Idaho Strategic Resources, Inc. 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF O PERATIONS 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 Mineral Hill. 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 the concentrate receivable as a whole will occur upon final settlement of the lots. 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 June 30, 2023, metals that had been sold but not finally settled included 5,223 ounces of which 4,276 ounces were sold at a predetermined price with the remaining 947 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 June 30, 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 June 30, 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. Highlights during the second quarter of 2023 include: Rare Earth Elements · Idaho Strategic announced the expansion (and consolidation) of the Company’s Roberts project with the addition of the Phyllis Gross and Lower Lee Buck claim groups; and the subsequent rebranding of this landholding as the Mineral Hill REE project. · Subsequent to the end of the second quarter, Idaho Strategic announced the results of a sample taken during the second quarter from the Company’s Mineral Hill project. The sample returned a grade of 23.5% total rare earth elements (TREE) and was taken from a seam of monazite enveloped between two distinct carbonatites, which each assayed 7.5% TREE respectively. 13 Table of Contents Golden Chest/Operations · At the Golden Chest, ore mined from underground stopes totaled approximately 8,700 tonnes with about 60% of that coming from the 797 and 812H-Vein stopes and the remainder from Idaho Vein stopes. A total of 1,800 cubic meters of cemented rockfill were placed during the quarter. The Main Access Ramp (“MAR”) and associated drifts were advanced by 60 meters at depth during the quarter to the 785 meter elevation and a ventilation raise was also completed. · Near the end of the quarter, the Company started work on a portal at the bottom of the Jumbo Pit as part of an exploration project to drift on the Jumbo Vein to establish vein continuity and gold grade. · For the quarter ended June 30, 2023, a total of 11,708 dry metric tonnes (“dmt”) were processed at the Company’s New Jersey mill with a flotation feed head grade of 7.31 gpt gold and gold recovery of 92.6%. The head grade increased 30% over the first quarter as a result of mining on the H-vein which accounted for about one-half of the ore tonnage during the quarter with the remainder from Idaho Vein stopes and a stockpile of Jumbo open pit ore. Results of Operations Our financial performance during the quarter is summarized below: · Revenue increased 37.2% from $2,358,492 in 2022 to $3,236,515 in 2023 for the three-month period ended June 30, 2023, and increased 49.4% from $4,402,909 to $6,578,111 for the 6-month period ended June 30, 2023. 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. Gold production is expected to remain at approximately this level for the remainder of the year as mining on the H-Vein continues. · Gross profit as a percentage of sales increased from 0.3% in the second quarter of 2022 to 24.5% in the second quarter of 2023. For the six months ending June 30, 2022 gross profit as a percentage of sales was 7.1% compared to 25.2% in 2023 · Exploration expense decreased in 2023, when compared to 2022, primarily due to a decrease in drilling by the company owned and operated drill rig, and a reduction in overall exploration activity. · Professional services remained relatively consistent with the exception of the six-month period where they increased significantly, compared to the same period in 2022. This was due to legal fees related to merger and acquisition activity in the first quarter of 2023. This was a one-time increase and is not expected to continue. · Operating income for the three-month period ended June 30, 2023, was $289,987 which is an increase of $1,136,708 from an operating loss of $846,721 in the second quarter of 2022. For the six-month period ending June 30, 2023, operating income of $303,010 was an increase of $1,575,897 over the same period in 2022 which had an operating loss of $1,272,887. · Other (income) expense increased $11,363 from an expense of $5,528 in the second quarter of 2022, to income of $5,835 in the same period in 2023. Other (income) expense increased $89,429 from an expense of $52,431 in the six months ending June 30, 2022, to income of $36,998 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 2022. Interest expense also decreased significantly due to many of the company’s notes being near the end of their term. · Net income increased $1,148,071 from a net loss of $852,249 for the three-month period ended June 30, 2022 to net income of $295,822 for the three-month period ending June 30, 2023. Net income increased $1,665,326 from a net loss of $1,325,318 in the six months ending June 30, 2022, to net income of $340,008 in the same period in 2023. · The consolidated net income for the six-month period ending June 30, 2023 and net loss for the six-month period ended June 30, 2022 included non-cash charges as follows: depreciation and amortization of $671,079 ($472,115 in 2022), income on disposal of equipment of $224 (loss of $3,901 in 2022), accretion of asset retirement obligation of $7,856 ($5,069 in 2022), issuance of common stock for services of $0 ($32,326 in 2022), gain on forgiveness of SBA loan of none in 2023 ($10,000 in 2022) and equity income on investment in Buckskin of $1,357 ($671 in 2022). · Cash cost and all-in sustaining cost per ounce decreased in 2023 compared to 2022 due to a higher ore grade and tonnes mined. A core drilling exploration program is planned for the Golden Chest for the late third and early fourth quarter which may increase all-in sustaining costs in the second half of 2023. 14 Table of Contents 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 six-month periods ended June 30, 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. June 30, 2023 June 30, 2022 Three Months Six Months Three Months Six Months Cost of sales and other direct production costs and depreciation and amortization $ 2,442,932 $ 4,918,929 $ 2,351,035 $ 4,089,310 Depreciation and amortization (343,042 ) (671,079 ) (241,906 ) (472,115 ) Change in concentrate inventory (109,648 ) (36,979 ) (40,229 ) (432,580 ) Cash Cost $ 1,990,242 $ 4,210,871 $ 2,068,900 $ 3,184,615 Exploration 207,369 480,811 386,781 782,905 Less rare earth exploration costs (122,760 ) (334,358 ) (154,130 ) (242,624 ) Sustaining capital 214,107 334,856 165,582 262,291 General and administrative 123,765 387,063 273,977 475,289 Less stock-based compensation and other non-cash items 514 (9,155 ) 3,885 (30,626 ) All in sustaining costs $ 2,413,237 $ 5,070,088 $ 2,744,995 $ 4,431,850 Divided by ounces produced 2,152 3,877 1,589 2,730 Cash cost per ounce $ 924.83 $ 1,086.12 $ 1,302.01 $ 1,166.53 All in sustaining cost (AISC) per ounce $ 1,121.39 $ 1,307.73 $ 1,727.50 $ 1,623.39 Financial Condition and Liquidity For the Six Months Ended June 30, Net cash provided (used) by: 2023 2022 Operating activities $ 1,143,346 $ (1,694,476 ) Investing activities (869,741 ) (889,004 ) Financing activities 318,382 3,740,585 Net change in cash and cash equivalents 591,987 1,157,105 Cash and cash equivalents, beginning of period 1,638,031 1,976,518 Cash and cash equivalents, end of period $ 2,230,018 $ 3,133,623 The Company is currently producing from the underground mine at the Golden Chest. 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. 15 Table of Contents ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for small reporting companies.