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 and critical minerals/rare earth elements exploration company focused on a diversified asset base and cash flows from operations. Its portfolio of mineral properties are located in the historic producing silver and gold districts of the Coeur d’Alene Mining region of north Idaho and the Elk City region of north-central Idaho, as well as the historic Rare Earth Elements-Thorium Belt located near the city of Salmon 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 technical and operating skills to build a portfolio of producing mines and milling operations with a focus on gold production and exploration for rare earth elements (REEs). The Company’s gold properties include: the Golden Chest Mine (currently in production), and the New Jersey Mill (majority ownership interest), as well as the Eastern Star exploration property and other less advanced properties. The Company’s primary focus as it relates to its gold properties is to continue to grow production at the Golden Chest Mine and look to reinvest the cash flow into both the Golden Chest Mine, the New Jersey Mill, and furthering its exploration efforts near the Golden Chest - as well as at its rare earth elements properties. In addition to its gold properties, Idaho Strategic has three rare earth elements exploration properties in Idaho known as Lemhi Pass, Diamond Creek, and Roberts. The Company’s expansion into rare earth elements came about in an effort to diversify its holdings towards the anticipated demand for these elements in the electrification of motorized vehicles and a renewed focus on the United States’ domestic critical minerals supply chain security. To date, Idaho Strategic has conducted numerous exploration programs on its rare earth elements landholdings which include drilling, trenching, sampling, and mapping of certain areas within the Company’s 18,030-acre landholdings. Idaho Strategic has been able to leverage its track record of operations and experience in mining, milling, and exploring at the Golden Chest Mine to develop relationships with different state government agencies, universities, national labs, and other government and non-government entities to advance its rare earth elements exploration activities on multiple fronts. Idaho Strategic plans to continue to look for additional partnerships to find mutually beneficial solutions to advance the U.S.' domestic rare earth elements supply chain. 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 March 31, 2023, metals that had been sold but not finally settled included 5,844 ounces of which 4,500 ounces were sold at a predetermined price with the remaining 1,344 exposed to future price changes. 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 March 31, 2023 we reviewed our December 31, 2022 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 March 31, 2023 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. An expected present value technique is used to estimate the fair value of the liability. This includes inflating the estimated costs in today’s dollars using a reasonable inflation rate up to the date of expected retirement and discounting the inflated costs using a credit-adjusted risk-free rate. Upon initial recognition of the liability, the carrying amount of the related long-lived asset is increased by the same amount. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is amortized over the life of the related asset. 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. Changes resulting from revisions to the timing or amount of the original estimate of undiscounted cash flows are recognized as either an increase or a decrease in the carrying amount of the liability for an asset retirement obligation and the related asset retirement cost capitalized as part of the carrying amount of the related long-lived asset. Upward revisions of the amount of undiscounted estimated cash flows are discounted using the current credit-adjusted risk-free rate. Downward revisions in the amount of undiscounted estimated cash flows are discounted using the credit-adjusted risk-free rate that existed when the original liability was recognized. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligations. Separately, the Company accrues costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable. 14 Table of Contents Highlights during the first quarter of 2023 include: Rare Earth Elements · The Company released the first drill results from its 2022 Diamond Creek rare earth elements (REEs) drill program – intercepted 11.3 meters of 1.3% total rare earth oxides (TREO) including intervals with 2.2% TREO and 1.0% niobium. · Also in January, Idaho Strategic announced select sample results from Lemhi Pass that returned REE grades greater than 4.2% TREO containing over 2.5% neodymium. Other select samples announced within the same press release include: 2.35% TREO containing 1.21% neodymium, 1.62% TREO containing 0.88% neodymium, and 0.98% TREO containing 0.53% neodymium. · In February, Idaho Strategic announced the discovery of 32 meters of continuous rare earth elements and niobium mineralization at the surface at its Diamond Creek project. The entire 32-meter interval averaged 1.28% total rare earth elements (TREE) with elevated values of 2% TREE at the 8-meter and 12-meter marks. Strong niobium mineralization reflecting grades greater than 0.5% niobium was also encountered in eight of the samples. · Also in February, Idaho Strategic increased its central Idaho rare earth elements landholdings via claim staking to bring its total land position amongst its three distinct projects (Lemhi Pass, Diamond Creek, and Roberts) to approximately 18,030 acres, which the Company believes makes it the largest rare earth elements landholder in the United States. Golden Chest/Operations · At the Golden Chest, ore mined from underground stopes totaled approximately 8,500 tonnes from the 803 and 821 stopes. A total of 1,420 cubic meters of cemented rockfill were placed during the quarter. The Main Access Ramp (MAR) was extended by 82 meters at depth during the quarter below the 790 elevation and a ventilation raise was started during the quarter. · During March the Company completed an exploration crosscut to explore the H-Vein which is located 60 meters west of the Idaho Vein. As announced in a press release dated April 18, 2023 the crosscut intercepted a strongly mineralized vein that assayed 32.1 grams per tonne (gpt) gold over 0.43 meters on the northern rib and 54.1 gpt over 0.72 meters on the southern rib. Both samples represent true thickness. Drifting along the vein continued subsequent to the end of the first quarter. · Open pit mining was completed in the Jumbo Pit at the end of March. A total of 4,000 tonnes of ore were mined from the pit with 2,350 tonnes mined in the first quarter. The Jumbo Vein consists of a banded quartz vein that typically occurs 10-20 meters (m) in the hangingwall of the Idaho Fault. The vein was typically exposed for 20 to 25 meters of strike on each bench and visible gold was often observed. Composite samples of the truckloads mined in the quarter had an average of 17.3 gpt gold. Plans are being made to further explore the Jumbo Vein. · For the quarter ended March 31, 2023, a total of 11,144 dry metric tonnes (dmt) were processed at the Company’s New Jersey mill with a flotation feed head grade of 5.63 gpt with gold recovery of 91.5%. About 80% of the feed was from the underground stopes with the remainder coming from the Jumbo Vein open pit. Results of Operations Our financial performance during the quarter is summarized below: · Revenue increased 63% from $2,044,417 for the three-month period ended March 31, 2022, to $3,341,596 for the same period in the current year. The increase in revenue is largely due to the increased gold production throughout the quarter as well as a higher average gold price recognized on ounces produced. · Gross profit as a percentage of sales increased from 15% in the first quarter of 2022 to 26% in the first quarter of 2023. · Exploration expense decreased, when compared to the first quarter of 2022, primarily due to a decrease in drilling by the company owned and operated drill rig. 15 Table of Contents · Professional services for the three-month period ended March 31, 2023, increased significantly, compared to the same period in 2022, due to legal fees related to merger and acquisition activity. This was a one-time increase and is not expected to continue. · Operating income for the three-month period ended March 31, 2023, was $13,023 which is an increase of $439,189 from an operating loss of $426,166 in the first quarter of 2022. · Other (income) expense increased $78,066 from an expense of $46,903 in the first quarter of 2022, to income of $31,163 in the same period in 2023. The increase was from timber sales during the first quarter of 2023, as well as increased interest income from the company’s interest-bearing money market account that was not in place during the first quarter of 2022. Interest expense also decreased significantly due to many of the company’s notes being near the end of their term. · Net income increased $517,255 from a net loss of $473,069 to net income of $44,186 for the three-month period ended March 31, 2023. · The consolidated net income for the three-month period ending March 31, 2023 and net loss for the three-month period ended March 31, 2022 included non-cash charges as follows: depreciation and amortization of $328,037 ($230,208 in 2022), loss on disposal of equipment of $6,120 (none in 2022), accretion of asset retirement obligation of $3,899 ($2,516 in 2022), issuance of common stock for services of $0 ($32,326 in 2022) and equity income on investment in Buckskin of $350 ($331 in 2022). · Cash cost and all-in sustaining cost per ounce increased during the first quarter of 2023 compared to the first quarter of 2022 due to a higher ratio of underground to open pit ore mined. With the completion of the Jumbo Pit in the first quarter, we expect this increased cost per ounce to reflect future mining costs more accurately as all production will be from underground at the Golden Chest for the foreseeable future. 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-month periods ended March 31, 2023, and 2022. 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. March 31, 2023 2022 Cost of sales and other direct production costs and depreciation and amortization $ 2,475,997 $ 1,738,274 Depreciation and amortization (328,037 ) (230,208 ) Change in concentrate inventory 72,669 (392,351 ) Cash Cost $ 2,220,629 $ 1,115,715 Exploration 273,442 396,124 Less rare earth exploration costs (211,598 ) (88,495 ) Sustaining capital 120,749 96,709 General and administrative 263,298 201,312 Less stock-based compensation and other non-cash items (9,669 ) (34,511 ) All in sustaining costs $ 2,656,851 $ 1,686,854 Divided by ounces produced 1,725 1,140 Cash cost per ounce $ 1,287.32 $ 978.70 All in sustaining cost (AISC) per ounce $ 1,540.20 $ 1,479.70 Financial Condition and Liquidity For the Three Months Ended March 31, Net cash provided (used) by: 2023 2022 Operating activities $ 160,762 $ (848,086 ) Investing activities (416,121 ) (288,821 ) Financing activities 631,132 2,569,577 Net change in cash and cash equivalents 375,773 1,432,670 Cash and cash equivalents, beginning of period 1,638,031 1,976,518 Cash and cash equivalents, end of period $ 2,013,804 $ 3,409,188 16 Table of Contents 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. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for small reporting companies.