Idaho Strategic Resources, Inc. 10-Q

ITEM 2: Management’s Discussion AND Analysis of Financial Condition and Results of Operations Plan of Operation Idaho Strategic Resources, Inc is a gold producer focused on diversifying and building its asset base and cash flows through a portfolio of mineral properties located in historic producing gold districts in Idaho and Montana and the historic rare earth element/thorium trend located in Central Idaho. The Company’s plan of operation is to generate positive cash flow, increase its gold production and asset base over time while being mindful of corporate overhead. The Company’s management is focused on utilizing its in-house skills to build a portfolio of producing mines and milling operations with a primary focus on gold and the advancement of its rare earth elements (REE) and thorium prospects. The Company’s properties include: the Golden Chest Mine (currently in production), the New Jersey Mill (majority ownership interest), and a 50% carried to production interest in the past producing Butte Highlands Mine located in Montana. In addition to its producing and near-term production projects, Idaho Strategic Resources, Inc. has added two rare earth element properties and one thorium property in Idaho to its portfolio of exploration properties in an effort to diversify its holdings towards the anticipated demand for these elements in the electrification of motorized vehicles and a rediscovered focus on critical mineral supply chain security. Additionally, Idaho Strategic holds gold exploration prospects, including Eastern Star and the McKinley-Monarch located in Central Idaho, and additional holdings near the Golden Chest in the Murray Gold Belt. COVID-19 Coronavirus Pandemic Response and Impact Following the outbreak of the COVID-19 coronavirus global pandemic (“COVID-19”) in early 2020, in March 2020 the U.S. Centers for Disease Control issued guidelines to mitigate the spread and health consequences of COVID-19. The Company implemented changes to its operations and business practices to follow the guidelines and minimize physical interaction, including using technology to allow employees to work from home when possible and altering production procedures and schedules, asset maintenance, and limiting discretionary spending. As long as they are required, the operational practices implemented could have an adverse impact on our operating results due to deferred production and revenues or additional costs. The negative impact of COVID-19 remains uncertain, including on overall business and market conditions. There is uncertainty related to the potential additional impacts COVID-19 could have on our operations and financial results for the year. Critical Accounting Estimates We have, besides our estimates of the amount of depreciation on our assets, two critical accounting estimates. The ounces of gold contained in our process and concentrate inventory is based on assays taken at the time the ore is processed and the ounces of gold contained in shipped concentrate which is based upon assays taken prior to shipment however subject to final assays at the refinery, these shipments are also subject to the fluctuation in gold prices between our shipment date and estimated and actual final settlement date. Also, the reclamation bond obligation on our balance sheet is based on an estimate of the future cost to recover and remediate our properties as required by our permits upon cessation of our operations, and may differ when we cease operations. Our concentrate sales sometimes involve variable consideration, as they can be subject to changes in metals prices between the time of shipment and their final settlement. However, we are able to reasonably estimate the transaction price for the concentrate sales at the time of shipment using forward prices for the estimated month of settlement, and previously recorded sales and accounts receivable are adjusted to estimated settlement metals prices until final settlement for financial reporting purposes. The embedded derivative contained in our concentrate sales is adjusted to fair value through earnings each period prior to final settlement. It is unlikely a significant reversal of revenue for any one concentrate lot will occur. As such, we use the expected value method to price the concentrate until the final settlement date occurs, at which time the final transaction price is known. At September 30, 2022, metals that had been sold but not final settled thus exposed to future price changes totaled 3,685 ounces of gold. The Company has received provisional payments on the sale of these ounces with the remaining amount due reflected in gold sales receivable. The asset retirement obligation and asset on our balance sheet is based on an estimate of the future cost to recover and remediate our properties as required by our permits upon cessation of our operations and may differ when we cease operations. At September 30, 2022 we reviewed our December 31, 2021 estimate that the cost of the machine and man hours probable to be needed to put our properties in the condition required by our permits once we cease operations. The September 30, 2022 estimated costs would be $103,320 for the Golden Chest property and $203,600 for the New Jersey Mine and Mill. For purposes of the estimate, we evaluated the expected life in years and costs that, initially, are comparable to rates that we would incur at the present. We are adding to the liability each year, and amortizing the asset over the estimated life, which decreases our net income in total each year. We make periodic reviews of the remaining life of the mine and other operations, and the estimated remediation costs upon closure, and adjust our account balances accordingly. At this time, we think that an adjustment in our asset recovery obligation is not required, and an adjustment in future periods would not have a material impact in the year of adjustment but would change the amount of the annual accretion and amortization costs charged to our expenses by an undetermined amount. 15 Table of Contents Critical Accounting Policies The SEC has requested that all registrants address their most critical accounting policies. The SEC has indicated that a “critical accounting policy” is one which is both important to the representation of the registrant’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on past experience and on various other assumptions our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ, and may differ materially from these estimates under different assumptions or conditions. Additionally, changes in accounting estimates could occur in the future from period to period. Our management has discussed the development and selection of our most critical financial estimates with the Audit and Finance Committee of our Board of Directors. The following paragraphs identify our most critical accounting policies: Determination of Fair Values Management determines the fair value of a financial instrument based on the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value is calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities includes consideration of non-performance risk, including the party’s own credit risk. Impairment of Mineral Rights and Properties, Plant and Equipment The Company assesses its mineral rights and properties, plant and equipment for possible impairment whenever events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Such indicators include changes in the Company’s business plans, changes in precious metal prices and significant downward revisions of estimated mineralization quantities. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, an impairment charge is recorded for the excess of carrying value of the asset over its estimated fair value. Determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity prices, the effects of inflation and technology improvements on operating expenses, and the outlook for global or regional demand conditions for gold and silver. However, the impairment reviews and calculations are based on assumptions that are consistent with the Company’s business plans and long-term investment decisions. Management does not believe there are impairments present in mineral rights and properties, plant, and equipment. Reclamation and Remediation Obligations Reclamation costs are allocated to expense over the life of the related assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and remediation costs. Reclamation obligations are based on when the spending for an existing environmental disturbance will occur. We review, on at least an annual basis, the reclamation obligation at each mine site in accordance with guidance for accounting for asset retirement obligations. Reclamation obligations for inactive mines are accrued based on management’s best estimate of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. Accounting for reclamation and remediation obligations requires management to make estimates unique to each mining operation of the future costs we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required. Any such increases in future costs could materially impact the amounts charged to earnings for reclamation and remediation. Income Taxes Our income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated future taxes to be paid. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates that we are using to manage the underlying businesses. Valuation allowances are recorded as reserves against net deferred tax assets by the Company when it is determined that net deferred tax assets are not likely to be realized in the foreseeable future. 16 Table of Contents The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Highlights during the third quarter of 2022 include: Rare Earth Elements · The Company began drilling at its Diamond Creek REE project, only to be delayed due to the Moose Fire (the largest wildfire in the US over the summer). After the fire burned through the project site, drilling began (see press release dated July 18, 2022, Idaho Strategic Resources to Begin Rare Earth Element Drill Program at Diamond Creek–Early Stages of IGEM Program Begin). An update to the drill program was announced on November 2, 2022, after the end of the quarter. · Also in July, the University of Idaho began conducting its Rare Earth Element separation experiments at their lab using soil and samples collected at Diamond Creek as part of the IGEM Program. · Fieldwork continued at other REE/Thorium holdings in the areas that were not impacted by the Moose Fire during the quarter. Murray Gold Belt · The Company conducted the first ever drill program on its holdings in the Murray Gold Belt (see press release dated September 1, 2022, Idaho Strategic Makes New Discovery–Gold Veins in the First Ever Drilling in the Murray Gold Belt Outside of the Golden Chest). · At the start of the third quarter the Company moved its in-house drill to the Murray Gold Belt where a total of 1,328 meters of drilling were completed at the following four prospects: the Argus, the Evans, the Ida, and the Badger. Not all of the core from the Murray Gold Belt drilling has been logged and assayed, however the Company did release initial results from the Argus prospect where a new gold zone was discovered and the highlight to date was hole number AG 22-2: o AG 22-2 o 0.566 g/t gold over 24 m from 99.0 m to 123.0 m including the following higher-grade intervals: o 1.09 gpt gold over 2.7 m from 107.5 to 110.2 m o 2.08 gpt gold over 2.2 m from 113.7 to 115.9 m o 9.19 g/t gold over 0.6 m from 134.4 to 135.0 m including a 20 cm vein assaying 22.2 g/t Au Golden Chest/Operations · At the Golden Chest, ore mined from underground stopes totaled approximately 7,500 tonnes from the 833, 827, and 818 stopes. Another 600 tonnes of material was mined from the Klondike South crosscut in the quarter. Development tonnage totaled 3,200 tonnes during the quarter as the Main Access Ramp (MAR) was extended below the 806 elevation and an associated ventilation drift was also completed. · Late in the third quarter, the Company commissioned a double-boom electric/hydraulic jumbo capable of drilling 3.65 m (12-foot) rounds to accelerate MAR development. Previously, a single-boom jumbo drilling 3 m (10-foot) rounds was used in the MAR so the advancement rate is expected to increase substantially by drilling longer rounds faster with the double-boom jumbo. The double-boom was acquired in the used equipment market for $150,000 and has required very little refurbishment while demonstrating good reliability. · Also late in the third quarter, the Company received delivery of an electric/hydraulic bolter designed for narrow headings such as our 3-meter-wide stopes. The bolter is a Muki model manufactured by Resemin of Peru. Currently, the bolter is performing quite well installing ground support in the MAR as preparations are made to install electrical service into the stopes so the Muki can be used to install ground support in the stopes. The bolter should increase the efficiency and safety of installing ground support over the current jackleg-based techniques. · Open pit mining was suspended as the contractor was mobilized to the New Jersey Mill to construct the Phase 5 lift and buttress on the Tailings Storage Facility (TSF). A large buttress of over 40,000 cubic meters was placed around the TSF to exceed the geotechnical stability requirements of the State of Idaho. Additional fill was placed on the top of the buttress to raise the embankment and increase the storage volume of the TSF providing the footprint for another four years of tailings storage capacity. · For the quarter ended September 30, 2022, a total of 10,024 dry metric tonnes (dmt) were processed at the Company’s New Jersey mill with a flotation feed head grade of 4.59 gpt with gold recovery of 89.8%. About 80% of the feed was from the underground stopes with the remainder coming from a stockpile of open pit material. 17 Table of Contents Results of Operations Our financial performance during the quarter is summarized below: · The Company had a gross loss of $228,760 and a gross profit of $84,839 in the three and nine-month periods ending September 30, 2022, compared to a gross profit of $278,010 and $568,855 for the comparative periods in 2021. Gross profit decreased in 2022 because of lower gold prices and increased costs of consumables. We are currently working towards increasing operational efficiencies and processed ore grade from the underground operations to bring gross profit back up. · Cash costs per ounce and AISC remained relatively flat for the three and nine-month periods ended September 30, 2022, and 2021 with the exception of the AISC for the three-month period September 30, 2022 being higher than the comparable period in 2021. The Company spent significant funds in the third quarter of 2022 expanding its tailings facility for future milling capacity at the New Jersey Mill as well as adding additional underground mining equipment, exploration costs were also up in 2022 versus 2021 as the Company has increased both drilling with the Company’s in house drilling for gold exploration in the Murray area and also on the Company’s rare earth properties including contract core drilling on the Diamond Creek property. · Revenue was $1,745,278 and $6,148,187, respectively for the three and nine-month periods ended September 30, 2022, compared to $2,098,849 and $5,865,708 for the comparable periods of 2021. The lower three-month revenue in 2022 was a result of lower gold prices while the higher nine-month revenue in 2022 was mostly the result of increased production. 354 more ounces of gold were produced year to date as of September 30, 2022 compared to the same period in 2021. · An operating loss of $1,888,044 and $3,160,931 for the three and nine-month periods ended September 30, 2022, compared to an operating loss of $187,310 and $1,894,656 in the comparable periods of 2021. Some of the changes were a result of increased exploration, costs associated with the Company’s NYSE original listing application, annual listing fee and legal expenses, fees associated with the Company’s S-3 Registration Statement filed with the SEC, contract core drilling for the Diamond Creek Rare Earth property, and expense for stock options granted in the third quarter of 2022. · Net loss of $1,909,424 and $3,234,742 for the three and nine-periods ended September 30, 2022, compared to net loss of $237,671 and $2,040,843 in the comparable periods ended September 30, 2021. The reasons for these changes are the same as those for the operating loss described above. · Exploration costs increased in 2022 compared to 2021 because of an increase in core drilling completed by the Company’s in-house drill, an increase in exploration on the Rare Earth properties, and contract core drilling at the Company’s Diamond Creek Rare Earth property in the third quarter of 2022. · Reasons for changes in management, professional services, and general and administrative expenses between the comparable periods in 2022 and 2021 include costs associated with the Company’s NYSE original listing application fee and SEC filings as mentioned above in the second quarter of 2022, options being granted to management, directors, and employees for a total cost of $547,275 in the third quarter of 2022, and options being granted to management, directors, and employees for a total cost of $604,571 in the first quarter of 2021. · Timber revenue decreased in 2022. No logging on the Company’s property occurred in 2022. · The consolidated net loss for the nine-months ended September 30, 2022, and 2021 included non-cash charges as follows: depreciation and amortization of $717,939 ($595,227 in 2021), loss on disposal of equipment of $68,641 (none in 2021), accretion of asset retirement obligation of $11,342 ($7,476 in 2021), stock-based compensation of $547,275 ($614,431 in 2021), the issuance of common stock for services $32,326 ($6,500 in 2021), gain on forgiveness of SBA loan of $10,000 (none in 2021), and equity income on investment in Buckskin $1,213 in 2022 (None in 2021). Cash Costs and All-In Sustaining Costs Reconciliation to GAAP- Reconciliation of cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) to cash cost per ounce and all-in sustaining costs (AISC) per ounce (non-GAAP). The table below presents reconciliations between the most comparable GAAP measure of cost of sales and other direct production costs and depreciation, depletion, and amortization to the non-GAAP measures of cash cost per ounce and all in sustaining costs per ounce for the Company’s gold production in the three and nine-month periods ended September 30, 2022, and 2021. 18 Table of Contents Cash cost per ounce is an important operating measure that we utilize to measure operating performance. AISC per ounce is an important measure that we utilize to assess net cash flow after costs for pre-development, exploration, reclamation, and sustaining capital. Current GAAP measures used in the mining industry, such as cost of goods sold do not capture all of the expenditures incurred to discover, develop, and sustain gold production. September 30, 2022 2021 Three Months Nine Months Three Months Nine Months Cost of sales and other direct production costs and depreciation and amortization $ 1,974,038 $ 6,063,348 $ 1,820,839 $ 5,296,853 Depreciation and amortization (245,824 ) (717,939 ) (217,054 ) (595,227 ) Change in concentrate inventory 38,380 (394,200 ) 37,535 146,431 Cash Cost $ 1,766,594 $ 4,951,209 $ 1,641,320 $ 4,848,057 Exploration 747,217 1,530,122 267,643 1,193,520 Sustaining capital 851,311 1,113,602 78,380 349,363 General and administrative 603,273 1,078,563 101,430 751,272 Less stock-based compensation and other non-cash items (617,745 ) (648,371 ) (9,178 ) (628,407 ) All in sustaining costs $ 3,350,650 $ 8,025,125 $ 2,079,595 $ 6,513,805 Divided by ounces produced 1,360 4,094 1,306 3,740 Cash cost per ounce $ 1,298.97 $ 1,209.38 $ 1,256.75 $ 1,296.27 All in sustaining cost (AISC) per ounce $ 2,463.71 $ 1,960.22 $ 1,592.34 $ 1,741.66 Financial Condition and Liquidity For the Nine Months Ended September 30, Net cash provided (used) by: 2022 2021 Operating activities $ (2,007,155 ) $ (758,113 ) Investing activities (1,787,414 ) (2,684,936 ) Financing activities 4,073,739 1,384,291 Net change in cash and cash equivalents 279,170 (2,058,758 ) Cash and cash equivalents, beginning of period 1,976,518 2,539,945 Cash and cash equivalents, end of period $ 2,255,688 $ 481,187 The Company is currently producing from both the open-pit and underground at the Golden Chest Mine. In the past, the Company has been successful in raising required capital from sale of common stock, forward gold contracts, and debt. As a result of its planned production, equity sales and potential debt borrowings or restructurings, management believes cash flows from operations and existing cash are sufficient to conduct planned operations and meet contractual obligations for the next 12 months. 19 Table of Contents ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for small reporting companies.