Idaho Strategic Resources, Inc. (formerly New Jersey Mining Company) — Q1 2018 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2018. The company was a gold producer focused on the Golden Chest Mine in Idaho, the majority-owned New Jersey Mill, and mineral properties in Idaho and Montana. The Golden Chest operated from both open-pit and underground workings, with the New Jersey Mill processing company and third-party material.
The financial statements are unaudited interim consolidated statements and include the 65%-owned New Jersey Mill Joint Venture. The company reported 118.7 million common shares outstanding at March 31, 2018 and 122.5 million shares outstanding on May 1, 2018.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $1.101 million | $0.689 million |
| Cost of sales | $1.095 million | $0.555 million |
| Gross profit | $6,611 | $134,272 |
| Gross margin | 0.6% | 19.5% |
| Operating loss | $232,082 | $84,860 |
| Net loss | $265,846 | $274,178 |
| Net loss attributable to the company | $253,239 | $263,145 |
| Cash flow from operations | $70,265 | $(97,379) |
| Capital expenditures and mineral property purchases | $189,813 | $28,980 |
| Cash flow from financing | $374,133 | $598,831 |
| Ending cash | $379,202 | $627,305 |
Revenue increased approximately 60% year over year, primarily from higher Golden Chest production and recovery of gold during a mill cleanout. Gold and silver sales before smelter and refining charges were $1.213 million and $3,973, respectively; concentrate sales were $824,029 and doré sales were $277,362.
Production included approximately 7,860 dry metric tonnes processed at a 3.26 gpt head grade and 90.7% gold recovery, producing 746 contained ounces in flotation concentrates. Approximately 211 additional ounces were recovered during ball-mill repairs. Underground mining produced approximately 700 tonnes at an average grade of 11.2 gpt.
Despite higher revenue, gross margin declined substantially because cost of sales increased approximately 95%, reflecting lower open-pit grades between ore shoots, seasonal operating conditions, increased depreciation, and underground mining constraints. Exploration expense increased to $99,232 from $18,652.
At March 31, 2018, total assets were $10.476 million, total liabilities were $3.031 million, and stockholders’ equity was $7.445 million. Current assets were $797,578 versus current liabilities of $1.203 million. Cash increased from $124,617 at year-end 2017, but remained below the March 31, 2017 balance.
Debt and debt-like obligations included $1.267 million payable to related parties, $348,919 of other notes payable, $593,254 of mineral-property purchase obligations, and $290,701 of current forward-gold-contract liabilities. The company converted a $492,783 related-party forward gold contract into a 6% conventional note payable in January 2018. Management stated that operating cash flows, existing cash, equity financing, planned production, and debt restructuring were expected to fund operations and contractual obligations for the following 12 months.
Material changes versus the prior comparable period
- Revenue rose by $412,073, but gross profit fell by $127,661 and gross margin contracted from 19.5% to 0.6%.
- Operating loss increased to $232,082 from $84,860, while net loss attributable to the company improved modestly from $263,145 to $253,239.
- Operating cash flow improved from an outflow of $97,379 to an inflow of $70,265.
- Capital investment increased substantially, including purchases of equipment and mineral properties.
- The company raised $607,570 net from a first-quarter private placement of 5,012,423 shares and warrants. Shares outstanding increased from 112.3 million at December 31, 2017 to 118.7 million at March 31, 2018.
- The company acquired the Four Square property for recorded consideration of $826,587, consisting of shares and future cash and share obligations.
- Forward-gold-contract liabilities decreased from $920,579 at December 31, 2017 to $290,701 at March 31, 2018, primarily due to conversion of the Ophir contract and contractual payments.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected production over the next 18 months to improve operating cash flow and intended to reduce debt while expanding production and the mineral-property portfolio.
- Open-pit mining advanced into a lower-grade area, and the company reported an estimated 24,000-tonne stockpile grading 0.75 gpt.
- Underground progress was slowed by ground conditions and water management. The company purchased a shotcrete machine to improve ground stability.
- The New Jersey Mill experienced unexpected downtime for ball-mill motor repairs during February.
- Remaining forward-gold obligations included approximately 224.5 ounces due during the remainder of 2018. Counterparties could request cash instead of gold, exposing the company to gold-price and liquidity risk.
- All gold concentrate sales during the quarter were made to H&H Metals, creating customer concentration risk. Concentrate pricing remains subject to final settlement for metal prices, weights, assays, and charges.
- The asset-retirement obligation increased to $136,344 after a $10,771 revision related to additional disturbance at the Golden Chest property.
- On April 20, 2018, the company raised an additional $500,000 net through a private placement of 3,846,154 units.
- The company reported no material legal proceedings, mine-safety events requiring disclosure, or material changes in internal control. The filing states that controls and procedures were effective.
Important facts for investors to verify
- Verify the company’s legal name and corporate history, since the filing identifies the registrant as New Jersey Mining Company while the requested company name is Idaho Strategic Resources, Inc.
- Reconcile the filing’s references to first-quarter equity proceeds: the financial statements report $607,570, while management’s discussion references $840,904 in first-quarter common-stock and warrant sales.
- Assess whether production growth can offset the sharp decline in gross margin and the increase in operating and exploration costs.
- Review the maturity schedule and related-party nature of debt, including the February 2020 balloon obligations and the remaining forward-gold deliveries.
- Evaluate liquidity against current liabilities exceeding current assets and the company’s dependence on continued production and external financing.
- Review the Four Square acquisition consideration, future cash and share commitments, and the company’s mineral-property development assumptions.
- Confirm the filing signature date, which appears as May 15, 2017 despite the report covering March 31, 2018.