - Classification Tonnes (Mt) Au (g/t) Contained Au (000's) Measured 497.34 0.68 10,840.84 Indicated 28.04 0.69 620.33 Total Measured and Indicated (M&I) 525.38 0.68 1 1 ,46 1 .1 7 Inferred 52.80 0.66 1 , 1 27.2 1 *Using gold price of $1,250 per ounce. Total M&I includes the P&P Reserves. More information available in ITH April 10, 2017 NI 43-101. The Livengood Gold Project mineralization is found in sedimentary, volcanic, and intrusive rocks, as well as quartz veins cutting through the rock units. Cautionary Note Concerning Reserves & Resource Estimates Forward-Looking Statements Mineral resources that are not mineral reserves do not have demonstrated economic The Company uses certain terms in this presentation, such as "resources," "indicated," viability. Mineral resource estimates do not account for mineability, selectivity, and "inferred" that are defined in, and required to be disclosed by, NI 43-101 but that mining loss, and dilution. These mineral resource estimates include inferred mineral the SEC's guidelines strictly prohibit U.S. registered companies from including in their resources that are normally considered too speculative geologically to have economic filings with the SEC. Accordingly, the Company's disclosures regarding mineralization considerations applied to them that would enable them to be categorized as mineral may not be comparable to similar information disclosed by U.S. registered companies reserves. There is also no certainty that these inferred mineral resources will be that are not subject to NI 43-101. You are urged to consider closely the disclosure in converted to measured and indicated categories through further drilling, or into mineral the Company's latest 10-K annual report, which may be secured from the Company reserves, once economic considerations are applied. website www.ithmines.com, or from the SEC's website at www.sec.gov. Qualified Person This document contains information with respect to adjacent or similar mineral properties in respect of which the Company has no interest or rights to explore or Mr. Christopher Puchner (CPG 07048), a Qualified Person as defined by National mine. Readers are cautioned that the Company has no interest in or right to acquire Instrument 43-101, has reviewed and approved the technical information contained in any interest in any such properties, and that mineral deposits on adjacent or similar this report and has approved the disclosure herein. Mr. Puchner is not independent properties are not indicative of mineral deposits on the Company's properties. of ITH, as he is the Chief Geologist of the Company and holds common shares and incentive options. 10
Livengood's 11.5 million ounce gold measured and indicated resource is well defined by robust drilling programs that have logged 783 holes with more than 715,000 feet of drilling. 11
CORPORATE INFORMATION Denise Herzog, Karl Hanneman, Thomas Irwin, Richard Solie, Christopher Puchner Management Karl Hanneman, Chief Executive Officer Debbie Evans, Corporate Controller (not pictured) Thomas Irwin, Senior Advisor Denise Herzog, Environmental Manager Christopher Puchner, Chief Geologist Richard Solie, Investor and Community Relations Manager Board of Directors Marcelo Kim, Chairman (2,4) Partner, Paulson & Co. Inc., and Director of Midas Gold Corp. Stephen Lang, Lead Independent Director (2,3,4) Chairman, Centerra Gold Inc., and Director, Allied Nevada Gold Corp. Anton Drescher, Director (1,4) Certified Management Accountant; Chief Financial Officer and Director, Oculus Visiontech Inc. John Ellis, Director (2,3) Past Chairman and CEO, AngloGold North America and Hudson Bay Mining and Smelting Company Mark Hamilton, Director (1,2) Retired U.S. Army Major General; past president of the University of Alaska System Thomas Weng, Director (1,3,4) Co-Founding Partner, Alta Capital Partners Members of: 1. Audit Committee 2. Compensation Committee 3. Technical Committee 4. Corporate Governance and Nominating Committee 12
Annual General Meeting Wednesday, May 24, 2017, 9:00 AM PDT Location: McCarthy Tetrault LLP 745 Thurlow Street, Suite 2400 Vancouver, British Columbia, Canada Investor Inquiries 907-328-2825; Toll Free 1-855-428-2825 info@ithmines.com ithmines.com Alaska Headquarters Tower Hill Mines, Inc. 506 Gaffney Road, Suite 200 Fairbanks, Alaska 99701 907-328-2800; Toll Free 1-855-428-2825 Fax: 907-328-2832 Corporate Head Offce 2300-1177 West Hastings Street Vancouver, British Columbia, Canada V6E 2K3 604-683-6332; Fax: 604-408-7499 Transfer Agent For lost certificate or a change of address, contact: Computershare 1-800-564-6253 (Toll Free in the U.S. and Canada) 514-982-7555 (international direct dial) computershare.com Auditors PricewaterhouseCoopers LLP Share Listings TSX: ITH; NYSE MKT: THM Ongoing environmental baseline program continues at Livengood as shown by the geochemical characterization test program, also known as barrel tests. Livengood is among the world's most significant gold discoveries in the last decade.