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 is a gold producer and critical minerals/rare earth element (“REE”) 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 REE-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 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, the New Jersey Mill, and furthering its exploration efforts near the Golden Chest, as well as at its REE properties. In addition to its gold properties, Idaho Strategic has three REE exploration properties in Idaho known as Lemhi Pass, Diamond Creek, and Mineral Hill. Following observation of industry dynamics and in early response to events impacting long-term domestic critical mineral supply and demand trends, the Company’s strategic expansion into REE’s also aids in diversifying its holdings. The Company believes the anticipated demand for these elements in the electrification of motorized vehicles, defense spending, and a renewed focus on the United States’ domestic critical minerals supply chain security may benefit domestic holders of such assets. The Company also believes it has a first-mover advantage with its addition of recognized REE land holdings in Idaho. To date, Idaho Strategic has conducted numerous exploration programs on its REE properties which include drilling, trenching, sampling, and mapping of certain areas within the Company’s 19,090-acre landholdings. Idaho Strategic has been able to demonstrate and utilize its track record of operations and experience in mining, milling, and exploring at the Golden Chest to develop relationships with different state government agencies, universities, national labs, and other government and non-government entities to advance its REE 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 REE 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 can 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 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, 2024, metals that had been sold but not finally settled included 6,358 ounces of which 2,666 ounces were sold at a predetermined price with the remaining 3,692 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. 15 Table of Contents 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, 2024 we reviewed our December 31, 2023 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, 2024 estimated costs would be $104,000 for the Golden Chest Mine property and $224,000 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 able to be reasonably estimated. Highlights during the second quarter of 2024 include: REE Exploration · Continued discussions with various laboratories, universities, and partners to advance our understanding of Idaho’s rare earth mineralogy and broader mineral endowment. Golden Chest/Operations · At the Golden Chest, ore mined from underground stopes totaled approximately 11,500 tonnes with all of the tonnage coming from H-Vein stopes. · A total of 3,230 cubic meters of cemented rockfill (“CRF”) were placed during the quarter which is a new quarterly record. The Main Access Ramp (“MAR”) and associated drifts and raises were advanced by about 100 meters during the quarter. · For the quarter ended June 30, 2024, a total of 9,260 dry metric tonnes (“dmt”) were processed at the Company’s New Jersey mill with a flotation feed head grade of 10.29 gpt gold and gold recovery of 93.6%. · An exploration program consisting of both underground and surface core drilling was started in the second quarter. Underground drilling was focused on exploring the Klondike area and the projected northerly strike of the H-vein. Surface drilling was started in Butte Gulch with plans to move to the northern area of the Golden Chest in the third quarter. Results of Operations Our financial performance during the quarter is summarized below: · Revenue increased 89.3% from $3,236,515 to $6,125,382 for the three-month periods ended June 30, 2023 and 2024, respectively, Year to date revenue increased 82.8% from $6,578,111 to $12,024,320 for the six-month periods ended June 30, 2023 and 2024, respectively. The increase in revenue is largely due to the increased gold production compared to previous periods 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 24.5% in the second quarter of 2023 to 50.2% in the second quarter of 2024. For the six-month periods ending June 30, 2024 and 2023 gross profit as a percentage of sales increased to 49.2% from 25.2%. · Exploration expense increased in both the three-month and six-month periods ending June 30, 2024, when compared to the same periods in 2023, due to an increase in surface and underground drilling activity at the Company’s Golden Chest Mine. Drilling is expected to continue throughout the third quarter which may result in an increased exploration expense when compared to prior periods. · Operating income for the three-month period ended June 30, 2024 was $2,095,596 which is an increase of $1,805,609 from operating income of $289,987 in the second quarter of 2023. For the six-month period ending June 30, 2024, operating income of $4,237,569 increased by $3,934,559 over the same period in 2023. · Other income increased $33,491 from $5,835 in the second quarter of 2023, to $39,326 in the same period in 2024. Other income increased $16,169 from $36,998 in the six months ending June 30, 2023, to $53,167 in the same period in 2024.The increase was from increased interest income and gains on treasuries from the company’s short term investment account due to having a higher cash balance. 16 Table of Contents · Net income increased $1,839,100 from net income of $295,822 for the three-month period ended June 30, 2023 to net income of $2,134,922 for the three-month period ending June 30, 2024. Net income increased $3,950,728 from net income of $340,008 in the six-month period ending June 30, 2023, to net income of $4,290,736 in the same period in 2024. · The consolidated net income for the six-month periods ending June 30, 2024 and June 30, 2023 included non-cash charges as follows: depreciation and amortization of $957,718 ($671,079 in 2023), loss on disposal of equipment of $7,431 (gain of $224 in 2023), accretion of asset retirement obligation of $9,226 ($7,856 in 2023), loss on investment in equity securities of $453 ($2,880 in 2023), gain on short term investment of $21,862 (none in 2023) and equity income on investment in Buckskin of $278 ($1,357 in 2023). · Cash cost per ounce for the three-month period ending June 30, 2024 remained relatively flat compared to the same period in 2023. For the six month-period ending June 30, 2024, cash cost per ounce decreased significantly due to a 55.2% increase in ounces produced when compared to the six-month period ending June 30, 2023. · All in sustaining cost per ounce increased during the three-month period ending June 30, 2024 compared to the same period in 2023 due to an increase in exploration costs from underground and surface drilling at the Golden Chest Mine, as well as higher sustaining capital from deposits on paste backfill plant equipment. For the six-month period ending June 30, 2024, all in sustaining costs decreased slightly as the increased exploration and sustaining capital was largely made up for by the increased production when compared to the six-month period ending June 30, 2023. Cash Costs and All In Sustaining Costs (“AISC”) Reconciliation to Generally Accepted Accounting Principles (“GAAP”) Reconciliation of cost of sales and other direct production costs and depreciation, depletion, and amortization (GAAP) to cash cost per ounce and 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, 2024, and 2023. 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, 2024 June 30, 2023 Three Months Six Months Three Months Six Months Cost of sales and other direct production costs and depreciation and amortization $ 3,051,957 $ 6,112,658 $ 2,442,932 $ 4,918,929 Depreciation and amortization (455,930 ) (957,718 ) (343,042 ) (671,079 ) Change in concentrate inventory 30,224 110,069 (109,648 ) (36,979 ) Cash Cost $ 2,626,251 $ 5,265,009 $ 1,990,242 $ 4,210,871 Exploration 620,056 887,904 207,369 480,811 Less REE exploration costs (70,381 ) (157,526 ) (122,760 ) (334,358 ) Sustaining capital 484,092 929,748 214,107 334,856 General and administrative 179,456 340,119 123,765 387,063 Less stock-based compensation and other non-cash items (9,262 ) (16,832 ) 514 (9,155 ) AISC $ 3,830,212 $ 7,248,422 $ 2,413,237 $ 5,070,088 Divided by ounces produced 2,903 6,019 2,152 3,877 Cash cost per ounce $ 904.67 $ 874.73 $ 924.83 $ 1,086.12 AISC per ounce $ 1,319.40 $ 1,204.26 $ 1,121.39 $ 1,307.73 Financial Condition and Liquidity For the Six-Months Ended June 30, Net cash provided (used) by: 2024 2023 Operating activities $ 5,209,442 $ 1,143,346 Investing activities (8,212,803 ) (869,741 ) Financing activities 2,517,619 318,382 Net change in cash and cash equivalents (485,742 ) 591,987 Cash and cash equivalents, beginning of period 2,286,999 1,638,031 Cash and cash equivalents, end of period $ 1,801,257 $ 2,230,018 The Company is currently producing profitably from 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 profitable 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. 17 Table of Contents ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for small reporting companies.