UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20212022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 001-39649
GATOS SILVER, INC.
(Exact name of registrant as specified in its charter)
Delaware | 27-2654848 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
8400 E. Crescent Parkway,925 W Georgia Street, Suite 600910
Greenwood VillageVancouver, COBritish Columbia, Canada 80111V6C 3L2
(Address of principal executive offices) (Zip Code)
(303604) 784-5350424-0984
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | GATO | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑☐ No ☐☑
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑☐ No ☐☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | ||
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☑ | Smaller reporting company | ☑ |
| | Emerging growth company | ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The Company has 700,000,000 shares of common stock, par value $0.001, authorized of which 69,134,49469,162,223 were issued and outstanding as of November 1, 2021.March 24, 2023.
TABLE OF CONTENTS
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| Condensed Consolidated Statements of Shareholders’ Equity (Deficit) | 5 | |
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| 7 | | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | | |
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2
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
GATOS SILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands of United States dollars, except for share and per share amounts)
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2021 |
| 2020 | ||
ASSETS |
| |
|
| |
|
Current Assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 12,398 | | $ | 150,146 |
Related party receivables | |
| 1,280 | |
| 1,727 |
Other current assets | |
| 1,058 | |
| 3,879 |
Total current assets | |
| 14,736 | |
| 155,752 |
Non‑Current Assets | |
| | |
| |
Investment in affiliates | |
| 393,608 | |
| 109,597 |
Other non-current assets | |
| 41 | |
| 61 |
Total Assets | | $ | 408,385 | | $ | 265,410 |
LIABILITIES AND SHAREHOLDERS' EQUITY | |
| | |
| |
| | | | | | |
Current Liabilities | |
| | |
| |
Accounts payable and other accrued liabilities | | $ | 4,043 | | $ | 4,024 |
Non-Current Liabilities | | | | | | |
Credit Facility, net of debt issuance costs | | | 12,583 | | | — |
Shareholders' Equity | |
| | | | |
Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,134,494 and 59,183,076 shares outstanding as of September 30, 2021 and December 31, 2020 | |
| 117 | |
| 108 |
Paid‑in capital | |
| 542,193 | |
| 409,728 |
Accumulated deficit | |
| (150,551) | |
| (147,423) |
Treasury stock, at cost, NaN and 144,589 shares as of September 30, 2021 and December 31, 2020, respectively | |
| — | |
| (1,027) |
Total shareholders' equity | |
| 391,759 | |
| 261,386 |
Total Liabilities and Shareholders' Equity | | $ | 408,385 | | $ | 265,410 |
| | | | | | | | |
| | | | September 30, | | December 31, | ||
|
| Notes |
| 2022 |
| 2021 | ||
ASSETS | | |
| |
|
| |
|
Current Assets | | |
| |
|
| |
|
Cash and cash equivalents | | | | $ | 15,269 | | $ | 6,616 |
Related party receivables | | 5 | |
| 586 | |
| 1,592 |
Other current assets | | 3 | |
| 1,077 | |
| 3,558 |
Total current assets | | | |
| 16,932 | |
| 11,766 |
Non‑Current Assets | | | |
| | |
| |
Investment in affiliates | | 12 | |
| 371,452 | |
| 355,310 |
Other non-current assets | | | |
| 39 | |
| 35 |
Total Assets | | | | $ | 388,423 | | $ | 367,111 |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| | |
| |
| | | | | | | | |
Current Liabilities | | | |
| | |
| |
Accounts payable and other accrued liabilities | | 4 | | $ | 2,334 | | $ | 1,406 |
Non-Current Liabilities | | | | | | | | |
Credit Facility, net of debt issuance costs | | 10 | | | 12,730 | | | 12,620 |
Shareholders’ Equity | | | |
| | | | |
Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,162,223 shares outstanding as of September 30, 2022 and December 31, 2021 | | | |
| 117 | |
| 117 |
Paid‑in capital | | | |
| 545,800 | |
| 543,829 |
Accumulated deficit | | | |
| (172,558) | |
| (190,861) |
Total shareholders’ equity | | | |
| 373,359 | |
| 353,085 |
Total Liabilities and Shareholders’ Equity | | | | $ | 388,423 | | $ | 367,111 |
See accompanying notes to the condensed consolidated financial statements.
3
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of United States dollars, except for share and per share amounts)
| | | | | | | | | | | | | | |
| | | | Three Months Ended | | Nine Months Ended | ||||||||
| | | | September 30, | | September 30, | ||||||||
|
| Notes |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
| | | | | | | | | | | | | | |
Expenses | | | | |
| | |
| | |
| | |
|
Exploration | | | | $ | — | | $ | 479 | | $ | 110 | | $ | 1,397 |
General and administrative | | | |
| 5,933 | |
| 7,244 | |
| 16,967 | |
| 17,758 |
Amortization | | | |
| 44 | |
| 31 | |
| 132 | |
| 45 |
Total expenses | | | |
| 5,977 | |
| 7,754 | |
| 17,209 | |
| 19,200 |
| | | | | | | | | | | | | | |
Other income (expense) | | | |
| | | | | |
| | | | |
Equity income in affiliates | | 12 | |
| 6,801 | |
| 1,600 | |
| 32,180 | |
| 22,592 |
Other income (expense) | | 5,9 | | | 1,076 | | | (8,845) | | | 3,332 | | | (6,520) |
Net other income (expense) | | | |
| 7,877 | |
| (7,245) | |
| 35,512 | |
| 16,072 |
Net income (loss) | | | | $ | 1,900 | | $ | (14,999) | | $ | 18,303 | | $ | (3,128) |
Net income (loss) per share: | | 7 | | | | | | | | | | | | |
Basic | | | | $ | 0.03 | | $ | (0.22) | | $ | 0.26 | | $ | (0.05) |
Diluted | | | | $ | 0.03 | | $ | (0.22) | | $ | 0.26 | | $ | (0.05) |
Weighted average shares outstanding: | | | |
|
| |
|
| |
|
| |
|
|
Basic | | | | | 69,162,223 | | | 67,133,205 | | | 69,162,223 | | | 62,024,175 |
Diluted | | | |
| 69,309,019 | |
| 67,133,205 | |
| 69,309,019 | |
| 62,024,175 |
See accompanying notes to the condensed consolidated financial statements.
4
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(In thousands of United States dollars, except for share amounts)
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Expenses | | |
| | |
| | |
| | |
|
Exploration | | $ | 479 | | $ | 134 | | $ | 1,397 | | $ | 516 |
General and administrative | |
| 5,994 | |
| 1,965 | |
| 14,008 | |
| 4,345 |
Amortization | |
| 31 | |
| 7 | |
| 45 | |
| 24 |
Total expenses | |
| 6,504 | |
| 2,106 | |
| 15,450 | |
| 4,885 |
| | | | | | | | | | | | |
Other income (expense) | |
| | | | | |
| | | | |
Equity income (loss) in affiliates | |
| 1,600 | |
| 3,447 | |
| 22,592 | |
| (18,069) |
Term Loan closing fee | | | (10,000) | | | — | | | (10,000) | | | — |
Other loss | | | (95) | | | (908) | | | (270) | | | (3,253) |
Net other income (expense) | |
| (8,495) | |
| 2,539 | |
| 12,322 | |
| (21,322) |
Net income (loss) from continuing operations | | $ | (14,999) | | $ | 433 | | $ | (3,128) | | $ | (26,207) |
Net loss from discontinued operations | | | — | | | (1,618) | | | — | | | (4,943) |
Net loss | | $ | (14,999) | | $ | (1,185) | | $ | (3,128) | | $ | (31,150) |
Net income (loss) per share: | |
|
| |
|
| |
|
| |
|
|
Basic(1) | | | | | | | | | | | | |
Continuing operations | | $ | (0.22) | | $ | 0.01 | | $ | (0.05) | | $ | (0.65) |
Discontinued operations | | $ | — | | $ | (0.04) | | $ | — | | $ | (0.12) |
| | $ | (0.22) | | $ | (0.03) | | $ | (0.05) | | $ | (0.77) |
Diluted(1) | | | | | | | | | | | | |
Continuing operations | | $ | (0.22) | | $ | 0.01 | | $ | (0.05) | | $ | (0.65) |
Discontinued operations | | $ | — | | $ | (0.04) | | $ | — | | $ | (0.12) |
| | $ | (0.22) | | $ | (0.03) | | $ | (0.05) | | $ | (0.77) |
Weighted average shares outstanding: | |
|
| |
|
| |
|
| |
|
|
Basic(1) | | | 67,325,644 | | | 40,506,144 | | | 62,210,848 | | | 40,505,790 |
Diluted(1) | |
| 67,325,644 | |
| 40,506,144 | |
| 62,210,848 | |
| 40,505,790 |
See accompanying notes to the condensed consolidated financial statements.
4
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except for share amounts)
| | | | | | | | | | | | | | | | | | | |
| | Number | | Amount | | | | | | | | | | ||||||
| | Common | | Treasury | | Common | | Treasury | | Paid‑in | | Accumulated | | | | ||||
|
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Deficit |
| Total | |||||
Balance at December 31, 2021 | | 69,162,223 | | — | | $ | 117 | | $ | — | | $ | 543,829 | | $ | (190,861) | | $ | 353,085 |
Stock‑based compensation |
| — |
| — | |
| — | |
| — | |
| 1,482 | |
| — | |
| 1,482 |
Net income | | — | | — | | | — | | | — | | | — | | | 18,829 | | | 18,829 |
Balance at March 31, 2022 |
| 69,162,223 |
| — | | $ | 117 | | $ | — | | $ | 545,311 | | $ | (172,032) | | $ | 373,396 |
Stock‑based compensation |
| — |
| — | |
| — | |
| — | |
| (250) | |
| — | |
| (250) |
Net loss | | — | | — | | | — | | | — | | | — | | | (2,426) | | | (2,426) |
Balance at June 30, 2022 |
| 69,162,223 |
| — | | $ | 117 | | $ | — | | $ | 545,061 | | $ | (174,458) | | $ | 370,720 |
Stock‑based compensation |
| — |
| — | |
| — | |
| — | |
| 739 | |
| — | |
| 739 |
Net income | | — | | — | | | — | | | — | | | — | | | 1,900 | | | 1,900 |
Balance at September 30, 2022 |
| 69,162,223 |
| — | | $ | 117 | | $ | — | | $ | 545,800 | | $ | (172,558) | | $ | 373,359 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number | | Amount | | | | | | | | | | | Number | | Amount | |
| | |
| | | |
| ||||||||||||
| | Common | | Treasury | | Common | | Treasury | | Paid‑in | | Accumulated | | | | | Common | | Treasury | | Common | | Treasury | | Paid-in | | Accumulated | | | | ||||||||
|
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Deficit |
| Total |
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Deficit |
| | Total | |||||||||
Balance at December 31, 2020 | | 59,183,076 | | 144,589 | | $ | 108 | | $ | (1,027) | | $ | 409,728 | | $ | (147,423) | | $ | 261,386 |
| 59,183,076 |
| 144,589 | | $ | 108 | | $ | (1,027) | | $ | 409,728 | | $ | (147,423) | | $ | 261,386 |
Stock‑based compensation |
| — |
| — | |
| — | |
| — | |
| 1,078 | |
| — | |
| 1,078 | |||||||||||||||||||
Stock-based compensation |
| — |
| — | |
| — | |
| — | |
| 1,078 | |
| — | | | 1,078 | |||||||||||||||||||
Issuance of common stock | | 182,453 | | — | | | — | | | — | | | 1,559 | | | — | | | 1,559 | | 182,453 | | — | | | — | | | — | | | 1,559 | | | — | | | 1,559 |
DSUs converted to common stock | | 43,523 | | — | | | — | | | — | | | — | | | — | | | — |
| 43,523 |
| — | |
| — | |
| — | |
| — | |
| — | | | — |
Other | | — | | — | | | — | | | — | | | (262) | | | — | | | (262) | | — | | — | | | — | | | — | | | (262) | | | — | | | (262) |
Net loss |
| — |
| — | |
| — | |
| — | |
| — | |
| (1,620) | |
| (1,620) | | — | | — | | | — | | | — | | | — | | | (1,620) | | | (1,620) |
Balance at March 31, 2021 |
| 59,409,052 |
| 144,589 | | $ | 108 | | $ | (1,027) | | $ | 412,103 | | $ | (149,043) | | $ | 262,141 |
| 59,409,052 |
| 144,589 | | $ | 108 | | $ | (1,027) | | $ | 412,103 | | $ | (149,043) | | $ | 262,141 |
Stock‑based compensation |
| — |
| — | |
| — | |
| — | |
| 2,490 | |
| — | |
| 2,490 | |||||||||||||||||||
Stock-based compensation |
| — |
| — | |
| — | |
| — | |
| 2,490 | |
| — | | | 2,490 | |||||||||||||||||||
Issuance of common stock | | 331,497 | | — | | | — | | | — | | | 2,662 | | | — | | | 2,662 |
| 331,497 |
| — | |
| — | |
| — | |
| 2,662 | |
| — | | | 2,662 |
DSUs converted to common stock | | 33,652 | | — | | | — | | | — | | | — | | | — | | | — |
| 33,652 |
| — | | | — | | | — | | | — | | | — | | | — |
Other | | — | | — | | | — | | | — | | | (7) | | | — | | | (7) |
| — |
| — | |
| — | |
| — | |
| (7) | |
| — | | | (7) |
Net income |
| — |
| — | |
| — | |
| — | |
| — | |
| 13,491 | | | 13,491 |
| — |
| — | |
| — | |
| — | |
| — | |
| 13,491 | | | 13,491 |
Balance at June 30, 2021 |
| 59,774,201 |
| 144,589 | | $ | 108 | | $ | (1,027) | | $ | 417,248 | | $ | (135,552) | | $ | 280,777 |
| 59,774,201 |
| 144,589 | | $ | 108 | | $ | (1,027) | | $ | 417,248 | | $ | (135,552) | | $ | 280,777 |
Stock‑based compensation |
| — |
| — | |
| — | |
| — | |
| 2,167 | |
| — | |
| 2,167 | |||||||||||||||||||
Stock-based compensation | | — | | — | | | — | | | - | | | 2,167 | | | — | | | 2,167 | |||||||||||||||||||
Issuance of common stock, net | | 9,288,747 | | (144,589) | | | 9 | | | 1,027 | | | 121,637 | | | — | | | 122,673 | | 9,288,747 | | (144,589) | | | 9 | | | 1,027 | | | 121,637 | | | — | | | 122,673 |
DSU compensation | | — | | — | | | — | | | — | | | 1,141 | | | — | | | 1,141 | | — | | — | | | — | | | — | | | 1,141 | | | — | | | 1,141 |
DSUs converted to common stock | | 71,546 | | — | | | — | | | — | | | — | | | — | | | — | | 71,546 | | — | | | — | | | — | | | — | | | — | | | — |
Net loss |
| — |
| — | |
| — | |
| — | |
| — | |
| (14,999) | | | (14,999) | | — | | — | | | — | | | — | | | — | | | (14,999) | | | (14,999) |
Balance at September 30, 2021 |
| 69,134,494 |
| — | | $ | 117 | | $ | — | | $ | 542,193 | | $ | (150,551) | | $ | 391,759 | | 69,134,494 | | — | | $ | 117 | | $ | — | | $ | 542,193 | | $ | (150,551) | | $ | 391,759 |
See accompanying notes to the condensed consolidated financial statements.
5
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS (UNAUDITED) (Continued)
(In thousands except for share amounts)of United States dollars)
| | | | | | | | | | | | | | | | | | | |
| | Number(1) | | Amount | |
| | |
| | | |
| ||||||
| | Common | | Treasury | | Common | | Treasury | | Paid-in | | Accumulated | | | | ||||
|
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Deficit |
| | Total | ||||
Balance at December 31, 2019 |
| 40,323,430 |
| 144,589 | | $ | 80 | | $ | (1,027) | | $ | 375,921 | | $ | (225,583) | | | 149,391 |
Stock-based compensation |
| — |
| — | |
| — | |
| — | |
| 1,031 | |
| — | | | 1,031 |
DSU compensation | | — | | — | | | — | | | — | | | 61 | | | — | | | 61 |
Net loss |
| — |
| — | |
| — | |
| — | |
| — | |
| (17,821) | | | (17,821) |
Balance at March 31, 2020 |
| 40,323,430 |
| 144,589 | | $ | 80 | | $ | (1,027) | | $ | 377,013 | | $ | (243,404) | | $ | 132,662 |
Stock-based compensation |
| — |
| — | |
| — | |
| — | |
| 1,086 | |
| — | | | 1,086 |
Net loss |
| — |
| — | |
| — | |
| — | |
| — | |
| (12,144) | | | (12,144) |
Balance at June 30, 2020 |
| 40,323,430 |
| 144,589 | | $ | 80 | | $ | (1,027) | | $ | 378,099 | | $ | (255,548) | | $ | 121,604 |
Stock-based compensation |
| — |
| — | |
| — | |
| — | |
| 1,105 | |
| — | | | 1,105 |
Net loss |
| — |
| — | |
| — | |
| — | |
| — | |
| (1,185) | | | (1,185) |
Balance at September 30, 2020 |
| 40,323,430 |
| 144,589 | | $ | 80 | | $ | (1,027) | | $ | 379,204 | | $ | (256,733) | | $ | 121,524 |
|
|
See accompanying notes to the condensed consolidated financial statements.
6
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| | | | | | | | | | | | | | |
| | Nine Months Ended | | | | Nine Months Ended | ||||||||
| | September 30, | | | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| Notes |
| 2022 |
| 2021 | ||||
OPERATING ACTIVITIES | | |
| | |
| | | | |
| | |
|
Net loss | | $ | (3,128) | | $ | (31,150) | ||||||||
Plus net loss from discontinued operations | | | — | | | 4,943 | ||||||||
Adjustments to reconcile net income (loss) to net cash used by operating activities: | |
|
| |
|
| ||||||||
Net income (loss) | | | | $ | 18,303 | | $ | (3,128) | ||||||
Adjustments to reconcile net income to net cash used by operating activities: | | | |
|
| |
|
| ||||||
Amortization | |
| 45 | |
| 24 | | | |
| 132 | |
| 45 |
Stock‑based compensation expense | |
| 5,755 | |
| 3,043 | | 6 | |
| 2,099 | |
| 5,755 |
Equity (income) loss in affiliates | |
| (22,592) | |
| 18,069 | ||||||||
Other | | 6 | |
| 180 | |
| 65 | ||||||
Equity income in affiliates | | 12 | | | (32,180) | | | (22,592) | ||||||
Dividends from affiliates, net of withholding taxes | | 12 | | | 23,275 | | | — | ||||||
| | | | | | | | | | | | | | |
Changes in operating assets and liabilities: | |
|
| |
|
| | | |
|
| |
|
|
Receivables from related‑parties | |
| 446 | |
| (3,788) | ||||||||
Receivables from related-parties | | | |
| 1,006 | |
| 446 | ||||||
Accounts payable and other accrued liabilities | |
| 1,159 | |
| 146 | | | |
| 748 | |
| 1,094 |
Other current assets | | | 2,821 | | | (4) | | | | | 2,481 | | | 2,821 |
Operating cash flows from discontinued operations | | | — | | | (3,181) | ||||||||
Net cash used by operating activities | |
| (15,494) | |
| (11,898) | ||||||||
Net cash provided by (used by) operating activities | | | |
| 16,045 | |
| (15,494) | ||||||
| | | | | | | | | | | | | | |
INVESTING ACTIVITIES | |
|
| |
|
| | | |
|
| |
|
|
Purchase of property, plant and equipment | | | |
| (27) | |
| — | ||||||
Investment in affiliates | |
| (261,439) | |
| (8,383) | | 12 | |
| (7,365) | |
| (261,439) |
Investing cash flows from discontinued operations | | | — | | | (22) | ||||||||
Net cash used by investing activities | |
| (261,439) | |
| (8,405) | | | |
| (7,392) | |
| (261,439) |
| | | | | | | | | | | | | | |
FINANCING ACTIVITIES | |
|
| |
|
| | | |
|
| |
|
|
Related‑party convertible debt | |
| — | |
| 15,000 | ||||||||
Credit Facility | | | 13,000 | | | — | | | | | — | | | 13,000 |
Financing costs | |
| (7,274) | |
| (722) | | | |
| — | |
| (7,274) |
Issuance of common stock | |
| 132,873 | |
| — | | | |
| — | |
| 132,873 |
Issuance of treasury stock | | | 1,027 | | | — | | | | | — | | | 1,027 |
Other | | | (441) | | | 260 | | | | | — | | | (441) |
Financing cash flows from discontinued operations | | | — | | | 307 | ||||||||
Net cash provided by financing activities | |
| 139,185 | |
| 14,845 | | | |
| — | |
| 139,185 |
Net decrease in cash and cash equivalents | | | (137,748) | |
| (5,458) | ||||||||
Net increase (decrease) in cash and cash equivalents | | | | | 8,653 | |
| (137,748) | ||||||
Cash and cash equivalents, beginning of period | |
| 150,146 | |
| 9,085 | | | |
| 6,616 | |
| 150,146 |
Cash and cash equivalents, end of period | | | 12,398 | | | 3,627 | | | | | 15,269 | | | 12,398 |
Less cash of discontinued operations | | | — | | | 619 | ||||||||
Cash of continuing operations, end of period | | $ | 12,398 | | $ | 3,008 | ||||||||
Interest paid | | $ | 67 | | $ | — | | | | $ | 385 | | $ | 67 |
| | | | | | | | | | | | | | |
Supplemental disclosure of noncash transactions: | |
| | |
|
| | | |
| | |
|
|
Deferred financing costs included in accounts payable and accrued liabilities | | $ | — | | $ | 882 | ||||||||
Director fees in accrued liabilities converted to deferred share units | | $ | 1,141 | | $ | 61 | | | | $ | — | | $ | 1,141 |
Conversion of related party accounts receivable into LGJV capital contributions | | $ | — | | $ | 9,448 |
See accompanying notes to the condensed consolidated financial statements.
6
GATOS SILVER, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands of United States dollars, except share, per share, option, and stock unit amounts)
1. DescriptionBasis of Business
Organization and Nature of Business
Gatos Silver, Inc. (“Gatos Silver” or “the Company”) is a silver dominant production, development and exploration company that discovered a new silver and zinc-rich mineral district in southern Chihuahua State, Mexico.
The Company’s primary efforts are focused on the operation of the Los Gatos Joint Venture (“LGJV”) in Chihuahua, Mexico. On January 1, 2015, the Company entered into the LGJV to develop the Los Gatos District (“LGD”) with Dowa Metals and Mining Co., Ltd. (“Dowa”). Until July 15, 2021, the LGJV operating entities consisted of Minera Plata Real S. de R.L. de C.V (“MPR”), Operaciones San Jose del Plata S. de R.L. de C.V. and Servicios San Jose del Plata S. de R.L. de C.V. (“Servicios”) (collectively the “LGJV Entities”). Effective July 15, 2021, Servicios was merged into MPR.
Dowa completed its $50,000 funding requirement to the LGJV on April 1, 2016, thereby acquiring a 30% interest in the LGJV and the right to purchase future zinc-concentrate production at market rates. The LGJV completed a feasibility study in January 2017 and a technical update to the feasibility study in July 2020. In May 2019, Dowa increased its ownership interest by 18.5% to 48.5% through the conversion of the remaining Dowa MPR Loan (as defined in Note 9 —Commitments, Contingencies and Guarantees) to equity. On March 11, 2021, the Company repurchased the 18.5% interest from Dowa. See Note 9—Commitments, Contingencies and Guarantees for further discussion. As of September 30, 2021, the LGJV ownership is 70.0% Gatos Silver and 30.0% Dowa.
On September 1, 2019, the LGJV commenced commercial production of its 2 concentrate products: a lead concentrate and a zinc concentrate. The LGJV’s lead and zinc concentrates are currently sold to third-party customers.
The Company continues to perform additional definition drilling to further define and expand mineralization of the Cerro Los Gatos deposit, and is performing definition and exploratory drilling at the nearby Esther deposit. On December 5, 2020, the LGJV began the current infill and extension drilling program at the Cerro Los Gatos deposit. On May 7, 2021, the LGJV restarted drilling at the Esther zone.
The Company’s other Mexico exploration efforts are conducted through its wholly-owned subsidiary, Minera Luz del Sol S. de R.L. de C.V. (“MLS”). In March 2021, MLS commenced a 5,400-meter exploration program on its wholly-owned Santa Valeria project, located approximately 15 kilometers from the Cerro Los Gatos deposit.
Discontinued Operations
In October 2020, the Company completed the distribution of its wholly-owned subsidiary, Silver Opportunity Partners LLC (“SOP”), and SOP has been presented as discontinued operations in the Company’s condensed consolidated financial statements. See Note 11 – Discontinued Operations for additional detail.
2. Summary of Significant Accounting PoliciesPresentation
Basis of Consolidation and Presentation
The financial statements represent the condensed consolidated financial position and results of operations of Gatos Silver, Inc. and its subsidiary, MLS.subsidiaries, Gatos Silver Canada Corporation and Minera Luz del Sol S. de R.L. de C.V. Unless the context otherwise requires, references to Gatos Silver or the Company mean Gatos Silver, Inc. and its consolidated subsidiary. All equity interest in the Company’s wholly-owned subsidiary, SOP, was distributed to its stockholders in October 2020. The accounts for SOP have been presented as discontinued operations in the accompanying interim condensed consolidated financial statements.subsidiaries.
7
The interim condensedconsolidated financial statements are unaudited, but include all adjustments, consisting of normal recurring entries, which are necessary for a fair presentation for the dates and periods presented. Interim results are not necessarily indicative of results for a full year. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all financial information and disclosures required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 (the “2020 10- K”“2021 10-K”).
2. | Summary of Significant Accounting Policies |
Summary of Significant Accounting Policies
The consolidated financial statements for the year ended December 31, 2020,2021, disclose those accounting policies considered significant in determining results of operations and financial position. There have been no material changes to, or in the application of, the accounting policies previously identified and described in the 20202021 10-K.
Recent Accounting Pronouncements
The Company adopted the provision of Accounting Standards Update No. 2019-12, Income Taxes (Topic 740). This provision did not have a material impact on the financial statements. There have been no additional accounting pronouncements issued or adopted during the nine months ended September 30, 2021,2022, which are expected to have a material impact on the financial statements.
3. Property, Plant and Equipment, net3.Other Current Assets
| | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||
Value added tax receivable | | $ | 683 | | $ | 575 |
Prepaid expenses | |
| 387 | |
| 2,976 |
Other | |
| 7 | |
| 7 |
Total other current assets | | $ | 1,077 | | $ | 3,558 |
Mineral Properties4.Accounts Payable and Other Accrued Liabilities
Mining Concessions
| | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||
Accounts payable | | $ | 887 | | $ | 196 |
Accrued expenses | |
| 361 | |
| 623 |
Accrued compensation | |
| 1,086 | |
| 587 |
Total accounts payable and other current liabilities | | $ | 2,334 | | $ | 1,406 |
7
5.Related-Party Transactions
LGJV
Under the Unanimous Omnibus Partner Agreement, the Company provides certain management and administrative services to the LGJV. The Company earned $1,250 under this agreement for both the three months ended September 30, 2022 and 2021 and during both the nine months ended September 30, 2022 and 2021, the Company earned $3,750. The income from these services has been recorded on the statements of operations under other income. In Mexico, mineral concessionsthe September 30, 2021 unaudited financial statements filed on Form 10-Q, the management fee was presented as a reduction to general and administrative expense and is now presented in other income to be consistent with the 2021 10-K. The Company also incurs certain LGJV costs that are subsequently reimbursed by the LGJV. The Company received $4,167 and $4,117 in cash from the Mexican government can only be held by Mexican nationals or Mexican-incorporated companies. The concessions are validLGJV under this agreement for 50 yearsthe nine months ended September 30, 2022 and are extendable provided the concessions are kept in good standing. For concessions to remain in good standing a semi-annual fee must be paid to the Mexican government and an annual report describing the work accomplished on the property must be filed. These concessions may be cancelled without penalty with prior notice to the Mexican government. MLS is the concession holder of a series of claims titles granted by the Mexican government.
Santa Valeria Concession
2021, respectively. The Company is required to make a production royalty paymenthad receivables under this agreement of 1%$417 and $833 as of the net smelter returns on production. The Company may terminate the agreement upon prior notice.September 30, 2022 and December 31, 2021, respectively.
4. Accounts Payable and Other Accrued Liabilities
6.
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Accounts payable | | $ | 263 | | $ | 560 |
Accrued expenses | |
| 955 | |
| 1,240 |
Accrued compensation | |
| 2,565 | |
| 1,964 |
Other | | | 260 | | | 260 |
Total accounts payable and other current liabilities | | $ | 4,043 | | $ | 4,024 |
8
5. Related-Party Transactions
LGJV
The Company has a services agreement with the LGJV to provide certain consulting and administrative services. The Company earned $1,250 and $900 under this agreement for the three months ended September 30, 2021 and 2020, respectively, and during the nine months ended September 30, 2021 and 2020, the Company earned $3,750 and $3,000, respectively. The Company received $4,117 and NaN from the LGJV under this agreement for the nine months ended September 30, 2021 and 2020. The Company had receivables under this agreement of $833 and $1,200 as of September 30, 2021 and December 31, 2020, respectively. The Company also incurs certain LGJV costs and provides short term advances that are reimbursed by the LGJV.
SSMRC
The Company has a Management Services Agreement with Sunshine Silver Mining & Refining Corporation (“SSMRC”) (formerly Silver Opportunity Partners Corporation), pursuant to which the Company provides certain limited executive and managerial advisory services to SSMRC until terminated by either party. SSMRC reimburses the Company for costs of such services. The Company earned NaN from SSMRC under this agreement for the three months ended September 30, 2021 and 2020, respectively, and during the nine months ended September 30, 2021 and 2020, the Company earned $16 and NaN, respectively.
6. Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed similarly, except that weighted average common shares is increased to reflect the potential dilution that would occur if stock options outstanding were exercised or converted into common stock. The dilutive effects are calculated using the treasury stock method.
For both the three and nine months ended September 30, 2021 and 2020, all stock options outstanding have been excluded from the dilutive earnings per share calculation as their effect would be anti-dilutive.
7. Stockholders’ Equity
The Company is authorized to issue 700,000,000 shares of $0.001 par value common stock and 50,000,000 shares of $0.001 par value preferred stock.
Common Stock Transactions
On July 19, 2021, the Company completed a follow-on public offering of 8,930,000 shares of common stock at a price of $14.00 per share, resulting in net proceeds of $118,894, after deducting underwriting discounts and commissions and expenses paid by the Company. On August 18, 2021, the Company issued an additional 286,962 shares of common stock at a price of $14.00 per share, through the exercise of the over-allotment option, with net proceeds from the additional issuance of $3,837, after deducting underwriting discounts and commissions and expenses paid bycommissions. Additionally, the Company.Company incurred an additional $1,700 in other costs related to the offering.
Stock Option TransactionsStock-Based Compensation
The Company’sCompany recognized stock-based compensation expense as follows:
| | | | | | | | | | | | |
|
| Three months ended September 30, |
| Nine months ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Stock Options | | $ | 682 | | $ | 2,329 | | $ | 1,936 | | $ | 5,755 |
Performance share units | |
| 57 | |
| — | |
| 163 | |
| — |
| | $ | 739 | | $ | 2,329 | | $ | 2,099 | | $ | 5,755 |
Stock Option Transactions
The Company granted 100,000 stock options haveduring the nine months ended September 30, 2022, with a contractual termweighted-average grant-date fair value per share of 10 years$5.83. The Company received cash from the exercise of stock options of nil and entitle$4,862 for the holdernine months ended September 30, 2022 and 2021, respectively.
Total unrecognized stock-based compensation expense as of September 30, 2022, was $3,543 which is expected to purchase sharesbe recognized over a weighted average period of 1.7 years.
8
Stock option activity for the Company’s common stock. The optionsnine months ended September 30, 2022, is summarized in the following tables:
| | | | | |
| | | | Weighted‑ | |
| | | | Average | |
Employee & Director Options |
| Shares |
| Exercise Price | |
Outstanding at December 31, 2021 | | 5,873,968 | | $ | 13.11 |
Granted |
| 100,000 | | $ | 10.28 |
Forfeited |
| (3,641,568) | | $ | 13.45 |
Outstanding at September 30, 2022 |
| 2,332,400 | | $ | 12.46 |
Vested at September 30, 2022 |
| 1,548,981 | | $ | 12.81 |
| | | | | |
| | | | Weighted‑ | |
| | | | Average | |
LGJV Personnel Options |
| Shares |
| Exercise Price | |
Outstanding at December 31, 2021 | | 32,393 | | $ | 7.31 |
Outstanding and vested at September 30, 2022 |
| 32,393 | | $ | 7.31 |
Performance Share Unit (“PSU”) Transactions
On December 17, 2021, 119,790 PSUs were granted to the Company’s employees and LGJV personnel priorwith a weighted average grant date fair value per share of $14.22. During the nine months ended September 30, 2022, 71,480 PSUs were forfeited. At September 30, 2022, there were 48,310 PSUs outstanding. On September 30, 2022, unrecognized compensation expense related to 2020 havethe PSUs was $507 which is expected to be recognized over a requisite serviceweighted-average period of four years2.2 years.
Deferred Stock Unit (“DSU”) Transactions
The following table summarizes the DSU activity for the nine months ended September 30, 2022:
| | | | | |
|
| |
| Weighted-Average | |
| | | | Grant Date Fair | |
Employee and Director DSUs | | Shares | | Value | |
Outstanding at December 31, 2021 |
| 146,796 | | $ | 10.88 |
Outstanding at September 30, 2022 |
| 146,796 | | $ | 10.88 |
7.Net Income (Loss) per Share
Basic net income per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed similarly, except that weighted-average common shares is increased to reflect the potential dilution that would occur if stock options were exercised or PSUs and vestDSUs were converted into common stock. The dilutive effects are calculated using the treasury stock method.
For both the three and nine months ended September 30, 2022, all stock options have been excluded from the dilutive earnings per common share calculation as the exercise price of these stock options was greater than the average market value of our common stock for those periods, resulting in equal annual installments. Starting in 2020,an anti-dilutive effect. Additionally, for both the options granted tothree and nine months ended September 30, 2022, all PSUs were excluded from the Company’s employeesdiluted earnings per common share calculation as the PSUs do not currently meet the criteria for issuance. For both the three and LGJV personnel generally have a requisite service period of three years. The sign on options granted to the Company’s President in Junenine months ended September 30, 2021, vest in three equal tranches, the first of which vested immediately, and the remainder on the first and second anniversaries of employment with the Company subject to continued employment on such vesting dates. Theexperienced a net loss, thus all stock options granted to non-employee directors prior to 2020and DSUs outstanding have a requisite service period of one year and vest in equal monthly installments. The options granted to non-employee directors in January 2020 have a requisite service period of one and a half years and vest in monthly installments. The options granted to non-employee directors in June 2020 have a requisite service period of one year and vest in semi-annual installments.been excluded as they are anti-dilutive.
9
The Company granted 489,719A reconciliation of basic and 810,333 stock options duringdiluted earnings per common share for the three and nine months ended September 30, 2022 and 2021, and 2020, respectively. The weighted-average grant-date fair value per share was $9.53 and $6.73 for the nine months ended September 30, 2021 and 2020, respectively. The Company received $4,862 from stock options exercised during the nine months ended September 30, 2021.
Total unrecognized stock-based compensation expenseare as of September 30, 2021, was $8,346 which is expected to be recognized over a weighted average period of 1.9 years.
Stock option activity for the nine months ended September 30, 2021, is summarized in the following tables:follows:
| | | | | |
| | | | Weighted‑ | |
| | | | Average | |
Director and Employee Options |
| Shares |
| Exercise Price | |
Outstanding at December 31, 2020 | | 5,411,930 | | $ | 12.52 |
Granted |
| 489,719 | | $ | 16.72 |
Exercised |
| 585,735 | | $ | 8.30 |
Forfeited |
| 15,000 | | $ | 7.00 |
Outstanding at September 30, 2021 |
| 5,300,914 | | $ | 13.39 |
Vested at September 30, 2021 |
| 3,366,804 | | $ | 15.11 |
| | | | | | | | | | | | |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
| | 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
| | | | | | | | | | | | |
Net income (loss) | | $ | 1,900 | | $ | (14,999) | | $ | 18,303 | | $ | (3,128) |
| | | | | | | | | | | | |
Weighted average shares: | |
|
| |
|
| |
|
| |
|
|
Basic | |
| 69,162,223 | |
| 67,133,205 | |
| 69,162,223 | |
| 62,024,175 |
Effect of dilutive DSUs | |
| 146,796 | |
| — | |
| 146,796 | |
| — |
Diluted | |
| 69,309,019 | |
| 67,133,205 | |
| 69,309,019 | |
| 62,024,175 |
| | | | | | | | | | | | |
Net income (loss) per share: | |
|
| |
|
| |
|
| |
|
|
Basic | | $ | 0.03 | | $ | (0.22) | | $ | 0.26 | | $ | (0.05) |
Diluted | | $ | 0.03 | | $ | (0.22) | | $ | 0.26 | | $ | (0.05) |
| | | | | |
| | | | Weighted‑ | |
| | | | Average | |
LGJV Personnel Options |
| Shares |
| Exercise Price | |
Outstanding at December 31, 2020 | | 43,676 | | $ | 7.23 |
Outstanding and vested at September 30, 2021 |
| 43,676 | | $ | 7.23 |
Deferred Stock Unit Transactions
Deferred stock units (“DSUs”) are awarded to directors at the discretion of the Board of Directors. The DSUs are fully vested on the grant date and each DSU entitles the holder to receive 1 share of the Company’s common stock upon the director’s cessation of continuous service. In addition, senior executives are eligible to elect to defer receipt of any portion of cash compensation or equity compensation awards other than from the exercise of stock options and take payment in the form of DSUs. Non-employee directors are eligible to elect to defer receipt of any portion of annual retainers or meeting awards and take payment in the form of DSUs. The DSU entitles the holder to receive one share of the Company’s common stock at either a date specified in the deferral election or cessation of service, whichever comes first. The fair value of the DSUs are equal to the fair value of the Company’s common stock on the grant date.
At September 30, 2021, there were 144,958 DSUs outstanding. The Company granted 110,965 and 5,103 DSUs during the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, 148,721 DSUs were converted to common stock.
8.Fair Value Measurements
The Company establishes a framework for measuring the fair value of financial assets and liabilities and nonfinancial assets and liabilities, which are measured at fair value on a recurring (annual) basis in the form of a fair value hierarchy that prioritizes the inputs into valuation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2: Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.
10
Level 3: Unobservable inputs due to the fact there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.
Financial Assets and Liabilities
At September 30, 2021, and December 31, 2020, the Company’s financial instruments consisted of cash and cash equivalents, receivables, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate fair value due to their short maturities.
Non-Financial Assets and Liabilities that are Measured at Fair Value on a Non-recurring Basis
The Company discloses and recognizes its non-financial assets and liabilities at fair value on a non-recurring basis. The estimatedbasis and makes adjustments to fair value, for these non-financial assets and liabilities are classified as Level 3needed (for example, when there is evidence of the fair value hierarchy, as the valuation was determined based on internally developed assumptions that market participants would use in the pricing of such assets without observable inputs and no market activity.impairment).
The Company recorded its initial investment in affiliates at fair value. The estimated fair value for this non-financial asset is classified aswithin Level 3 of the fair value hierarchy, as the valuation was determined based on internally developed assumptions with few observable inputs and no market activity. For the year ended December 31, 2021, the Company recorded impairment charges associated with the investment in the LGJV and reduced the carrying amount of such the investment in affiliate to its estimated fair value.
9.Commitments, Contingencies and Guarantees
In determining its accruals and disclosures with respect to loss contingencies, the Company will charge to income an estimated loss if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Legal expenses associated with the commitments and contingencies are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.
10
Environmental Contingencies
The Company’s mining and exploration activities are subject to various laws, regulations and permits governing the protection of the environment. These laws, regulations and permits are continually changing and are generally becoming more restrictive. The Company has made, and expects to make in the future, expenditures to comply with such laws, regulations and permits, but cannot predict the full amount of such future expenditures.
Legal
On February 22, 2022, a purported Gatos stockholder filed a putative class action lawsuit in the United States District Court for the District of Colorado against the Company, certain of our former officers, and several directors. An amended complaint was filed on August 15, 2022. The amended complaint, allegedly brought on behalf of certain purchasers of Gatos common stock and certain traders of call and put options on Gatos common stock from December 9, 2020 through January 25, 2022, seeks, among other things, damages, costs, and expenses, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 as well as Sections 11 and 15 of the Securities Act of 1933. The amended complaint alleges that certain individual defendants and Gatos, pursuant to the control and authority of the individual defendants, made false and misleading statements and/or omitted certain material information regarding the mineral resources and reserves at the Cerro Los Gatos mine. Gatos and all defendants filed a motion to dismiss this action on October 14, 2022. That motion was fully briefed as of December 23, 2022.
By Notice of Action issued February 9, 2022 and subsequent Statement of Claim dated March 11, 2022 Izabela Przybylska commenced a putative class action against Gatos Silver, Inc. (“Gatos”), certain of its former officers and directors, and others in the Ontario Superior Court of Justice on behalf of a purported class of all persons or entities, wherever they may reside or be domiciled, who acquired securities of Gatos in both the primary and secondary markets during the period from October 28, 2020 until January 25, 2022. The action asserts claims under Canadian securities legislation and at common law and seeks unspecified monetary damages and other relief in respect of allegations the defendants made false and misleading statements and omitted material information regarding the mineral resources and reserves of Gatos. The plaintiff filed motion materials for leave to proceed in respect of her statutory claims and for class certification on March 3, 2023. The court has tentatively set dates in late March of 2024 for the hearing of the plaintiff’s motions.
There can be no assurance that any of the foregoing matters individually or in aggregate will not result in outcomes that are materially adverse for us.
Dowa Debt Agreements
In July 2017, the LGJV Entitiesoperating entities consisting of Minera Plata Real S. de R.L. de C.V (“MPR”) and Operaciones San Jose del Plata S. de R.L. de C.V. (collectively, the “LGJV Entities”) entered into a loan agreement (the “Term Loan”) with Dowa whereby the LGJV Entities could borrow up to $210,000 for LGDLos Gatos District (“LGD”) development, with a maturity date of December 29, 2027. Interest on the Term Loan accrued daily at LIBOR plus 2.35% per annum, with the interest added to the amount borrowed until commencement of production. During 2018, the LGJV paid Dowa a $4,200 closing fee. Commencing June 30, 2021, repayment of the Term Loan in 14 consecutive semi-annual equal payments of the aggregate principal and capitalized interest began. The Company was required to pay an arrangement fee on the borrowing, calculated as 2% per annum of 70% of the outstanding principal balance, payable in semi-annual installments, on that date which was 2two business days prior to June 30 and December 31 each fiscal year until maturity, commencing after the initial drawdown which occurred in July 2018. The Term Loan also required additional principal payments equal to 70% of excess cash flows (as defined).
On July 26, 2021, the Term Loan was repaid in full through capital contributions made to the LGJV by the Company and Dowa in pro-rata amounts equal to their ownership in the LGJV of 70% and 30%, respectively. In conjunction with the repayment, the Company and the LGJV paid closing feesa fee to Dowa of $10,000, and $1,585, respectively.which is recorded on the statements of operations under other income (expense).
On January 23, 2018, the LGJV entered into a loan agreement with Dowa (the “Dowa MPR Loan”) whereby the LGJV could borrow up to $65,700 to continue LGD development. Interest on this loan accrued daily at LIBOR plus 1.5% per annum and was added to the amount borrowed. The amount borrowed plus accrued interest was due the earlier of June 30, 2019, or upon the Cerro Los Gatos mine’s substantial completion. If the Company’s 70% portion of the Dowa MPR Loan was not repaid in full on or before the due date, Dowa could elect to convert all or a portion of the principal amount into additional LGJV ownership at a favorable conversion rate.
11
TheIn connection with entering into the WCF (as defined below), the Company contributed $18,200 to the LGJV in May 2019 to provide funding for a partial repayment of principal and interest related to the Dowa MPR Loan. In late May 2019, the Dowa MPR Loan was fully extinguished with a cash payment of $18,200 and the conversion of the remaining $50,737 of principal and interest. The conversion of the remaining principal and interest increased Dowa’s ownership in the LGJV entities by 18.5% to 48.5%. On March 11, 2021, the Company repurchased the 18.5% interest from Dowa, for a total consideration of $71,550, increasing the Company’s ownership in the LGJV to 70.0%. These transactions resulted in a $47,400 higher basis than the underlying net assets of the LGJV Entities. This basis difference is being amortized overas the LGJV EntitiesEntities’ proven and probable reserves.reserves are processed.
On May 30, 2019, the LGJV entered into a working capital facility agreement (the “WCF”) with Dowa whereby the LGJV could borrow up to $60,000 to fund the working capital and sustaining capital requirements of the LGD. Interest on this loan accrued daily at LIBOR plus 3.0% per annum and all outstanding principal and interest was to mature on June 28, 2021. The Company was required to pay an arrangement fee on the borrowing, calculated as 15.0% per annum of 70.0% of the average daily principal amount outstanding under the WCF during such fiscal quarter. On March 11, 2021, the full $60,000 amount outstanding under the WCF was extinguished of whichusing funds contributed to the LGJV. The Company’s pro-rata capital contribution to the LGJV was $42,000.$42,000.
The Company guarantees the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of September 30, 2021,2022, the LGJV had $7,588$1,195 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $19,$3, with varying maturity dates through August 2023.
10.Debt
On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Facility”). The Credit Facility provides for a revolving line of credit in a principal amount of $50,000 and has an accordion feature which allowsat the time allowed for an increase in the total line of credit up to $100,000, subject to certain conditions. The Credit Facility matures on July 31, 2024. LoansBorrowings under the Credit Facility will bear interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% or the U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined in accordance with the Company’s consolidated net leverage ratio as of the end of the applicable period. The Credit Facility contains affirmative and negative covenants that are customary for credit agreements of this nature. The affirmative covenants consist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, among other things, limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. Obligations under the Credit Facility may be accelerated upon the occurrence of certain customary events of default. The Company was in compliance with all covenants under the Credit Facility, as amended, as of September 30, 2021.March 31, 2022.
On July 19, 2021, the Company borrowed $13,000 under the Credit Facility at a rate of LIBOR plus 3%. Debt issuance costs of $442 were to be amortized through July 31, 2024, prior to the amended and restated Credit Facility (see terms below). The Company has presentedcurrent balance outstanding on the Credit Facility net of the debt issuance costs and will amortize the debt issuance costs onis $9,000, following a straight-line basis over the term of the Credit Facility. The Company recognized amortization of debt issuance costs of $25 for both$4,000 principal repayment in December 2022.
For the three and nine months ended September 30, 2021. Unamortized debt issuance cost was $417 as of September 30, 2021.
The2022, the Company recognized interest expense of $82 for both the three$142 and nine months ended September 30, 2021,$368, respectively, with an effective interest rate of 4.4% and 3.8%, respectively, which has been recorded on the statements of operations under other loss.income (expense), and $36 and $110, respectively, for amortization of debt issuance costs. The Company paid interest of $67$158 and $385 for both the three and nine months ended September 30, 2021.2022.
11. Discontinued Operations
In October 2020,On March 7, 2022, the Company completedamended the distributionCredit Facility with the lender, Bank of its reportable U.S. segment, which was comprised of SOP. To effectMontreal (“BMO”), to address potential loan covenant deficiencies. The amendment included the distribution, the Company distributed, on a pro rata basis, all equity interest of SOP to its stockholders of record immediately prior to completion of the initial public offering. Shareholders received approximately 0.10594 shares of common stock of SOP for every share of the Company’s common stock held. SOP became a wholly owned subsidiary of a newly created Delaware corporation named Silver Opportunity Partners Corporation, subsequently renamed SSMRC.following revisions:
● | audited financial statements were to be provided prior to November 15, 2022; |
● | the credit limit was reduced to $30,000, until the Company delivered a new LOM CLG financial model with updated mineral reserves; |
● | upon assessment of the new CLG financial model, BMO, in its sole discretion, could increase the credit limit up to the original $50,000; |
● | requirement to provide updated financial projections for the CLG by September 30, 2022. The financial projections were provided by the required date and were used as the basis for the amendment entered into on December 19, 2022 discussed below; and |
● | waivers of certain defaults, events of default, representations and warranties and covenants arising out of the facts that led to the potential reduction in metal content of the Company’s previously stated mineral reserve figures. |
12
The resultsOn December 19, 2022, the Company entered an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of operations for SOP have been reflected as discontinued operations in the condensed consolidated statement of operations for the three and nine months ended September 30, 2020, and consist$50,000, with an accordion feature providing up to an additional $25,000. Key terms of the following:
| | | | | | |
| | Three Months Ended | | Nine Months Ended | ||
|
| September 30, 2020 |
| September 30, 2020 | ||
Operating Expenses of Discontinued Operations | | | | | | |
Exploration |
| $ | 102 |
| $ | 318 |
Pre-development | | | 506 | | | 1,554 |
General and administrative | | | 423 | | | 1,300 |
Amortization | | | 588 | | | 1,774 |
Total expenses |
| | 1,619 |
| | 4,946 |
| | | | | | |
Other Income of Discontinued Operations | | | | | | |
Other income | | | (1) | | | (3) |
Net loss of discontinued operations | | $ | 1,618 | | $ | 4,943 |
The cash flow activity from discontinued operations for the nine months ended September 30, 2020, have been reflected as discontinued operations in the condensed consolidated statement of cash flows for the nine months ended September 30, 2020, and consists of the following:
amended Credit Facility include:
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13
12. 11.Segment Information
The Company operates in a single industry as a corporation engaged in the acquisition, exploration and development of primarily silver mineral interests. The Company has mineral property interests in Mexico. The Company’s reportable segments are based on the Company’s mineral interests and management structure and include Mexico and Corporate segments. The Mexico segment engages in the exploration, development and exploration onoperation of the Company’s Mexican mineral properties and includes the Company’s investment in the LGJV. Financial information relating to the Company’s segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
|
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total | ||||||||||||
Exploration | | $ | 479 | | $ | — | | $ | 479 | | $ | 134 | | $ | — | | $ | 134 | | $ | — | | $ | — | | $ | — | | $ | 479 | | $ | — | | $ | 479 |
General and administrative |
| | 577 |
| | 5,417 |
| | 5,994 |
| | 195 |
| | 1,770 |
| | 1,965 |
| | 108 |
| | 5,825 |
| | 5,933 |
| | 577 |
| | 6,667 |
| | 7,244 |
Amortization |
| | — |
| | 31 |
| | 31 |
| | — |
| | 7 |
| | 7 |
| | — |
| | 44 |
| | 44 |
| | — |
| | 31 |
| | 31 |
Equity income in affiliates |
| | 1,600 |
| | — |
| | 1,600 |
| | 3,447 |
| | — |
| | 3,447 | ||||||||||||||||||
Term Loan closing fee | | | — | | | 10,000 | | | 10,000 | | | — | | | — | | | — | ||||||||||||||||||
Net other loss (income) |
| | 15 |
| | 80 |
| | 95 |
| | (2) |
| | 910 |
| | 908 | ||||||||||||||||||
Equity (income) in affiliates |
| | (6,801) |
| | — |
| | (6,801) |
| | (1,600) |
| | — |
| | (1,600) | ||||||||||||||||||
Net other (income) expense |
| | 23 |
| | (1,099) |
| | (1,076) |
| | 15 |
| | 8,830 |
| | 8,845 | ||||||||||||||||||
Total assets |
| | 61,373 |
| | 347,012 |
| | 408,385 |
| | 37,359 |
| | 75,574 |
| | 112,933 |
| $ | 12,722 |
| $ | 375,701 |
| $ | 388,423 |
| $ | 61,373 |
| $ | 347,012 |
| $ | 408,385 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
|
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total | ||||||||||||
Exploration | | $ | 1,397 | | $ | — | | $ | 1,397 | | $ | 516 | | $ | — | | $ | 516 | | $ | 110 | | $ | — | | $ | 110 | | $ | 1,397 | | $ | — | | $ | 1,397 |
General and administrative |
| | 909 |
| | 13,099 |
| | 14,008 |
| | 447 |
| | 3,898 |
| | 4,345 |
| | 1,497 |
| | 15,470 |
| | 16,967 |
| | 909 |
| | 16,849 |
| | 17,758 |
Amortization |
| | — |
| | 45 |
| | 45 |
| | — |
| | 24 |
| | 24 |
| | 1 |
| | 131 |
| | 132 |
| | — |
| | 45 |
| | 45 |
Equity income (loss) in affiliates |
| | 22,592 |
| | — |
| | 22,592 |
| | (18,069) |
| | — |
| | (18,069) | ||||||||||||||||||
Term Loan closing fee | | | — | | | 10,000 | | | 10,000 | | | — | | | — | | | — | ||||||||||||||||||
Net other loss |
| | 34 |
| | 236 |
| | 270 |
| | 22 |
| | 3,231 |
| | 3,253 | ||||||||||||||||||
Equity (income) in affiliates |
| | (32,180) |
| | — |
| | (32,180) |
| | (22,592) |
| | — |
| | (22,592) | ||||||||||||||||||
Net other (income) expense |
| | 37 |
| | (3,369) |
| | (3,332) |
| | 34 |
| | 6,486 |
| | 6,520 | ||||||||||||||||||
Total assets |
| $ | 61,373 |
| $ | 347,012 |
| $ | 408,385 |
| $ | 37,359 |
| $ | 75,574 |
| $ | 112,933 |
| $ | 12,722 |
| $ | 375,701 |
| $ | 388,423 |
| $ | 61,373 |
| $ | 347,012 |
| $ | 408,385 |
13. 12.Investment in Affiliate
During the three months ended September 30, 20212022 and 2020,2021, the Company recognized $1,600$6,801 and $3,447$1,600 of income, respectively, and during the nine months ended September 30, 20212022 and 2020,2021, the Company recognized $32,180 and $22,592 of income, and a $18,069 loss, respectively, on its investment in the LGJV Entities, representing its ownership share of the LGJV Entities’ results. The equity income or loss in affiliate includes amortization of the carrying value of the investment in excess of the underlying net assets of the LGJV Entities. This basis difference is being amortized over the utilization ofas the LGJV Entities’ proven and probable reserves.reserves are processed.
The Company provided an updated technical report compliant with Regulation S-K subpart 1300 (the “Los Gatos Technical Report”) dated November 10, 2022. The Los Gatos Technical Report indicated a significant decrease in the mineral reserve and mineral resource from the previously issued technical report in 2020. The Company considered this reduction in the mineral reserve and mineral resources as an indicator of a possible other-than-temporary impairment and as a result compared the carrying value of the LGJV on December 31, 2021 to the fair value of the LGJV.
13
The fair value of the LGJV was estimated based on the net present value of the expected cash flows to be generated by the LGJV on 70% basis. The discount rate used was 5.00%. The fair value of the investment in the LGJV was estimated to be $355,310 and the carrying value at December 31, 2021 was $406,874. Since the carrying value exceeded the fair value, an impairment charge of $51,564 was recorded during the fourth quarter of 2021. See Note 8 - Fair Value Measurements for additional detail of the assumptions used in the determination of the fair value of the long-lived assets tested for impairment.
For the year ended December 31, 2021, the Company contributed $260,039 to the LGJV to repurchase 18.5% of the ownership of the LGJV, to retire the WCF and the Term Loan and in support of exploration activities.
On March 17, 2022, we entered into a definitive agreement with Dowa to build and operate a leaching plant to reduce fluorine levels in zinc concentrates produced at CLG at an expected construction cost of $6,000. As part of the agreement, the initial payment of the $20,000 due to Dowa under the partner’s priority distribution agreement was reduced to $10,300. The reduced priority dividend amount reflects a portion of both the construction and future estimated operating costs of the leaching plant and is dependent on the successful construction and operation of the leaching plant. Should the leaching plant construction not be completed, or the leaching plant not operate according to certain parameters during the first five years, portions of the $9,700 reduction could be reinstated.
In April 2022, the LGJV paid its first dividend of $20,000 to its partners. The Company’s share of the first dividend was $14,000, before withholding taxes of $700. A payment of $7,365 was subsequently made to Dowa to cover the full amount of the reduced initial priority distribution due, for a net dividend received of $5,935. In July 2022 the LGJV paid an additional dividend in the amount of $15,000 to its partners. The Company’s share, after withholding taxes of $525 was $9,975.
The LGJV Entities combined balance sheets as of September 30, 2021,2022, and December 31, 2020,2021, and the combined statements of income (loss) for the three months and nine months ended September 30, 20212022 and 2020,2021, are as follows:
14
LOS GATOS JOINT VENTURE
COMBINED BALANCE SHEETS (UNAUDITED)
(in thousands)
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
ASSETS |
| |
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| |
|
Current Assets |
| |
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| |
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| |
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| |
|
Cash and cash equivalents | | $ | 9,941 | | $ | 1,676 | | $ | 38,665 | | $ | 20,280 |
Receivables | |
| 6,961 | |
| 3,988 | |
| 12,412 | |
| 11,263 |
Inventories | |
| 10,027 | |
| 10,315 | |
| 10,776 | |
| 11,062 |
VAT receivable | |
| 47,096 | |
| 50,732 | |
| 20,749 | |
| 46,242 |
Other current assets | |
| 2,543 | |
| 2,891 | |
| 4,727 | |
| 4,515 |
Total current assets | |
| 76,568 | |
| 69,602 | |
| 87,329 | |
| 93,362 |
Non‑Current Assets | |
| | |
|
| |
| | |
|
|
Mine development, net | |
| 222,128 | |
| 202,874 | |
| 229,800 | |
| 229,076 |
Property, plant and equipment, net | |
| 192,675 | |
| 196,942 | |
| 198,399 | |
| 190,896 |
Net deferred tax assets | | | 17,896 | | | 9,226 | ||||||
Total non‑current assets | |
| 414,803 | |
| 399,816 | |
| 446,095 | |
| 429,198 |
| | | | | | | | | | | | |
Total Assets | | $ | 491,371 | | $ | 469,418 | | $ | 533,424 | | $ | 522,560 |
| | | | | | | | | | | | |
LIABILITIES AND OWNERS' CAPITAL | |
|
| |
|
| ||||||
LIABILITIES AND OWNERS’ CAPITAL | |
|
| |
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| ||||||
| | | | | | | | | | | | |
Current Liabilities | |
|
| |
|
| |
|
| |
|
|
Accounts payable and accrued liabilities | | $ | 32,951 | | $ | 35,767 | | $ | 34,715 | | $ | 33,179 |
Related party payable | |
| 1,299 | |
| 1,703 | |
| 593 | |
| 1,609 |
Accrued interest | |
| 45 | |
| 101 | |
| 21 | |
| 51 |
Unearned revenue | |
| — | |
| 3,276 | ||||||
Income taxes | |
| 4,291 | |
| 6,315 | ||||||
Equipment loans | |
| 6,365 | |
| 7,084 | |
| 1,195 | |
| 5,534 |
Dowa Term Loan | | | — | | | 31,826 | ||||||
Working Capital Facility | | | — | | | 60,000 | ||||||
Unearned Revenue | | | — | | | 1,714 | ||||||
Total current liabilities | |
| 40,660 | |
| 139,757 | |
| 40,815 | |
| 48,402 |
| | | | | | | | | | | | |
Non‑Current Liabilities | |
|
| |
|
| |
|
| |
|
|
Dowa Term Loan | |
| — | |
| 187,767 | ||||||
Equipment loans | |
| 1,224 | |
| 6,120 | |
| — | |
| 478 |
Lease liability | |
| 283 | |
| — | ||||||
Reclamation obligations | |
| 12,846 | |
| 12,162 | |
| 15,533 | |
| 14,706 |
Total non‑current liabilities | |
| 14,070 | |
| 206,049 | |
| 15,816 | |
| 15,184 |
| | | | | | | | | | | | |
Owners' Capital | |
| | |
|
| ||||||
Owners’ Capital | |
| | |
|
| ||||||
Capital contributions | |
| 540,638 | |
| 271,368 | |
| 540,638 | |
| 540,638 |
Paid‑in capital | |
| 18,405 | |
| 16,366 | |
| 18,188 | |
| 18,370 |
Accumulated deficit | |
| (122,402) | |
| (164,122) | |
| (82,033) | |
| (100,034) |
Total owners' capital | |
| 436,641 | |
| 123,612 | ||||||
Total Liabilities and Owners' Capital | | $ | 491,371 | | $ | 469,418 | ||||||
Total owners’ capital | |
| 476,793 | |
| 458,974 | ||||||
Total Liabilities and Owners’ Capital | | $ | 533,424 | | $ | 522,560 |
15
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Sales | | $ | 56,991 | | $ | 44,021 | | $ | 178,326 | | $ | 81,181 | ||||||||||||
Revenue | | $ | 73,926 | | $ | 56,991 | | $ | 218,730 | | $ | 178,326 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Expenses | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Cost of sales | |
| 26,374 | |
| 17,224 | |
| 70,275 | |
| 45,496 | |
| 28,625 | |
| 26,374 | |
| 81,550 | |
| 70,275 |
Royalties | |
| 1,181 | |
| 1,343 | |
| 3,480 | |
| 1,372 | |
| 327 | |
| 1,181 | |
| 2,739 | |
| 3,480 |
Exploration | |
| 1,595 | |
| 166 | |
| 3,505 | |
| 574 | |
| 1,881 | |
| 1,595 | |
| 6,235 | |
| 3,505 |
General and administrative | |
| 3,414 | |
| 1,900 | |
| 9,493 | |
| 6,550 | |
| 3,431 | |
| 3,414 | |
| 9,846 | |
| 9,493 |
Depreciation, depletion and amortization | |
| 12,734 | |
| 11,817 | |
| 36,388 | |
| 33,077 | |
| 19,943 | |
| 12,734 | |
| 52,340 | |
| 36,388 |
Other | |
| — | |
| — | |
| — | |
| 3,416 | ||||||||||||
Total operating expenses | |
| 54,207 | |
| 45,298 | |
| 152,710 | |
| 123,141 | ||||||||||||
| |
| 45,298 | |
| 32,450 | |
| 123,141 | |
| 90,485 | |
| | |
| | |
| | |
| |
Other expense | |
| | |
| | |
| | |
| | ||||||||||||
Other (income) expense | |
| | |
| | |
| | |
| | ||||||||||||
Interest expense | | | 847 | |
| 2,862 | |
| 5,320 | |
| 9,805 | | | 103 | |
| 847 | |
| 368 | |
| 5,320 |
Loss on Term Loan extinguishment | | | 4,359 | | | — | | | 4,359 | | | — | | | — | | | 4,359 | | | — | | | 4,359 |
Arrangement fee | |
| — | |
| 1,576 | |
| 2,090 | |
| 6,285 | | | — | | | — | | | — | | | 2,090 |
Accretion expense | |
| 228 | |
| 212 | |
| 684 | |
| 636 | |
| 276 | |
| 228 | |
| 827 | |
| 684 |
Other income | |
| (61) | |
| — | |
| (80) | |
| (108) | |
| — | |
| (61) | |
| (1,339) | |
| (80) |
Foreign exchange loss | |
| 47 | |
| (867) | |
| 342 | |
| 4,655 | |
| 144 | |
| 47 | |
| 410 | |
| 342 |
Total other expense | |
| 523 | |
| 5,420 | |
| 266 | |
| 12,715 | ||||||||||||
| |
| 5,420 | |
| 3,783 | |
| 12,715 | |
| 21,273 | | | | | | | | | | | | |
Income before income and mining taxes | | | 19,196 | | | 6,273 | | | 65,754 | | | 42,470 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before taxes | | | 6,273 | | | 7,788 | | | 42,470 | | | (30,577) | ||||||||||||
Income and mining tax expense | | | (6,579) | | | (750) | | | (12,753) | | | (750) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Mexico mining tax | | | 750 | | | — | | | 750 | | | — | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Net income (loss) | | $ | 5,523 | | $ | 7,788 | | $ | 41,720 | | $ | (30,577) | ||||||||||||
Net income | | $ | 12,617 | | $ | 5,523 | | $ | 53,001 | | $ | 41,720 |
13. Subsequent Events
In November 2022, the LGJV paid an additional dividend in the amount of $20,000, to its partners. The Company’s share, after withholding taxes of $700, was $13,300.
On December 19, 2022, the Company entered into an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of $50,000, with an accordion feature, as further described above.
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of the Company and should be read in conjunction with the Company’s consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q (the “Report”) and the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 20202021 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 20202021 (the “2020“2021 10-K”), filed with the Securities and Exchange Commission (“SEC”) on March 29, 2021.20, 2023.
Forward-Looking Statements
This Report contains statements that constitute “forward looking information” and “forward-looking statements” within the meaning of U.S. and Canadian securities laws.laws, including the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by words such as ‘‘may,’’ ‘‘might,’’ ‘‘could,’’ ‘‘would,’’ ‘‘achieve,’’ ‘‘budget,’’ ‘‘scheduled,’’ ‘‘forecasts,’’ ‘‘should,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential’’“may,” “might,” “could,” “would,” “achieve,” “budget,” “scheduled,” “forecasts,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or ‘‘continue,’’“continue,” the negative of these terms and other comparable terminology. These forward-looking statements may include, but are not limited to, the following:
● | estimates of future mineral production and sales; |
● | estimates of future production costs, other expenses and taxes for specific operations and on a consolidated basis; |
● | estimates of future cash flows and the sensitivity of cash flows to gold, copper, silver, lead, zinc and other metal prices; |
● | estimates of future capital expenditures, construction, production or closure activities and other cash needs, for specific operations and on a consolidated basis, and expectations as to the funding or timing thereof; |
● | estimates as to the projected development of certain ore deposits, including the timing of such development, the costs of such development and other capital costs, financing plans for these deposits and expected production commencement dates; |
● | estimates of mineral reserves and mineral resources statements regarding future exploration results and mineral reserve and mineral resource replacement and the sensitivity of mineral reserves to metal price changes; |
● | statements regarding the availability of, and terms and costs related to, future borrowing or financing and expectations regarding future debt repayments; |
● | statements regarding future dividends and returns to shareholders; |
● | estimates regarding future exploration expenditures, programs and discoveries; |
● | statements regarding fluctuations in financial and currency markets; |
● | estimates regarding potential cost savings, productivity, operating performance and ownership and cost structures; |
● | expectations regarding statements regarding future transactions, including, without limitation, statements related to future acquisitions and projected benefits, synergies and costs associated with acquisitions and related matters; |
● | expectations of future equity and enterprise value; |
● | expectations regarding the start-up time, design, mine life, production and costs applicable to sales and exploration potential of our projects; |
● | statements regarding future hedge and derivative positions or modifications thereto; |
● | statements regarding local, community, political, economic or governmental conditions and environments; |
● | statements and expectations regarding the impacts of COVID-19 and variants thereof and other health and safety conditions; |
● | statements regarding the impacts of changes in the legal and regulatory environment in which we operate, including, without limitation, relating to regional, national, domestic and foreign laws; |
● | statements regarding climate strategy and expectations regarding greenhouse gas emission targets and related operating costs and capital expenditures; |
● | statements regarding expected changes in the tax regimes in which we operate, including, without limitation, estimates of future tax rates and estimates of the impacts to income tax expense, valuation of deferred tax assets and liabilities, and other financial impacts; |
● | estimates of income taxes and expectations relating to tax contingencies or tax audits; |
● | estimates of future costs, accruals for reclamation costs and other liabilities for certain environmental matters, including without limitation, in connection with water treatment and tailings management; |
17
● | statements relating to potential impairments, revisions or write-offs, including without limitation, the result of fluctuation in metal prices, unexpected production or capital costs, or unrealized mineral reserve potential; |
● | estimates of pension and other post-retirement costs; |
● | statements regarding estimates of timing of adoption of recent accounting pronouncements and expectations regarding future impacts to the financial statements resulting from accounting pronouncements; |
● | estimates of future cost reductions, synergies, savings and efficiencies in connection with full potential programs and initiatives; and |
● | expectations regarding future exploration and the development, growth and potential of operations, projects and investments, including in respect of the CLG and the LGD. |
Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by those relating to projections of our future financial performance, our anticipated growth strategies and anticipated trends in our industry, production from the Cerro Los Gatos Mine (“CLG”), our expectations relating to further exploration of the Los Gatos District (“LGD”) and the Santa Valeria property, estimated calculations of mineral reserves and resources at our properties, anticipated expenses, tax benefits, future strategic infrastructure development at the CLG and our requirements for additional capital.forward-looking statements.
All forward-looking statements speak only as of the date on which they are made. These statements are not a guarantee of future performance and involve certain risks, uncertainties and assumptions concerning future events that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. Important factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:
17
TheseSuch factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and information included in this Report and those described from time to time in our filings with the SEC,U.S. Securities and Exchange Commission (“SEC”), including, but not limited to, our 20202021 10-K. These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material, may cause our actual future results to be materially different than those expressed in our forward-looking statements. Undue reliance should not be placed on these forward-looking statements. We do not undertake any obligation to make any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, except as required by law. Certain forward-looking statements are based on assumptions, qualifications and procedures which are set out only in the technical report entitled “Los Gatos Project, Chihuahua, Mexico,” dated July 1, 2020, which was prepared in accordance with the requirements of subpart 1300 of Regulation S-K and Canadian National Instrument 43-101 — Standards of Disclosure for Mineral Projects (the “LosLos Gatos Technical Report”).Report. For a complete description of assumptions, qualifications and procedures associated with such information, reference should be made to the full text of the Los Gatos Technical Report, which was filed as Exhibit 96.1 to our Registration Statement on Form S-1 (File No. 333-249224), filed with the SEC on October 1, 2020.Report.
Overview
We are a U.S.-basedCanadian headquartered, Delaware incorporated precious metals production,exploration, development and explorationproduction company with the objective of becoming a premierleading silver producer. Our primary efforts are focused on the operation of the LGJV in Chihuahua, Mexico. The LGJV was formed on January 1, 2015 when we entered into the Unanimous Omnibus Partner Agreement with Dowa to further explore, and potentially develop and operate mining properties within the LGD. The LGJV Entities own certain surface and mineral rights associated with the LGD. The LGJV ownership is currently 70% Gatos Silver and 30% Dowa. On September 1, 2019, the LGJV commenced commercial production at CLG, which produces a silver containing lead concentrate and zinc concentrate. We are currently focused on the production and continued development of the CLG and the further exploration and development of the LGD through the LGJV with Dowa:LGD.
Third Quarter 2022 Highlights
Gatos Silver
Third Quarter and Year to date
● | The |
● | The |
● | The |
18
Operational Update
In the first three quarters of 2021, the LGJV achieved the following production from CLG:
| | | | | | | | | |
CLG Production (100% Basis) |
| Q3 2021 |
| Q2 2021 |
| Q1 2021 | | 2021 YTD | |
Tonnes mined (wmt - unreconciled) |
| 242,899 |
| 240,047 | | 209,832 | | 692,778 | |
Tonnes milled (dmt - reconciled) |
| 234,054 |
| 230,656 | | 203,479 | | 668,189 | |
Tonnes milled per day (dmt) |
| 2,544 |
| 2,535 | | 2,261 | | 2,448 | |
Average Grades |
| |
| | | | | | |
Silver grade (g/t) |
| 256 |
| 322 | | 261 | | 282 | |
Gold grade (g/t) |
| 0.30 |
| 0.35 | | 0.32 | | 0.32 | |
Lead grade (%) |
| 2.35 |
| 2.51 | | 2.00 | | 2.3 | |
Zinc grade (%) |
| 4.10 |
| 4.41 | | 3.24 | | 3.95 | |
Contained Metal |
| |
| | | | | | |
Silver ounces (millions) |
| 1.7 |
| 2.1 | | 1.5 | | 5.3 | |
Gold ounces - in lead concentrate (thousands) |
| 1.3 |
| 1.5 | | 1.1 | | 3.9 | |
Lead pounds - in lead concentrate (millions) |
| 10.8 |
| 11.2 | | 7.6 | | 29.6 | |
Zinc pounds - in zinc concentrate (millions) |
| 13.5 |
| 14.5 | | 8.7 | | 36.7 | |
Recoveries (combined lead and zinc concentrate) |
| |
| | | | | | |
Silver |
| 89 | % | 89 | % | 85 | % | 88 | % |
Gold |
| 63 | % | 63 | % | 60 | % | 62 | % |
Lead |
| 91 | % | 90 | % | 87 | % | 90 | % |
Zinc |
| 74 | % | 75 | % | 71 | % | 74 | % |
COVID-19 PandemicOperational highlights
In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic temporarily affected our operations in 2020 in part dueThird Quarter 2022
● | Silver production was 2.7 million ounces for the three months ended September 30, 2022, a 59% increase compared to the three months ended September 30,2021. The majority of production for the quarter was sourced from the Central Zone, with the remainder sourced from Northwest and Southeast Upper Zone; |
● | The processing plant processed a record 263,331 tonnes (averaging 2,862 tonnes per day), an increase of 13% compared to the third quarter of 2021 as a result of continued debottlenecking efforts; |
● | Metal recoveries exceeded design rates for payable metals with silver recovery averaging 89.6%, zinc recovery averaging 65.4% and lead recovery averaging 88.5%; |
● | Construction progress on key infrastructure projects continued, including the installation of underground dewatering equipment, the paste plant and a tailings dam raise. These projects are expected to support increased productivity and to help reduce unit operating costs. The tailings dam raise fill placement was completed during the third quarter and the paste plant was subsequently completed in the fourth quarter of 2022; and |
● | The transition to a new 100% renewable power supply contract was completed in September, which helped to reduce operating costs and greenhouse gas emissions. |
Year to the loss of revenue resulting from the 45-day government mandated temporary suspension of all nonessential activities at the LGJV’s CLG site and the expenses associated with the development and implementation of COVID-19 protocols. We believe we have taken appropriate stepsdate
● | Silver production increased 39% to 7.4 million ounces for the nine months ended September 30, 2022 primarily due to higher throughput, higher grades and higher recovery; |
● | The processing plant processed 709,666 tonnes (averaging 2,600 tonnes per day), an increase of 6% compared to the nine months ended September 30, 2021 as a result of continued debottlenecking efforts; and |
● | Metal recoveries exceeded design rates for payable metals with silver recovery averaging 89.9%, zinc recovery averaging 65.4% and lead recovery averaging 89.4%. |
Financial highlights
Third Quarter 2022
● | Revenues of $73.9 million increased 30% for the three months ended September 30, 2022 compared to the same period in 2021, primarily due the higher concentrate sales and a positive mark-to-market adjustment of provisional revenue as a result of the change in commodity prices during the third quarter 2022; |
● | Cost of sales totaled $28.6 million for the three months ended September 30, 2022, 9% higher compared to the same period in 2021, primarily due to increased production. Compared to the three months ended September 30, 2021, co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 27% and 11% respectively, to $8.88 and $3.20, respectively, for the three months ended September 30, 2022; |
● | Compared to the three months ended September 30, 2021, co-product all-in sustaining cost per ounce of payable silver equivalent and by-product all-in sustaining cost per ounce of payable silver decreased by 35% and 41% respectively, to $12.81 and $9.79, respectively, for the three months ended September 30, 2022; |
● | LGJV net income totaled $12.6 million for the three months ended September 30, 2022 compared to $5.5 million in the same period in 2021 primarily due to increased revenue and lower other expenses partially offset by increased incomes and mining taxes for the three months ended September 30, 2022; and |
● | The LGJV declared and paid its second dividend of $15 million in July 2022 to its partners. |
Year to minimize the risk to our employees and to maintain normal business operations. We may take further actions as may be required by government authorities or as we determine are in the best interests of our employees and business partners which may cause additional closures of some or all of our operations in the future.date
While the full impact of this pandemic is unknown, we are closely monitoring the developments of the outbreak and continually assessing the potential impact on our business. More recently, new variants of COVID-19, such as the Delta variant, that are significantly more contagious than previous strains, have emerged. The spread of these new strains is causing many government authorities to reimplement tighter restrictions in an effort to lessen the spread of COVID-19 and its variants. Any prolonged disruption of our operations and closure of facilities could result in additional costs being incurred, production and development delays, cost overruns and operational restart costs that would negatively impact our business, financial condition and results of operations. The degree to which the pandemic impacts our business, financial condition and results of operations will depend on future developments, which are highly uncertain, continuously evolving and in many cases cannot be predicted, including, but not limited to, the duration and spread of the pandemic and its variants; its severity; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and the potential hesitancy to utilize them; general economic factors, such as increased inflation; supply chain constraints; and labor supply issues. Accordingly, there remains significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. See “Part I, Item 1A. Risk Factors” in the 2020 10-K for additional risks we face due to the COVID-19 pandemic.
Exploration Update
The Company is active in three separate exploration drilling programs that collectively are estimated to require 51,400 meters of exploration and definition drilling at an expected total cost of $7,700 thousand including Dowa's share of LGJV exploration expenditures. The programs are further detailed below.
● | Revenues of $218.7 million increased 23% for the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to higher concentrate sales as a result of the increase in metal grades and increased processed tonnes; |
● | Cost of sales totaled $81.6 million for the nine months ended September 30, 2022, 16% higher compared to the same period in 2021, primarily due to increased production. Compared to the nine months ended September 30, 2021 co-product cash cost |
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Cerro Los Gatos Infill and Extension Drilling Program
On December 5, 2020, the LGJV commenced a 90-hole, 27,000-meter fill and extension drilling program at the CLG within the LGJV with the goal of converting the CLG’s established 3.7 million tonnes of inferred resources to the measured and indicated category and to discover additional resources along the northwest and southeast extensions of the CLG deposit. Once completed, the Company intends to incorporate the additional measured and indicated resources into a new mine plan that will increase the proven and probable reserves and further support a possible expansion of the CLG’s production rate from 2,500 tpd to 3,000 tpd. The LGJV expanded the drilling program to 132 holes during the third quarter of 2021. The $4,400 thousand program is anticipated to be completed by June 30, 2022. As of September 30, 2021, 78 holes have been drilled.
Los Gatos District Resource Expansion
On May 12, 2021, the LGJV commenced a second exploration program to expand resources throughout the LGD. The initial target is a 59-hole, 19,000-meter campaign with 50-meter spacing at the Esther deposit, to expand its initial indicated resource of 0.46 million tonnes at 133 g/t silver, 2.1% zinc, 0.7% lead and inferred resource of 2.29 million tonnes at 98 g/t silver, 3.0% zinc, and 1.6% lead. Esther is located about four kilometers from the CLG and contains similar styles of mineralization and geochemistry. The $2,700 thousand program is anticipated to be complete by January 31, 2022. As of September 30, 2021, 18 holes have been drilled.
Santa Valeria Project
In March 2021, the Company commenced an 18-hole, 5,400-meter exploration program on its wholly-owned Santa Valeria property. The Santa Valeria target has been developed through regional geologic work by the Company’s exploration team, which defined a large basin structure hosting the mineralization zones within the LGD. Santa Valeria is geologically comparable to CLG, and the Company believes it may contain similar mineral content. As of September 30, 2021, the $600,000 program was completed, and the Company is analyzing the drill data.
Components
per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 27% and 77% respectively, to $9.25 and $1.24, respectively, for the nine months ended September 30, 2022; |
● | Compared to the nine months ended September 30, 2021 co-product all-in sustaining cost per ounce of payable silver equivalent and by-product all-in sustaining cost per ounce of payable silver decreased by 27% and 42% respectively, to $14.05 and $9.50, respectively, for the nine months ended September 30, 2022; and |
● | LGJV net income totaled $53.0 million the nine months ended September 30, 2022 compared to $41.7 million in the same period in 2021. |
Results of Operations
Operating Expenses
Exploration Expenses
We conduct exploration activities under mining concessions in Mexico. We expect exploration expenses to increase significantly as we continue to expand our exploration activities at the LGD and our other exploration properties. Our exploration expenses primarily consist of drilling costs, lease concession payments, assay costs and geological and support costs at our exploration properties.
General and Administrative Expenses
Our general and administrative expenses consist of salaries and benefits, stock compensation, professional and consultant fees, insurance and other general administration costs. Our general and administrative expenses have increased and are expected to further increase significantly as we operate as a public company. We expect higher costs related to salaries, benefits, stock compensation, legal fees, compliance and corporate governance, accounting and audit expenses, stock exchange listing fees, transfer agent and other shareholder-related fees, directors’ and officers’ and other insurance costs, and other administrative costs. We are party to a Management Services Agreement with SSMRC, pursuant to which we will provide certain limited executive and managerial advisory services to SSMRC. SSMRC reimburses us for costs of providing such services.
Equity Income (Loss) in Affiliates
Our equity income (loss) in affiliates relates to our proportional share of net income or loss incurred from the LGJV and the amortization of the basis difference between our investment in the LGJV and the net assets of the LGJV.
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LGJV Arrangement Fee
Our LGJV arrangement fee consisted of arrangement fees related to the Term Loan and the Working Capital Facility (“WCF”) with Dowa prior to their extinguishment on July 26, 2021, and March 11, 2021, respectively. The arrangement fees were based on a fixed 1% and 15% rate for the Term Loan and the WCF, respectively, and 70% of the outstanding principal of the respective facility. These arrangement fees were solely our responsibility. We did not incur LGJV arrangement fees beyond July 26, 2021, on the WCF or Term Loan.
Income Taxes
As we have incurred substantial losses from our exploration and pre-development activities, we may receive further benefits in the form of deferred tax assets that can reduce our future income tax liabilities, if it is more likely than not that the benefit will be realized before expiration. Historically, we have not recognized these potential benefits in our financial statements and have fully reserved for such net deferred tax assets, as we believe it is more likely than not that the full benefit of these net deferred tax assets will not be realized before expiration.
Royalties
Exploration activities are conducted on the LGD mining concessions and on the Company’s 100% owned Santa Valeria concessions in Mexico. Mineral and concession lease payments are required to be paid to various entities to secure the appropriate claims or surface rights. Certain of these agreements also have royalty payments that were triggered when we began producing and selling metal-bearing concentrate.
Results of Operationsoperations Gatos Silver
The following table presents certain selected financial information relating to our operating results for the three and nine months ended September 30, 20212022 and 2020.2021. In accordance with generally accepted accounting principles in the United States (“GAAP”(‘‘U.S. GAAP’’), these financial results represent the consolidated results of operations of our Company and its subsidiarysubsidiaries (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||||||||||||||
|
| | 2021 |
| | 2020 |
| | 2021 |
| | 2020 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Expenses |
| |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
Exploration | | $ | 479 | | $ | 134 | | $ | 1,397 | | $ | 516 | | $ | — | | $ | 479 | | $ | 110 | | $ | 1,397 |
General and administrative | |
| 5,994 | |
| 1,965 | |
| 14,008 | |
| 4,345 | |
| 5,933 | |
| 7,244 | |
| 16,967 | |
| 17,758 |
Amortization | |
| 31 | |
| 7 | |
| 45 | |
| 24 | |
| 44 | |
| 31 | |
| 132 | |
| 45 |
Total expenses | |
| 6,504 | |
| 2,106 | |
| 15,450 | |
| 4,885 | |
| 5,977 | |
| 7,754 | |
| 17,209 | |
| 19,200 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense) | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Equity income (loss) in affiliates | |
| 1,600 | |
| 3,447 | |
| 22,592 | |
| (18,069) | ||||||||||||
Term Loan closing fee | | | (10,000) | | | — | | | (10,000) | | | — | ||||||||||||
Other loss | |
| (95) | |
| (908) | |
| (270) | |
| (3,253) | ||||||||||||
Equity income in affiliates | |
| 6,801 | |
| 1,600 | |
| 32,180 | |
| 22,592 | ||||||||||||
Other income (expense) | | | 1,076 | | | (8,845) | | | 3,332 | | | (6,520) | ||||||||||||
Net other income (expense) | |
| (8,495) | |
| 2,539 | |
| 12,322 | |
| (21,322) | |
| 7,877 | |
| (7,245) | |
| 35,512 | |
| 16,072 |
Net income (loss) from continuing operations | | $ | (14,999) | | $ | 433 | | $ | (3,128) | | $ | (26,207) | ||||||||||||
Net loss from discontinued operations | |
| — | |
| (1,618) | |
| — | |
| (4,943) | ||||||||||||
Net loss | | $ | (14,999) | | $ | (1,185) | | $ | (3,128) | | $ | (31,150) | ||||||||||||
Net income (loss) | | $ | 1,900 | | $ | (14,999) | | $ | 18,303 | | $ | (3,128) | ||||||||||||
Net income (loss) per share: | | | | | | | | | | | | | ||||||||||||
Basic | | $ | 0.03 | | $ | (0.22) | | $ | 0.26 | | $ | (0.05) | ||||||||||||
Diluted | | $ | 0.03 | | $ | (0.22) | | $ | 0.26 | | $ | (0.05) |
Gatos Silver
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Exploration expenses
During 2022, our exploration activities were focused on the LGJV and no exploration costs were incurred for our wholly owned properties outside of the first quarter of 2022.
General and administrative expenses
During the three months ended September 30, 2022, we incurred general and administration expense of $5.9 million compared to $7.2 million for the three months ended September 30, 2021. The $1.3 million decrease is primarily due to a $1.6 million decrease in shared-based compensation expense during the three months ended September 30, 2022, compared to the same period in 2021.
Equity income in affiliates
The increase in equity income resulted primarily from the LGJV recording net income of $12.6 million during the three months ended September 30, 2022, compared to $5.5 million for the same period in 2021. The increase in net income at the LGJV was primarily due to the increase in concentrate sold reflecting increased production and higher zinc prices.
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Other income (expense)
The $9.9 million change in other income (expense) for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021, was mainly due to a $10.0 million fee paid to Dowa in conjunction with the Term Loan repayment in 2021.
Net income (loss)
For the quarter ended September 30, 2022, we recorded net income of $1.9 million, or $0.03 per diluted share, compared to a net loss of $15.0 million, or $0.22 per diluted share, for the quarter ended September 30, 2021. The change was mainly due to the increase in equity income in affiliates and the 2021 payment of a $10.0 million fee to Dowa as described above.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Exploration expenses
During 2022, our exploration activities were focused on the LGJV and no exploration costs were incurred for our wholly owned properties outside of the first quarter of 2022.
General and administrative expenses
During the nine months ended September 30, 2022, we incurred general and administration expense of $17.0 million compared to $17.8 million for the nine months ended September 30, 2021 primarily due to lower share-based compensation expense of $3.7 million and $0.7 million of separation costs for a departing executive officer partially offset by increased legal fees of $3.3 million attributable to legal consultation regarding the mineral resource and mineral reserve errors in the July 2020 technical report for CLG.
Equity income in affiliates
The increase in equity income resulted primarily from the LGJV recording net income of $53.0 million for the nine months ended September 30, 2022 compared to $41.7 million for the nine months ended September 30, 2021. The increase in net income at the LGJV was primarily due to the increase in concentrates sold, higher grades, and higher realized metals prices for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Other income (expense)
The $9.9 million change in other income (expense) for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was mainly due to a $10.0 million fee paid to Dowa in conjunction with the Term Loan repayment in 2021.
Net income (loss)
For the nine months ended September 30, 2022, we recorded net income of $18.3 million, or $0.26 per diluted share, compared to net loss of $3.1 million, or $0.05 per diluted share, for the nine months ended September 30, 2021. The change was mainly due to the increase in equity income in affiliates and fee paid to Dowa as described above.
21
Results of operations LGJV
The following table presents operational information of the LGJV for the three and nine months ended September 30, 2022 and 2021, and select financial information of the LGJV for the three and nine months ended September 30, 2022 and 2021. The financial and operational information of the LGJV and CLG is shown on a 100% basis.
| | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
Financial | | 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Amounts in thousands | | |
| | |
| | |
| | |
|
Revenue |
| $ | 73,926 |
| $ | 56,991 |
| $ | 218,730 |
| $ | 178,326 |
Cost of sales |
| | 28,625 |
| | 26,374 |
| | 81,550 |
| | 70,275 |
Royalties |
| | 327 |
| | 1,181 |
| | 2,739 |
| | 3,480 |
Exploration |
| | 1,881 |
| | 1,595 |
| | 6,235 |
| | 3,505 |
General and administrative |
| | 3,431 |
| | 3,414 |
| | 9,846 |
| | 9,493 |
Depreciation, depletion and amortization |
| | 19,943 |
| | 12,734 |
| | 52,340 |
| | 36,388 |
Other expense |
| | 523 |
| | 5,420 |
| | 266 |
| | 12,715 |
Income and mining tax expense |
| | 6,579 |
| | 750 |
| | 12,753 |
| | 750 |
Net income |
| | 12,617 |
| | 5,523 |
| | 53,001 |
| | 41,720 |
Sustaining capital expenditures |
| $ | 17,086 |
| $ | 21,180 |
| $ | 57,036 |
| $ | 51,864 |
| | | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
| | September 30, | | September 30, |
| ||||||||
Operating Results | | 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Tonnes milled (dmt) |
| | 263,331 |
| | 234,054 |
| | 709,666 |
| | 669,876 | |
Tonnes milled per day (dmt) |
| | 2,862 |
| | 2,544 |
| | 2,600 |
| | 2,454 | |
Average Grades |
| |
|
| |
|
| |
|
| |
| |
Silver (g/t) |
| | 356 |
| | 256 |
| | 361 |
| | 282 | |
Zinc (%) |
| | 4.70 |
| | 4.10 |
| | 4.61 |
| | 3.95 | |
Lead (%) |
| | 2.38 |
| | 2.35 |
| | 2.45 |
| | 2.30 | |
Gold (g/t) |
| | 0.34 |
| | 0.30 |
| | 0.34 |
| | 0.32 | |
Contained Metal |
| |
|
| |
|
| |
|
| |
| |
Silver ounces (millions) |
| | 2.70 |
| | 1.70 |
| | 7.4 |
| | 5.33 | |
Zinc pounds - in zinc conc. (millions) |
| | 17.8 |
| | 13.5 |
| | 47.1 |
| | 36.7 | |
Lead pounds - in lead conc. (millions) |
| | 12.2 |
| | 10.8 |
| | 34.2 |
| | 29.7 | |
Gold ounces - in lead conc. (thousands) |
| | 1.40 |
| | 1.30 |
| | 3.98 |
| | 3.92 | |
Recoveries1 |
| |
|
| |
|
| |
|
| |
| |
Silver – in both lead and zinc concentrates |
| | 89.6 | % | | 88.6 | % | | 89.9 | % | | 87.7 | % |
Zinc - in zinc concentrate |
| | 65.4 | % | | 63.9 | % | | 65.4 | % | | 62.9 | % |
Lead - in lead concentrate |
| | 88.5 | % | | 89.1 | % | | 89.4 | % | | 87.3 | % |
Gold - in lead concentrate |
| | 48.9 | % | | 56.5 | % | | 51.3 | % | | 56.2 | % |
Average realized price per silver ounce2 | | $ | 17.25 | | $ | 23.31 | | $ | 20.38 | | $ | 24.03 | |
Average realized price per zinc pound2 | | $ | 1.52 | | $ | 1.40 | | $ | 1.55 | | $ | 1.29 | |
Average realized price per lead pound2 | | $ | 0.91 | | $ | 0.99 | | $ | 0.98 | | $ | 0.97 | |
Average realized price per gold ounce2 | | $ | 1,790 | | $ | 1,776 | | $ | 1,837 | | $ | 1,799 | |
Co-product cash cost per ounce of payable silver equivalent3 | | $ | 8.88 | | $ | 12.13 | | $ | 9.25 | | $ | 12.71 | |
By-product cash cost per ounce of payable silver3 | | $ | 3.20 | | $ | 3.58 | | $ | 1.24 | | $ | 5.48 | |
Co-product AISC per ounce of payable silver equivalent3 | | $ | 12.81 | | $ | 19.57 | | $ | 14.05 | | $ | 19.33 | |
By-product AISC per ounce of payable silver3 | | $ | 9.79 | | $ | 16.71 | | $ | 9.50 | | $ | 16.33 | |
(1) | Recoveries are reported for payable metals in the identified concentrate. Recoveries reported previously were based on total metal in both concentrates. |
(2) | Realized prices include the impact of final settlement adjustments from sales of previous periods. |
(3) | See “Non-GAAP Financial Measures” below. |
22
LGJV
Three Months Ended September 30, 20212022 Compared to Three Months Ended September 30, 20202021
Revenue
The LGJV’s concentrate sales for the three months ended September 30, 2022 and 2021 are summarized below (in thousands):
| | | | | | |
| | Three Months Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Lead concentrate revenue | | $ | 53,619 | | $ | 45,400 |
Zinc concentrate revenue | |
| 21,426 | |
| 19,964 |
Treatment and refining charges | |
| (6,230) | |
| (5,234) |
Subtotal | |
| 68,815 | |
| 60,130 |
Provisional revenue adjustments | |
| 5,111 | |
| (3,139) |
Total Revenue | | $ | 73,926 | | $ | 56,991 |
Revenue increased by 30% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, as a result of increased concentrate sales, increased realized zinc prices and positive market-to-market adjustments included in provisional revenue adjustments in the three months ended September 30, 2022 partially offset by lower realized lead and silver prices.
Lead concentrate revenue increased by 18% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to an 11% increase in lead concentrate production and higher silver and lead recoveries, partially offset by an 11% decrease in the realized lead prices and a 15% decrease in the realized silver price.
Zinc concentrate revenue increased by 7% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to a 13% increase in the realized zinc price and a 30% increase in zinc concentrate production, partially offset by a lower silver and zinc recoveries and a 15% decrease in the realized silver price.
Provisional revenue adjustments account for commodity price fluctuations in concentrate sales still subject to final settlement. Provisional revenue adjustments increased period over period primarily due to increases in metals prices at the end of Q3 2022 as compared to the beginning of the period, compared to the end of Q3 2021 due to a decrease in volume subject to final settlement and lower silver prices, partially offset by a slight increase in zinc and lead prices over this period.
Cost of sales
Cost of sales increased by 9% primarily as a result of an increase in processed tonnes, and increased equipment maintenance costs, cost of materials & supplies and higher power costs. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 27% and 11%, to $8.88 and $3.20, respectively, for the three months ended September 30, 2022.
Royalties
Royalty expense decreased by $0.9 million for the three months ended September 30, 2022 due to a reduction of the royalty percentage on revenue based on the contractual terms.
General and administrative
The amount of general and administrative expense for Q3 2022 was consistent with the expenditure incurred during Q3 2021.
23
Depreciation, depletion and amortization
Depreciation, depletion, and amortization expense increased by approximately 57% quarter over quarter primarily as a result of an increase in tonnes mined and also due to the decrease in the mineral reserve and the shorter mine life based on the Los Gatos Technical Report dated November 10, 2022 which reduced the basis for depreciation.
Exploration
Exploration expense for the three months ended September 30, 2022 was $0.3 million higher as compared to the three months ended September 30, 2021 primarily as a result of increased surface drilling around CLG exploration targets. The dominant focus for drilling was at CLG aiming to convert Inferred Resources to Indicated and also to expand the Inferred Resource base, particularly in the South-East Deeps area.
Other expense
Other expense was lower primarily due to an 88% decrease in interest expense as a result of lower interest rates, lower borrowings and lower arrangement fees incurred during Q3 2022 compared to Q3 2021 which was impacted by the retirement of the WCF and the Term Loan in March 2021 and July 2021, respectively, and the $4.4 million loss incurred in Q3 2021 on the Term Loan extinguishment.
Income and mining tax expense
Income and mining tax expense for the three months ended September 30, 2022 was $5.8 million higher as compared to the three months ended September 30, 2021 as a result of increased taxable income and reduced losses carried forward.
Net Income
For the three months ended September 30, 2021, we experienced a net loss from continuing operations of $14,999 thousand compared to2022, the LGJV had net income of $433 thousand$12.6 million compared to $5.5 million for the three months ended September 30, 2020.2021. The $15,432 thousand decreasechange in net income from continuing operations was primarily attributabledue to the $10,000 thousand Term Loan closing fee paid to Dowa, the $1,847 thousand decrease in equity income in affiliates from the LGJV operations,increased production and the $4,029 thousand increase in general and administrative expense due to: 1) higher legal, consulting and directors and officer’s insurance costs related to public company governance and reporting requirements, 2) increased stock-based compensation expense, and 3) costs relating to a separation agreement entered into with a departing executive officer during the current year quarter.
The decrease in equity income in the LGJV’s operating incomezinc prices for the three months ended September 30, 2021, resulted2022, partially offset by lower realized silver and lead prices, as well as an increase in cost of sales and depreciation, depletion and amortization costs and increased income and mining taxes. In addition, interest expense decreased 88% due to lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan and the $4.4 million loss incurred in Q3 2021 on the Term Loan extinguishment, lower ore grades processed, estimated Mexico mining taxes, new in 2021, basedextinguishment.
Sustaining capital expenditures
During the three months ended September 30, 2022 sustaining capital expenditures primarily consisted of $7.1 million on estimated incomemine development, $4.3 million on the construction of the mining entitypaste-fill plant, $2.3 million on the construction of the LGJV,raise of the tailings storage facility, $0.4 million on underground power distribution infrastructure and estimated statutorily entitled employee profit sharing$0.3 million on the LGJV operations, also new in 2021, duringconstruction of a ventilation raise. During the three months ended September 30, 2021 partially offset by higher metals pricesmajor sustaining capital expenditures included $7.1 million on mine development, $3.8 million on the processing plant and higher throughputtailings storage facility, $1.1 million for the three months ended September 30, 2021, compared toconstruction of a ventilation raise, $0.8 million for the three months ended September 30, 2020,purchase of mining equipment, $2.2 million on underground power distribution infrastructure and higher interest expense and arrangement fees incurred$2.9 million on the WCF and Term Loan for the three months ended September 30, 2020.construction of dewatering wells.
24
Nine Months Ended September 30, 20212022 Compared to Nine Months Ended September 30, 20202021
Revenue
The LGJV’s concentrate sales for the nine months ended September 30, 2022 and 2021, are summarized below (in thousands):
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Lead concentrate revenue | | $ | 164,706 | | $ | 146,327 |
Zinc concentrate revenue | |
| 77,404 | |
| 52,374 |
Treatment and refining charges | |
| (16,074) | |
| (16,429) |
Subtotal | |
| 226,036 | |
| 182,272 |
Provisional revenue adjustments | |
| (7,306) | |
| (3,946) |
Total Revenue | | $ | 218,730 | | $ | 178,326 |
Revenue increased by 23% for the nine months ended September 30, 2022 compared to the nine months ended September 30 2021. The increase in revenue is primarily due to an increase in lead and zinc concentrate sales as a result of higher production partially offset by a negative market-to-market adjustment included in provisional revenue.
Lead concentrate revenue increased by 13% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to an 17% increase in lead concentrate production and higher silver recoveries, partially offset by an 1% decrease in the realized lead prices, a 26% decrease in the realized silver price and slightly lower lead recoveries.
Zinc concentrate revenue increased by 48% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to a 18% increase in the realized zinc price and a 27% increase in zinc concentrate production, partially offset by a lower silver and zinc recoveries and a 26% decrease in the realized silver price.
Provisional revenue adjustments account for commodity price fluctuations in concentrate sales still subject to final settlement. Provisional revenue adjustments were lower period over period primarily due to decreases in metals prices at the end of Q3 2022 as compared to the beginning of the period, compared to the end of Q3 2021 due to a decrease in silver prices over that period partially offset by price increases in lead and zinc over this period.
Cost of sales
Cost of sales increased by 16% primarily as a result of an increase in production and increased equipment maintenance, materials and supplies and power costs. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 27% and 77%, to $9.25 and $1.24, respectively, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Royalties
Royalty expense decreased by $0.7 million for the nine months ended September 30, 2022, primarily due to a reduction of the royalty percentage on revenue based on the contractual terms in 2022 partially offset by increased revenue resulting primarily from increased production and higher zinc and lead prices.
General and administrative
General and administrative expense for the nine months ended September 30, 2022 was 4% higher as compared to the nine months ended September 30, 2021 primarily due to inflation.
Depreciation, depletion and amortization
Depreciation, depletion, and amortization expense increased by approximately 44% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 primarily as a result of an increase in tonnes mined and also due to
25
the decrease in the mineral reserve and the shorter mine life based on the Los Gatos Technical Report dated November 10, 2022 which reduced the basis for the depreciation.
Exploration
Exploration expense for the nine months ended September 30, 2022 was $2.7 million higher as compared to the nine months ended September 30, 2021 primarily as a result of increased surface drilling around CLG, Esther and greenfield exploration targets. The dominant focus for drilling was at CLG aiming to convert Inferred Resources to Indicated and also to expand the Inferred Resource base, particularly in the South-East Deeps area.
Other (income) expense
Other (income) expense were lower primarily due to a 93% decrease in interest expense due to lower interest rates, lower borrowings and lower arrangement fees incurred during nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 as a result of the retirement of the WCF and the Term Loan in March 2021 and July 2021, respectively, and the $4.4 million loss incurred in Q3 2021 on the Term Loan extinguishment.
Income and mining tax expense
Income and mining tax expense for the nine months ended September 30, 2022 was $12.0 million higher as compared to the nine months ended September 30, 2021 as a result of increased taxable income and reduced losses carried forward.
Net Income
For the nine months ended September 30, 2021, we experienced a2022, the LGJV had net loss from continuing operationsincome of $3,128 thousand$53.0 million compared to a net loss of $26,207 thousand$41.7 million for the nine months ended September 30, 2020.2021. The $23,079 thousand decreasechange in net loss from continuing operationsincome was primarily attributabledue to the $40,661 thousand changeincrease in equityrevenue driven by the strong improvement in production during 2022, partially offset by an increase in cost of sales, exploration and depreciation, depletion and amortization and increased income (loss)and mining taxes. In addition, interest expense decreased 93% due to lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan and the $4.4 million loss incurred in affiliatesQ3 2021 on the Term Loan extinguishment.
Sustaining capital expenditures
During the nine months ended September 30, 2022, sustaining capital expenditures primarily consisted of $21.7 million of mine development, $17.9 million on the construction of the paste-fill plant, $8.1 million on the construction of the raise of the tailings storage facility, $2.0 million on underground power distribution infrastructure and $1.7 million on the construction of a ventilation raise. During the nine months ended September 30, 2021, major sustaining capital expenditures included $21.6 million of mine development, $8.2 million on the processing plant and tailings storage facility, $2.4 million for the construction of a ventilation raise, $3.0 million for the purchase of mining equipment, $4.3 million on underground power distribution infrastructure and $6.3 million on the construction of dewatering wells.
26
Cash Flows
Gatos Silver
The following table presents our cash flows for the nine months ended September 30, 2022 and 2021.
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2022 | | 2021 | ||
| | (in thousands) | ||||
Net cash provided by (used by) | | |
|
| |
|
Operating activities | | $ | 16,045 | | $ | (15,494) |
Investing activities | |
| (7,392) | |
| (261,439) |
Financing activities | |
| — | |
| 139,185 |
Total change in cash | | $ | 8,653 | | $ | (137,748) |
Cash and cash equivalents, beginning of period | | $ | 6,616 | | $ | 150,146 |
Cash and cash equivalents, end of period | | $ | 15,269 | | $ | 12,398 |
The cash balance at September 30, 2022 increased to $15.3 million compared to $12.4 million at September 30, 2021.
Nine months ended September 30, 2022 compared to September 30, 2021
Cash provided by (used by) operating activities was $16.0 million and ($15.5) million for the nine months ended September 30, 2022 and 2021, respectively. The $31.5 million increase in cash was primarily due to receipt of $23.3 million of dividends from the LGJV operations,and the 2021 payment of a $10.0 million fee to Dowa, partially offset by working capital changes.
Cash used by investing activities was ($7.4) million and ($261.4) million for the $10,000 thousand Term Loan closing fee paidnine months ended September 30, 2022 and 2021, respectively. Cash used by investing activities for the for the nine months ended September 30, 2022 was primarily due to Dowa and the $9,663 thousand increase in general and administrative expense due to: 1) higher legal, consulting and directors and officer’s insurance costs relatedpriority distribution payment made to public company governance and reporting requirements, 2) increased stock-based compensation expense, and 3) costs relating to a separation agreement entered into with a departing executive officer during the current year quarter.
The improvement in equity income (loss) in the LGJV’s operating income,Dowa. Cash used for the nine months ended September 30, 2021, resultedwas primarily from:due to the increase in our ownership$71.6 million acquisition of the 18.5% interest in the LGJV from 51.5%Dowa, the $42.0 million pro-rata capital contribution to 70.0% onthe LGJV for the extinguishment of the WCF in March 11, 2021; mining2021 and processingthe $144.8 million capital contribution to the LGJV to retire the Dowa Term Loan in July 2021.
Cash provided by financing activities operating near design throughputwas nil and $139.2 million for the nine months ended September 30, 2022 and 2021, respectively. Cash provided for the nine months ended September 30, 2021, comparedprimarily related to the ramp-up$4.2 million in proceeds from the follow-on offering of stock in July 2021 and the issuance of common stock from the exercise of stock options.
LGJV
The following table presents summarized information relating to design throughput duringthe LGJV’s cash flows for the nine months ended September 30, 2020;2022 and significantly2021.
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Net cash provided by (used by) | | | | | | |
Operating activities | | $ | 118,250 | | $ | 84,964 |
Investing activities | | | (61,903) | | | (57,698) |
Financing activities | | | (37,962) | | | (19,001) |
Total change in cash | | $ | 18,385 | | $ | 8,265 |
Cash and cash equivalents, beginning of period | | $ | 20,280 | | $ | 1,676 |
Cash and cash equivalents, end of period | | $ | 38,665 | | $ | 9,941 |
The LGJV cash balance at September 30, 2022 was $38.7 million compared to $9.9 million at September 30, 2021.
27
Nine months ended September 30, 2022 compared to September 30, 2021
Cash provided by operating activities was $118.3 million and $85.0 million for the nine months ended September 30, 2022 and 2021, respectively. The $33.3 million increase in cash provided by operating activities was primarily due to the increase in revenue due to increased production and higher metalszinc and lead prices for the nine months ended September 30, 2021,2022, compared to the prior year period, partially offset by increased income taxes, receivables from customers and other favorable working capital changes.
Cash used by investing activities was $61.9 million and $57.7 million for the nine months ended September 30, 2020.2022 and 2021, respectively. The $4.2 million increase in cash used was primarily due to $13.3 million of higher expenditures for property, plant and equipment, partially offset by $8.8 million of lower mine development expenditures. The majority of property, plant and equipment expenditures in 2022 are related to construction of the paste plant and continued construction of the tailings dam raise.
Cash used by financing activities was $38.0 million and $19.0 million for the nine months ended September 30, 2022 and 2021, respectively. The $19.0 million increase in cash used was primarily due to $33 million of dividends paid to partners partially offset by $13.5 million of capital contributions received in 2021 in excess of the $15.9 million paid on the Term Loan in June 2021, the $60.0 million paid to extinguish the Working Capital Facility and the $144.9 million paid to retire the Dowa Term Loan.
Liquidity and Capital Resources
As of September 30, 20212022 and December 31, 2020, we2021, the Company had cash and cash equivalents of $12,398 thousand$15.3 million and $150,146 thousand, respectively, and working capital of $10,693 thousand and $151,728 thousand,$6.6 million, respectively. The decreaseincrease in cash and cash equivalents and working capital werewas primarily due to our $71,550 thousand repurchasereceipt of the 18.5% interestdividend payments in the LGJV from Dowa, the $42,000 thousand capital contribution to the LGJV used to extinguish our 70% shareApril 2022 and July 2022 of the WCF, the $144,809 thousand capital contribution to the LGJV used to extinguish our 70% share of the Term Loan repayment,$5.9 million and the $10,000 thousand closing fee paid to Dowa;$10.0 million, respectively, partially offset by proceeds from the July 2021 follow-on public offering and $13,000 thousand borrowing under the Credit Facility. As a result of the 18.5% repurchase, our ownership in the LGJV increased to 70.0% and Dowa’s ownership was reduced to 30% on March 11, 2021.
On July 19, 2021, we completed a public offering of 8,930,000 shares of common stock at a price of $14.00 per share, resulting in net proceeds of $118,894 thousand, after deducting underwriting discounts and commissions and expenses paid by us. On August 18, 2021, the Company issued an additional 286,962 shares of common stock at a price of $14.00 per share, through the exercise of the over-allotment option, with net proceeds from the additional issuance of $3,837 thousand, after deducting underwriting discounts and commissions and expenses paid by us.operating costs.
On July 12, 2021, the Company entered into a Revolvingthe Credit Facility (the “Credit Facility”). The Credit Facilitythat provides for a $50,000 thousand$50 million revolving line of credit and has an accordion feature, which allows for an increase in the total line of credit up to $100,000 thousand,$100.0 million (reduced to $75 million per the December 19, 2022 amendment), subject to certain conditions. As of September 30, 2021, $13,000 thousand2022, $13.0 million was outstanding under the Credit Facility. For additional information, see “—LiquidityAs of the date of this report the balance outstanding on the Credit Facility is $9.0 million following a $4.0 million principal repayment in December 2022.
On February 28, 2023 the Company’s cash and Capital Resources—Revolving Credit Facility” below.
We guarantee the payment of all obligations, including accrued interest,cash equivalents were $15.6 million and we had $41.0 million available to be drawn under the LGJV equipment loan agreements. As of September 30, 2021, theCredit Facility. The LGJV had $7,588 outstanding under the LGJV equipment loan agreements, netcash and cash equivalents of unamortized debt discount.
22
$55.5 million at February 28, 2023. We believe we have sufficient cash and access to borrowings and other resources to carry out our business plans for at least the next 12 months. We are focused on our forward-looking liquidity needs. We are evaluating our ongoing fixed cost structure as well as decisions related to project retention, advancement and development. We may be required to raise additional capital or take other measures to fund future exploration and development. Significant development activities, if warranted, may require that we arrange for financing in advance of planned expenditures. In addition, we expect to continuedecide to increase our current financial resources with external financings as long asif our long-term business needs require us to do so. Thereso however there can be no assurance that externalthe financing will be available to us on acceptable terms, or at all. We manage liquidity risk through our credit facility and the management of our capital structure.
Contractual Obligations
There have been no changes from the contractual obligations described in our 2021 10-K.
Critical Accounting Policies
Please refer to Note 2 – Summary of Significant Accounting Policies in our consolidated financial statements included in this Report and the 2021 10-K for discussion of our critical accounting policies and estimates.
Jumpstart Our Business Startups Act of 2012
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We may behave elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. The decision to provide funds to the LGJV to support operations at the CLG which, depending upon the circumstances, may be in the form of equity, various forms of debt, joint venture funding or some combination thereof. There can be no assurance that additional funds will be available to us on acceptable terms, or at all. If we raise additional funds by issuing equity or convertible securities, substantial dilution to existing stockholders may result. Additionally, if we raise additional funds by incurring new debt obligations, the termsopt out of the debt may require significant cash payment obligations, as well as covenants and specific financial ratios that may restrict our ability to operate our business.
Dowa Debt Agreements
Dowa Term Loan
On July 11, 2017, we entered into the Term Loan with Dowa whereby the LGJV could borrow up to $210,000 thousand to finance the development of the Los Gatos project, with a maturity date of December 29, 2027. Interest accrued daily at LIBOR plus 2.35% per annum, and the interest was added to the amount borrowed until production commenced at the Los Gatos project. The LGJV was obligated to pay 14 consecutive semi-annual payments totaling the aggregate principal amount and capitalized interest beginning June 30, 2021, with payments made two business days prior to the end of each June and December. We guaranteed 70.0% of the Term Loan and were required to pay an arrangement fee on the borrowing, calculated as 2% per annum on 70% of the outstanding principal balance, payable in semi-annual installments.
On July 26, 2021, the LGJV repaid all amounts owed to Dowaextended transition period under the Term Loan. In conjunction with the Term Loan repayment, the Company also paid Dowa a $10,000 thousand closing fee. To fund its 70% portion of the Term Loan repayment, the Company loaned $144,800 thousand to the LGJV. This loan was converted into a capital contribution to the LGJV on July 26, 2021. Dowa’s 30% portion of the Term Loan was also converted into a capital contribution on July 26, 2021. The LGJV paid $386 thousand of outstanding accrued interest and a $1,585 thousand closing fee related to the Term Loan repayment.
Los Gatos Working Capital Facility
On May 30, 2019, we entered into the WCF with the LGJV and Dowa, under which Dowa agreed to provide a maximum of $60,000 thousand for the benefit of the LGJV, with a maturity date of June 28, 2021. Interest payable under the WCF was LIBOR plus 3% per annum and was payable by the LGJV. We guaranteed 70% of this facility and were required to pay an arrangement fee on the borrowing, calculated as 15.0% per annum on 70.0% of the average daily principal amount outstanding during the relevant fiscal quarter. The full principal amount of the WCF was drawn down by the LGJV as of September 2019. On March 11, 2021, we and Dowa contributed $42,000 thousand and $18,000 thousand, respectively, in capital to the LGJV, extinguishing the WCF.
Revolving Credit Facility
On July 12, 2021, the Company entered into the Credit Facility. The Credit Facility provides for a $50,000 thousand revolving line of credit with an accordion feature, which allows for an increase in the total line of credit up to $100,000 thousand, subject to certain conditions. The Credit Facility matures on July 31, 2024. The Credit Facility contains affirmative and negative covenants that are customary for credit agreements of this nature. The affirmative covenants consist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, among other things, limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. Obligations under the Credit Facility may be accelerated upon the occurrence of certain customary events of default. Loans under the Credit Facility bear interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% or the U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined in accordance with a pricing grid based upon the Company’s consolidated net leverage ratio as of the end of the applicable period.JOBS Act is irrevocable.
2328
On July 19, 2021, the Company borrowed $13,000 thousand under the Credit Facility at a rate of LIBOR plus 3%. As of September 30, 2021, $13,000 thousand was outstanding under the Credit Agreement.
Cash Flows
The following table presents our sources and uses of cash for the periods indicated:
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Net cash provided by (used by) |
| |
|
| |
|
Operating activities | | $ | (15,494) | | $ | (11,898) |
Investing activities | |
| (261,439) | |
| (8,405) |
Financing activities | |
| 139,185 | |
| 14,845 |
Total change in cash | | $ | (137,748) | | $ | (5,458) |
Cash used by operating activities was $15,494 thousand and $11,898 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $3,596 thousand increase in cash usage was primarily due to the $10,000 thousand closing fee paid to Dowa and higher general and administrative costs, partially offset by favorable working capital changes from operations and discontinued operations spun off in October 2020.
Cash used by investing activities was $261,439 thousand and $8,405 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $253,034 thousand increase was primarily due to the $144,809 thousand capital contribution to the LGJV used to extinguish our 70% share of the Term Loan repayment, the $71,550 thousand acquisition of the 18.5% interest in the LGJV from Dowa and the $42,000 thousand pro-rata capital contribution to the LGJV for the extinguishment of the WCF in March 2021.
Cash provided by financing activities was $139,185 thousand and $14,845 thousand for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, cash provided by financing activities primarily reflected the $125,599 thousand in net proceeds from the issuance of common stock in a follow-on public offering and the $13,000 thousand in borrowings under the Credit Facility. For the nine months ended September 30, 2020, cash provided by financing activities primarily reflected the $15,000 thousand in proceeds from related party borrowings.
Results of LGJV Operations
The following table presents information relating to the LGJV’s financial condition as of September 30, 2021 and December 31, 2020, and the operating results for the three and nine months ended September 30, 2021 and 2020, in accordance with GAAP. Pursuant to the purchase of the 18.5% interest from Dowa on March 11, 2021, our current ownership of the LGJV is 70.0%.
24
LOS GATOS JOINT VENTURE
COMBINED BALANCE SHEETS (UNAUDITED)
(in thousands)
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2021 |
| 2020 | ||
ASSETS | |
| | |
| |
| | | | | | |
Current Assets | |
| | |
| |
Cash and cash equivalents | | $ | 9,941 | | $ | 1,676 |
Receivables | |
| 6,961 | |
| 3,988 |
Inventories | |
| 10,027 | |
| 10,315 |
VAT receivable | |
| 47,096 | |
| 50,732 |
Other current assets | |
| 2,543 | |
| 2,891 |
Total current assets | |
| 76,568 | |
| 69,602 |
Non-Current Assets | |
|
| |
|
|
Mine development, net | |
| 222,128 | |
| 202,874 |
Property, plant and equipment, net | |
| 192,675 | |
| 196,942 |
Total non-current assets | |
| 414,803 | |
| 399,816 |
| | | | | | |
Total Assets | | $ | 491,371 | | $ | 469,418 |
| | | | | | |
LIABILITIES AND OWNERS' CAPITAL | |
|
| |
|
|
| | | | | | |
Current Liabilities | |
|
| |
|
|
Accounts payable and accrued liabilities | | $ | 32,951 | | $ | 35,767 |
Related party payable | |
| 1,299 | |
| 1,703 |
Accrued interest | |
| 45 | |
| 101 |
Unearned revenue | |
| — | |
| 3,276 |
Equipment loans | |
| 6,365 | |
| 7,084 |
Dowa Term Loan | |
| — | |
| 31,826 |
Working Capital Facility | |
| — | |
| 60,000 |
Total current liabilities | |
| 40,660 | |
| 139,757 |
| | | | | | |
Non-Current Liabilities | |
|
| |
|
|
Dowa Term Loan | |
| — | |
| 187,767 |
Equipment loans | |
| 1,224 | |
| 6,120 |
Reclamation obligations | |
| 12,846 | |
| 12,162 |
Total non-current liabilities | |
| 14,070 | |
| 206,049 |
Owners' Capital | |
|
| |
|
|
Capital contributions | |
| 540,638 | |
| 271,368 |
Paid-in capital | |
| 18,405 | |
| 16,366 |
Accumulated deficit | |
| (122,402) | |
| (164,122) |
Total owners' capital | |
| 436,641 | |
| 123,612 |
Total Liabilities and Owners' Capital | | $ | 491,371 | | $ | 469,418 |
At September 30, 2021, and December 31, 2020, the LGJV had current assets of $76,568 thousand and $69,602 thousand, respectively. The increase in total current assets was primarily due to an increase in cash and trade receivables generated from operations on the higher sales volumes generated in 2021, partially offset by a decrease in value added tax (“VAT”) receivables primarily from the ability to retain VAT collected from the higher concentrate sales. At September 30, 2021, and December 31, 2020, the LGJV had noncurrent assets of $414,803 thousand and $399,816 thousand, respectively. The increase in noncurrent assets was due to sustaining capital expenditures, primarily for mine development at the CLG, partially offset by depletion and depreciation for the nine months ended September 30, 2021.
25
At September 30, 2021, and December 31, 2020, the LGJV had current liabilities of $40,660 thousand and $139,757 thousand, respectively. The decrease in current liabilities was primarily due to the extinguishment of the $60,000 thousand WCF on March 11, 2021, and the extinguishment of the $31,286 thousand current portion of the Term Loan in July 2021. At September 30, 2021, and December 31, 2020, the LGJV had noncurrent liabilities of $14,070 thousand and $206,049 thousand, respectively. The decrease in non-current liabilities was primarily due to the principal payment and the July 2021 extinguishment of the Term Loan and scheduled equipment loan payments.
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
(in thousands)
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Sales | | $ | 56,991 | | $ | 44,021 | | $ | 178,326 | | $ | 81,181 |
| | | | | | | | | | | | |
Expenses | |
|
| |
|
| |
|
| |
|
|
Cost of sales | |
| 26,374 | |
| 17,224 | |
| 70,275 | |
| 45,496 |
Royalties | |
| 1,181 | |
| 1,343 | |
| 3,480 | |
| 1,372 |
Exploration | |
| 1,595 | |
| 166 | |
| 3,505 | |
| 574 |
General and administrative | |
| 3,414 | |
| 1,900 | |
| 9,493 | |
| 6,550 |
Depreciation, depletion and amortization | |
| 12,734 | |
| 11,817 | |
| 36,388 | |
| 33,077 |
Other | | | — | | | — | | | — | | | 3,416 |
| |
| 45,298 | |
| 32,450 | |
| 123,141 | |
| 90,485 |
Other expense | |
|
| |
|
| |
|
| |
|
|
Interest expense | |
| 847 | |
| 2,862 | |
| 5,320 | |
| 9,805 |
Loss on Term Loan extinguishment | | | 4,359 | | | — | | | 4,359 | | | — |
Arrangement fee | | | — | | | 1,576 | | | 2,090 | | | 6,285 |
Accretion expense | |
| 228 | |
| 212 | |
| 684 | |
| 636 |
Other income | |
| (61) | |
| — | |
| (80) | |
| (108) |
Foreign exchange loss | |
| 47 | |
| (867) | |
| 342 | |
| 4,655 |
| |
| 5,420 | |
| 3,783 | |
| 12,715 | |
| 21,273 |
| | | | | | | | | | | | |
Income (loss) before taxes | | | 6,273 | | | 7,788 | | | 42,470 | | | (30,577) |
| | | | | | | | | | | | |
Mexico mining tax | | | 750 | | | — | | | 750 | | | — |
| | | | | | | | | | | | |
Net income (loss) | | $ | 5,523 | | $ | 7,788 | | $ | 41,720 | | $ | (30,577) |
For the three months ended September 30, 2021, the LGJV had net income of $5,523 thousand compared to net income of $7,788 thousand for the three months ended September 30, 2020. The decrease in net income was primarily due to the loss on the Term Loan extinguishment in July 2021, partially offset by lower interest expense due to lower interest rates, lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan.
For the nine months ended September 30, 2021, the LGJV had net income of $41,720 thousand compared to a net loss of $30,577 thousand for the nine months ended September 30, 2020. The change in net income (loss) was primarily due to increased revenue as a result of 30%, 35% and 17% increases in realized silver, zinc and lead prices, respectively, 67% and 50% higher production rates of lead and zinc concentrates, respectively, 27% and 9% higher silver and zinc ore grades, respectively, and lower interest expense due to lower interest rates, lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan, partially offset by 1% lower lead ore grades and costs incurred directly related to the two-month Mexican government ordered temporary suspension of operations relating to the COVID-19 pandemic during the prior year period.
26
The following table presents summarized information relating to the LGJV’s cash flows for the nine months ended September 30, 2021 and 2020.
LOS GATOS JOINT VENTURE
COMBINED STATEMENT OF CASH FLOWS
(in thousands)
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2021 |
| 2020 | ||
Net cash provided by (used by) |
| |
|
| |
|
Operating activities | | $ | 84,964 | | $ | 31,411 |
Investing activities | |
| (57,698) | |
| (44,208) |
Financing activities | |
| (19,001) | |
| 13,492 |
Total change in cash | | $ | 8,265 | | $ | 695 |
Cash provided by operating activities was $84,964 thousand and $31,411 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $53,553 thousand increase in cash provided by operating activities was primarily due to the increase in revenue due to higher metals prices, higher processed ore tonnes and higher ore grades for the nine months ended September 30, 2021, compared to the prior year period, partially offset by increased receivables from customers.
Cash used by investing activities was $57,698 thousand and $44,208 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $13,490 thousand increase in cash used was primarily due to higher expenditures for property, plant and equipment and mine development.
Cash (used by) provided by financing activities was ($19,001) thousand and $13,492 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $32,493 thousand change in financing cash flows was primarily due to the $144,809 thousand retirement of the Term Loan in July 2021, the $60,000 thousand extinguishment of the WCF in March 2021, and the $15,913 thousand Term Loan payment in June 2021, partially offset by the $207,209 thousand of capital contributions in 2021 and the proceeds from the $18,904 thousand related party loans to the LGJV during the nine months ended September 30, 2020.
Non-GAAP Financial Measures
We use certain measures that are not defined by GAAP to evaluate various aspects of our business. These non-GAAP financial measures are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP. Please see “Cash Costs and All-In Sustaining Costs” and “Reconciliation of expenses (GAAP) to non-GAAP measures” below.
Cash Costs and All-In Sustaining Costs
Cash costs and all-in sustaining costs (“AISC”) are non-GAAP measures. AISC was calculated based on guidance provided by the World Gold Council (“WGC”). WGC is not a regulatory industry organization and does not have the authority to develop accounting standards for disclosure requirements. Other mining companies may calculate AISC differently as a result of differences in underlying accounting principles and policies applied, as well as definitional differences of sustaining versus expansionary (i.e. non-sustaining) capital expenditures based upon each company’s internal policies. Current GAAP measures used in the mining industry, such as cost of sales, do not capture all of the expenditures incurred to discover, develop and sustain production. Therefore, we believe that cash costs and AISC are non-GAAP measures that provide additional information to management, investors and analysts that aid in the understanding of the economics of the Company’s operations and performance compared to other producers and provides investors visibility by better defining the total costs associated with production.
Cash costs include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, treatment and refining costs, general and administrative costs, royalties and mining production taxes. AISC includes total production cash costs incurred at the LGJV’s mining operations plus sustaining capital expenditures. The Company believes this measure represents the total sustainable costs of producing silver from current operations and provides additional information of the LGJV’s operational performance and ability to generate cash flows. As the measure seeks to reflect the full cost of silver production from current operations, new project and expansionary capital at current operations are not included. Certain cash expenditures such as new project spending, tax payments, dividends, and financing costs are not included.
2729
Reconciliation of expenses (GAAP) to non-GAAP measures
The table below presents a reconciliation between the most comparable GAAP measure of the LGJV’s expenses to the non-GAAP measures of (i) cash costs, (ii) cash costs, net of by-product credits, (iii) co-product all-in sustaining costs and (iv) by-product all-in sustaining costs for our operations.
| | | | | | |
| | Three Months Ended | | Nine Months Ended | ||
(in thousands, except unit costs) |
| September 30, 2021 |
| September 30, 2021 | ||
Expenses | | $ | 45,298 | | $ | 123,141 |
Depreciation, depletion and amortization | |
| (12,734) | |
| (36,388) |
Exploration1 | |
| (1,595) | |
| (3,505) |
Treatment and refining costs2 | |
| 3,596 | |
| 16,372 |
Cash costs | | $ | 34,565 | | $ | 99,620 |
Sustaining capital | |
| 21,180 | |
| 51,864 |
All-in sustaining costs | | $ | 55,745 | | $ | 151,484 |
By-product credits3 | |
| (28,780) | |
| (73,402) |
All-in sustaining costs, net of by-product credits | | $ | 26,965 | | $ | 78,082 |
Cash costs, net of by-product credits | | $ | 5,785 | | $ | 26,218 |
| | | | | | |
Payable ounces of silver equivalent4 | |
| 2,849 | |
| 7,837 |
Co-product cash cost per ounce of payable silver equivalent | | $ | 12.13 | | $ | 12.71 |
Co-product all-in sustaining cost per ounce of payable silver equivalent | | $ | 19.57 | | $ | 19.33 |
| | | | | | |
Payable ounces of silver | |
| 1,614 | |
| 4,782 |
By-product cash cost per ounce of payable silver | | $ | 3.58 | | $ | 5.48 |
By-product all-in sustaining cost per ounce of payable silver | | $ | 16.71 | | $ | 16.33 |
1 Exploration costs are not related to current operations.
2 Represent reductions on customer invoices and included in Sales of the LGJV combined statement of income (loss).
3 By-product credits reflect realized metal prices of zinc, lead and gold for the applicable period.
4 Silver equivalents utilize the average realized prices during the nine months ended September 30, 2021 of $24.03/oz silver, $1.29/lb zinc, $0.97/lb lead and $1,799/oz gold and the average realized prices during the three months ended September 30, 2021 of $23.31/oz silver, $1.40/lb zinc, $0.99/lb lead and $1,776/oz gold.
Off-balance sheet arrangements
During the periods presented, we did not, and we currently do not, have any significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our shareholders.
Critical Accounting Policies
Please refer to Note 2 – Summary of Significant Accounting Policies in our consolidated financial statements included in this Report and the 2020 10-K for discussion of our critical accounting policies and estimates.
Jumpstart Our Business Startups Act of 2012
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
(in thousands, except unit costs) |
| September 30, 2022 |
| September 30, 2021 |
| September 30, 2022 |
| September 30, 2021 | ||||
Cost of sales | | $ | 28,625 | | $ | 26,374 | | $ | 81,550 | | $ | 70,275 |
Royalties | | | 327 | | | 1,181 | | | 2,739 | | | 3,480 |
Exploration | | | 1,881 | | | 1,595 | | | 6,235 | | | 3,505 |
General and administrative | | | 3,431 | | | 3,414 | | | 9,846 | | | 9,493 |
Depreciation, depletion and amortization | | | 19,943 | | | 12,734 | | | 52,340 | | | 36,388 |
Expenses | | $ | 54,207 | | $ | 45,298 | | $ | 152,710 | | $ | 123,141 |
Depreciation, depletion and amortization | |
| (19,943) | |
| (12,734) | |
| (52,340) | |
| (36,388) |
Exploration1 | |
| (1,881) | |
| (1,595) | |
| (6,235) | |
| (3,505) |
Treatment and refining charges2 | |
| 6,230 | |
| 3,596 | |
| 15,668 | |
| 16,372 |
Cash costs(A) | | $ | 38,613 | | $ | 34,565 | | $ | 109,803 | | $ | 99,620 |
Sustaining capital | |
| 17,086 | |
| 21,180 | |
| 57,036 | |
| 51,864 |
AISC(B) | | $ | 55,699 | | $ | 55,745 | | $ | 166,839 | | $ | 151,484 |
By-product credits3 | |
| (30,304) | |
| (28,780) | |
| (101,200) | |
| (73,402) |
AISC, net of by-product credits (C) | | $ | 25,395 | | $ | 26,965 | | $ | 65,639 | | $ | 78,082 |
Cash costs, net of by-product credits(D) | | $ | 8,308 | | $ | 5,785 | | $ | 8,603 | | $ | 26,218 |
| | | | | | | | | | | | |
Payable ounces of silver equivalent4(E) | |
| 4,349 | |
| 2,849 | |
| 11,877 | |
| 7,837 |
Co-product cash cost per ounce of payable silver equivalent(A/E) | | $ | 8.88 | | $ | 12.13 | | $ | 9.25 | | $ | 12.71 |
Co-product AISC per ounce of payable silver equivalent(B/E) | | $ | 12.81 | | $ | 19.57 | | $ | 14.05 | | $ | 19.33 |
| | | | | | | | | | | | |
Payable ounces of silver(F) | |
| 2,593 | |
| 1,614 | |
| 6,912 | |
| 4,782 |
By-product cash cost per ounce of payable silver(D/F) | | $ | 3.20 | | $ | 3.58 | | $ | 1.24 | | $ | 5.48 |
By-product AISC per ounce of payable silver(C/F) | | $ | 9.79 | | $ | 16.71 | | $ | 9.50 | | $ | 16.33 |
28
(1) | Exploration costs are not related to current operations. |
(2) | Represent reductions on customer invoices and included in Sales of the LGJV combined statement of income (loss). |
(3) | By-product credits reflect realized metal prices of zinc, lead and gold for the applicable period, which includes any final settlement adjustments from prior periods. |
(4) | Silver equivalents utilize the average realized prices during the nine months ended September 30, 2022 of $20.38/oz silver, $1.55/lb zinc, $0.98/lb lead and $1,837/oz gold and the average realized prices during the three months ended September 30, 2022 of $17.25/oz silver, $1.52/lb zinc, $0.91/lb lead and $1,790/oz gold. Silver equivalents utilize the average realized prices during the nine months ended September 30, 2021 of $24.03/oz silver, $1.29/lb zinc, $0.97/lb lead and $1,799/oz gold and the average realized prices during the three months ended September 30, 2021 of $23.31/oz silver, $1.40/lb zinc, $0.99/lb lead and $1,776/oz gold. Realized prices include the impact of final settlement adjustments from sales. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
We engage in the productionare a smaller reporting company and are not required to provide disclosure pursuant to this Item.
30
Foreign Currency Risk
Although most of our expenditures are in U.S. dollars, certain purchases of labor, operating supplies and capital assets are denominated in other currencies, primarily the Mexican peso. As a result, currency exchange fluctuations may impact the costs of our operations.
Concentration of Risk
We have placed nearly all of our cash investments with a single, high-quality financial institution. All cash equivalents are invested in high-quality, short-term money market instruments, including certificates of deposit. At no time have we had funds invested in asset-backed commercial paper. We have not experienced any losses on our cash investments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintainhave established disclosure controls and procedures, (asas such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms,forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officerprincipal executive and Chief Financial Officer,principal financial officers as appropriate, to allow timely decisions regarding required disclosures. disclosure.
Our management, with the participation of our Chief Executive Officerprincipal executive officer and Chief Financial Officer,principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b).as of September 30, 2022. Based on this evaluation, our Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2021.2022, due to the material weaknesses in our internal control over financial reporting described in the 2021 10-K.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the third quarter of 2021ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect resource constraints, which require management to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control.
29
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
31
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, involved in legal proceedings of a nature considered normal to our business. We believe that other than as set out below in this Item none of the litigation in which we are currently involved, or have been involved since the beginning of our most recently completed financial year, individually or in the aggregate, is material to or potentially material to our consolidated financial condition, cash flows or results of operations. See Note
On February 22, 2022, a purported Company stockholder filed a putative class action lawsuit in the United States District Court for the District of Colorado against the Company, certain of our former officers, and several directors. An amended complaint was filed on August 15, 2022. The amended complaint, allegedly brought on behalf of certain purchasers of the Company’s common stock and certain traders of call and put options on the Company’s common stock from December 9, – Commitments, Contingencies2020 through January 25, 2022, seeks, among other things, damages, costs, and Guarantees in our consolidated financialexpenses, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 as well as Sections 11 and 15 of the Securities Act of 1933. The amended complaint alleges that certain individual defendants and the Company, pursuant to the control and authority of the individual defendants, made false and misleading statements included in this Report for additionaland/or omitted certain material information regarding our assessmentthe mineral resources and reserves at the Cerro Los Gatos mine. The Company and all defendants filed a motion to dismiss this action on October 14, 2022. That motion was fully briefed as of contingencies relatedDecember 23, 2022.
By Notice of Action issued February 9, 2022 and subsequent Statement of Claim dated March 11, 2022 Izabela Przybylska commenced a putative class action against the Company, certain of its former officers and directors, and others in the Ontario Superior Court of Justice on behalf of a purported class of all persons or entities, wherever they may reside or be domiciled, who acquired securities of the Company in both the primary and secondary markets during the period from October 28, 2020 until January 25, 2022. The action asserts claims under Canadian securities legislation and at common law and seeks unspecified monetary damages and other relief in respect of allegations the defendants made false and misleading statements and omitted material information regarding the mineral resources and reserves of the Company. The plaintiff filed motion materials for leave to legal matters.proceed in respect of her statutory claims and for class certification on March 3, 2023. The court has tentatively set dates in late March of 2024 for the hearing of the plaintiff’s motions.
There can be no assurance that any of the foregoing matters individually or in aggregate will not result in outcomes that are materially adverse for us.
Item 1A. Risk Factors
Factors that could cause our actual results to differ materially from those in this Report include, but are not limited to, any of the risks described in the 20202021 10-K. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not currently known to us or that we currently deem immaterial may also adversely affect us. As of the date of this Report, there have been no material changes to the risk factors disclosed in the 20202021 10-K.
32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During the quarter ended September 30, 2021,2022, the Company did not issue any shares of its common stock or other equity securities that were not registered under the Securities Act of 1933, as amended.
Use of Proceeds
On October 27, 2020, the SEC declared effective the Company’s registration statement on Form S-1 (No. 333-249224), as amended, filed in connection with the Company’s IPO. There has been no material change in the planned use of proceeds from the IPO as described in the Company’s final prospectus, filed with the SEC on October 29, 2020, pursuant to Rule 424(b) under the Securities Act.
As of September 30, 2021, the Company has used approximately $131,972 thousand of the net proceeds from the IPO, including (i) $71,550 thousand for the repurchase of the 18.5% interest in the LGJV from Dowa; (ii) $42,000 thousand for the capital contribution to the LGJV to extinguish the Company’s 70% share of the WCF; and (iii) $16,742 thousand for working capital and general corporate purposes.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
During the quarter ended September 30, 2021,2022, there were no purchases made by or on behalf of the Company or any affiliated purchaser of the Company’s common stock.
30
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
3.1 |
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33
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32.1** | | |
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101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
* | Filed herewith |
** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GATOS SILVER, INC. | |
| (Registrant) | |
| | |
| By: | /s/ |
| |
|
| | Chief Executive Officer |
| | |
| By: | /s/ |
| |
|
| | Chief Financial Officer |
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