| TABLE OF CONTENTS |
| | |
| UNITED STATES |
| | SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
| | | |
| FORM 10-K |
| | | | ☒ |
| | | | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2020 |
| | | 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 | (I.R.S. Employer |
| | | | | | | of incorporation or organization) | Identification No.) |
| 8400 E. Crescent Parkway, Suite 600 |
| Greenwood Village, CO 80111 |
| | | | | | (Address of principal executive offices) (Zip Code) |
| | | (303) 784-5350 |
| | | | | | (Registrant’s telephone number, including area code) |
| | | | | | 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 | |
| | | | | | | | Toronto Stock Exchange |
| | | | | | Securities registered pursuant to Section 12(g) of the Act: None |
| | | | Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes | | | | | | ☐ No ☒ |
| | | | Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes | | | | | | ☐ No ☒ |
| | | | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal |
| control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or |
| issued its audit report. | | | | | | | ☐ |
| | | | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes | | | | | | ☐No ☒ |
| | | | As of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, there was no public market for the registrant’s |
| common stock. The registrant’s common stock began trading on the New York Stock Exchange and the Toronto Stock Exchange on October 28, 2020. The |
| aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of the registrant’s common |
| stock on the New York Stock Exchange on March 23, 2021, was $326,610,768. |
| | | | As of March 23, 2021, the number of shares of Registrant’s common stock outstanding was 59,409,052. |
| | | | | | DOCUMENTS INCORPORATED BY REFERENCE |
| | | | Certain information required by Part III of this Form 10-K is incorporated by reference from the registrant’s definitive proxy statement for the 2021 |
| Annual Meeting of Stockholders which will be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. |
| | |
| TABLE OF CONTENTS |
| |
| | TABLE OF CONTENTS |
| | | Page |
| | Part I | |
| Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. | | | | Business | 6 |
| | | | Risk Factors | 15 |
| | | | Unresolved Staff Comments | 35 |
| | | | Properties | 36 |
| | | | Legal Proceedings | 52 |
| | | | Mine Safety Disclosures | 52 |
| | Part II | |
| Item 5. | | | | Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities |
| | | 53 |
| Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. | | | | [Reserved] | 54 |
| | | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 54 |
| | | | Quantitative and Qualitative Disclosures about Market Risk | 66 |
| | | | Financial Statements and Supplementary Data | 67 |
| | | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 105 |
| | | | Controls and Procedures | 105 |
| | | | Other Information | 105 |
| | Part III | |
| Item 10. Item 11. Item 12. | | | | Directors, Executive Officers and Corporate Governance | 106 |
| | | | Executive Compensation | 106 |
| | | | Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters |
| | | 106 |
| Item 13. Item 14. | | | | Certain Relationships and Related Transactions, and Director Independence | 106 |
| | | | Principal Accountant Fees and Services | 106 |
| | Part IV | |
| Item 15. Item 16. | | | | Exhibits and Financial Statement Schedules | 107 |
| | | | Form 10-K Summary | 110 |
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| | About this Annual Report |
| On October 30, 2020, we effected a reorganization (the “Reorganization”) in which (i) our then- |
| subsidiary Silver Opportunity Partners LLC (“SOP”) became a wholly owned subsidiary of a newly createdDelaware corporation named Silver Opportunity Partners Corporation (“SOP Corporation”), (ii) each shareof our common stock outstanding immediately prior to the Reorganization was exchanged for(A) 0.394057448219062 shares of our common stock (subject to rounding to eliminate fractional shares)and (B) 0.105942551780938 shares of common stock of SOP Corporation (subject to rounding to eliminatefractional shares) and (iii) we changed our name from Sunshine Silver Mining & Refining Corporation toGatos Silver, Inc. SOP held our interest in the Sunshine Complex, which is located in the Coeur d’AleneMining District in Idaho and is comprised of the Sunshine Mine and the Sunshine Big Creek Refinery.Through the Reorganization, we distributed all of our equity interest in SOP to our stockholdersimmediately prior to the Reorganization. As used in this Annual Report on Form 10-K (this “Report”),“SOP” refers to (i) SOP prior to the Reorganization and (ii) SOP Corporation from and after theReorganization. |
| Where information relates to our company before the Reorganization and where the context otherwise |
| requires, the “Company,” “we,” “us” and “our” refer to Sunshine Silver Mining & Refining Corporation andits consolidated subsidiaries, and, unless the context otherwise requires, to its affiliate entities, Minera PlataReal S. de R.L. de C.V. (“MPR”), Operaciones San Jose de Plata S. de R.L. de C.V. (“OSJ”) and ServiciosSan Jose de Plata S. de R.L. de C.V. (“SSJ”). We also refer to these entities collectively as the “Los GatosJoint Venture” or “LGJV” where applicable. Where information relates to our company following theReorganization and where the context otherwise requires, “Gatos,” the “Company,” “we,” “us” and “our”refer to Gatos Silver, Inc. and its consolidated subsidiaries, and, unless the context otherwise requires, to itsaffiliate entities that are part of the Los Gatos Joint Venture. As of December 31, 2020, we ownedapproximately 51.5% of the LGJV. As of the date of this Report, we own 70.0% of the LGJV. Despiteowning the majority interest in the LGJV, we do not exercise control over the LGJV due to certainprovisions contained in the Unanimous Omnibus Partner Agreement effective as of January 1, 2015 amongMinera Plata Real, S. de R.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Josede Plata, S. de R.L. de C.V., Los Gatos Luxembourg S.a.r.l., Sunshine Silver Mining & RefiningCorporation and Dowa Metals & Mining Co., Ltd. (the “Unanimous Omnibus Partner Agreement”) thatcurrently require unanimous partner approval of all major operating decisions (such as certain approvals, thecreation of security interests on property, any initial public offering of the joint venture, and litigationsettlements). |
| References to the “Los Gatos Technical Report” are to the “NI 43-101 Technical Report: Los Gatos |
| Project, Chihuahua, Mexico,” prepared by Tetra Tech Inc. (“Tetra Tech”), dated July 1, 2020, which wasprepared in accordance with the requirements of subpart 1300 of Regulation S K (the “SEC MiningModernization Rules”) and Canadian National Instrument 43-101 — Standards of Disclosure for MineralProjects (“NI 43-101”). The Los Gatos Technical Report was filed as Exhibit 96.1 to our RegistrationStatement on Form S-1 (File No. 333-249224), filed with the SEC on October 1, 2020. The mineral resourceestimates contained in the Los Gatos Technical Report have an effective date of September 6, 2019 and havenot been updated since that time. We believe that activity at the CLG subsequent to the effective date of themineral resource estimates would not result in a material change to the information contained in the LosGatos Technical Report. The mineral reserve estimates and the economic analysis contained in the LosGatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of mineralreserves that have been mined through June 30, 2020. Subsequent to July 1, 2020, 363,857 tonnes ofmaterial have been mined through December 31, 2020, which we believe would not result in a materialchange to the information contained in the Los Gatos Technical Report. |
| All mineral reserves and mineral resources contained herein for the Cerro Los Gatos Mine (“CLG”), |
| the Esther deposit and the Amapola deposit are presented on both a 100% basis as well as on a 51.5% basisto reflect our ownership interest in the LGJV as of December 31, 2020. |
| References to “$” or “dollars” are to United States dollars. |
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| | Notice Regarding Mineral Disclosure |
| “Inferred mineral resources” are subject to uncertainty as to their existence and as to their economic |
| and legal feasibility. The level of geological uncertainty associated with an inferred mineral resource is toohigh to apply relevant technical and economic factors likely to influence the prospects of economicextraction in a manner useful for evaluation of economic viability. |
| | Glossary of Technical Terms |
| Certain terms and abbreviations used in this Report are defined below: |
| “Ag” means the chemical symbol for the element silver. |
| “AISC” means all-in sustaining cost. |
| “Au” means the chemical symbol for the element gold. |
| “By-Product” is a secondary metal or mineral product recovered in the milling process. |
| “Concentrate” is the product of physical concentration process, such as flotation or gravity |
| concentration, which involves separating ore minerals from unwanted waste rock. Concentrates requiresubsequent processing (such as smelting or leaching) to break down or dissolve the ore minerals and obtainthe desired elements, usually metals. |
| “Dilution” is an estimate of the amount of waste or low-grade mineralized rock which will be mined |
| with the ore as part of normal mining practices in extracting an ore body. |
| “Feasibility Study” is a comprehensive study of a mineral deposit in which all geological, engineering, |
| legal, operating, economic, social, environmental and other relevant factors are considered in sufficientdetail that it could reasonably serve as the basis for a final decision by a financial institution to finance thedevelopment of the deposit for mineral production. |
| “Grade” means the concentration of each ore metal in a rock sample, usually given as weight percent. |
| Where extremely low concentrations are involved, the concentration may be given in grams per tonne (g/t)or ounces per ton (oz/t), the grade of an ore deposit is calculated, often using sophisticated statisticalprocedures, as an average of the grades of a very large number of samples collected from the deposit. |
| “g/t” means grams per tonne. |
| “Hectare” is a metric unit of area equal to 10,000 square meters (2.471 acres). |
| “Indicated Mineral Resources” or “Indicated Resources” is that part of a Mineral Resource for which |
| quantity, grade or quality, densities, shape and physical characteristics, can be estimated with a level ofconfidence sufficient to allow the appropriate application of technical and economic parameters, to supportmine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed andreliable exploration and testing information gathered through appropriate techniques from locations such asoutcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and gradecontinuity to be reasonably assumed. |
| “Inferred Mineral Resources” or “Inferred Resources” is that part of a Mineral Resource for which |
| quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling andreasonably assumed, but not verified, geological and grade continuity. The estimate is based on limitedinformation and sampling gathered through appropriate techniques from locations such as outcrops,trenches, pits, workings and drill holes. |
| “Los Gatos Technical Report” means “NI 43-101 Technical Report: Los Gatos Project, Chihuahua, |
| Mexico,” prepared by Tetra Tech Inc., dated July 1, 2020, which was prepared in accordance with therequirements of the SEC Mining Modernization Rules and NI 43-101. |
| “masl” is meters above sea level. |
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| “Mineral Reserves” means the economically mineable part of a Measured or Indicated Resource |
| demonstrated by at least a preliminary feasibility study. This study must include adequate information onmining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time ofreporting, that economic extraction can be justified. A Mineral Reserve includes diluting materials andallowances for losses that may occur when the material is mined. |
| “Mineral Resources” means a concentration or occurrence of minerals, natural solid inorganic material, |
| or natural solid fossilized organic material including base and precious metals, coal, and industrial mineralsin or on the earth’s crust in such form and quantity and of such a grade or quality that it has reasonableprospects for economic extraction. The location, quantity, grade, geological characteristics and continuity ofa Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge. |
| “Measured Mineral Resources” is that part of a Mineral Resource for which quantity, grade or quality, |
| densities, shape, and physical characteristics are so well established that they can be estimated withconfidence sufficient to allow the appropriate application of technical and economic parameters, to supportproduction planning and evaluation of the economic viability of the deposit. The estimate is based ondetailed and reliable exploration, sampling and testing information gathered through appropriate techniquesfrom locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough toconfirm both geological and grade continuity. |
| “M&I” means Measured Mineral Resources and Indicated Mineral Resources. |
| “NI 43-101” means National Instrument 43-101 — Standards of Disclosure for Mineral Projects |
| adopted by the Canadian Securities Administrators. |
| “NSR” means Net Smelter Return: the proceeds returned from the smelter and/or refinery to the mine |
| owner less certain costs. |
| “Ore Reserve” is the part of a mineral deposit that could be economically and legally extracted or |
| produced at the time of the reserve determination. |
| “Pb” means the chemical symbol for the element lead. |
| “Probable Mineral Reserve” means the economically mineable part of an Indicated, and in some |
| circumstances a Measured, Mineral Resource demonstrated by at least a preliminary feasibility study. Thisstudy must include adequate information on mining, processing, metallurgical, economic, and other relevantfactors that demonstrate, at the time of reporting, that economic extraction can be justified. |
| “Proven Mineral Reserve” means the economically mineable part of a Measured Mineral Resource |
| demonstrated by at least a preliminary feasibility study. This preliminary feasibility study must includeadequate information on mining, processing, metallurgical, economic, and other relevant factors thatdemonstrate, at the time of reporting, that economic extraction can be justified. |
| “SEC Mining Modernization Rules” means subpart 1300 of Regulation S-K. |
| “Tailings” is the material that remains after all economically and technically recovered precious metals |
| have been removed from the ore during processing. |
| “Ton” means a short ton which is equivalent to 2,000 pounds, unless otherwise specified. We will also |
| reference “Tonne,” which is a metric ton or 2,204.6 pounds. “Tonne” is referenced under the “Grade”definition. |
| “toz” means a troy ounce. |
| “Zn” means the chemical symbol for the element zinc. |
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| | Cautionary Information about 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, including the Private SecuritiesLitigation 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” or “continue,” the negative of these terms andother comparable terminology. These forward-looking statements may include, but are not limited to, thoserelating to projections of our future financial performance, our anticipated growth strategies and anticipatedtrends in our industry, production from the CLG and further exploration of the Los Gatos District, estimatedcalculations of mineral reserves and resources at our properties, anticipated expenses, tax benefits, futurestrategic infrastructure development at the CLG and our requirements for additional capital. |
| 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 concerningfuture events that are difficult to predict. Therefore, actual future events or results may differ materiallyfrom these statements. Important factors that could cause our actual results to differ materially from thoseexpressed or implied by forward-looking statements include, but are not limited to, the risks set forth under“Risk Factors Summary” below, which are discussed in further detail in “Item 1A — Risk Factors.”. Suchfactors should not be construed as exhaustive and should be read in conjunction with the other cautionarystatements included in this Report and those described from time to time in our filings with the U.S.Securities and Exchange Commission (“SEC”). These risks and uncertainties, as well as other risks of whichwe are not aware or which we currently do not believe to be material, may cause our actual future results tobe materially different than those expressed in our forward-looking statements. Undue reliance should notbe placed on these forward-looking statements. We do not undertake any obligation to make any revisions tothese forward-looking statements to reflect events or circumstances after the date of this filing or to reflectthe occurrence of unanticipated events, except as required by law. Certain forward-looking statements arebased on assumptions, qualifications and procedures which are set out only in the Los Gatos TechnicalReport. For a complete description of assumptions, qualifications and procedures associated with suchinformation, reference should be made to the full text of the Los Gatos Technical Report. |
| | | Risk Factors Summary |
| We are subject to a variety of risks and uncertainties, including risks related to our business and |
| industry; risks related to government regulations and international operations; risks related to the ownershipof our common stock; and certain general risks, which could have a material adverse effect on our business,financial condition, results of operations and cash flows. These risks include, but are not limited to, thefollowing principal risks: |
| • | we have a history of negative operating cash flows and net losses and we may never achieve orsustain profitability; |
| • | we are dependent on two principal projects for our future operations; |
| • | the LGJV has debt and may incur further debt in the future, which could adversely affect the LGJV’sand our financial health and ability to obtain financing in the future and pursue certain businessopportunities; |
| • | mineral reserve and mineral resource calculations at the CLG and the Los Gatos District are onlyestimates and actual production results may vary significantly from the estimates; |
| • | our mineral exploration efforts are highly speculative in nature and may be unsuccessful; |
| • | actual capital costs, operating costs, production and economic returns may differ significantly fromthose we have anticipated and there are no assurances that any future development activities willresult in profitable mining operations; |
| • | our operations involve significant risks and hazards inherent to the mining industry; |
| • | the title to some of the mineral properties may be uncertain or defective; |
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| • | the widespread outbreak of the COVID-19 pandemic and any other health epidemics, communicablediseases or public health crises could also adversely affect us, particularly in regions where weconduct our business operations; |
| • | the prices of silver, zinc and lead are subject to change and a substantial or extended decline in theprices of silver, zinc or lead could materially and adversely affect our revenues and the value of ourmineral properties; |
| • | the Mexican government, as well as local governments, extensively regulate mining operations,which impose significant actual and potential costs on us, and future regulation could increase thosecosts, delay receipt of regulatory refunds or limit our ability to produce silver and other metals; |
| • | our operations are subject to additional political, economic and other uncertainties not generallyassociated with U.S. operations; and |
| • | we are required to obtain, maintain and renew environmental, construction and mining permits,which is often a costly and time-consuming process and may ultimately not be possible. |
| For a more complete discussion of the material risk factors applicable to us, see “Item 1A — Risk |
| Factors.” |
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| | PART I |
| Item 1. Business |
| Our Company |
| We are a U.S.-based precious metals production, development and exploration company with the |
| objective of becoming a premier silver producer. We were formed on February 2, 2011, when ourpredecessor Precious Metals Opportunities LLC, which was formed in December 2009, converted to aDelaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us to form Sunshine SilverMines Corporation. In 2014, we changed our name to Sunshine Silver Mining & Refining Corporation. OnOctober 30, 2020, as part of the Reorganization, we changed our name to Gatos Silver, Inc. For additionalinformation regarding the Reorganization, see “About this Annual Report.” |
| Our primary efforts are focused on the operation of the LGJV in Chihuahua, Mexico. On January 1, |
| 2015, we entered into the LGJV with Dowa Metals and Mining Co., Ltd. (“Dowa”) to develop the LosGatos District. On September 1, 2019, the LGJV commenced commercial production of its two concentrateproducts: a lead concentrate and a zinc concentrate. The LGJV’s lead and zinc concentrates are sold to third-party customers. |
| In addition to the Los Gatos District, we have 100% ownership of the Santa Valeria property, located in |
| Chihuahua, Mexico, which comprises 1,543 hectares and could provide additional opportunities for resourcegrowth. |
| Our Principal Projects |
| We are currently focused on the production and continued development of the CLG and the further |
| exploration and development of the Los Gatos District: |
| • | The CLG, located within the Los Gatos District, Chihuahua, Mexico, consists of a 2,500 tonnes perday (“tpd”) polymetallic mine and processing facility that commenced concentrate sales onSeptember 1, 2019. |
| For the year ended December 31, 2020, the CLG mined 652,739 tonnes and processed 667,422tonnes at average grades of 229 g/t silver, 0.42 g/t gold, 2.27% lead and 3.64% zinc, withmetallurgical recovery of 84.1% silver, 61.9% gold, 86.6% lead and 72.8% zinc. A total of 21,176tonnes of lead concentrate were produced at average grades of 5,295 g/t silver, 7.3 g/t gold, 58.9%lead and 10.1% zinc, with metallurgical recovery of 72.7% silver, 55.4% gold, 82.3% lead and8.8% zinc. A total of 27,879 tonnes of zinc concentrate were produced at average grades of 619 g/tsilver, 0.66 g/t gold, 2.4% lead and 55.6% zinc, with metallurgical recovery of 11.3% silver, 6.6%gold, 4.3% lead and 63.9% zinc. For the year ended December 31, 2019, the CLG mined 357,342tonnes and processed 269,853 tonnes at average grades of 229 g/t silver, 0.52 g/t gold, 1.97% leadand 3.03% zinc, with metallurgical recovery of 82.1% silver, 63.5% gold, 83.4% lead and 72.3%zinc. A total of 7,188 tonnes of lead concentrate were produced at average grades of 5,774 g/tsilver, 10.9 g/t gold, 56.3% lead and 12.6% zinc, with metallurgical recovery of 67.3% silver,55.2% gold, 76.0% lead and 11.1% zinc. A total of 9,320 tonnes of zinc concentrate wereproduced at average grades of 978 g/t silver, 1.26 g/t gold, 4.2% lead and 53.7% zinc, withmetallurgical recovery of 14.8% silver, 8.3% gold, 7.4% lead and 61.2% zinc. |
| The Los Gatos Technical Report estimates that the deposit contains approximately 9.6 milliondiluted tonnes of proven and probable mineral reserves (or approximately 5.0 million dilutedtonnes of proven and probable mineral reserves on a 51.5% basis), with approximately 6.4 milliondiluted tonnes of proven mineral reserves (or approximately 3.3 million diluted tonnes of provenmineral reserves on a 51.5% basis) and approximately 3.3 million diluted tonnes of probablemineral reserves (or approximately 1.7 million diluted tonnes of probable mineral reserves on a51.5% basis). Average proven and probable mineral reserve grades are 306 g/t silver, 0.35 g/t gold,2.76% lead and 5.65% zinc. The mineral reserve estimates contained in the Los Gatos TechnicalReport have an effective date of July 1, 2020 and exclude 655,746 tonnes of mineral reserves thathave |
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| been mined through June 30, 2020. Subsequent to July 1, 2020, 363,857 tonnes of material havebeen mined through December 31, 2020, which we believe would not result in a material change tothe information contained in the Los Gatos Technical Report. |
| • | The Los Gatos District, located in Chihuahua, Mexico, is located approximately 120 kilometerssouth of Chihuahua City and is comprised of a 103,087-hectare land position, constituting a newmining district. The Los Gatos District consists of 14 mineralized zones, which include threeidentified silver-lead-zinc deposits that contain mineral resources — the CLG, the Esther deposit andthe Amapola deposit — as well as 11 additional high-priority targets defined by high-grade drillintersections and over 150 kilometers of outcropping quartz and calcite veins. The area ischaracterized by a predominantly silver-lead-zinc epithermal mineralization. On September 1, 2020,the LGJV commenced concentrate sales at the CLG. A core component of the LGJV’s business planis to explore the highly prospective, underexplored Los Gatos District with the objective ofidentifying additional mineral deposits that can be mined and processed, possibly utilizing the CLGplant infrastructure. |
| Prior to our initial acquisition of exploration concession rights in April 2006, very limited historical |
| prospecting and exploration activities had been conducted in the Los Gatos District. We were able to acquireconcessions covering approximately 103,087 hectares and, through our exploration, discovered a virginsilver region containing high-grade epithermal vein-style mineralization throughout the Los Gatos Districtconcession package. |
| In 2008, we negotiated surface access rights with local ranch owners and obtained the necessary |
| environmental permits for drilling and road construction. Through 2015, we purchased all the surface landsrequired for the CLG development. Environmental baseline data collection began in May 2010 and wascompleted in 2016 and approved in 2017 to prepare for the development of future environmental studiesrequired for the CLG. In 2014, we partnered with Dowa to finance and develop the CLG and pursueexploration in the Los Gatos District. Together with Dowa, we formed the LGJV, which owns certainsurface and mineral rights associated with the Los Gatos District. In connection with the formation of theLGJV, we entered into the Unanimous Omnibus Partner Agreement, which governs our and Dowa’srespective rights over the LGJV. As of December 31, 2020, we owned approximately 51.5% of the LGJV.As of the date of this Report, we own 70.0% of the LGJV and Dowa owns the remainder. Despite owningthe majority interest in the LGJV, we do not exercise control over the LGJV due to certain provisionscontained in the Unanimous Omnibus Partner Agreement that currently require unanimous partner approvalof all major operating decisions (such as certain approvals, the creation of security interests on property, anyinitial public offering of the joint venture, and litigation settlements). |
| We believe that we have strong support from the local community, with about 150 employees from the |
| local community working across multiple areas involving the continued underground development,construction of the surface facilities and operation of the CLG. Over 99% of the approximate 620employees at the CLG hail from Mexico, highlighting our commitment to the local workforce. |
| Our primary areas of focus have been constructing and commissioning the CLG and defining and |
| expanding the mineral resources associated with the CLG, the Esther deposit and the Amapola deposit. Asof December 31, 2020, 739 exploration drill holes have been completed in the Los Gatos District, totaling267,060 meters. The Los Gatos Technical Report estimates that the CLG contains 10.4 million tonnes ofmeasured and indicated resources (or 5.4 million tonnes of measured and indicated resources on a 51.5%basis) inclusive of mineral reserves, at average grades of 269 g/t silver, 2.7% lead, 5.5% zinc, 0.34 g/t goldand 0.11% copper, or 3.5 million tonnes of measured and indicated resources (or 1.8 million tonnes ofmeasured and indicated resources on a 51.5% basis) exclusive of mineral reserves, at average grades of 154g/t silver, 2.2% lead, 4.3% zinc and 0.29 g/t gold, and 3.7 million tonnes of inferred resources (or1.9 million tonnes of inferred resources on a 51.5% basis), at average grades of 107 g/t silver, 2.8% lead,4.0% zinc and 0.28 g/t gold. The mineral resource estimates for the CLG have an effective date ofSeptember 6, 2019 and have not been updated since that time. We believe that activity at the CLGsubsequent to the effective date of the mineral resource estimates would not result in a material change tothe information contained in the Los Gatos Technical Report. The mineral resource estimates contained inthe Los Gatos Technical Report are presented on an undiluted basis without adjustment for mining recovery. |
| The Los Gatos Technical Report estimates that the Esther deposit contains 0.46 million tonnes of |
| indicated resources (or 0.24 million tonnes of indicated resources on a 51.5% basis) at average grades of |
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| 133 g/t silver, 0.04 g/t gold, 0.02% copper, 0.70% lead and 2.10% zinc, and 2.29 million tonnes of inferredresources (or 1.18 million tonnes of inferred resources on a 51.5% basis) at average grades of 98 g/t silver,0.12 g/t gold, 0.05% copper, 1.60% lead and 3.00% zinc; and the Amapola deposit contains 0.25 milliontonnes of indicated resources (or 0.13 million tonnes of indicated resources on a 51.5% basis) at averagegrades of 135 g/t silver, 0.10 g/t gold, 0.02% copper, 0.10% lead and 0.30% zinc, and 3.44 million tonnes ofinferred resources (or 1.77 million tonnes of inferred resources on a 51.5% basis) at average grades of 140g/t silver, 0.10 g/t gold, 0.03% copper, 0.20% lead and 0.30% zinc. The mineral resource estimates for theEsther and Amapola deposits have an effective date of December 21, 2012 and have not been updated sincethat time. The mineral resource estimates contained in the Los Gatos Technical Report are presented on anundiluted basis without adjustment for mining recovery. |
| The CLG is currently in production. The first lead concentrate was shipped on September 3, 2019, and |
| the first zinc concentrate was shipped on September 4, 2019. We increased production to the designed 2,500tpd rate by the end of 2020. |
| Our objectives at the CLG are to, among other things: |
| • | continue production at the designed 2,500 tpd rate; |
| • | produce and sell concentrate material containing zinc, lead, silver and gold metals to smeltingfacilities in Japan, Mexico and other locations; |
| • | initiate a feasibility study, prepared in accordance with the SEC Mining Modernization Rules and NI43-101, on expanding the production rate from 2,500 to 3,000 tpd; and |
| • | perform additional in-fill and step-out drilling to further define mineral resources at the CLG. |
| Our objectives at the Los Gatos District are to, among other things: |
| • | perform additional in-fill and expansion drilling to further define and expand mineralization at theEsther and Amapola deposits; |
| • | conduct social, environmental and technical work on the property with the objective of completing ascoping study on the Esther and Amapola deposits; |
| • | expand the exploration drilling program on the Esther deposit, the Amapola deposit and the other 11mineralized zones within the Los Gatos District; and |
| • | continue to expand the LGJV’s interest in prospective mineral and surface rights. |
| Business Strategy and Competitive Strengths |
| Our business strategy is focused on creating value for stakeholders through the ownership and |
| advancement of two principal projects — the CLG and the Los Gatos District — and through the pursuit ofsimilarly attractive silver-focused projects. We have undertaken and intend to undertake the followingvalue-enhancing near-term and long-term initiatives: |
| • | Extinguished the Los Gatos Working Capital Facility (“WCF”): On March 11, 2021, the WCFprovided to the LGJV by Dowa was extinguished. The WCF carried an annual interest rate of LIBORplus 3%. In addition, we were required to pay an arrangement fee on the borrowing, calculated as15.0% per annum of 70.0% of the average daily principal amount outstanding during the relevantfiscal quarter. We believe that by extinguishing the WCF, we are able to reduce our borrowing costsin future periods. |
| • | Repurchased an 18.5% interest in the Los Gatos Joint Venture to increase our ownership to 70.0%: OnMarch 11, 2021, we repurchased an approximate 18.5% interest in the LGJV from Dowa, increasingour ownership to 70.0%. The repurchase represented an attractive investment opportunity that webelieve is immediately value-accretive. With increased ownership, we will further benefit from theproduction at the CLG, supported by the attractive cash flow generation profile and fully fundednature of the project. In addition to increasing our economic interest in the CLG, this repurchase alsoprovides us with greater exposure to potential upside from additional exploration within the LosGatos District, in particular the Esther and Amapola deposits. |
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| • | Complete a feasibility study expanding the CLG production rate to 3,000 tpd: Our desktop studyestimated that a production rate expansion from 2,500 to 3,000 tpd could significantly improve theeconomics of the CLG. Given the appealing potential return, we intend to complete a feasibilitystudy, prepared in accordance with the SEC Mining Modernization Rules and NI 43-101, to assess aCLG production rate increase. |
| • | Further exploration of the Los Gatos District: In December 2020, we and Dowa commenced a 27,000-meter exploration program to convert the CLG’s established 3.2 million tonnes of inferred resourcesto the measured and indicated category and to discover additional resources along the northwest andsoutheast extensions of the CLG deposit. In 2021, the LGJV intends to initiate a second explorationprogram to expand resources throughout the Los Gatos District. The initial target is an estimated19,000-meter campaign at the Esther deposit, to expand its initial NI 43-101-compliant indicatedresource of 0.46 million tonnes at 133 g/t silver, 2.1% zinc, 0.7% lead and inferred resource of2.29 million tonnes at 98 g/t silver, 3.0% zinc, and 1.6% lead. Esther is located about four kilometersfrom Cerro Los Gatos and contains similar styles of mineralization and geochemistry. We believethat further drilling may materially expand the size and mineral tenor of this resource. |
| • | Explore our wholly-owned Santa Valeria property: In March 2021, we commenced a 5,400-meterexploration program on our wholly-owned Santa Valeria property. The Santa Valeria target has beendeveloped through regional geologic work by our exploration team, which defined a large basinstructure hosting the mineralization zones within the Los Gatos District. Santa Valeria is geologicallycomparable to Cerro Los Gatos and may contain similar mineral content. |
| We believe the following strengths provide us with significant competitive advantages: |
| • | High Quality and Long Life Assets: CLG is expected to generate average life-of-mine (“LOM”)unlevered, after-tax free cash flow of approximately $76 million per year on a 100% basis (orapproximately $53 million per year on a 70.0% basis). We successfully commissioned the CLG in2019 and the CLG commenced concentrate sales on September 1, 2019. |
| • | Assets Located in Geopolitically Safe and Established Mining Regions: The Los Gatos District islocated in one of the world’s premier silver mining regions: the Mexican Silver Belt, which was theworld’s largest silver producing region. Mexico is highly ranked among silver mining jurisdictionsworldwide in terms of the attractiveness of investment and has a long history of successful mineraldevelopment and operations, which we believe makes it a desirable jurisdiction in which to conductmining operations due to stable political, tax and regulatory policies. |
| • | Resource Growth Potential from Exploration of the Los Gatos District: We believe that our propertieshave significant exploration upside with numerous opportunities to define additional mineralresources through continued exploration. The Los Gatos District is located in the Mexican SilverBelt, near several other silver assets owned by large public companies. The Mexican Silver Belt hasexperienced significant exploration success, and the Los Gatos District represents an underexploredproperty where there has been little historical workings or previous exploration. The Los GatosDistrict contains numerous significant high-grade targets throughout. Previous work done hasresulted in a 190% increase in measured and indicated silver equivalent resources from March 2014to September 2019, with additional exploration planned. In addition to the significant existingresources at the CLG, the Los Gatos District also contains the Esther and Amapola deposits and 11other mineralized zones. With the LGJV’s control of the concessions, the ability to develop the entire103,087-hectare land position and more than 85% of the land position yet to be explored, we expectthat we will benefit from additional exploration that has the potential to expand mineralizationbeyond that already identified in the 14 mineralized zones, which include the CLG, the Estherdeposit and the Amapola deposit. |
| • | Experienced Management Team and Board of Directors: We have an experienced and growingmanagement team with a track record of successfully identifying and developing mineral discoveries.Our Chief Executive Officer, Stephen Orr, Chief Financial Officer, Roger Johnson, Vice President ofExploration and Chief Geologist, Philip Pyle, and Chief Operating Officer, John Kinyon, each hassignificant experience in the mining industry. Our Board of Directors is comprised of senior miningand financial executives who have broad domestic and international experience in mineralexploration, |
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| For a discussion of the mineral resource estimates contained in the Los Gatos Technical Report, see“Item 2. Properties — The Los Gatos District — Mineral Resource Estimates — CLG, Esther andAmapola Deposits.” |
| | Summary Mineral Reserves as of December 31, 2020 |
| | Proven Mineral | | Probable Mineral | | Total Mineral |
| | | Reserves | | Reserves | | Reserves |
| | Amount | Amount | Amount | Amount | Amount | Amount |
| | (100% | (51.5% | | | | | Grades / | (100% | (51.5% | | | | Grades / | (100% | (51.5% | | | Grades / |
| | | basis) | basis) | | | | | Qualities | | basis) | basis) | | | | Qualities | | basis) | basis) | | | | Qualities |
| | (in millions of | | | | | (g/t Ag or Au) | (in millions of | | | | | (g/t Ag or Au) | (in millions of | | | | (g/t Ag or Au) |
| | | tonnes) | | | | | | (% Pb or Zn) | tonnes) | | | | | | (% Pb or Zn) | tonnes) | | | | | (% Pb or Zn) |
| Ag: | | | | | | | | | | | | | | | | | | | | | | |
| Los Gatos District | | | | | | | | | | | | | | | | | | | | | | |
| Cerro Los |
| Gatos Mine | 6.4 3.3 | | | | | 332 | 3.3 1.7 | | | | | 254 | 9.6 5.0 | | | | 306 | |
| Total | 6.4 3.3 | | | | | 332 | 3.3 1.7 | | | | | 254 | 9.6 5.0 | | | | 306 | |
| Au: | | | | | | | | | | | | | | | | | | | | | | |
| Los Gatos District | | | | | | | | | | | | | | | | | | | | | | |
| Cerro Los |
| Gatos Mine | 6.4 3.3 | | | | | 0.36 | 3.3 1.7 | | | | | 0.34 | 9.6 5.0 | | | | 0.35 | |
| Total | 6.4 3.3 | | | | | 0.36 | 3.3 1.7 | | | | | 0.34 | 9.6 5.0 | | | | 0.35 | |
| Pb: | | | | | | | | | | | | | | | | | | | | | | |
| Los Gatos District | | | | | | | | | | | | | | | | | | | | | | |
| Cerro Los |
| Gatos Mine | 6.4 3.3 | | | | | 2.77 | 3.3 1.7 | | | | | 2.74 | 9.6 5.0 | | | | 2.76 | |
| Total | 6.4 3.3 | | | | | 2.77 | 3.3 1.7 | | | | | 2.74 | 9.6 5.0 | | | | 2.76 | |
| Zn: | | | | | | | | | | | | | | | | | | | | | | |
| Los Gatos District | | | | | | | | | | | | | | | | | | | | | | |
| Cerro Los |
| Gatos Mine | 6.4 3.3 | | | | | 5.55 | 3.3 1.7 | | | | | 5.86 | 9.6 5.0 | | | | 5.65 | |
| Total | 6.4 3.3 | | | | | 5.55 | 3.3 1.7 | | | | | 5.86 | 9.6 5.0 | | | | 5.65 | |
| Reserves based on a $75 Net Smelter Return (“NSR”) cut-off value. NSR is defined as revenue per tonnemined less the sum of concentrate refining, treatment and transportation costs per tonne mined. The mineralreserve estimates for the CLG reflect diluted grades with adjustment for metallurgical recovery. The mineralreserve estimates contained in the Los Gatos Technical Report have an effective date of July 1, 2020 andexclude 655,746 tonnes of mineral reserves that have been mined through June 30, 2020. For a discussion ofthe mineral reserve estimates contained in the Los Gatos Technical Report, see “Item 2. Properties — TheLos Gatos District — Mineral Reserve Estimates — CLG.” |
| Competition |
| There is aggressive competition within the precious metals industry. We compete with other precious |
| metals companies, such as Coeur Mining Inc., Pan American Silver Corp. and First Majestic Silver Corp., aswell as other mineral miners, in efforts to obtain financing to explore and develop its projects. Thesecompanies currently have greater resources than we do. In the future, we may compete with such companiesto acquire additional properties. |
| In addition, we also encounter competition for the hiring of key personnel. The mining industry is |
| currently facing a shortage of experienced mining professionals, particularly experienced mine construction |
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| and mine management personnel. This competition affects our operations. Larger regional companies canoffer better employment terms than smaller companies such as us. |
| We also compete for the services of mine service companies, such as project coordinators and drilling |
| companies. Potential suppliers may choose to provide better terms and scheduling to larger companies in theindustry due to the scale and scope of their operations. |
| Environmental, Health and Safety Matters |
| We are subject to stringent and complex environmental laws, regulations and permits in the various |
| jurisdictions in which we operate. These requirements are a significant consideration for us as ouroperations involve, or may in the future involve, among other things, the removal, extraction and processingof natural resources, emission and discharge of materials into the environment, remediation of soil andgroundwater contamination, workplace health and safety, reclamation and closure of waste impoundmentsand other properties, and handling, storage, transport and disposal of wastes and hazardous materials.Compliance with these laws, regulations and permits can require substantial capital or operating costs orotherwise delay, limit or prohibit our development or future operation of our properties. These laws,regulations and permits, and the enforcement and interpretation thereof, change frequently and generallyhave become more stringent over time. If we violate these environmental requirements, we may be subjectto litigation, fines or other sanctions, including the revocation of permits and suspension of operations.Pursuant to such requirements, we also may be subject to inspections or reviews by governmentalauthorities. |
| Permits and Approvals |
| To obtain, maintain and renew our environmental permits, we may be required to conduct |
| environmental studies and collect and present to governmental authorities data pertaining to the potentialimpact that our current or future operations may have upon the environment. For example, in order tocommence underground exploration activities at the CLG, we were required to submit an environmentalanalysis to the applicable governmental authorities. In May 2010, we began collecting the environmentalbaseline data for the CLG and received the permit in 2015. |
| Hazardous Substances and Waste Management |
| We could be liable for environmental contamination at or from our or our predecessors’ currently or |
| formerly owned or operated properties or third-party waste disposal sites. Certain environmental lawsimpose joint and several strict liability for releases of hazardous substances at such properties or sites,without regard to fault or the legality of the original conduct. A generator of waste can be held responsiblefor contamination resulting from the treatment or disposal of such waste at any off-site location (such as alandfill), regardless of whether the generator arranged for the treatment or disposal of the waste incompliance with applicable laws. Costs associated with liability for removal or remediation ofcontamination or damage to natural resources could be substantial and liability under these laws may attachwithout regard to whether the responsible party knew of, or was responsible for, the presence of thecontaminants. In addition to potentially significant investigation and remediation costs, such matters cangive rise to claims from governmental authorities and other third parties for fines or penalties, naturalresource damages, personal injury and property damage. |
| Mine Health and Safety Laws |
| Our Mexican properties are subject to regulation by the Political Constitution of the United Mexican |
| States, and are subject to various legislation in Mexico, including the Mining Law, the Federal Law ofWaters, the Federal Labor Law, the Federal Law of Firearms and Explosives, the General Law on EcologicalBalance and Environmental Protection and the Federal Law on Metrology Standards, as well as theaccompanying regulations and regulatory authorities. Mining, environmental and labor authorities mayinspect our operations on a regular basis and issue various citations and orders when they believe a violationhas occurred under the relevant statute. Regulations and the results of inspections may have a significanteffect on our operating costs. |
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| At this time, it is not possible to predict the full effect that the new or proposed statutes, regulations |
| and policies will have on our operating costs, but it may increase our costs and those of our competitors. |
| Other Environmental Laws |
| We are required to comply with numerous other environmental laws, regulations and permits in |
| addition to those previously discussed. These additional requirements include, for example, various permitsregulating road construction and drilling at the Mexican properties. |
| We endeavor to conduct our mining operations in compliance with all applicable laws and regulations. |
| However, because of extensive and comprehensive regulatory requirements, violations during miningoperations occur from time to time in the industry. |
| Facilities and Employees |
| We own and lease land at our other exploration properties in Mexico and at the Los Gatos District |
| through our ownership interest in the LGJV. |
| As of December 31, 2020, we had 11 full-time employees in the United States and 10 full-time |
| employees in Mexico, and the LGJV had approximately 620 employees in Mexico. We believe that ouremployee relations are good and plan to continue to hire employees as our operations expand. |
| Available Information |
| Our internet address is www.gatossilver.com. We make available free of charge through our investor |
| relations website, https://investor.gatossilver.com, copies of our Annual Reports on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as soon as reasonably practicable after such documents are electronically filed with, or furnished to,the SEC. The information contained on our website is not included as a part of, or incorporated by referenceinto, this Report. |
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| Item 1A. Risk Factors |
| The following risks could materially and adversely affect our business, financial condition, cash flows, |
| and results of operations, and the trading price of our common stock could decline. These risk factors donot identify all risks that we face; our operations could also be affected by factors that are not presentlyknown to us or that we currently consider to be immaterial to our operations. Due to risks anduncertainties, known and unknown, our past financial results may not be a reliable indicator of futureperformance, and historical trends should not be used to anticipate results or trends in future periods. Referalso to the other information set forth in this this Report, including our consolidated financial statementsand the related notes and “Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations.” |
| Risks Related to Our Financial Condition |
| We have a history of negative operating cash flows and net losses and we may never achieve or sustain profitability. |
| We have a history of negative operating cash flows and net losses. We expect to continue to incur |
| negative operating cash flows and net losses until such time as one or more of our mineral propertiesgenerates sufficient revenues to fund our continuing operations. For the years ended December 31, 2020 and2019, our net loss was $40.4 million and $37.8 million, respectively. |
| We may never achieve or sustain profitability. The CLG commenced production on September 1, 2019. |
| To become and remain profitable, we must succeed in generating significant revenues at the CLG, whichwill require us to be successful in a range of challenging activities and is subject to numerous risks,including the risk factors set forth in this “Risk Factors” section. In addition, we may encounter unforeseenexpenses, difficulties, complications, delays and other unknown factors that may adversely affect ourrevenues, expenses and profitability. Our failure to achieve or sustain profitability would depress our marketvalue, could impair our ability to execute our business plan, raise capital or continue our operations andcould cause our shareholders to lose all or part of their investment. |
| We are dependent on two principal projects for our future operations, the CLG and the Los Gatos District. The LosGatos District (other than the CLG) does not currently have proven or probable mineral reserves. |
| The Los Gatos District (other than the CLG) does not have identified proven and probable mineral |
| reserves. Mineral exploration and development involve a high degree of risk that even a combination ofcareful evaluation, experience and knowledge cannot eliminate, and few properties that are explored areultimately developed into producing mines. There is no assurance that our mineral exploration programs atthe Los Gatos District will establish the presence of any additional proven or probable mineral reserves. Thefailure to establish additional proven or probable mineral reserves would severely restrict our ability toimplement our strategies for long-term growth. |
| Deliveries under concentrate sales agreements may be suspended or cancelled by our customers in certain cases. |
| Under concentrate sales agreements, our customers may suspend or cancel delivery of our products in |
| some cases, such as force majeure. Events of force majeure under these agreements generally include,among others, acts of God, strikes, fires, floods, wars, government actions or other events that are beyondthe control of the parties involved. Any suspension or cancellation by our customers of deliveries under oursales contracts that are not replaced by deliveries under new contracts would reduce our cash flow and couldmaterially and adversely affect our financial condition and results of operations. |
| We do not currently intend to enter into hedging arrangements with respect to silver and other minerals and ourhedging activities, or our decision not to hedge, with respect to our expenses could expose us to losses. We are alsosubject to risks relating to fluctuations in the exchange rate of the Mexican peso to the U.S. dollar. |
| We do not currently intend to enter into hedging arrangements with respect to silver and other minerals. |
| As such, we will not be protected from a decline in the price of silver and other minerals. This strategy mayhave a material adverse effect upon our financial performance, financial position and results of operations. |
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| We report our financial statements in U.S. dollars. A portion of our costs and expenses are incurred in |
| Mexican pesos. As a result, any significant and sustained appreciation of the Mexican peso against the U.S.dollar may materially increase our costs and expenses. Additionally, we are, and will be, exposed to thepotentially adverse effects of fluctuations in input costs, such as diesel fuel, and if we borrow funds atfloating interest rates. We may seek to enter into hedging arrangements to hedge some of our input costs,such as diesel fuel, and our currency exposure with respect to the portion of our costs and expenses incurredin Mexican pesos. In the future we may also seek to enter into interest rate hedge agreements in connectionwith future indebtedness we may incur that bears interest at a floating rate. We currently, however, have notentered into any such hedging arrangements, or made a decision to do so, and there can be no assurance thatwe will be able to do so on acceptable terms, or at all. Even if we seek and are able to enter into hedgingcontracts, there is no assurance that such hedging program will be effective, and any hedging programwould also prevent us from benefitting fully from applicable input cost or rate decreases. In addition, wemay in the future experience losses if a counterparty fails to perform under a hedge arrangement. |
| The LGJV has debt and may incur further debt in the future, which could adversely affect the LGJV’s and ourfinancial health and limit our ability to obtain financing in the future and pursue certain business opportunities. |
| The LGJV has debt service obligations pursuant to the agreements governing its outstanding debt. As |
| of December 31, 2020, the LGJV had $222.8 million of debt outstanding under a term loan agreement withDowa, dated July 11, 2017, as amended from time to time (the “Term Loan”) and $60.0 million of debtoutstanding under the WCF(together with the Term Loan, the “Dowa Debt Agreements”). On March 11,2021, the WCF was extinguished. For more information, see “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — DowaDebt Agreements.” |
| The Term Loan contains certain restrictive covenants, including restrictions on the LGJV’s ability to |
| incur additional indebtedness and create liens on its properties, to dispose of property other than in theordinary course of business, to liquidate or dissolve itself or to enter into acquisitions or mergers, to makeinvestments or other capital expenditures and to make distributions or dividends. In addition, the LGJV isrequired to retain sufficient funds at all times to pay one semi-annual payment of principal under the TermLoan and to fund the LGJV’s operations for at least three months. These covenants and restrictions reducefunds available for operations and capital expenditures, future business opportunities, future dividends to usand other purposes; make the LGJV more vulnerable to economic and industry downturns and reduceflexibility in responding to changing business and economic conditions; limit flexibility in planning for, orreacting to, changes in the business and the industry in which we operate; place us at a competitivedisadvantage compared to our competitors that have less debt; limit our ability to borrow more money foroperations and sustaining capital or to finance acquisitions in the future; or require us to make future capitalcontributions to the LGJV, if needed, in order to make required payments of interest and principal. If we, asa 70.0% guarantor of the Term Loan, or the LGJV are unable to meet debt service obligations in the future,our financial position, financial performance and results of operations may be materially and adverselyaffected. |
| Risks Related to Our Operations |
| Mineral reserve and mineral resource calculations at the CLG and the Los Gatos District are only estimates andactual production results may vary significantly from the estimates. |
| Calculations of mineral reserves at the CLG and of the mineral resources at the Los Gatos District are |
| only estimates and depend on geological interpretation and statistical inferences or assumptions drawn fromdrilling and sampling analysis, which might prove to be materially inaccurate. There is a degree ofuncertainty attributable to the calculation of mineral reserves and mineral resources. Until mineral reservesand mineral resources are actually mined and processed, the quantity of metal and grades must beconsidered as estimates only and no assurance can be given that the indicated levels of metals will beproduced. In making determinations about whether to advance any of our projects to development, we mustrely upon estimated calculations for the mineral reserves and mineral resources and grades of mineralizationon our properties. |
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| The estimation of mineral reserves and mineral resources is a subjective process that is partially |
| dependent upon the judgment of the persons preparing the estimates. The process relies on the quantity andquality of available data and is based on knowledge, mining experience, statistical analysis of drillingresults and industry practices. Valid estimates made at a given time may significantly change when newinformation becomes available. |
| Estimated mineral reserves and mineral resources may have to be recalculated based on changes in |
| metal prices, further exploration or development activity or actual production experience. This couldmaterially and adversely affect estimates of the volume or grade of mineralization, estimated recovery ratesor other important factors that influence mineral reserves and mineral resources estimates. The extent towhich mineral resources may ultimately be reclassified as mineral reserves is dependent upon thedemonstration of their profitable recovery. Any material changes in volume and grades of mineralizationwill affect the economic viability of placing a property into production and a property’s return on capital.We cannot provide assurance that mineralization can be mined or processed profitably. |
| Mineral reserve and mineral resource estimates have been determined and valued based on assumed |
| future metal prices, cut-off grades and operating costs that may prove to be inaccurate. Extended declines inthe market price for silver, lead and zinc may render portions of our mineralization uneconomic and resultin reduced reported volume and grades, which in turn could have a material adverse effect on our financialperformance, financial position and results of operations. |
| In addition, inferred mineral resources have a great amount of uncertainty as to their existence and their |
| economic and legal feasibility. There should be no assumption that any part of an inferred mineral resourcewill be upgraded to a higher category or that any of the mineral resources not already classified as mineralreserves will be reclassified as mineral reserves. |
| Our mineral exploration efforts are highly speculative in nature and may be unsuccessful. |
| Mineral exploration is highly speculative in nature, involves many uncertainties and risks and is |
| frequently unsuccessful. It is performed to demonstrate the dimensions, position and mineral characteristicsof mineral deposits, estimate mineral resources, assess amenability of the deposit to mining and processingscenarios and estimate potential deposit value. Once mineralization is discovered, it may take a numberof years from the initial exploration phases before production is possible, during which time the potentialfeasibility of the project may change adversely. Substantial expenditures are required to establish additionalproven and probable mineral reserves, to determine processes to extract the metals and, if required, toconstruct mining and processing facilities and obtain the rights to the land and resources required to developthe mining activities. |
| Development projects have no operating history upon which to base estimates of proven and probable |
| mineral reserves and estimates of future operating costs. Estimates are, to a large extent, based upon theinterpretation of geological data and modeling obtained from drill holes and other sampling techniques,feasibility studies that derive estimates of operating costs based upon anticipated tonnage and grades ofmaterial to be mined and processed, the configuration of the deposit, expected recovery rates of metal fromthe mill feed material, facility and equipment capital and operating costs, anticipated climatic conditionsand other factors. As a result, actual operating costs and economic returns based upon development ofproven and probable mineral reserves may differ significantly from those originally estimated. Moreover,significant decreases in actual or expected commodity prices may mean mineralization, once found, will beuneconomical to mine. |
| Our processing ability may be adversely impacted by certain circumstances. |
| A number of factors could affect our ability to process the quantities of metals that we recover and our |
| ability to efficiently handle certain quantities of processed materials, including, but not limited to, thepresence of oversized material at the crushing stage; material showing breakage characteristics differentthan those planned; material with grades outside of planned grade range; the presence of deleteriousmaterials in ratios different than expected; material drier or wetter than expected, due to natural orenvironmental effects; and materials having viscosity or density different than expected. |
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| The occurrence of one or more of the circumstances described above could affect our ability to process |
| the number of tonnes planned, recover valuable materials, remove deleterious materials, and produceplanned quantities of concentrates. In turn, this may result in lower throughput, lower recoveries, increaseddowntime or some combination of all of the foregoing. While issues of this nature are part of normaloperations, there is no assurance that unexpected conditions may not materially and adversely affect ourbusiness, results of operations or financial condition. |
| Actual capital costs, operating costs, production and economic returns may differ significantly from those we haveanticipated and there are no assurances that any future development activities will result in profitable miningoperations. |
| The actual operating costs at the CLG will depend upon changes in the availability and prices of labor, |
| equipment and infrastructure, variances in ore recovery and mining rates from those assumed in the miningplan, operational risks, changes in governmental regulation, including taxation, environmental, permittingand other regulations and other factors, many of which are beyond our control. Due to any of these or otherfactors, the operating costs at the CLG may be significantly higher than those set forth in the Los GatosTechnical Report. As a result of higher capital and operating costs, production and economic returns maydiffer significantly from those set forth in the Los Gatos Technical Report and there are no assurances thatany future development activities will result in profitable mining operations. |
| Land reclamation and mine closure may be burdensome and costly. |
| Land reclamation and mine closure requirements are generally imposed on mining and exploration |
| companies, such as ours, which require us, among other things, to minimize the effects of land disturbance.Such requirements may include controlling the discharge of potentially dangerous effluents from a site andrestoring a site’s landscape to its pre-exploration form. The actual costs of reclamation and mine closure areuncertain and planned expenditures may differ from the actual expenditures required. Therefore, the amountthat we are required to spend could be materially higher than current estimates. Any additional amountsrequired to be spent on reclamation and mine closure may have a material adverse effect on our financialperformance, financial position and results of operations and may cause us to alter our operations. Inaddition, we are required to maintain financial assurances, such as letters of credit, to secure reclamationobligations under certain laws and regulations. The failure to acquire, maintain or renew such financialassurances could subject us to fines and penalties or suspension of our operations. Letters of credit or otherforms of financial assurance represent only a portion of the total amount of money that will be spent onreclamation over the life of a mine’s operation. Although we include liabilities for estimated reclamationand mine closure costs in our financial statements, it may be necessary to spend more than what is projectedto fund required reclamation and mine closure activities. |
| The development of one or more of our mineral projects that have been, or may in the future be, found to beeconomically feasible will be subject to all of the risks associated with establishing new mining operations. |
| The Los Gatos Technical Report indicates that the CLG is a profitable silver-zinc-lead project with an |
| estimated 11-year mine life, at modeled metals prices. If the development of one of our other mineralprojects is found to be economically feasible, the development of such projects will require obtainingpermits and financing, and the construction and operation of mines, processing plants and relatedinfrastructure. As a result, we will be subject to certain risks associated with establishing new miningoperations, including: |
| • | the timing and cost, which can be considerable, of the construction of mining and processingfacilities and related infrastructure; |
| • | the availability and cost of skilled labor, mining equipment and principal supplies needed foroperations, including explosives, fuels, chemical reagents, water, power, equipment parts andlubricants; |
| • | the availability and cost of appropriate smelting and refining arrangements; |
| • | the need to obtain necessary environmental and other governmental approvals and permits and thetiming of the receipt of those approvals and permits; |
| • | the availability of funds to finance construction and development activities; |
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| • | industrial accidents; |
| • | mine failures, shaft failures or equipment failures; |
| • | natural phenomena such as inclement weather conditions, floods, droughts, rock slides and seismicactivity; |
| • | unusual or unexpected geological and metallurgical conditions; |
| • | exchange rate and commodity price fluctuations; |
| • | high rates of inflation; |
| • | health pandemics, including the COVID-19 pandemic; |
| • | potential opposition from non-governmental organizations, environmental groups or local groups,which may delay or prevent development activities; and |
| • | restrictions or regulations imposed by governmental or regulatory authorities, including with respectto environmental matters. |
| The costs, timing and complexities of developing the projects may be greater than anticipated. Cost |
| estimates may increase significantly as more detailed engineering work is completed on a project. It is |
| common in mining operations to experience unexpected costs, problems and delays during construction, |
| development and mine startup. In addition, the cost of producing silver bearing concentrates that are of |
| acceptable quality to smelters may be significantly higher than expected. We may encounter higher than |
| acceptable contaminants in our concentrates such as arsenic, antimony, mercury, copper, iron, selenium, |
| fluorine or other contaminants that, when present in high concentrations, can result in penalties or outright |
| rejection of the metals concentrates by the smelters or offtakers. For example, due to the high fluorine |
| content at the CLG, it was necessary to provide additional cleaning stages to reduce the fluorine content of |
| the concentrate produced at the CLG. Accordingly, we cannot provide assurance that our activities will |
| result in profitable mining operations at the mineral properties. |
| Our operations involve significant risks and hazards inherent to the mining industry. |
| Our operations involve the operation of large machines, heavy mobile equipment and drilling |
| equipment. Hazards such as adverse environmental conditions, industrial accidents, labor disputes, unusualor unexpected geological conditions, ground control problems, cave-ins, changes in the regulatoryenvironment, metallurgical and other processing problems, mechanical equipment failure, facilityperformance problems, fire and natural phenomena such as inclement weather conditions, floods andearthquakes are inherent risks in our operations. Hazards inherent to the mining industry can cause injuriesor death to employees, contractors or other persons at our mineral properties, severe damage to anddestruction of our property, plant and equipment, and contamination of, or damage to, the environment, andcan result in the suspension of our exploration activities and future development and production activities.While we aim to maintain best safety practices as part of its culture, safety measures implemented by usmay not be successful in preventing or mitigating future accidents. |
| In addition, from time to time we may be subject to governmental investigations and claims and |
| litigation filed on behalf of persons who are harmed while at our properties or otherwise in connection withour operations. To the extent that we are subject to personal injury or other claims or lawsuits in the future,it may not be possible to predict the ultimate outcome of these claims and lawsuits due to the nature ofpersonal injury litigation. Similarly, if we are subject to governmental investigations or proceedings, wemay incur significant penalties and fines, and enforcement actions against us could result in the closing ofcertain of our mining operations. If claims and lawsuits or governmental investigations or proceedings areultimately resolved against us, it could have a material adverse effect on our financial performance,financial position and results of operations. Also, if we mine on property without the appropriate licensesand approvals, we could incur liability, or our operations could be suspended. |
| We may be materially and adversely affected by challenges relating to slope and stability of underground openings. |
| Our underground mines get deeper and our waste and tailings deposits increase in size as we continue |
| with and expand our mining activities, presenting certain geotechnical challenges, including the possibility |
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| of failure of underground openings. If we are required to reinforce such openings or take additional actionsto prevent such a failure, we could incur additional expenses, and our operations and stated mineral reservescould be negatively affected. We have taken the actions we determined to be proper in order to maintain thestability of underground openings, but additional action may be required in the future. Unexpected failuresor additional requirements to prevent such failures may adversely affect our costs and expose us to healthand safety and other liabilities in the event of an accident, and in turn materially and adversely affect theresults of our operations and financial condition, as well as potentially have the effect of diminishing ourstated mineral reserves. |
| The title to some of the mineral properties may be uncertain or defective, thus risking our investment in suchproperties. |
| Under the laws of Mexico, mineral resources belong to the state, and government concessions are |
| required to explore for or exploit mineral reserves. Mineral rights derive from concessions granted, on adiscretionary basis, by the Ministry of Economy, pursuant to the Mexican mining law and the regulationsthereunder. While we and the LGJV hold title to the mineral properties in Mexico described in this Report,including the CLG, through these government concessions, there is no assurance that title to the concessionscomprising the CLG or our or the LGJV’s other properties will not be challenged or impaired. The LosGatos concession is held by us subject to the terms of an agreement with the original holder of thatconcession. The CLG and our or the LGJV’s other properties may be subject to prior unregisteredagreements, interests or native land claims, and title may be affected by such undetected defects. A titledefect on any of our mineral properties (or any portion thereof) could adversely affect our ability to minethe property and/or process the minerals that we mine. |
| The mineral properties’ mining concessions in Mexico may be terminated if the obligations to maintain |
| the concessions in good standing are not satisfied, including obligations to explore or exploit the relevantconcession, to pay any relevant fees, to comply with all environmental and safety standards, to provideinformation to the Mexican Ministry of Economy and to allow inspections by the Mexican Ministry ofEconomy. In addition to termination, failure to make timely concession maintenance payments andotherwise comply with applicable laws, regulations and local practices relating to mineral right applicationsand tenure could result in reduction or expropriation of entitlements. |
| Title insurance is generally not available for mineral properties and our ability to ensure that we have |
| obtained secure claim to individual mineral properties or mining concessions may be severely constrained.We rely on title information and/or representations and warranties provided by our grantors. Any challengeto our title could result in litigation, insurance claims and potential losses, delay the exploration anddevelopment of a property and ultimately result in the loss of some or all of our interest in the property. Inaddition, if we mine on property without the appropriate title, we could incur liability for such activities.While we have received a title opinion in relation to the Los Gatos District dated as of November 5, 2019,such opinion is not a guarantee of title and such title may be challenged. |
| Suitable infrastructure may not be available or damage to existing infrastructure may occur. |
| Mining, processing, development and exploration activities depend on adequate infrastructure. Reliable |
| roads, bridges, port and/or rail transportation, power sources, water supply and access to key consumablesare important determinants for capital and operating costs. The lack of availability on acceptable terms orthe delay in the availability of any one or more of these items could prevent or delay exploration,development or exploitation of our projects. If adequate infrastructure is not available in a timely manner,there can be no assurance that the exploitation or development of our projects will be commenced orcompleted on a timely basis, or at all, or that the resulting operations will achieve the anticipated productionvolume, or that the construction costs and operating costs associated with the exploitation and/ordevelopment of our projects will not be higher than anticipated. In addition, extreme weather phenomena,sabotage, vandalism, government, non-governmental organization and community or other interference inthe maintenance or provision of such infrastructure could adversely affect our operations and profitability. |
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| Risks Related to Our Business and Industry |
| The COVID-19 pandemic has adversely affected our business and operations. The widespread outbreak of anyother health epidemics, communicable diseases or public health crises could also adversely affect us, particularly inregions where we conduct our business operations. |
| Our business could be adversely affected by the widespread outbreak of a health epidemic, |
| communicable disease or any other public health crisis. For example, the outbreak of COVID-19 in theUnited States, Mexico and elsewhere has created significant business disruption and adversely affected ourbusiness and operations. The outbreak has resulted in governments implementing numerous measures tocontain COVID-19, such as travel bans and restrictions, particularly quarantines, shelter-in-place or totallockdown orders and business limitations and shutdowns. These containment measures are subject to changeand the respective government authorities may tighten the restrictions at any time. |
| In late March 2020, the Mexican government declared a national health emergency due to increasing |
| infection rates from the COVID-19 pandemic. Pursuant to the health emergency declaration, the Mexicangovernment ordered a temporary suspension of all “non-essential” operations nationwide in Mexico,including mining operations, in order to help combat the spread of COVID-19. In response to the order, theLGJV effected a 45-day temporary suspension of all non-essential activities at the CLG site, which reducedthe number of employees and contractors at the site and at the Chihuahua corporate office. During thetemporary suspension, the LGJV implemented health protocols, allowed most administrative and technicalservices employees to work remotely, reduced mining and milling, completed project enhancements andfinalized a mine plan upon reactivation of mining activities after the temporary suspension. |
| In late May 2020, the Mexican government designated mining an essential service and allowed mines |
| to resume production, subject to deploying COVID-19 prevention protocols. Our existing COVID-19protocols exceeded those mandated by the Mexican government and, accordingly, the LGJV reactivatedmine development and mining in late May 2020 and hired additional employees. Ore processing resumed inearly June 2020. In order to maintain social distancing and best practice protocols, public areas, such as theresidential camps’ cafeterias, limited the number of personnel. Food service periods were extended withemployees assigned specific times for meals. Face masks are required in offices and other public areas.Daily working shift times are staggered to limit the number of employees in changing areas and pre-shiftwork meetings. Two sterilization tunnels have been installed at the main entry gate and at the entrance to thecafeteria. All individuals entering the CLG site are subject to a molecular COVID-19 test. If an individualtests positive, the individual will be subject to quarantine protocols and denied entry to the mine site. In theevent of an outbreak of COVID-19 on site, we could determine that a full suspension of our operations isnecessary for the safety and protection of the workers. |
| The COVID-19 pandemic temporarily affected our financial condition in 2020, in part due to the loss |
| of revenue resulting from the 45-day temporary suspension of all nonessential activities at the LGJV’s CLGsite and the expenses associated with the development and implementation of COVID-19 protocols. Inaddition, as the LGJV reactivated mine development and mining, it implemented a scalable optimized planwith a lower employee complement and with reduced average monthly production rate at 1,750 tpd untilSeptember 2020, targeting higher ore grades. This resulted in higher per tonne mining, processing andsustaining capital costs than previously anticipated. We began ramping up to the 2,500 tpd design capacitybeginning in September 2020 and met our goal of reaching the 2,500 tpd design capacity in late December. |
| If the Mexican government were to reinstate the suspension order caused by the COVID-19 pandemic, |
| or if all mining activities at the CLG site were suspended for an undefined period of time, there could beadditional costs incurred, production and development delays, cost overruns and operational restart costs. Inaddition, given that our management travels regularly between Mexico City and the CLG site, anyrestrictions on travel within Mexico may adversely affect our management’s ability to oversee ongoingmining activities at the CLG and our ability to achieve our business objectives and milestones. |
| 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. There is no guarantee that we will not experiencesignificant disruptions to or additional closures of some or all of our operations in the future. Suchmodifications to our business practices may negatively impact productivity, divert resources away from or |
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| otherwise disrupt our or the LGJV’s business operations and delay and disrupt exploration and productiontimelines. Any long-term closures or suspensions may also result in the loss of personnel or the workforcein general as employees seek employment elsewhere. |
| While the full impact of this pandemic is unknown at this time, we are closely monitoring the |
| developments of the COVID-19 pandemic and continually assessing the potential impact on our business.Any prolonged disruption of our or the LGJV’s operations and closures of facilities would delay our currentexploration and production timelines and negatively impact our business, financial condition and results ofoperations. Although vaccines for COVID-19 have been approved for use, the distribution of the vaccinesdid not begin until late 2020, and a majority of the public will likely not be vaccinated until sometime in2021 or later. Additionally, new strains of COVID-19 are surfacing, and the effectiveness of the approvedvaccines against these new strains is unknown. |
| 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 casescannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity andthe actions to contain the virus or treat its impact, such as the efficacy of vaccines (particularly with respectto emerging strains of the virus). Accordingly, there remains significant uncertainty about the duration andextent of the impact of the COVID-19 pandemic. However, the COVID-19 pandemic may heighten the otherrisk factors discussed in this “Risk Factors” section. |
| The mining industry is very competitive. |
| The mining industry is very competitive. Much of our competition is from larger, established mining |
| companies with greater liquidity, greater access to credit and other financial resources, newer or moreefficient equipment, lower cost structures, more effective risk management policies and procedures and/or agreater ability than us to withstand losses. Our competitors may be able to respond more quickly to newlaws or regulations or emerging technologies or devote greater resources to the expansion or efficiency oftheir operations than we can. In addition, current and potential competitors may make strategic acquisitionsor establish cooperative relationships among themselves or with third parties. Accordingly, it is possible thatnew competitors or alliances among current and new competitors may emerge and gain significant marketshare to our detriment. We may not be able to compete successfully against current and future competitors,and any failure to do so could have a material adverse effect on our business, financial condition or resultsof operations. |
| Our insurance may not provide adequate coverage. |
| Our business and operations are subject to a number of risks and hazards, including, but not limited to, |
| adverse environmental conditions, industrial accidents, labor disputes, unusual or unexpected geologicalconditions, ground control problems, cave-ins, changes in the regulatory environment, metallurgical andother processing problems, mechanical equipment failure, facility performance problems, fires and naturalphenomena such as inclement weather conditions, floods and earthquakes. These risks could result indamage to, or destruction of, our mineral properties or production facilities, personal injury or death,environmental damage, delays in exploration, mining or processing, increased production costs, asset writedowns, monetary losses and legal liability. |
| Our property and liability insurance may not provide sufficient coverage for losses related to these or |
| other hazards. Insurance against certain risks, including those related to environmental matters or otherhazards resulting from exploration and production, is generally not available to us or to other companieswithin the mining industry. Our current insurance coverage may not continue to be available ateconomically feasible premiums, or at all. In addition, our business interruption insurance relating to ourproperties has long waiting periods before coverage begins. Accordingly, delays in returning to any futureproduction could produce near-term severe impact to our business. Any losses from these events may causeus to incur significant costs that could have a material adverse effect on our financial performance, financialposition and results of operations. |
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| Our business is sensitive to nature and climate conditions. |
| A number of governments have introduced or are moving to introduce climate change legislation and |
| treaties at the international, national, state/provincial and local levels. Regulations relating to emissionlevels (such as carbon taxes) and energy efficiency are becoming more stringent. If the current regulatorytrend continues, this may result in increased costs at some or all of our business locations. In addition, thephysical risks of climate change may also have an adverse effect on our operations. Extreme weather eventshave the potential to disrupt our power supply, surface operations and exploration at our mines and mayrequire us to make additional expenditures to mitigate the impact of such events. |
| If we are unable to retain key members of management, our business might be harmed. |
| Our exploration activities and any future development and construction or mining and processing |
| activities depend to a significant extent on the continued service and performance of our senior managementteam, including our Chief Executive Officer. We depend on a relatively small number of key officers, andwe currently do not, and do not intend to, have key-person insurance for these individuals. Departures bymembers of our senior management could have a negative impact on our business, as we may not be able tofind suitable personnel to replace departing management on a timely basis, or at all. The loss of any memberof our senior management team could impair our ability to execute our business plan and could, therefore,have a material adverse effect on our business, results of operations and financial condition. In addition, theinternational mining industry is very active and we are facing increased competition for personnel in alldisciplines and areas of operation. There is no assurance that we will be able to attract and retain personnelto sufficiently staff our development and operating teams. |
| The prices of silver, zinc and lead are subject to change and a substantial or extended decline in the prices of silver,zinc or lead could materially and adversely affect our revenues and the value of our mineral properties. |
| Our business and financial performance will be significantly affected by fluctuations in the prices of |
| silver, zinc and lead. The prices of silver, zinc and lead are volatile, can fluctuate substantially and areaffected by numerous factors that are beyond our control. For the year ended December 31, 2020, theLBMA silver price ranged from a low of $12.01 per ounce on March 19, 2020 to a high of $28.89 per ounceon September 1, 2020; the LME Official Settlement zinc price ranged from a low of $1,774 per tonne ($0.80per pound) on March 24, 2020 to a high of $2,842 per tonne ($1.29 per pound) on December 17, 2020; theLME Official Settlement lead price ranged from a low of $1,587 per tonne ($0.72 per pound) on May 14,2020 to a high of $2,118 per tonne ($0.96 per pound) on November 30, 2020. Prices are affected bynumerous factors beyond our control, including: |
| • | prevailing interest rates and returns on other asset classes; |
| • | expectations regarding inflation, monetary policy and currency values; |
| • | speculation; |
| • | governmental and exchange decisions regarding the disposal of precious metals stockpiles, includingthe decision by the CME Group, the owner and operator of the futures exchange, to raise silver’sinitial margin requirements on futures contracts; |
| • | political and economic conditions; |
| • | available supplies of silver, zinc and lead from mine production, inventories and recycled metal; |
| • | sales by holders and producers of silver, zinc and lead; and |
| • | demand for products containing silver, zinc and lead. |
| Additionally, the COVID-19 pandemic and efforts to contain it, including restrictions on travel and |
| other advisories issued may have a significant effect on silver, zinc and lead prices as well as demand.Because we expect to derive the substantial majority of our revenues from sales of silver, zinc and lead, ourresults of operations and cash flows will fluctuate as the prices for these metals increase or decrease. Asustained period of declining prices would materially and adversely affect our financial performance,financial position and results of operations. |
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| Changes in the future demand for the silver, zinc and lead we produce could adversely affect our future salesvolume and revenues. |
| Our future revenues will depend, in substantial part, on the volume of silver, zinc and lead we sell and |
| the prices at which we sell, which in turn will depend on the level of industrial and consumer demand.Demand for silver is mostly driven by its general perception as a store of value as well as its uses inindustrial processes and products, such as batteries, bearings, brazing and soldering, catalysts, electronicsand photographic material, and its use by direct consumers, such as for jewelry, silverware and coins. Anincrease in the production of silver worldwide or changes in technology, industrial processes or consumerhabits, including increased demand for substitute materials, may decrease the demand for silver. Increaseddemand for substitute materials may be either technologically induced, when technological improvementsrender alternative products more attractive for first-use or end-use than silver or allow for reducedapplication of silver, or price induced, when a sustained increase in the price of silver leads to partialsubstitution for silver by a less expensive product or reduced application of silver. Demand for zinc isprimarily driven by the demand for galvanized steel, used in construction, automobile and other industrialapplications. Demand for lead is primarily driven by the demand for batteries, used in vehicles, emergencysystems and other industrial battery application. Any substitution of these materials may decrease thedemand for the silver, zinc and lead we produce. A fall in demand, resulting from economic slow-downs orrecessions or other factors, could also decrease the price and volume of silver, zinc and lead we sell andtherefore materially and adversely impact our results of operations and financial condition. |
| We may fail to identify attractive acquisition candidates or joint ventures with strategic partners or may fail tosuccessfully integrate acquired mineral properties or successfully manage joint ventures. |
| As part of our development strategy, we may acquire additional mineral properties or enter into joint |
| ventures with strategic partners. However, there can be no assurance that we will be able to identifyattractive acquisition or joint venture candidates in the future or that we will succeed at effectivelymanaging their integration or operation. In particular, significant and increasing competition exists formineral acquisition opportunities throughout the world. We face strong competition from other miningcompanies in connection with the acquisition of properties producing, or capable of producing, metals aswell as in entering into joint ventures with other parties. If the expected synergies from such transactions donot materialize or if we fail to integrate them successfully into our existing business or operate themsuccessfully with our joint venture partners, or if there are unexpected liabilities, our results of operationscould be adversely affected. |
| Pursuant to the Unanimous Omnibus Partner Agreement, which governs our and Dowa’s respective |
| rights over the LGJV, we and Dowa must jointly approve certain major decisions involving the LGJV,including decisions relating to the merger, amalgamation or restructuring of the LGJV and key strategicdecisions, including with respect to expansion, among others. If we are unable to obtain the consent ofDowa, we may be unable to make decisions relating to the LGJV that we believe are beneficial for itsoperations, which may materially and adversely impact our results of operations and financial condition. |
| In connection with any future acquisitions or joint ventures, we may incur indebtedness or issue equity |
| securities, resulting in increased interest expense or dilution of the percentage ownership of existingshareholders. Unprofitable acquisitions or joint ventures, or additional indebtedness or issuances ofsecurities in connection with such acquisitions or joint ventures, may adversely affect the price of ourcommon stock and negatively affect our results of operations. |
| Our information technology systems may be vulnerable to disruption, which could place our systems at risk fromdata loss, operational failure or compromise of confidential information. |
| We rely on various information technology systems. These systems remain vulnerable to disruption, |
| damage or failure from a variety of sources, including, but not limited to, errors by employees orcontractors, computer viruses, cyberattacks, including phishing, ransomware, and similar malware,misappropriation of data by outside parties, and various other threats. Techniques used to obtainunauthorized access to or sabotage our systems are under continuous and rapid evolution, and we may beunable to detect efforts to disrupt our data and systems in advance. Breaches and unauthorized access carrythe potential to cause losses of assets or production, operational delays, equipment failure that could causeother risks to be realized, inaccurate recordkeeping, or disclosure of confidential information, any of whichcould result in financial |
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| losses and regulatory or legal exposure, and could have a material adverse effect on our cash flows,financial condition or results of operations. Although to date we have not experienced any material lossesrelating to cyberattacks or other information security breaches, there can be no assurance that we will notincur such losses in the future. Our risk and exposure to these matters cannot be fully mitigated because of,among other things, the evolving nature of these threats. As such threats continue to evolve, we may berequired to expend additional resources to modify or enhance any protective measures or to investigate andremediate any security vulnerabilities. |
| We are subject to the risk of labor disputes, which could adversely affect our business. |
| Although we have not experienced any significant labor disputes in recent years, there can be no |
| assurances that we will not experience labor disputes in the future, including protests, blockades and strikes,which could disrupt our business operations and have an adverse effect on our business and results ofoperation. Although we consider our relations with our employees to be good, there can be no assurance thatwe will be able to maintain a satisfactory working relationship with our employees in the future. |
| Our success depends on developing and maintaining relationships with local communities and stakeholders. |
| Our ongoing and future success depends on developing and maintaining productive relationships with |
| the communities surrounding our operations, including local indigenous people who may have rights or mayassert rights to certain of our properties, and other stakeholders in our operating locations. We believe ouroperations can provide valuable benefits to surrounding communities in terms of direct employment,training and skills development and other benefits associated with ongoing payment of taxes. In addition,we seek to maintain partnerships and relationships with local communities. Notwithstanding our ongoingefforts, local communities and stakeholders can become dissatisfied with our activities or the level ofbenefits provided, which may result in legal or administrative proceedings, civil unrest, protests, directaction or campaigns against us. Any such occurrence could materially and adversely affect our business,financial condition or results of operations. |
| Our directors may have conflicts of interest as a result of their relationships with other mining companies. |
| Our directors are also directors, officers and shareholders of other companies that are similarly engaged |
| in the business of developing and exploiting natural resource properties. Consequently, there is a possibilitythat our directors may be in a position of conflict in the future. |
| Our relationship with SOP may strain our senior management resources and could potentially result in conflicts ofinterest. |
| In connection with the Reorganization, we entered into a Management Services Agreement with SOP, |
| pursuant to which we will provide certain executive and managerial advisory services to SOP. SOPreimburses us for costs representing the proportion of our advisory services allocated to it under theManagement Services Agreement. However, providing such advisory services to SOP may strain ourresources and divert management’s attention from our principal projects and other business concerns, whichwould adversely affect our business and operating results. Certain of our directors are also directors of SOP,which could create, or appear to create, conflicts of interest with respect to matters involving both us andSOP. |
| Risks Related to Government Regulations |
| The Mexican government, as well as local governments, extensively regulate mining operations, which imposesignificant actual and potential costs on us, and future regulation could increase those costs, delay receipt ofregulatory refunds or limit our ability to produce silver and other metals. |
| The mining industry is subject to increasingly strict regulation by federal, state and local authorities in |
| Mexico, including in relation to: |
| • | limitations on land use; |
| • | mine permitting and licensing requirements; |
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| • | reclamation and restoration of properties after mining is completed; |
| • | management of materials generated by mining operations; and |
| • | storage, treatment and disposal of wastes and hazardous materials. |
| The liabilities and requirements associated with the laws and regulations related to these and other |
| matters, including with respect to air emissions, water discharges and other environmental matters, may becostly and time-consuming and may restrict, delay or prevent commencement or continuation of explorationor production operations. There can be no assurance that we have been or will be at all times in compliancewith all applicable laws and regulations. Failure to comply with applicable laws and regulations may resultin the assessment of administrative, civil and criminal penalties, the imposition of cleanup and siterestoration costs and liens, the issuance of injunctions to limit or cease operations, the suspension orrevocation of permits or authorizations and other enforcement measures that could have the effect oflimiting or preventing production from our operations. We may incur material costs and liabilities resultingfrom claims for damages to property or injury to persons arising from our operations. If we are pursued forsanctions, costs and liabilities in respect of these matters, our mining operations and, as a result, ourfinancial performance, financial position and results of operations, could be materially and adverselyaffected. |
| Any new legislation or administrative regulations or new judicial interpretations or administrative |
| enforcement of existing laws and regulations that would further regulate and tax the mining industry mayalso require us to change operations significantly or incur increased costs. Such changes could have amaterial adverse effect on our financial performance, financial position and results of operations. |
| Our Mexican properties are subject to regulation by the Political Constitution of the United Mexican |
| States, and are subject to various legislation in Mexico, including the Mining Law, the Federal Law ofWaters, the Federal Labor Law, the Federal Law of Firearms and Explosives, the General Law on EcologicalBalance and Environmental Protection and the Federal Law on Metrology Standards. Our operations at ourMexican properties also require us to obtain local authorizations and, under the Agrarian Law, to complywith the uses and customs of communities located within the properties. Mining, environmental and laborauthorities may inspect our Mexican operations on a regular basis and issue various citations and orderswhen they believe a violation has occurred under the relevant statute. |
| If inspections in Mexico result in an alleged violation, we may be subject to fines, penalties or |
| sanctions, our mining operations could be subject to temporary or extended closures, and we may berequired to incur capital expenditures to re-commence our operations. Any of these actions could have amaterial adverse effect on our financial performance, financial position and results of operations. |
| In late March 2020, in response to the COVID-19 pandemic, the Mexican government ordered a |
| temporary suspension of all “non-essential” operations nationwide in Mexico, including mining operations.In late May 2020, the Mexican government designated mining an essential service and allowed mines toresume production, subject to deploying COVID-19 prevention protocols. However, there is no certaintythat the Mexican regulators will not require further limitations on, or even a full shut down of, theoperations at the CLG in connection with COVID-19. The potential costs of complying with these COVID-19 requirements is unknown and could have a material adverse effect on us. |
| Our operations are subject to additional political, economic and other uncertainties not generally associated withU.S. operations. |
| We currently have two properties in Mexico: the Los Gatos District, which the LGJV controls, and the |
| Santa Valeria property, which is owned 100% by us. Our operations are subject to significant risks inherentin exploration and resource extraction by foreign companies in Mexico. Exploration, development,production and closure activities in Mexico are potentially subject to heightened political, economic,regulatory and social risks that are beyond our control. These risks include: |
| • | the possible unilateral cancellation or forced re-negotiation of contracts and licenses; |
| • | unfavorable changes in laws and regulations; |
| • | royalty and tax increases; |
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| • | claims by governmental entities or indigenous communities; |
| • | expropriation or nationalization of property; |
| • | political instability; |
| • | fluctuations in currency exchange rates; |
| • | social and labor unrest, organized crime, hostage taking, terrorism and violent crime; |
| • | uncertainty regarding the availability of reasonable electric power costs; |
| • | uncertainty regarding the enforceability of contractual rights and judgments; and |
| • | other risks arising out of foreign governmental sovereignty over areas in which our mineralproperties are located. |
| Local economic conditions also can increase costs and adversely affect the security of our operations |
| and the availability of skilled workers and supplies. Higher incidences of criminal activity and violence inthe area of some of our properties could adversely affect the LGJV’s ability to operate in an optimal fashionor at all, and may impose greater risks of theft and higher costs, which would adversely affect results ofoperations and cash flows. |
| Acts of civil disobedience are common in Mexico. In recent years, many mining companies have been |
| targets of actions to restrict their legally entitled access to mining concessions or property. Such acts of civildisobedience often occur with no warning and can result in significant direct and indirect costs. We cannotprovide assurance that there will be no disruptions to site access in the future, which could adversely affectour business. |
| Local and regional meteorological conditions can increase our operating costs and adversely affect our |
| ability to mine and process ore. Such inclement conditions, including severe precipitation events, extremelyhigh winds or wildfires could directly impact our surface operations. Northern Mexico is highly dependentupon natural gas from Texas to generate power. Regional inclement weather conditions in the state ofChihuahua, Mexico, or Texas, such as the recent severe winter storms in Texas, could adversely impact ourability to maintain sufficient power from the national Mexico power grid. The CLG project was designed toallow the mine and processing plant to operate independently. The project has diesel-powered generatorswith sufficient capacity to maintain power to the residential camp, surface administrative facilities and theunderground mine but not the processing plant. During such events, our ability to mine and process atdesign capacities could become constrained. |
| The right to export silver-bearing concentrate and other metals may depend on obtaining certain |
| licenses, which could be delayed or denied at the discretion of the relevant regulatory authorities, ormeeting certain quotas. The United States and Mexico began implementation of the United States-Mexico-Canada Agreement (USMCA) in 2020. The United States and Mexico, and any other country in which wemay operate in the future, could alter their trade agreements, including terminating trade agreements,instituting economic sanctions on individuals, corporations or countries, and introducing other governmentregulations affecting trade between the United States and other countries. It may be time consuming andexpensive for us to alter our operations in order to adapt to or comply with any such changes. If the UnitedStates were to withdraw from or materially modify international trade agreements to which it is a party, or ifother countries imposed or increased tariffs on the minerals we may extract in the future, the costs of suchproducts could increase significantly. Any of these conditions could lead to lower productivity and highercosts, which would adversely affect our financial performance, financial position and results of operations.Generally, our operations may be affected in varying degrees by changing government regulations in theUnited States and/or Mexico with respect to, but not limited to, restrictions on production, price controls,export controls, currency remittance, importation of products and supplies, income and other taxes,royalties, the repatriation of profits, expropriation of mineral property, foreign investment, maintenance ofconcessions, licenses, approvals and permit, environmental matters, land use, land claims of localindigenous people and workplace safety. |
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| Such developments could require us to curtail or terminate operations at our mineral properties in |
| Mexico, incur significant costs to meet newly imposed environmental or other standards, pay greaterroyalties or higher prices for labor or services and recognize higher taxes, which could materially andadversely affect our results of operations, cash flows and financial condition. Furthermore, failure to complystrictly with applicable laws, regulations and local practices could result in loss, reduction or expropriationof licenses, or the imposition of additional local or foreign parties as joint venture partners with carried orother interests. |
| We continue to monitor developments and policies in Mexico and assess the impact thereof on our |
| operations; however, such developments cannot be accurately predicted and could have an adverse effect onour business, financial condition and results of operations. |
| We are required to obtain, maintain and renew environmental, construction and mining permits, which is often acostly and time-consuming process and may ultimately not be possible. |
| Mining companies, including ours, need many environmental, construction and mining permits, each of |
| which can be time consuming and costly to obtain, maintain and renew. In connection with our current andfuture operations, we must obtain and maintain a number of permits that impose strict conditions,requirements and obligations, including those relating to various environmental and health and safetymatters. To obtain, maintain and renew certain permits, we have been and may in the future be required toconduct environmental studies, and make associated presentations to governmental authorities, pertaining tothe potential impact of our current and future operations upon the environment and to take steps to avoid ormitigate those impacts. Permit terms and conditions can impose restrictions on how we conduct ouroperations and limit our flexibility in developing our mineral properties. Many of our permits are subject torenewal from time to time, and applications for renewal may be denied or the renewed permits may containmore restrictive conditions than our existing permits, including those governing impacts on theenvironment. We may be required to obtain new permits to expand our operations, and the grant of suchpermits may be subject to an expansive governmental review of our operations. We may not be successful inobtaining such permits, which could prevent us from commencing, continuing or expanding operations orotherwise adversely affect our business. Renewal of existing permits or obtaining new permits may be moredifficult if we are not able to comply with our existing permits. Applications for permits, permit areaexpansions and permit renewals can also be subject to challenge by interested parties, which can delay orprevent receipt of needed permits. The permitting process can vary by jurisdiction in terms of its complexityand likely outcomes. The applicable laws and regulations, and the related judicial interpretations andenforcement policies, change frequently, which can make it difficult for us to obtain and renew permits andto comply with applicable requirements. Accordingly, permits required for our operations may not beissued, maintained or renewed in a timely fashion or at all, may be issued or renewed upon conditions thatrestrict our ability to conduct our operations economically, or may be subsequently revoked. Any suchfailure to obtain, maintain or renew permits, or other permitting delays or conditions, including inconnection with any environmental impact analyses, could have a material adverse effect on our business,results of operations and financial condition. |
| In regard to the CLG, the Los Gatos District and other Mexican projects, Mexico has adopted laws and |
| guidelines for environmental permitting that are similar to those in effect in the United States and SouthAmerican countries. We are currently operating under permits regulating mining, processing, use ofexplosives, water use and discharge and surface disturbance in relation to the Los Gatos District and theSanta Valeria property. We will be required to apply for corresponding authorizations prior to anyproduction at our other Mexican properties and there can be no certainty as to whether, or the terms underwhich, such authorizations will be granted or renewed. Any failure to obtain authorizations and permits, orother authorization or permitting delays or conditions, could have a material adverse effect on our business,results of operations and financial condition. |
| We are subject to environmental and health and safety laws, regulations and permits that may subject us to materialcosts, liabilities and obligations. |
| We are subject to environmental laws, regulations and permits in the various jurisdictions in which we |
| operate, including those relating to, among other things, the removal and extraction of natural resources, |
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| the emission and discharge of materials into the environment, including plant and wildlife protection,remediation of soil and groundwater contamination, reclamation and closure of properties, including tailingsand waste storage facilities, groundwater quality and availability, and the handling, storage, transport anddisposal of wastes and hazardous materials. Pursuant to such requirements, we may be subject to inspectionsor reviews by governmental authorities. Failure to comply with these environmental requirements mayexpose us to litigation, fines or other sanctions, including the revocation of permits and suspension ofoperations. We expect to continue to incur significant capital and other compliance costs related to suchrequirements. These laws, regulations and permits, and the enforcement and interpretation thereof, changefrequently and generally have become more stringent over time. If our noncompliance with such regulationswere to result in a release of hazardous materials into the environment, such as soil or groundwater, wecould be required to remediate such contamination, which could be costly. Moreover, noncompliance couldsubject us to private claims for property damage or personal injury based on exposure to hazardousmaterials or unsafe working conditions. In addition, changes in applicable requirements or stricterinterpretation of existing requirements may result in costly compliance requirements or otherwise subject usto future liabilities. The occurrence of any of the foregoing, as well as any new environmental, health andsafety laws and regulations applicable to our business or stricter interpretation or enforcement of existinglaws and regulations, could have a material adverse effect on our business, financial condition and results ofoperations. |
| We could be liable for any environmental contamination at, under or released from our or our |
| predecessors’ currently or formerly owned or operated properties or third-party waste disposal sites. Certainenvironmental laws impose joint and several strict liability for releases of hazardous substances at suchproperties or sites, without regard to fault or the legality of the original conduct. A generator of waste canbe held responsible for contamination resulting from the treatment or disposal of such waste at any offsitelocation (such as a landfill), regardless of whether the generator arranged for the treatment or disposal of thewaste in compliance with applicable laws. Costs associated with liability for removal or remediation ofcontamination or damage to natural resources could be substantial and liability under these laws may attachwithout regard to whether the responsible party knew of, or was responsible for, the presence of thecontaminants. Accordingly, we may be held responsible for more than our share of the contamination orother damages, up to and including the entire amount of such damages. In addition to potentially significantinvestigation and remediation costs, such matters can give rise to claims from governmental authorities andother third parties, including for orders, inspections, fines or penalties, natural resource damages, personalinjury, property damage, toxic torts and other damages. |
| Our costs, liabilities and obligations relating to environmental matters could have a material adverse |
| effect on our financial performance, financial position and results of operations. |
| We may be responsible for anti-corruption and anti-bribery law violations. |
| Our operations are governed by, and involve interactions with, various levels of government in foreign |
| countries. We are required to comply with anti-corruption and anti-bribery laws, including the Corruption ofForeign Public Officials Act (Canada) and the U.S. Foreign Corrupt Practices Act (the “FCPA”) and similarlaws in Mexico. These laws generally prohibit companies and company employees from engaging in briberyor other prohibited payments to foreign officials for the purpose of obtaining or retaining business. TheFCPA also requires companies to maintain accurate books and records and internal controls. Because ourinterests are located in Mexico, there is a risk of potential FCPA violations. |
| In recent years, there has been a general increase in both the frequency of enforcement and the severity |
| of penalties under such laws, resulting in greater scrutiny and punishment to companies convicted ofviolating anti-corruption and anti-bribery laws. A company may be found liable for violations by not onlyits employees, but also by its contractors and third-party agents. Our internal procedures and programs maynot always be effective in ensuring that we, our employees, contractors or third-party agents will complystrictly with all such applicable laws. If we become subject to an enforcement action or we are found to bein violation of such laws, this may have a material adverse effect on our reputation and may possibly resultin significant penalties or sanctions, and may have a material adverse effect on our cash flows, financialcondition or results of operations. |
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| We may be required by human rights laws to take actions that delay our operations or the advancement of ourprojects. |
| Various international and national laws, codes, resolutions, conventions, guidelines and other materials |
| relate to human rights (including rights with respect to health and safety and the environment surroundingour operations). Many of these materials impose obligations on government and companies to respecthuman rights. Some mandate that governments consult with communities surrounding our projectsregarding government actions that may affect local stakeholders, including actions to approve or grantmining rights or permits. The obligations of government and private parties under the various internationaland national materials pertaining to human rights continue to evolve and be defined. One or more groups ofpeople may oppose our current and future operations or further development or new development of ourprojects or operations. Such opposition may be directed through legal or administrative proceedings orexpressed in manifestations such as protests, roadblocks or other forms of public expression against ouractivities, and may have a negative impact on our reputation. Opposition by such groups to our operationsmay require modification of, or preclude the operation or development of, our projects or may require us toenter into agreements with such groups or local governments with respect to our projects, in some casescausing considerable delays to the advancement of our projects. |
| Risks Related to Ownership of Our Common Stock |
| The market price of our common stock may be volatile. |
| The trading price of our common stock could be volatile. Some of the factors that may cause the market |
| price of our common stock to fluctuate include: |
| • | failure to identify mineral reserves at our properties; |
| • | failure to achieve production at our mineral properties; |
| • | actual or anticipated changes in the price of silver and base metal by-products; |
| • | fluctuations in our quarterly and annual financial results or the quarterly and annual financial resultsof companies perceived to be similar to us; |
| • | changes in market valuations of similar companies; |
| • | success or failure of competitor mining companies; |
| • | changes in our capital structure, such as future issuances of securities or the incurrence of debt; |
| • | sales of large blocks of our common stock; |
| • | announcements by us or our competitors of significant developments, contracts, acquisitions orstrategic alliances; |
| • | changes in regulatory requirements and the political climate in the United States, Mexico or both; |
| • | litigation involving our Company, our general industry or both; |
| • | additions or departures of key personnel; |
| • | investors’ general perception of us, including any perception of misuse of sensitive information; |
| • | changes in general economic, industry and market conditions; |
| • | accidents at mining properties, whether owned by us or otherwise; |
| • | natural disasters, terrorist attacks and acts of war; and |
| • | our ability to control our costs. |
| If the market for stocks in our industry, or the stock market in general, experiences a loss of investor |
| confidence, the trading price of our common stock could decline for reasons unrelated to our business,financial condition or results of operations. These and other factors may cause the market price and demandfor our common stock to fluctuate substantially, which may limit or prevent investors from readily selling |
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| their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In thepast, when the market price of a stock has been volatile, holders of that stock have instituted securities classaction litigation against the company that issued the stock. If any of our shareholders brought a lawsuitagainst us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the timeand attention of our management from our business. |
| If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, |
| even if unsuccessful, could be both costly to defend against and a distraction to management. |
| Our anti-takeover defense provisions may cause our common stock to trade at market prices lower than it mightabsent such provisions. |
| Our Board of Directors has the authority to issue blank check preferred stock. Additionally, our |
| Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain severalprovisions that may make it more difficult or expensive for a third party to acquire control of us without theapproval of our Board of Directors. These include provisions setting forth advance notice procedures forshareholders’ nominations of directors and proposals of topics for consideration at meetings of shareholders,provisions restricting shareholders from calling a special meeting of shareholders or requiring one to becalled, provisions limiting the ability of shareholders to act by written consent and provisions requiring a66.67% shareholder vote to amend our Amended and Restated Certificate of Incorporation and Amendedand Restated Bylaws. These provisions may delay, prevent or deter a merger, acquisition, tender offer, proxycontest or other transaction that might otherwise result in our shareholders receiving a premium over themarket price for their common stock. In addition, these provisions may cause our common stock to trade ata market price lower than it might absent such provisions. |
| Sales of a substantial number of shares of our common stock in the public market, or the perception in the marketthat the holders of a large number of shares intend to sell shares, could cause the market price of our common stockto drop significantly. |
| Sales of a substantial number of shares of our common stock in the public market, or the perception in |
| the market that the holders of a large number of shares intend to sell shares, could reduce the market priceof our common stock. As of March 23, 2021, we had 59,409,052 shares of common stock outstanding. Inconnection with our initial public offering, all of our directors and executive officers and the holders ofsubstantially all of our common stock entered into lockup agreements in which they agreed, subject tocertain exceptions, not to offer, pledge, sell, contract to sell, sell any option or contract to purchase,purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transferor dispose of, directly or indirectly, or enter into any swap or other arrangement that transfers to another, inwhole or in part, any of the economic consequences of ownership of any shares of our common stock or anysecurities convertible into or exercisable or exchangeable for shares of our common stock. The shares of ourcommon stock covered by these lockup agreements will become eligible to be sold beginning on April 26,2021. The representatives of the underwriters in our initial public offering may, in their sole discretion andwithout notice, release all or any portion of the common stock subject to lockup agreements. As restrictionson resale end, the market price of our common stock could drop significantly if the holders of these sharessell them. or are perceived by the market as intending to sell them. |
| Moreover, certain stockholders will have rights, subject to specified conditions, to require us to file |
| registration statements covering their shares or to include their shares in registration statements that we mayfile for ourselves or other stockholders. We have also registered all shares of common stock that we mayissue under our equity compensation plans, which can be freely sold in the public market upon issuance,subject to volume limitations applicable to affiliates and the lock-up agreements described above. Thesefactors could also make it more difficult for us to raise additional funds through future offerings of ourcommon stock or other securities. |
| We do not currently intend to pay dividends on our common stock and, consequently, shareholders’ ability toachieve a return on their investment will depend on appreciation in the price of our common stock. |
| We have never declared or paid any cash dividend on our capital stock. We do not intend to pay any |
| cash dividends on our common stock for the foreseeable future. We currently intend to retain all future |
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| earnings, if any, to finance our business. The payment of any future dividends, if any, will be determined byour Board of Directors in light of conditions then existing, including our earnings, financial condition andcapital requirements, business conditions, corporate law requirements and other factors. |
| Electrum and its affiliates and MERS have a substantial degree of influence over us, which could delay or prevent achange of corporate control or result in the entrenchment of our management and/or Board of Directors. |
| As of March 23, 2021, the Electrum Group, LLC and its affiliates (collectively, “Electrum”) and the |
| Municipal Employees’ Retirement System of Michigan (“MERS”) beneficially own approximately 42% and10% of our outstanding common stock, respectively. We have entered into a shareholders agreement withElectrum and MERS pursuant to which Electrum and MERS have certain director nomination rights. Theshareholders agreement also provides that Electrum approval must be obtained prior to us engaging incertain corporate actions. As a result, Electrum has significant influence over our management and affairsand, so long as Electrum owns at least 35% of our outstanding common stock, will have approval rightsover certain corporate actions, including, among others, any merger, consolidation or sale of all orsubstantially all of our assets, the incurrence of more than $100 million of indebtedness and the issuance ofmore than $100 million of equity securities. |
| The concentration of ownership and our shareholders agreement may harm the market price of our |
| common stock by, among other things: |
| • | delaying, deferring or preventing a change of control, even at a per share price that is in excess of thethen-current price of our common stock; |
| • | impeding a merger, consolidation, takeover or other business combination involving us, even at a pershare price that is in excess of the then-current price of our common stock; or |
| • | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtaincontrol of us, even at a per share price that is in excess of the then-current price of our commonstock. |
| We are an “emerging growth company” and a smaller reporting company, and we cannot be certain if the reduceddisclosure requirements applicable to us will make our common stock less attractive to investors. |
| We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of |
| certain exemptions from various reporting requirements that are applicable to other public companies thatare not “emerging growth companies” including, but not limited to, not being required to comply with theauditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“the “Sarbanes-OxleyAct”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxystatements and exemptions from the requirements of holding a nonbinding advisory vote on executivecompensation and shareholder approval of any golden parachute payments not previously approved. Wecannot predict if investors will find our common stock less attractive if we rely on these exemptions. Ifsome investors find our common stock less attractive as a result, there may be a less active trading marketfor our common stock and our stock price may be more volatile. |
| Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller |
| reporting company,” which would allow us to take advantage of many of the same exemptions fromdisclosure requirements including reduced disclosure obligations regarding executive compensation in ourperiodic reports and proxy statements. We would also be exempt from the requirement to obtain an externalaudit on the effectiveness of internal control over financial reporting provided in Section 404(b) of theSarbanes-Oxley Act. These exemptions and reduced disclosures in our SEC filings due to our status as asmaller reporting company mean our auditors do not review our internal control over financial reporting andmay make it harder for investors to analyze our results of operations and financial prospects. We cannotpredict if investors will find our common stock less attractive because we may rely on these exemptions. Ifsome investors find our common stock less attractive as a result, there may be a less active trading marketfor our common stock and our stock prices may be more volatile. |
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| Our Amended and Restated Certificate of Incorporation and shareholders agreement contain a provisionrenouncing our interest and expectancy in certain corporate opportunities. |
| Our Amended and Restated Certificate of Incorporation and shareholders agreement provide for the |
| allocation of certain corporate opportunities between us and Electrum and MERS. Under these provisions,neither Electrum nor MERS, their affiliates and subsidiaries, nor any of their officers, directors, agents,stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in thesame business activities or similar business activities or lines of business in which we operate. For instance,a director of our Company who is not also our employee and also serves as a director, officer or employeeof Electrum or MERS or any of their subsidiaries or affiliates may pursue certain acquisition or otheropportunities that may be complementary to our business and, as a result, such acquisition or otheropportunities may not be available to us. These potential conflicts of interest could have a material adverseeffect on our financial performance, financial position and results of operations if attractive corporateopportunities are allocated by Electrum or MERS to themselves or their subsidiaries or affiliates instead ofto us. |
| Our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State ofDelaware and the federal district courts of the United States are the exclusive forums for substantially all disputesbetween us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum fordisputes with us or our directors, officers or employees. |
| Our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the |
| State of Delaware is the exclusive forum for the following types of actions or proceedings under Delawarestatutory or common law: |
| • • • | any derivative action or proceeding brought on our behalf;any action asserting a breach of fiduciary duty;any action asserting a claim against us arising under the Delaware General Corporation Law; and |
| • | any action asserting a claim against us that is governed by the internal affairs doctrine. |
| The foregoing provision does not apply to claims under the Securities Act, the Exchange Act or any |
| claim for which the U.S. federal courts have exclusive jurisdiction. Our Amended and Restated Certificateof Incorporation further provides that the federal district courts of the United States will, to the fullestextent permitted by law, be the exclusive forum for resolving any complaint asserting a cause of actionarising under the Securities Act. |
| Our Amended and Restated Certificate of Incorporation also provides that any person or entity |
| purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed tohave notice of and to have consented to these choice of forum provisions. These exclusive forum provisionsmay limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes withus or our directors, officers or other employees, which may discourage lawsuits against us and our directors,officers, and other employees, although our stockholders will not be deemed to have waived our compliancewith federal securities laws and the rules and regulations thereunder. |
| While Delaware courts have determined that choice of forum provisions are facially valid, it is possible |
| that a court of law in another jurisdiction could rule that the choice of forum provisions contained in ourAmended and Restated Certificate of Incorporation are inapplicable or unenforceable if they are challengedin a proceeding or otherwise. If a court were to find the choice of forum provision in our Amended andRestated Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incuradditional costs associated with resolving such action in other jurisdictions. |
| General Risk Factors |
| We may be subject to claims and legal proceedings that could materially and adversely impact our financial position,financial performance and results of operations. |
| We may be subject to claims or legal proceedings covering a wide range of matters that arise in the |
| ordinary course of business activities. These matters may result in litigation or unfavorable resolution, |
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| which could materially and adversely impact our financial performance, financial position and results ofoperations. See “Item 3. Legal Proceedings.” |
| We will continue to incur significantly increased costs and devote substantial management time as a result ofoperating as a public company. |
| As a public company, we will continue to incur significant legal, accounting and other expenses that we |
| did not incur as a private company. For example, we are subject to the reporting requirements of theExchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act andthe Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations of theSEC, NYSE and TSX, including the establishment and maintenance of effective disclosure and financialcontrols, changes in corporate governance practices and required filing of annual, quarterly and currentreports with respect to our business and results of operations. We expect that compliance with theserequirements will increase our legal and financial compliance costs and will make some activities moretime-consuming and costly. In addition, we expect that our management and other personnel will need todivert attention from operational and other business matters to devote substantial time to these publiccompany requirements. In particular, we expect to incur significant expenses and devote substantialmanagement effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-OxleyAct, which will increase when we are no longer an emerging growth company. We have hired additionalaccounting personnel and we may need to hire additional accounting and financial staff with appropriatepublic company experience and technical accounting knowledge and will need to establish an internal auditfunction within one year of our initial public offering. |
| We are required to develop and maintain proper and effective internal controls over financial reporting. We may notcomplete our analysis of our internal controls over financial reporting in a timely manner, or these internal controlsmay not be determined to be effective, which may adversely affect investor confidence in us and, as a result, thevalue of our common stock. |
| We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management |
| on, among other things, the effectiveness of our internal controls over financial reporting for the first fiscalyear beginning with the year following our first annual report required to be filed with the SEC. Thisassessment will need to include disclosure of any material weaknesses identified by our management in ourinternal controls over financial reporting. Additionally, we are required to disclose changes made in ourinternal controls and procedures on a quarterly basis. |
| However, for as long as we are an emerging growth company, or a smaller reporting company that is a |
| non-accelerated filer, our independent registered public accounting firm will not be required to attest to theeffectiveness of our internal control over financial reporting pursuant to Section 404(b). At such time thisattestation will be required, our independent registered public accounting firm may issue a report that isadverse in the event it is not satisfied with the level at which our controls are documented, designed oroperating. Our remediation efforts may not enable us to avoid a material weakness in the future. We mayneed to undertake various actions, such as implementing new internal controls and procedures and hiringadditional accounting or internal audit staff. |
| We are in the early stages of the process of compiling the system and processing documentation |
| necessary to perform the evaluation needed to comply with Section 404. We may not be able to completeour evaluation, testing and any required remediation in a timely fashion. During the evaluation and testingprocess, if we identify one or more material weaknesses in our internal controls over financial reporting, wewill be unable to assert that our internal controls are effective. |
| If we are unable to assert that our internal controls over financial reporting are effective, or if our |
| independent registered public accounting firm is unable to express an opinion on the effectiveness of ourinternal controls to the extent required, we could lose investor confidence in the accuracy and completenessof our financial reports, which could cause the price of our common stock to decline, and we may be subjectto investigation or sanctions by the SEC. |
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| Item 2. Properties |
| The Los Gatos District |
| The technical information appearing below and elsewhere in this Report concerning the Los Gatos |
| District was derived from the Los Gatos Technical Report dated July 1, 2020 prepared by Tetra Tech. TheLos Gatos Technical Report was prepared by the following qualified persons, each of whom is an employeeof Tetra Tech: Guillermo Dante Ramírez Rodríguez, Leonel Lopez, Kira Johnson, Keith Thompson,Kenneth Smith, Luis Quirindongo and Max Johnson. None of the qualified persons who prepared the LosGatos Technical Report is affiliated with us or any other entity that has an ownership, royalty or otherinterest in the CLG or the Los Gatos District. |
| Location of the Los Gatos District and Access |
| The Los Gatos District covers approximately 103,087 hectares in the south-central part of the State of |
| Chihuahua in northern Mexico, within the municipality of Satevó. The Los Gatos District is roughlycentered on Latitude 27° 34’ 17” N, Longitude 106° 21’ 33” W, near the town of San José del Sitio. The LosGatos District is located approximately 120 kilometers south of the state capital of Chihuahua City andapproximately 100 kilometers northwest of the mining city of Hidalgo del Parral. |
| San José del Sitio is accessible by a nearly 100% paved road from the turnoff of Federal Highway 24 at |
| the 81 kilometer marker between the cities of Chihuahua and Hidalgo de Parral. The access road can betraveled by any motorized vehicle and has regular bus services to the surrounding communities. The LosGatos District area is accessible by a large network of dirt and gravel roads that are used by local ownersand lessees to access grazing areas for cattle and local ranches. Northern areas of the Los Gatos District arealso accessible from several gravel roads connecting with Mexican Federal Highway 24 between the 60kilometer to 81 kilometer markers. In more remote areas, the rolling topography permits easy access by footinto areas where roads do not exist. |
| There are a limited number of qualified workers in San José del Sitio, but technical workers (e.g., |
| miners, electricians, mechanics, computer technicians, etc.), heavy equipment and specialized operators canbe found in the surrounding area and at Parral, 88 kilometers southeast. Primary and secondary-leveltechnical schools are available in Valle de Zaragoza, and all levels of schooling are available in Parraland/or Chihuahua, each 2.5 hours away by vehicle. |
| See “Item 1A. Risk Factors — Risks Related to Our Business and Industry — The title to some of the |
| mineral properties may be uncertain or defective, thus risking our investment in such properties” for adiscussion of factors or risks that may affect access or title or the right or ability to perform work on theproperty. |
| See Section 4.1 of the Los Gatos Technical Report for further specific information of the location of the |
| Los Gatos District. |
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| Mining Concessions |
| The Los Gatos District is made up of a series of 17 claim titles covering approximately 103,087 |
| hectares. The titled mining concessions are summarized below: |
| | Los Gatos District — Titled Mining Concessions |
| | | | Date Granted | | Current |
| Concession Name | | Title Number | mm/dd/yy | Hectares | Concessionaire |
| Los Gatos | | 231498 | 3/4/08 19,712 | | Minera Plata Real |
| Los Gatos 2 | | 228950 | 2/22/07 10,720 | | Minera Plata Real |
| Los Gatos 3 | | 231076 | 1/16/08 | 27 | Minera Plata Real |
| Mezcalera | | 228249 | 10/17/06 4,992 | | Minera Plata Real |
| Mezcalera 2 Fracción I | | 228929 | 2/21/07 | 39 | Minera Plata Real |
| Mezcalera 2 Fracción II | | 228930 | 2/21/07 | 26 | Minera Plata Real |
| Mezcalera 2 Fracción III | | 228931 | 2/21/07 | 29 | Minera Plata Real |
| Paula Adorada | | 223392 | 12/9/04 | 40 | Minera Plata Real |
| La Gavilana | | 237137 | 11/19/10 | 10 | Minera Plata Real |
| San Luis | | 236908 | 10/5/10 | 16 | Minera Plata Real |
| La Gavilana Fracción I | | 237461 | 12/21/10 | 44 | Minera Plata Real |
| Los Estados Fracción I | | 237694 | 4/25/11 | 9 | Minera Plata Real |
| Los Estados Fracción II | | 237695 | 4/25/11 | 44 | Minera Plata Real |
| Los Gatos 4 | | 238511 | 9/23/11 52,597 | | Minera Plata Real |
| San Luis 2 | | 238694 | 10/18/11 | 42 | Minera Plata Real |
| Los Veranos | | 238573 | 9/23/11 14,740 | | Minera Plata Real |
| San Luis 3 | | 240452 | 5/23/12 | 0.01 | Minera Plata Real |
| Total | | | | | 103,087 |
| In addition, there are several small concessions within the Los Gatos District area that have been |
| cancelled and not yet liberated by the Dirección General de Minas, which we intend to apply for onceliberated. We have also arranged for permission to enter and perform exploration activities on a number ofprivate land properties in the district area. |
| These concessions are held by MPR. The concessions have a period of validity that ranges between |
| 2054 and 2062. MPR holds the rights to the concessions of Los Gatos and Paula Adorada subject to theterms of an agreement with the original holder of the concession. These agreements have been dulyrecorded in the Mexican Public Registry of Mines. Details of these agreements are provided below. |
| Royalty and Agreement on Los Gatos Concession |
| The Los Gatos concession is subject to the terms of an exploration, exploitation and unilateral promise |
| of assignment of rights agreement made between La Cuesta International, S.A. de C.V. and MPR, datedMay 4, 2006. Pursuant to this agreement, title to the Los Gatos concession was transferred to MPR and, inconnection with the transfer, MPR is required to make semi-annual advanced royalty payments of $20,000to La Cuesta International, S.A. de C.V. until the commencement of commercial production and thereafter isrequired to pay a 2% net smelter returns royalty on production from the Los Gatos concession and a 0.5%net smelter returns royalty from lands within a one-kilometer boundary of the Los Gatos concession, subjectto a minimum royalty payment in the same amount as the advanced royalty payment. Once total royaltypayments reach $10 million, the 2% net smelter returns royalty will decrease to 0.5% and once totalpayments have reached $15 million, the royalty will no longer be payable. MPR paid a royalty payment of$40,000 per year during the preproduction period. Upon commencing production, payments under thisagreement were deferred until March 31, 2021 with an annual interest rate of 4.5% applied to theoutstanding balance. During the deferral period, MPR will pay an advance royalty payment of $100,000 peryear until |
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| January 2021. Subsequent to March 31, 2021, the outstanding balance from the deferral period will berepaid in four quarterly payments of $500,000 with the remaining outstanding balance paid in full byMarch 31, 2022. As of December 31, 2020, $13,865,000 remained for future royalty obligations. During theterm of the agreement, MPR is required to comply with all mining, environmental and other applicable lawsin order to maintain its right and title to the Los Gatos concession. |
| Unanimous Omnibus Partner Agreement |
| The Los Gatos District is owned and operated through the Unanimous Omnibus Partner Agreement. |
| Pursuant to this agreement, the LGJV cannot make any “Major Decisions” without first having obtainedDowa’s consent or without first having obtained the consent of holders of at least 90% of the interest in theLGJV, depending on the time such Major Decisions are made. Major Decisions, as defined in the agreement,include the significant operating decisions of the LGJV, such as, among other decisions, budgeting,development and exploitation approvals, loan and outside financing approvals, expansion of area of interest,surrendering claims, the creation of security interests on property, any initial public offering of the jointventure, and litigation settlements. Therefore, despite holding a majority equity interest in the LGJV, we donot exercise control over the LGJV. |
| On March 11, 2021, we repurchased an approximate 18.5% interest in the LGJV from Dowa, increasing |
| our ownership to 70.0%. Following this increase in our ownership interest in the LGJV, we continue to notexercise control over the LGJV due to certain provisions contained in the Unanimous Omnibus PartnerAgreement that currently require unanimous partner approval of all major operating decisions (such ascertain approvals, the creation of security interests on property, any initial public offering of the jointventure, and litigation settlements). |
| Priority Distribution Agreement |
| On May 30, 2019 and in connection with the memorandum of understanding dated April 16, 2019, we |
| entered into a priority distribution agreement with MPR, OSJ and Dowa, pursuant to which we directed theLGJV to contribute dividend payments to an escrow account until an aggregate amount equal to $20 millionhas been deposited into the account, which is payable to Dowa as a priority dividend. |
| Sales Agreements |
| OSJ (the “Seller”), an entity that forms part of the LGJV, entered into a delivery contract, dated |
| April 14, 2019, with Metagri S.A. de C.V. (“Metagri”), whereby Metagri agreed to buy and accept deliveryof, and the Seller agreed to sell and deliver to Metagri, all lead concentrate that will be produced from theCLG until December 31, 2021. The lead concentrate will ultimately be delivered to Metagri’s warehouse inManzanillo, Mexico. |
| The Seller also entered into a delivery contract, dated July 15, 2019, with Ocean Partners, whereby |
| Ocean Partners agreed to buy and accept delivery of, and Seller agreed to sell and deliver to Ocean Partners,all zinc concentrate that will be produced from the CLG until June 30, 2022. The zinc concentrate willultimately be delivered to Dowa’s zinc smelter in Akita, Japan, unless otherwise agreed to by Dowa. TheSeller, from time to time, will enter into memoranda of agreement setting forth the terms and conditions forthe sales of zinc concentrate. |
| From time to time, the Seller may enter into certain spot sale contracts should impurities in lead and |
| zinc concentrate exceed certain specifications. Since the commencement of production, the Seller hasentered into spot sale contracts due to high fluorine content for some production, including substantially allthe lead concentrate produced in 2020. |
| Climate and Topography |
| The Los Gatos District area is located in the Sierras y Llanuras del Norte Physiographic Province near |
| the boundaries between the Gran Meseta, Cañones, the Sierras and Llanuras Tarahumara Sub Provinces. Thegeneral physiography of the Los Gatos District is characterized by low to middle rolling volcanic hills |
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| with local escarpments and flat valley floors. Altitudes vary with between 1,550 masl at the base of theSanto Toribio Creek and 1,780 masl at the top of the Los Gatos Hill, one of the highest peaks of the LosGatos District area. |
| Vegetation is characterized by a semi-desert landscape, with typical low brush vegetation in the slopes, |
| including lechuguilla, sotol, yucca, sage, bear grass and other types of indigenous grasses. Larger brush andtrees are common along the main watercourses, with the presence of oak, cypress, poplar, huizache andmesquite, among others. |
| The climate in the area is typical of desert areas of northwest Mexico, extreme semi-arid. Exploration |
| and mining activities at the Los Gatos District are seldom interrupted by adverse weather conditions, withthe exception of short-lived storms producing floods and damage to access roads. |
| Geological Setting |
| The Los Gatos District is located in the transition zone between the Sierra Madre Occidental volcanic |
| province of western Mexico and the Mesozoic Chihuahua basin to the east. It is also located in the generalcontact zone between the Sierra Madre Occidental, Chihuahua and Parral tectonostratigraphic terranes. |
| The area is largely characterized by a thick sequence of Tertiary volcanic rocks that are generally |
| dissected by a strong north-northwest bearing fault system that divides the area into the plateau andbarranca sections and are subdivided in two major units, the Lower Volcanic Group and Upper VolcanicGroup. The area is one of the largest known epithermal, precious-metal metallogenic provinces and is hostto several well-known gold-silver producing mining districts in Mexico, such as Concheño, Batopilas, SanDimas-Tayoltita and Ocampo. |
| The dominant rocks of the Los Gatos District area are thick accumulations of intermediate tuffs and |
| lavas, with lesser felsic rocks, and Upper Cretaceous (Cenomanian) to Lower Paleocene aged sandstones,shales and limestones correlative with the Mezcalera formation, locally metamorphosed to phyllites,quartzites and marbles near areas of igneous activity. Rocks of this oldest sedimentary sequence occurwithin a small horst block located to the northwest of the Cerro Los Gatos District, with prominent high-angle fault boundaries on the north and south, parallel to the regional trend of faulting. Intruding anddeposited on the entire section are locally important rhyolite flows, flow domes and dikes, usually stronglysilicified, that have all of the varied textures expected with the development of flow domes, includingbreccias, flow banding and intrusive/extrusive transitions. Each of the rocks in the section containsobservable hydrothermal alteration that suggests that mineralization in the area probably occurred late in thehistory of the development of the volcanic section. It is important to stress, however, that economic gradesof mineralization have only thus far been identified in the andesite and dacite sections. |
| History of the Los Gatos District |
| The Los Gatos District has been the subject of very limited historical prospecting and mineral |
| exploration, including the development of shallow workings and preliminary exploration activities byConsejo de Recursos Minerales (now the Servicio Geológico Mexicano, the Mexican Geologic Survey) atthe Esther, Gavilana (Paula) and San Luis zones with references to the occurrence of silver, lead and zinc.The construction and development work has not uncovered any evidence of past modern prospectingactivities in the area. The Los Gatos District was initially recognized by reconnaissance activities by LaCuesta International Inc. in 2005 and later offered to Los Gatos Ltd. (original parent of MPR). An initialletter of agreement for exploration work on the Los Gatos District was negotiated and a final contractratified in April 2006 between MPR and La Cuesta International S. A. de C.V. (the Mexican subsidiary ofLa Cuesta International Inc.). Only minor field work was conducted in 2006 and 2007 on the Los GatosDistrict during the waiting period for the initial concession to be titled, and formal exploration activities anddrilling were conducted by MPR from and after 2008. |
| Exploration |
| The Los Gatos District consists of three identified silver discoveries — the CLG, the Esther deposit and |
| the Amapola deposit — and 11 other mineralized zones with over 150 kilometers of outcropping quartz andcalcite veins are also located in the Los Gatos District. |
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| As of December 31, 2020, 739 exploration drill holes have been completed in the Los Gatos District, |
| totaling 267,060 meters. In late 2020, the LGJV recommenced its definitional drilling campaign at CerroLos Gatos. |
| Drill sites are selected based on surface vein outcrops and geometric projections into the subsurface, as |
| well as geochemical, geophysical and geological targets. Drilling is conducted using a wire line rig withdiamond core capabilities. Holes begin with HQ size and are reduced, if necessary, to NQ and very rarelyBQ, if difficult drilling conditions are encountered. Holes are surveyed with a Flexit EZ trac device at 50-meter intervals as the holes are completed. Surveys of drill hole-collar coordinates locations are completedby a local contract topographer using a Topcon Total Station GTS-236W. All information pertinent to thedrilling is stored in a master database in Microsoft Access®. Additional drilling at the CLG is aimed atupgrading the confidence of the resource and identifying mineralized extensions along strike and down dip. |
| In addition to the drilling conducted at the CLG, the Esther deposit and the Amapola deposit, MPR has |
| conducted limited exploration drilling programs in other areas in the Los Gatos District which include Bocade Leon, Cieneguita, El Lince, El Rodeo, La Paula, Los Torunos Mezcalera, Ocelote, San Agustin, San Luisand Wall-E/Ava. While anomalous levels of mineralization have been identified in each of these zones otherthan Wall-E/Ava, drilling data is too limited to speculate as to the presence of economic quantities ofmineralization. Additional drilling will be required in each area to delineate the mineralization identified. |
| Los Gatos District Mineralogy |
| The Los Gatos District hosts a series of quartz, quartz-calcite and calcite veins in at least fifteen |
| separate vein systems that are exposed along a strike length of approximately 30 kilometers and an outcropbelt width of approximately five kilometers. Vein width is generally in the order of one meter, but localwide zones up to eight meters in outcrop and true vein widths in excess of 30 meters have been identified bydiamond drilling. Structurally, the veins form two sets, with north and northwest strikes and mostly steepdips. West/northwest trending fault and fracture zones probably reflect reactivated basement structures,whereas many of the north/northwest trending faults probably are associated with basin-and-rangeextension. Epithermal mineralization is associated with both phases of extension, so both trends haveexploration potential; however, the basement architecture has overall control on the distribution ofmagmatic centers and hydrothermal systems. |
| Mineralization at the Los Gatos District is characterized by silver, lead, zinc and copper sulphides and |
| their oxides, along with fluorite, manganese, barite and traces of gold associated with quartz and calciteveins. The veins vary in orientation from west-northwest to northwest to north-northwest to north-northeastand vary in thickness from one meter to eight meters outcrop, but with much greater true width at depthbased upon diamond drilling. Study of the veins in hand specimen and thin section suggests that they areepithermal in origin and are likely of intermediate sulfidation composition, showing vein textures andgangue mineralogy that indicate a relatively high-level hydrothermal system in the boiling environment.Breccia with clasts of vein quartz indicates a protracted hydrothermal system during multiple faultingevents, a positive sign for economic epithermal veins. It has been interpreted that mineralized-ore shootsmay extend relatively far down dip, possibly to at least 250 meters. |
| The CLG vein system is persistent, with a general northwest trend dipping to the east, a mapped |
| extension in the order of ten kilometers, and true widths of as much as 30 meters and local associatedveining up to 50 meters wide. Banded quartz veins and breccias are cemented by quartz, calcite andabundant manganese oxides. A study based on geological characteristics and silver-lead-zinc (arsenic-antimony-mercury) anomalous sections of the vein resulted in the discovery of the Los Gatos listric-shapedmineralized horizon hosting the steeply to shallowly dipping mineralized-shoots at depth. Mineralization ofinterest is seen for approximately 2,500 meters in length and for an estimated average vertical extension inthe order of 200 meters. The reported average drilled true width of the structure is in the order of 8.9 meters.It has been interpreted that the top of the mineralized horizon at Los Gatos is generally located at anelevation of 1,400 masl. |
| Original exploration activities at the Esther vein system indicated the presence of a narrow quartz vein, |
| less than one meter, with minor veining and silicification and noticeable lack of calcite. However, thepresence of a small high-grade mineralized-shoot, probably 60 meters deep, attracted interest in the area.Drilling of |
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| this area also resulted in the discovery of the Esther mineralized-shoot, which has a known length of 800meters for the main mineralized-shoot, as well as up to 1,200 meters of additional mineralized vein. Theheight of the mineralized interval is indicated by two drill holes to be in the order of 100 meters; mostmineral intersections range in the order of two meters to eight meters, with a probable average slightly overthree meters. It has been interpreted that the top of the favorable horizon at Esther is generally located about120 meters below the surface. |
| The Amapola deposit contains several vein systems at varying degrees of strike and dip that are the |
| target of exploration. Currently, four of these veins comprise adequate Ag grade and thickness to beconsidered as mineralized material and geologically modeled. The four veins include the Albita, Elizabeth,Cascajal and Julia. The mineral resources are principally present on the Albita and Elizabeth veins, whichtogether comprise a “corridor” of mineralization up to approximately 50 meters thick. |
| Sampling, Analysis and Data Verification |
| MPR has carried out sampling campaigns that have included surface, limited underground and core |
| samples. Samples were taken by local crews under the supervision of either a geologist of MPR or one oftheir contractors. Sampling intervals were, in most cases, two meters, with local variations depending onvein geology, to a minimum of 0.8 meters where structures were found. Detailed sampling was carried out atintervals directed by geological criteria, with priority given to testing high-grade zones in the vein structuresand attention also given to identifying possible mineralization in the wall rock and quartz stockworkveining. |
| MPR established a sampling protocol, which was followed through the drilling campaign, that in |
| summary includes: supervision by MPR personnel, with the verification of core handling, recovery, coreaccommodation and depth recording by the contractor; and core collection, measurement, core recovery,photographing, specific gravity, geotechnical information and sampling interval selection by MPRgeologists. |
| Detailed logging of the sample intervals is conducted once the core samples are sawed, with detailed |
| descriptions and estimations of mineralogy and mineral content, hydrothermal alteration, veining andfracturing. Assay intervals are divided in two equal parts by diamond saw, with most sampling conducted ontwo-meter intervals, except for specific vein intervals. Vein intervals are selected for more detailedsampling, with a minimum of 0.8 meters per interval in the sample and a maximum of two meters. |
| Samples are collected in standard plastic sample bags and tagged with a unique sample number |
| recorded for each interval. Samples are grouped by drill hole and transported by pickup truck to the ALSChemex laboratories sample receiving location in Chihuahua City, Mexico. From the time the core samplesleave the drill site to the time the samples are delivered to ALS Chemex, they are escorted and under thesupervision of personnel from MPR. |
| Samples are dried, crushed and pulverized by ALS Chemex in Chihuahua City. Assay orders are |
| delivered to the lab, and a copy of the receipt obtained is filed and registered in MPR’s database. Samplepulps are then shipped by ALS Chemex to their laboratory in Vancouver, Canada for ICP analyses of silver,base metals and trace elements using a four-acid digestion technique. Gold assays are also completed usingfire assay-AA preparation on 30-gram splits of the sample material. |
| ALS Chemex has developed and implemented at each of its locations a Quality Management System |
| (QMS) designed to ensure the production of consistently reliable data. As a result, the lab has received,including its sample preparation section in Guadalajara, the ISO 9001:2000 QMS registration from QMI.The ALS Laboratory Vancouver branch has also been accredited as conforming to requirements of Canadianregulations in this matter. |
| MPR has set up a Quality Assurance/Quality Control (QA/QC) program to monitor the drilling |
| program at the Los Gatos District, including the use of: (1) blanks (barren silica sand or barren andesiticflow material inserted wherever the geologist deems appropriate, but no less than one for every 40 samplesfocused on areas of higher metal values, which could lead to contamination); (2) standards are added every20th sample (MPR has purchased 12 different standards from Rocklabs Ltd.); and (3) duplicates are alsoanalyzed every 50 samples (each batch) by placing two sample tickets in the same sample bag and havingthe lab generate two pulps of the same sample for analysis. |
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| It is believed that core sampling is representative of mineralized intersections, with minor variations |
| due to irregularities in mineralization, and that the QA/QC programs established by MPR and the samplingprocess follow industry standards and support the estimation of mineral resource. |
| A review was made of available information derived from previous exploration work. This information |
| included geological and sampling reports, drill logs, as well as assay results. Verification consisted of ageneral review of geological characteristics of the main mineralized areas, shown by the MPR fieldchecking of geological maps in all areas and of sampling procedures by MPR as well as a review of all veinintersections and discussions of detailed sample handling, sampling and security procedures established byMPR. The original locations of samples reviewed were located, although most require re-painting. TetraTech verified several drill hole location monuments with a handheld global positioning system. |
| Tetra Tech has conducted sample verification to evaluate whether the samples selected by MPR for |
| metallurgical and hardness testing were geologically representative of the material in the mine plan. Thereview found that: samples were well selected with respect to various grades, alterations and host rock;there was no apparent metal domaining or zoning in the deposit; and that most of the samples fall within thebulk of the grade distributions and sampling of the higher-grade material has been accounted. |
| Mineral Resource Estimates — CLG, Esther and Amapola Deposits |
| All blocks in mineral resource estimates contained in the Los Gatos Technical Report have been |
| delineated by appropriately spaced drilling. Grade and tonnage have been estimated within a digital three-dimensional block model using the Kriging method. Mineral resources have been estimated for threeindividual deposit areas: the CLG, Esther and Amapola deposits. The mineral resource estimates containedin the Los Gatos Technical Report have an effective date of September 6, 2019 and have not been updatedsince that time. We believe that activity at the CLG subsequent to the effective date of the mineral resourceestimates would not result in a material change to the information contained in the Los Gatos TechnicalReport. The mineral resource estimates contained in the Los Gatos Technical Report are presented on anundiluted basis without adjustment for mining recovery. |
| For the CLG, a cut-off grade of 150 grams silver equivalent/tonne was estimated using generalized |
| parameters, including the following: $40/tonne for mining costs; $20/tonne for processing costs; $4/tonnefor general and administrative costs; 83% recovery at an assumed price of $18.00/oz silver; 92% recovery atan assumed price of $0.92/lb lead; and 77% recovery at an assumed price of $1.01/lb zinc. For the Estherdeposit, a cut-off grade of 100 grams silver equivalent/tonne was estimated using generalized parameters,including the following: $40/tonne for mining costs; $20/tonne for processing costs; $3/tonne for generaland administrative costs; 100% recovery at an assumed price of $22.30/oz silver; 95% recovery at anassumed price of $0.97/lb lead; and 88% recovery at an assumed price of $0.91/lb zinc. For the Amapoladeposit, a cut-off grade of 100 grams silver equivalent/tonne was estimated using generalized parameters,including the following: $40/tonne for mining costs; $20/tonne for processing costs; $3/tonne for generaland administrative costs; 100% recovery at an assumed price of $22.30/oz silver; 95% recovery at anassumed price of $0.97/lb lead; and 88% recovery at an assumed price of $0.91/lb zinc. |
| Projected revenues from the sale of silver, zinc and lead are based upon long-term consensus prices that |
| were the averages of long-term forecast prices that MPR obtained from various financial institutions as ofthe effective date of the respective mineral resource estimates. As of the effective date of the respectivemineral resource estimates, the long-term consensus prices reflected the best estimate of the sales price thatmay be realized in the future from the mineral resources. Gold and copper, being part of the epithermalsystem, are included in the Mineral Resource estimate as comparisons, however they have not beenconsidered for purposes of determining the Ag/Eq cut-off grade since copper in the final concentrates soldwould not receive any payment and gold revenue is estimated at only 2.78% of the payable metal. |
| The tonne and grade estimates in the block model are based on drill hole assay sample intervals. The |
| vein widths are constrained by three-dimensional solids and have not been diluted. |
| Sample intervals were composited to two meters, which is the mode sample length. Compositing was |
| initiated and terminated at the top and bottom of continuous selected vein samples, resulting compositeswere permitted to be one to two meters in length and intervals less than one meter were rejected. As part of |
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| the Kriging process, composite influence was additionally weighted by interval length to provide furthernormalization. Compositing greater than two meters was determined not to be appropriate because three-meter composites would cause samples to be split and four-meter composites are too large to represent thevein across drip in some areas. At the Amapola deposit, ordinary Kriging was used. A single Kriging passwas made on each of the four veins and their secondary nearest neighbor. An inferred pass was only madefor the Albita and Elizabeth veins. Similarly, at the Esther deposit, grade estimation was completed usingordinary Kriging. An initial Kriging pass was made on each of the three veins and followed by a secondarynearest inferred pass. |
| Density of each block was determined from measured density samples within the mineralized zones |
| and Kriged as a block attribute. |
| The table below summarizes the mineral resource estimates at the CLG and the Esther and Amapola |
| deposits as of December 31, 2020. |
| Los Gatos District Mineral Resource Estimates Inclusive of Mineral Reserves as of December 31, 2020 |
| | | Tonnes | Tonnes |
| | | (million; | (million; |
| | Category | 100% basis) | 51.5% basis) Ag (g/t) Au (g/t) Pb (%) Zn (%) Cu (%) |
| Cerro Los Gatos Mine | | Measured 5.8 | | | 3.0 | 324 0.39 2.9 5.8 0.11 | (1) |
| | Indicated 4.6 | | | 2.4 | 202 0.28 2.5 5.2 0.11 |
| | M&I | 10.4 | | 5.4 | 269 0.34 2.7 5.5 0.11 |
| | Inferred 3.7 | | | 1.9 | 107 0.28 2.8 4.0 0.14 |
| Esther Deposit | | Indicated 0.46 | | | 0.24 | 133 0.04 0.70 2.10 0.02 | | (2) |
| | Inferred 2.29 | | | 1.18 | 98 0.12 1.60 3.00 0.05 |
| Amapola Deposit | | Indicated 0.25 | | | 0.13 | 135 0.10 0.10 0.30 0.02 | (2) |
| | Inferred 3.44 | | | 1.77 | 140 0.10 0.20 0.30 0.03 |
| (1) | Based on a cut-off grade of 150 grams silver equivalent/tonne at assumed metal prices of $18.00/tozsilver, $0.92/lb lead and $1.01/lb zinc; gold was not considered in silver equivalent calculation.Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Reporthave different effective dates and are based on different dilution and recovery factors and cut-offgrades. The mineral resource estimates contained in the Los Gatos Technical Report have an effectivedate of September 6, 2019 and include mineral reserves. We believe that activity at the CLG subsequentto the effective date of the mineral resource estimates would not result in a material change to theinformation contained in the Los Gatos Technical Report. The mineral resource estimates contained inthe Los Gatos Technical Report are presented on an undiluted basis without adjustment formetallurgical recovery. The mineral reserve estimates contained in the Los Gatos Technical Reporthave an effective date of July 1, 2020 and exclude 655,746 tonnes of mineral reserves that have beenmined through June 30, 2020. Subsequent to July 1, 2020, 363,857 tonnes of material have been minedthrough December 31, 2020, which we believe would not result in a material change to the informationcontained in the Los Gatos Technical Report. |
| (2) | Based on a cut-off grade of 100 grams silver equivalent/tonne using metal prices of $22.30/toz silver,$0.97/lb lead, and $0.91/lb zinc. The mineral resource estimates for the Esther and Amapola depositshave an effective date of December 21, 2012. The mineral resource estimates contained in the LosGatos Technical Report are presented on an undiluted basis without adjustment for metallurgicalrecovery. |
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| The table below summarizes the mineral resource estimates exclusive of reserves at the CLG as of |
| December 31, 2020. |
| | CLG Mineral Resource Estimates Exclusive of Mineral Reserves as of December 31, 2020 |
| | | | Tonnes | Tonnes |
| | | | (million; | (million; |
| | | | 100% | 51.5% | AgEq | Ag | Au | Pb | Zn | AgEq toz | Ag toz | Au toz | Pb lbs | Zn lbs |
| | | Category | basis) | basis) | (g/t) | (g/t) | (g/t) | (%) | (%) | (millions) | (millions) | (thousands) | (millions) | (millions) |
| Cerro Los Gatos |
| Mine | | Measured | 1.3 | | 0.7 | 442 181 0.39 2.4 4.5 | | | 19 | | 8 | | 16 | | 71 | | 131 | |
| | | Indicated | 2.2 | | 1.1 | 368 139 0.23 2.1 4.2 | | | 26 | | 10 | | 17 | | 101 | | 205 | |
| | | M&I | 3.5 | | 1.8 | 395 154 0.29 2.2 4.3 | | | 45 | | 17 | | 33 | | 172 | | 337 | |
| | | Inferred | 3.7 | | 1.9 | 361 107 0.28 2.8 4.0 | | | 43 | | 13 | | 34 | | 231 | | 330 | |
| Resources based on a cut-off grade of 150 grams silver equivalent/tonne at assumed metal prices of |
| $18.00/toz silver, $0.92/lb lead and $1.01/lb zinc; gold was not considered in silver equivalent calculation.Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report havedifferent effective dates and are based on different dilution and recovery factors and cut-off grades. Themineral resource estimates contained in the Los Gatos Technical Report have an effective date ofSeptember 6, 2019. We believe that activity at the CLG subsequent to the effective date of the mineralresource estimates would not result in a material change to the information contained in the Los GatosTechnical Report. The mineral resource estimates contained in the Los Gatos Technical Report are presentedon an undiluted basis without adjustment for metallurgical recovery. Reserves are based on a $75 NSR cutoff value. NSR is defined as revenue per tonne mined less the sum of concentrate refining, treatment andtransportation costs per tonne mined. The mineral reserve estimates contained in the Los Gatos TechnicalReport have an effective date of July 1, 2020 and exclude 655,746 tonnes of mineral reserves that have beenmined through June 30, 2020. Subsequent to July 1, 2020, 363,857 tonnes of material have been minedthrough December 31, 2020, which we believe would not result in a material change to the informationcontained in the Los Gatos Technical Report. The mineral reserve estimates for the Cerro Los Gatos Minereflect diluted grades with adjustment for metallurgical recovery. |
| The material assumptions for the mineral resource estimates at the CLG include (i) resource estimation |
| completed by Tetra Tech in MicroMine mining software using drill hole data provided by MPR, (ii) usage ofhistograms and probability plots to determine where high-grade distribution tails became unsupported ordeviated from lognormal and application of upper limits for grade capping, (iii) compositing sampleintervals to two meters to match the mode sample length, (iv) using geological modeling and vein modeling,(v) using specific gravity measurements and (vi) no dilution being accounted for in the mineral resourceestimates. See Section 14.1 of the Los Gatos Technical Report. The material assumptions for the mineralresource estimates at the Amapola deposit include (i) resource estimation completed by Tetra Tech inMicroMine software technology using drill hole data provided by MPR, (ii) using ordinary Kriging, with asingle Kriging pass being made on the four veins of the Amapola deposit and a secondary nearest neighborinferred pass made only for two of the veins and (iii) using specific gravity measurements to estimate veindensity. See Section 14.2 of the Los Gatos Technical Report. The material assumptions for the mineralresource estimates at the Esther deposit include (i) resource estimation completed by Tetra Tech inMicroMine software technology using drill hole data provided by MPR, (ii) using ordinary Kriging, with asingle Kriging pass made on each of the three veins of the Esther deposit followed by a secondary nearestneighbor inferred pass and (iii) using specific gravity measurements to estimate vein density. SeeSection 14.3 of the Los Gatos Technical Report. |
| The CLG mineral resource estimates inclusive and exclusive of mineral reserves as of December 31, |
| 2019 are substantially similar as those set forth in the tables above as of December 31, 2020. OnSeptember 1, 2019, the LGJV commenced commercial production. The mineral resource estimatescontained in the Los Gatos Technical Report have an effective date of September 6, 2019 and have not beenupdated since that time. We believe that activity at the CLG subsequent to the effective date of the mineralresource estimates would not result in a material change to the information contained in the Los GatosTechnical Report. The mineral reserve estimates contained in the Los Gatos Technical Report have aneffective date of July 1, 2020 and exclude 655,746 tonnes of mineral reserves that have been mined throughJune 30, 2020. Subsequent |
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| to July 1, 2020, 363,857 tonnes of material have been mined through December 31, 2020, which we believewould not result in a material change to the information contained in the Los Gatos Technical Report. |
| We are unaware of any title, taxations, socio-economic, marketing, political or other relevant factors |
| that could materially affect this mineral resources estimate. |
| Mineral Reserve Estimates — CLG |
| The mineral reserve estimates contained in the Los Gatos Technical Report include the portion of the |
| measured and indicated resource that can be mined economically. Economic criteria and mining constraints(based on the selected mining methods) are applied to the resource blocks to define mineable blocks.Mineral reserves are determined after applying dilution and recovery factors to these mineable blocks. |
| Mineral reserve estimates are calculated from the mine plan created from the September 2019 resource |
| update. The mineral reserve estimates contained in the Los Gatos Technical Report have an effective date ofJuly 1, 2020 and exclude 655,746 tonnes of mineral reserves that have been mined through June 30, 2020.Subsequent to July 1, 2020, 363,857 tonnes of material have been mined through December 31, 2020, whichwe believe would not result in a material change to the information contained in the Los Gatos TechnicalReport. |
| The table below shows the reconciliation of mined tonnage and grades to the modeled reserve depletion |
| through December 31, 2020, with differences resulting primarily from different sequencing of stopes andvariances in ore tonnes: |
| | Tonnes | Au (g/t) | Ag (g/t) | Pb (%) | Zn (%) |
| Production Statistics | 1,019,603 | 0.42 240.27 | | 2.71 | 3.63 |
| Modelled Reserve Depletion | 1,065,883 | 0.47 244.59 | | 1.85 | 3.27 |
| A cut-off grade of $75/tonne NSR value was used to calculate reserves. Projected revenues from the |
| sale of silver, gold, zinc and lead are based upon long-term consensus prices of $18.99/oz silver, $1,472/ozgold, $0.87/lb lead and $1.09/lb zinc. These prices were the averages of long-term forecast prices that MPRobtained from nine financial institutions. As of the effective date of the mineral reserve estimates, the long-term consensus prices reflected the best estimate of the sales price that may be realized in the future fromthe mineral reserves. See Section 21 of the Los Gatos Technical Report. |
| We are unaware of any title, taxation, socio-economic, marketing, political or other relevant factors that |
| could materially affect this mineral reserve estimate. |
| The table below summarizes the mineral reserve estimates at the CLG as of December 31, 2020, which |
| includes dilution and recovery factors. |
| | | | | | | CLG Mineral Reserve Estimates as of December 31, 2020 |
| | | | | | | | | Tonnes | Tonnes |
| | | | | | | | | (millions; | (millions; |
| Zone | | | | | | | Category | 100% basis) | 51.5% basis) | Ag (g/t) | Au (g/t) | Pb (%) | Zn (%) |
| Northwest Zone | | | | | | | Proven | 2.6 | | 1.3 | | 359 | 0.43 | 3.09 | 5.88 |
| | | | | | | | Probable | 0.5 | | 0.3 | | 333 | 0.34 | 2.86 | 5.88 |
| Central Zone | | | | | | | Proven | 3.8 | | 1.9 | | 314 | 0.31 | 2.55 | 5.32 |
| | | | | | | | Probable | 1.8 | | 0.9 | | 299 | 0.44 | 2.32 | 5.82 |
| Southeast Zone | | | | | | | Proven | 0.0 | | 0.0 | | 148 | 0.16 | 3.69 | 7.23 |
| | | | | | | | Probable | 0.6 | | 0.3 | | 148 | 0.16 | 3.69 | 7.23 |
| Southeast Zone Block 2 | | | | | | | Probable | 0.4 | | 0.2 | | 118 | 0.17 | 3.11 | 4.16 |
| Total (Proven) | | | | | | | | 6.4 | | 3.3 | | 332 | 0.36 | 2.77 | 5.55 |
| Total (Probable) | | | | | | | | 3.3 | | 1.7 | | 254 | 0.34 | 2.74 | 5.86 |
| Total (Proven & Probable) | | | | | | | | 9.6 | | 5.0 | | 306 | 0.35 | 2.76 | 5.65 |
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| Reserves based on a $75 NSR cut-off value. NSR is defined as revenue per tonne mined less the sum of |
| concentrate refining, treatment and transportation costs per tonne mined. The mineral reserve estimates forthe CLG reflect diluted grades with adjustment for metallurgical recovery. The mineral reserve estimatescontained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746tonnes of mineral reserves that have been mined through June 30, 2020. Subsequent to July 1, 2020,363,857 tonnes of material have been mined through December 31, 2020, which we believe would not resultin a material change to the information contained in the Los Gatos Technical Report. |
| Proven reserves exceed measured resources as a result of the different dilution and recovery factors and |
| cut-off grades being used for mineral reserve estimates compared to mineral resource estimates. Mineralreserve estimates have an effective date of July 1, 2020, account for dilution and recovery factors and arebased on a cut-off grade of $75/tonne NSR. In contrast, mineral resource estimates for the CLG have aneffective date of September 6, 2019, are presented on an undiluted basis without adjustment for miningrecovery and are based on a cut-off grade of 150 grams silver equivalent/tonne. |
| The material assumptions for the mineral reserve estimates at the CLG include (i) assigning NSR |
| values to the block model, (ii) using a dilution strategy developed by a geomechanical consultant,(iii) application of mining recovery factors, including stope recovery and drift-and-fill recovery and(iv) application of dilution and recovery factors to stope tonnage and using Deswik scheduling software todevelop a LOM development and production schedule. See Section 15 of the Los Gatos Technical Report. |
| The CLG mineral reserve estimates as of December 31, 2019 are substantially similar as those set forth |
| in the tables above as of December 31, 2020. On September 1, 2019, the LGJV commenced commercialproduction. The mineral reserve estimates contained in the Los Gatos Technical Report have an effectivedate of July 1, 2020 and exclude 655,746 tonnes of mineral reserves that have been mined through June 30,2020. Subsequent to July 1, 2020, 363,857 tonnes of material have been mined through December 31, 2020,which we believe would not result in a material change to the information contained in the Los GatosTechnical Report. |
| Mineral Processing and Metallurgical Testing |
| The CLG is a silver-lead-zinc deposit with relatively complex mineralogy. Upon review of the |
| metallurgical testing data, it was clear that the CLG mineralization responded well to a conventionalsequential silver-lead-zinc flotation processing. Zinc rougher flotation tailings and zinc first cleanerscavenger tailings are combined to become the final tailings. Tailings thickener underflow (100%) ispumped to a cyanide destruction facility. Currently, all tailings are disposed of in the tailings storagefacility. Once the backfill plant is in operation, and after detox, 40% of final tailings will be pumped to thebackfill plant and the remaining 60% will be pumped to the tailings storage facility. Operational results haveindicated that additional removal of fluorine will be required. Additional floatation cells have been added tothe lead and zinc circuits, with a goal of reducing the fluorine in the final concentrates. |
| The expected grades and recoveries for lead, zinc, and silver to individual flotation concentrates were |
| further investigated by a pilot plant program at SGS Lakefield using a sample composed of a bulk sampleaccessed by an underground decline into the orebody. The results of that program are being finalized butpreliminary indications generally support the study grade and recovery estimates provided herein. |
| Positive lead and silver flotation results were achieved from the SGS Vancouver Metallurgical Lab. The |
| final lead cleaner concentrates of the locked cycle tests averaged 60.9% lead at 5,404 g/t silver at averagerecoveries of 89% lead and 68.7% silver. The zinc cleaner concentrates averaged 54.2% at an averagerecovery of 66.0% due to the high willemite content. |
| Mining Operations |
| The underground mine design supports a steady-state production rate of 2,500 tpd of ore. As of the |
| effective date of the Los Gatos Technical Report, over the life of the mine, the mine is projected to produce81 million ounces of silver, 69 thousand ounces of gold, 878 million pounds of zinc, and 499 million poundsof lead in concentrate. The sequence of mining began with the Central Zone, which had already beenaccessed via the existing decline developed down to the 1400 Level. The bulk of the Central Zone will |
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| be mined using the drift-and-fill method, as the dips, widths and thicknesses of the vein structures areamenable to this mining method. |
| The Northwest Zone is being mined concurrently with the Central Zone via longhole stoping methods |
| with sublevels developed at 20 meter vertical intervals. Portions of the Northwest Zone that are thicker thannine meters (footwall to hanging wall) will be mined using transverse longhole mining. Areas that are lessthan nine meters in width will be mined using longitudinal longhole mining. In the Central Zone, operationsconfirmed that backfill deficiencies caused unstable conditions on the hanging-wall zone, as it wasexperienced in stope 625, where the stability problems created blocks causing the support to yield. Thepredicted conditions in this zone have been accurate. In the Northwest Zone, the operating geotechnicalconditions have been better than the anticipated conditions. This has allowed the excavation of biggerdimensions in the stope length (more than 12 meters), and the planned activities have considered excavatingmore in the vertical dimension of the stope (25 meters height). Some of the stability problems found in thiszone are mainly due to drilling deficiencies, which have reached areas near the hanging-wall fault zone. The3D modeling of the Southeast Zone did not identify any issues except for potential hanging wall failure. |
| Modern trackless mobile equipment is being employed for most mining activities. Load-Haul-Dump |
| (“LHD”) trucks and dedicated underground trucks are used for ore/waste loading and transport from theunderground workings through an internal ramp system and portal that connects all levels to surface.Ongoing waste development to sustain the 2,500 tpd production rate averages approximately 211meters/month during the production period. |
| Based on the deposit geometry and anticipated geomechanical conditions, underground mining of the |
| CLG resource will incorporate both longhole and drift-and-fill mining methods. The existing explorationdecline from surface will be extended to provide primary access and delivery of services. The ramp will alsobe used for haulage of ore and waste from the underground operations. |
| Processing and Recovery Operations |
| The processing facility is designed to treat 2,500 tpd of silver, lead and zinc material at an operational |
| availability of 92%. The processing flow sheet for the project is a standard flow sheet commonly used in themining industry, including conventional flotation recovery methods typical for lead-zinc material. Theproduction plant has been constructed and adjustments will continue to optimize performance. Additionalflotation cells have been installed to remove fluorine from the concentrates. |
| Run-of-mine (“ROM”) material is crushed in a primary jaw crusher located near the underground mine |
| portal. It is then conveyed to the processing facilities where it is ground to 80% finer than 45 microns in asemi-autogenous grinding and ball milling circuit. The ore is further processed in a flotation circuit,consisting of lead flotation followed by zinc flotation. The majority of the silver will be recovered in thelead flotation circuit and some silver will also be collected in the zinc flotation circuit. Lead sulfide isrecovered in a rougher flotation bank, producing a concentrate that is then upgraded to smelterspecifications in three stages of cleaning. Tails from the lead flotation section is then conditioned for zincsulfide flotation. The process scheme for zinc flotation also includes a rougher bank and five stages ofcleaning to produce smelter-grade zinc concentrates. For both lead and zinc sections, the rougher flotationconcentrates are reground to 80% finer than 25 microns prior to cleaner flotation to liberate the sulfides forfurther upgrading. An additional deep-froth flotation cell has been added to the zinc circuit, and oneadditional deep-froth flotation cell has been added to the zinc and lead circuits during 2020, to remove morefluorine, a deleterious mineral for sales. Both final lead and zinc concentrates are thickened, filtered andstored in concentrate storage facilities prior to being loaded in trucks for shipment. |
| Infrastructure, Permitting and Compliance Activities |
| In addition to the recently constructed CLG processing plant and other facilities, we have a field camp |
| located in nearby San José del Sitio, a community of approximately 264 persons, with electrical and waterservices, an elementary school and basic health services. Water resources in the region are mostly related tothe Conchos River Basin, which includes the San Pedro, San Francisco de Borja and Satevó River Sub-Basins. Locally, there are significant amounts of water, with shallow groundwater recorded from mostexploration drilling conducted by us. |
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| Underground development of the CLG commenced in 2015 and surface infrastructure development |
| commenced in 2017. All significant surface infrastructure was completed in mid-2019 and the CLGcommenced production of lead and zinc concentrates on September 1, 2019. The CLG processing plant iscurrently designed for 2,500 tpd capacity and the grinding circuit was engineered for expansion to 3,000 tpdin the future. |
| The CLG is located in the Municipality of Satevó, Chihuahua, Mexico, approximately 160 kilometers |
| southwest of the state capital of Chihuahua City and approximately 8 kilometers west of San José del Sitio,Chihuahua. The access road from Chihuahua, Mexico is newly paved. A portion of the road from San Josédel Sitio was rerouted to the mine site to minimize interference with the stream that runs near the mineproperty. |
| Construction of required infrastructure has been completed, including administration offices, mine dry, |
| fuel storage, mine maintenance shop, jaw crushing station, dome-covered crushed ore stockpile, processplant (including grinding circuit, flotation circuit, concentrate and tailing thickeners, concentrate loadoutand tailings detoxification), tailing storage facility, electrical substation, 66 kilometers of power lineconnecting high voltage to the grid substation at San Francisco de Borja, assay lab, mill maintenance,dewatering wells and water cooling and distribution system, and residential camps and associatedinfrastructure. |
| The camps consist of structural steel pre-engineered buildings capable of housing over 350 people. The |
| camps include kitchen and cafeteria, laundry, infirmary, and other buildings required to maintain thisfacility. Emergency power is provided for in the camp to deliver 100% backup in the event of a poweroutage. |
| The entire project is served by satellite-dish based internet and telephone communications. |
| Power to the site is supplied via a 115 kV utility transmission line. This originates from the San |
| Francisco de Borja substation in Satevó (Chihuahua), where a 115 kV connection has recently beeninstalled. |
| All raw water to meet potable and non-potable water demand is supplied by groundwater pumped from |
| dewatering wells. The well water is cooled from 50°C to 40°C prior to use. Sewage water treatment systemswere included to handle waste as required on the project. |
| Storage and management of landfill disposal is housed in a single building, separated into two zones |
| — one for non-hazardous waste and a second zone for hazardous waste. The hazardous waste is to becollected and disposal by a certified and authorized company per Mexican regulations. |
| In 2008, we negotiated surface access rights with local ranch owners and obtained environmental |
| permits for drilling. In April 2012, we entered into a mine and land access agreement with the localcommunity, the Ejido La Esperanza (the “Ejido”), which provides annual land access with a renewal fee of$11,200. We also maintain an easement contract for 30 years with the Ejido for the access road to the mine. |
| On December 12, 2016, MPR submitted an environmental impact statement to the Mexican Secretary |
| of Environment and Natural Resources, which regulates the environmental aspects of mining projects andissued the permits once such statement is approved. The statement was approved in 2017. We also receivedapproval for the permits for land use, authorization and approval for initiation of construction of miningworkings and infrastructure and official alignment and number from the Municipality of Satevó, Chihuahuain June and July of 2018. In May 2019, we received approval for Environmental Unique License for theproduction of 2,500 tpd. |
| On July 17, 2017, the Mexican Secretary of Environment and Natural Resources approved a mining |
| exploitation project in Satevó, Chihuahua to develop work and activities (site preparation, construction,operation and others) needed to mine and explore the area. The authorized permit period is for 24 yearsending July 17, 2041, with the possibility to extend for a similar period. Additionally, on September 4,2017, we received the permitting to develop, construct and operate a project named Línea Eléctrica 115 KVLos Gatos, which consists of opening an 18-meter wide corridor over 58.0 kilometers. This project affectsan area of 105 hectares to support the power lines in the municipalities of San Francisco de Borja and SanJavier Satevó, Chihuahua. The authorized permit period is until September 4, 2037. We also received therelevant change of land use permitting to remove forest vegetation and fertile soil in an area of 390.6972hectares to |
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| prepare the site and construct the infrastructure required for the mining exploitation of the Los Gatos projectwhich expires November 1, 2020, with the option to extend. |
| We are committed to safety at the CLG. The CLG is built to higher environmental standards than |
| required by Mexican law, with a fully-lined tailings impoundment facility and enclosure of the conveyorsand ore storage dome. We also use state-of-the-art rescue capsules to hoist personnel to surface. Ourcumulative injury frequency rate at the CLG has consistently been below the annual U.S. MSHA Lost TimeInjury Frequency Rate. |
| Capital and Operating Costs |
| All costs and economic results are presented in U.S. dollars. Quantities and values are presented using |
| standard metric units unless otherwise specified. No escalation has been applied to capital or operatingcosts. Financing costs have not been included in the analysis. Capital and operating cost estimates have anaccuracy level of ±15%, and, given that the mine is currently in production, capital and operating costestimates have a contingency of 0%. See Section 21.3 and Section 21.4 of the Los Gatos Technical Report. |
| The economic analysis contained in the Los Gatos Technical Report is presented on an unlevered, post- |
| tax, present value basis and has an effective date of July 1, 2020. For a discussion of the mineral resourceestimates and mineral reserve estimates contained in the Los Gatos Technical Report, see “— The Los GatosDistrict — Mineral Resource Estimates — CLG, Esther and Amapola Deposits” and “— The Los GatosDistrict — Mineral Reserve Estimates — CLG.” Technical economic tables and figures presented in thisReport require subsequent calculations to derive subtotals, totals, and weighted averages. Such calculationsinherently involve a degree of rounding, which are not considered to be material. |
| Per the Los Gatos Technical Report, LOM sustaining capital cost requirements are estimated to be |
| $267,000 thousand. Initial capital of $315,600 thousand was required to commence operations andconstruction was completed on time and on budget. Capital cost estimates used MPR-provided databaseinformation for mine and surface infrastructure, process plant and infrastructure, tailings storage facility,waste rock storage facility, water management, environmental, reclamation and owner’s cost. |
| | | Sustaining |
| Description | Units | Capital |
| Direct Costs | | | |
| | | | | Mine & Surface Infrastructure | $000s 266,398 |
| | | | | Direct Costs | $000s 266,398 |
| Indirect Costs | | | |
| | | | | Mine & Surface Infrastructure | $000s | 932 |
| | | | | Indirect Costs | $000s | 932 |
| | | | | Total Sustaining Capital | $000s 267,330 |
| LOM operating costs are based on current operations and are summarized in the table below. The mine |
| operating cost estimate includes all sill development, stope production, and drift-and-fill production andassociated indirect costs. Operating costs include all labor, material, mobile and fixed equipment operating,and power consumption costs. |
| | Unit Cost | Unit Cost |
| Description | | ($/meter) | ($/t-milled) |
| Mine, Surface and G&A | 26.47 83.58 |
| | | | | LOM Operating | — 83.58 |
| Economic Analysis |
| The economic analysis contained in the Los Gatos Technical Report is presented on an unlevered, post- |
| tax, present value basis and has an effective date of July 1, 2020. For a discussion of the mineral resourceestimates and mineral reserve estimates contained in the Los Gatos Technical Report, see “— The Los Gatos |
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| District — Mineral Resource Estimates — Cerro Los Gatos Mine, Esther and Amapola Deposits” and“— The Los Gatos District — Mineral Reserve Estimates — Cerro Los Gatos Mine.” For a discussion of theassumed capital and operating costs in the Los Gatos Technical Report, see “— The Los Gatos District — Capital and Operating Costs.” |
| The results of the economic analysis are summarized below: |
| | Economic Analysis Results |
| Mine Life | | years 11 |
| Ore Tonnage | | kt 9,618 |
| | | | | | Avg. Annual |
| | | Average Grade | | | Life-of-Mine Payable Production | PayableProduction |
| | | Processed | | | | | | (51.5% basis) | | | (100% basis) (51.5% basis) (100% basis) |
| Production Statistics | | | | | | | | | |
| Silver | 305 g/t | | 72.0 Moz 37.1 Moz 6.5 Moz | | 3.4 Moz |
| Zinc | | 5.7% | | 679 Mlb 350 Mlb 62 Mlb | | | | 32 Mlb |
| Lead | | 2.8% | | 442 Mlb 228 Mlb 40 Mlb | | | | 21 Mlb |
| Gold | 0.35 g/t | | 45.5 Koz 23.4 Koz 4.1 Koz | | 2.1 Koz |
| Silver Equivalent | 642 g/t | | 134.7 Moz 69.4 Moz 12.2 Moz | | 6.3 Moz |
| Life-of-Mine Cost Metrics | | | | | | | | | |
| Total Sustaining Capital Costs | $ millions $ 267 | | | | | | | |
| Operating Costs | $/t-milled $83.58 | | | | | | | |
| TC / RC, Penalties and Freight |
| Costs | | $/mt | | $51.90 | | | | | |
| Royalties | | $/mt | | $ 1.50 | | | | | |
| Life-of-Mine By-Product Costs | | | | | | | | | |
| AISC | $/oz Ag | | $ 5.47 | | | | | |
| Life-of-Mine Co-Product Costs | | | | | | | | | |
| AISC | $/oz AgEq $11.77 | | | | | | | |
| Project Economics | | | | | | | | | |
| NPV (post-tax; 5.0%) | $ millions $ 653 | | | | | | | |
| Silver equivalent and by-product credits calculated using LOM average prices of $18.99/oz silver, |
| $1,472/oz gold, $0.87/lb lead and $1.09/lb zinc. The economic analysis contained in the Los GatosTechnical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of mineral reserves thathave been mined through June 30, 2020. Subsequent to July 1, 2020, 363,857 tonnes of material have beenmined through December 31, 2020, which we believe would not result in a material change to theinformation contained in the Los Gatos Technical Report. |
| Exploration, Development, and Production |
| Concentrate production is currently achieving quality specifications and expected grades. The CLG is |
| expected to produce, on average, 12.2 million payable silver equivalent ounces annually through theexisting mine life (or 6.3 million payable silver equivalent ounces annually on a 51.5% basis), with anattractive, low-cost AISC profile. In addition to the goal of achieving the plant’s 2,500 tpd design capacity,we intend to complete a feasibility study, prepared in accordance with the SEC Mining Modernization Rulesand NI 43‑ 101, to expand the CLG production rate to 3,000 tpd. If feasible, we expect the LGJV tocomplete the expansion within the next three to four years. |
| We believe there is widespread mineralization potential beyond the CLG, the Esther and Amapola |
| deposits and the 11 other mineralized zones, as more than 85% of the land position has yet to be drilled. |
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| | Mineralized Zones Grade Intercepts |
| Mineralized Zones | | | Length (m) Ag (g/t) Pb (%) Zn (%) |
| Boca de Leon | | | | 2.2 | 90.6 5.0 0.8 |
| Cieneguita | | | | 1.3 | 62.4 5.4 0.9 |
| El Lince | | | | 4.0 | 62.2 0.0 0.1 |
| El Rodeo | | | | 0.8 | 61.5 3.4 4.0 |
| La Paula | | | | 4.0 | 180.0 0.1 0.1 |
| Los Torunos | | | | 1.8 | 34.2 2.6 0.9 |
| Mezcalera | | | | 2.0 | 59.4 0.1 0.1 |
| San Agustin | | | | 1.3 | 148.0 1.2 2.3 |
| San Luis | | | | 2.0 | 271.0 0.3 0.1 |
| The table above does not include Ocelote and Wall-E/Ava zones, as they do not have sufficient drilling. |
| Subject to financing, our objectives at the Los Gatos District are to, among other things: |
| • | perform additional in-fill and expansion drilling to further define and expand mineralization at theEsther and Amapola deposits; |
| • | study the feasibility of expanding production at the CLG from 2,500 tpd to 3,000 tpd; |
| • | conduct social, environmental and technical work on the property with the objective of completing ascoping study on the Esther and Amapola deposits; |
| • | expand the exploration drilling program on the Esther deposit, the Amapola deposit and the other 11mineralized zones within the Los Gatos District; and |
| • | continue to expand the LGJV’s interest in prospective mineral and surface rights. |
| Internal Controls |
| Quality assurance at the CLG and the Los Gatos District involves the use of standard practice |
| procedures for sample collection and includes oversight by experienced geological staff during datacollection. Certain quality control measures for sample analysis include in-stream sample submittal ofstandard reference material, blank material and field duplicate sampling. For data verification, staffmembers observed drill hole locations and orientations, inspected drill cores and compared to logs andanalytical results, observed core intake, visited outcrops and discussed with on-site geologists, includingreviewing working maps and cross-sections. Inherent risks in quality control include potential samplecontamination, among others. |
| Item 3. Legal Proceedings |
| We are, from time to time, involved in legal proceedings of a nature considered normal to our business. |
| We believe that none of the litigation in which we are currently involved, or have been involved since thebeginning of our most recently completed financial year, individually or in the aggregate, is material to ourconsolidated financial condition, cash flows or results of operations. See Note 10 — Commitments,Contingencies and Guarantees in our consolidated financial statements included in “Item 8. FinancialStatements and Supplementary Data” for additional information regarding our assessment of contingenciesrelated to legal matters. |
| Item 4. Mine Safety Disclosures |
| Information pertaining to mine safety matters or other regulatory matters is reported in accordance with |
| Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 ofRegulation S-K in Exhibit 95.1 attached to this Form 10-K. |
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| | PART II |
| Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities |
| Market Information |
| The Company’s common stock is listed on the New York Stock Exchange and the Toronto Stock |
| Exchange under the ticker symbol “GATO” and began trading on October 28, 2020. |
| Holders |
| On March 23, 2021, there were 59,409,052 outstanding shares of the Company’s common stock which |
| were held by approximately 48 stockholders of record. The actual number of holders of the Company’scommon stock is greater than the number of record holders, and includes stockholders who are beneficialowners, but whose shares are held in street name by brokers or other nominees. The number of holders ofrecord present here also do not include stockholders whose shares may be held in trust by other entities. |
| Securities Authorized for Issuance Under Equity Compensation Plans |
| The Company has an equity compensation plan under which options and shares of the Company’s |
| common stock are authorized for grant or issuance as compensation to eligible employees, consultants, andmembers of the Board of Directors. The Company’s stockholders have approved these plans. Please refer toNote 8 — Stockholders’ Equity in the Company’s consolidated financial statements included in “Item 8.Financial Statements and Supplementary Data” for further information about the material terms of theCompany’s equity compensation plans. The following table is a summary of the shares of common stockauthorized for issuance under equity compensation plans as of December 31, 2020: |
| | | | (a) | | | (b) | | (c) |
| | | | | | Number of securities |
| | | | | | remaining available for future |
| | Number of securities to be issued upon exercise | | Weighted-average | | issuance under equity |
| | | | exercise price of | | compensation plans |
| | of outstanding options, | | outstanding options, | | (excluding securities |
| Plan Category | | | | warrants and rights | | | warrants and rights | | reflected in column (a)) |
| Equity compensation plans not approved |
| by security holders: | | | | | — | | | | — | | | — | |
| Equity compensation plans approved by |
| security holders: | | | | | | | | | | | |
| Equity Incentive Compensation |
| Plan | | | | | | | | | | | | (1) |
| Deferred stock units | | | | 182,714 | | | N/A | | | | | (2) |
| Stock options | | | | 5,455,606 | | | $12.48 | | | | | (3) |
| Total for Equity Incentive Compensation |
| Plan | | | | 5,638,320 | | | $ | — | | 9,361,680 | |
| (1) | In October 2020, the Board of Directors approved the Amended and Restated Long-Term IncentivePlan to authorize the issuance of stock options, stock appreciation rights, stock awards, deferredstock units, cash awards and performance awards to NEOs, other employees, consultants and non-employee directors.DSUs do not have exercise prices associated with them, but rather a fair value that equaled theCompany’s common stock fair value on grant date. The weighted-average per unit fair value for theoutstanding DSUs is $9.43.The Company’s stock options have a contractual term of 10 years and entitle the holder to purchase oneshare of the Company’s common stock. |
| (2) |
| (3) |
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| Dividends |
| The Company has not declared any dividends since incorporation and does not anticipate that it will do |
| so in the foreseeable future. The present policy of the Company is to retain earnings for use in its operationsand expansion of its business. Payment of any dividends will depend upon the Company’s future earnings, ifany, the Company’s financial condition, and other factors as deemed relevant by the Company’s Board ofDirectors. |
| Pursuant to the priority distribution agreement, the LGJV is required to deposit all dividends or |
| distributions, other than management fees and partner expense reimbursements, into an escrow account untilan aggregate amount equal to $20 million has been deposited into such account for the benefit of Dowa as apriority dividend. Following the payment of $20 million to Dowa, dividends from LGJV will be paid inaccordance with the ownership percentage of the LGJV. |
| Unregistered Sales of Equity Securities |
| All unregistered sales of equity securities during the year ended December 31, 2020 were reported in |
| the Company’s Current Report on Form 8-K filed with the SEC on October 30, 2020. |
| 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 materialchange in the planned use of proceeds from the IPO as described in the Company’s final prospectus, filedwith the SEC on October 29, 2020 pursuant to Rule 424(b) under the Securities Act. |
| Purchase of Equity Securities by the Issuer and Affiliated Purchasers |
| During the quarter ended December 31, 2020, there were no purchases made by or on behalf of the |
| Company or any affiliated purchaser of the Company’s common stock. |
| Item 6. [Reserved] |
| Not applicable. |
| Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| The following discussion and analysis of our financial condition and results of operations should be |
| read in conjunction with our consolidated financial statements and related notes included in “Item 8.Financial Statements and Supplementary Data” and the other information included elsewhere in thisReport. |
| Overview |
| We are a U.S.-based precious metals production, development and exploration company with the |
| objective of becoming a premier silver producer. We are currently focused on the production and continueddevelopment of the CLG and the further exploration and development of the Los Gatos District: |
| • | The CLG, located within the Los Gatos District, Chihuahua, Mexico, consists of a 2,500 tpdpolymetallic mine and processing facility that commenced concentrate sales on September 1, 2019. For the year ended December 31, 2020, the CLG mined 652,739 tonnes and processed 667,422tonnes at average grades of 229 g/t silver, 0.42 g/t gold, 2.27% lead and 3.64% zinc, withmetallurgical recovery of 84.1% silver, 61.9% gold, 86.6% lead and 72.8% zinc. A total of 21,176tonnes of lead concentrate were produced at average grades of 5,295 g/t silver, 7.3 g/t gold, 58.9%lead and 10.1% zinc, with metallurgical recovery of 72.7% silver, 55.4% gold, 82.3% lead and 8.8%zinc. A total of 27,879 tonnes of zinc concentrate were produced at average grades of 619 g/t silver,0.66 g/t gold, 2.4% lead and 55.6% zinc, with metallurgical recovery of 11.3% silver, 6.6% gold,4.3% lead and 63.9% zinc. For the year ended December 31, 2019, the CLG mined 357,342 tonnesand processed 269,853 tonnes at average grades of 229 g/t silver, 0.52 g/t gold, 1.97% lead and3.03% zinc, with metallurgical |
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| recovery of 82.1% silver, 63.5% gold, 83.4% lead and 72.3% zinc. A total of 7,188 tonnes of leadconcentrate were produced at average grades of 5,774 g/t silver, 10.9 g/t gold, 56.3% lead and 12.6%zinc, with metallurgical recovery of 67.3% silver, 55.2% gold, 76.0% lead and 11.1% zinc. A total of9,320 tonnes of zinc concentrate were produced at average grades of 978 g/t silver, 1.26 g/t gold,4.2% lead and 53.7% zinc, with metallurgical recovery of 14.8% silver, 8.3% gold, 7.4% lead and61.2% zinc. |
| | The Los Gatos Technical Report estimates that the deposit contains approximately 9.6 million dilutedtonnes of proven and probable mineral reserves (or approximately 5.0 million diluted tonnes ofproven and probable mineral reserves on a 51.5% basis), with approximately 6.4 million dilutedtonnes of proven mineral reserves (or approximately 3.3 million diluted tonnes of proven mineralreserves on a 51.5% basis) and approximately 3.3 million diluted tonnes of probable mineral reserves(or approximately 1.7 million diluted tonnes of probable mineral reserves on a 51.5% basis). Averageproven and probable mineral reserve grades are 306 g/t silver, 0.35 g/t gold, 2.76% lead and 5.65%zinc. The mineral reserve estimates contained in the Los Gatos Technical Report have an effectivedate of July 1, 2020 and exclude 655,746 tonnes of mineral reserves that have been mined throughJune 30, 2020. Subsequent to July 1, 2020, 363,857 tonnes of material have been mined throughDecember 31, 2020, which we believe would not result in a material change to the informationcontained in the Los Gatos Technical Report.The Los Gatos District, located in Chihuahua, Mexico, is located approximately 120 kilometerssouth of Chihuahua City and is comprised of a 103,087-hectare land position, constituting a newmining district. The Los Gatos District consists of 14 mineralized zones, which include threeidentified silver-lead-zinc deposits that contain mineral resources — the CLG, the Esther deposit andthe Amapola deposit — as well as 11 additional high-priority targets defined by high-grade drillintersections and over 150 kilometers of outcropping quartz and calcite veins. The area ischaracterized by a predominant silver-lead-zinc epithermal mineralization. On September 1, 2020,the LGJV commenced concentrate sales at the CLG. A core component of the LGJV’s business planis to explore the highly prospective, underexplored Los Gatos District with the objective ofidentifying additional mineral deposits that can be mined and processed, possibly utilizing the CLGplant infrastructure. |
| • |
| 2020 Key Highlights |
| • | Rapid recommissioning of the CLG following Mexico’s mandated COVID-19 project suspension; |
| • | Strong operational and financial results from the CLG following a 45-day temporary suspension. TheCLG was recommissioned in late May 2020 with an optimized plan averaging a production rate of2,324 tpd in December 2020; |
| • | Record production from the CLG — 652,739 ore tonnes were mined in 2020; |
| • | Record silver, gold, zinc and lead metal recoveries at the CLG processing plant by the end of 2020 — silver, gold, zinc and lead recovery exceeded plan at 86.2%, 62.7%, 73.3% and 87.1%respectively, during the fourth quarter; |
| • | Commencement of a 27,000-meter exploration program at CLG; and |
| • | Successful completion of an IPO on the NYSE and TSX of 24,644,500 shares, raising gross proceedsof $172,500 thousand in the fourth quarter of 2020. |
| Recent Developments |
| Initial Public Offering |
| On October 27, 2020, our Registration Statement on Form S-1 relating to its initial public offering was |
| declared effective by the SEC. Our common stock began trading on the New York Stock Exchange and theToronto Stock Exchange on October 28, 2020. On October 30, 2020, we completed our initial publicoffering of 21,430,000 shares of common stock at a public offering price of $7.00 per share, resulting in netproceeds of $134,800 thousand, after deducting underwriting discounts and commissions and expensespayable by us. On November 10, 2020, we issued and sold an additional 3,214,500 shares of common stock |
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| at a public offering price of $7.00 per share, pursuant to the exercise in full of the underwriters’ over-allotment option, resulting in net proceeds of $20,900 thousand, after deducting underwriting discounts andcommissions and expenses payable by us. |
| On October 30, 2020, we effected the Reorganization in which (i) our then-subsidiary Silver |
| Opportunity Partners LLC became a wholly owned subsidiary of a newly created Delaware corporationnamed Silver Opportunity Partners Corporation, (ii) each share of our common stock outstandingimmediately prior to the Reorganization was exchanged for (A) 0.394057448219062 shares of our commonstock (subject to rounding to eliminate fractional shares) and (B) 0.105942551780938 shares of commonstock of SOP Corporation (subject to rounding to eliminate fractional shares) and (iii) we changed our namefrom Sunshine Silver Mining & Refining Corporation to Gatos Silver, Inc. SOP held our interest in theSunshine Complex, which is located in the Coeur d’Alene Mining District in Idaho and is comprised of theSunshine Mine and the Sunshine Big Creek Refinery. Through the Reorganization, we distributed all of ourequity interest in SOP to our stockholders immediately prior to the Reorganization. The Reorganization didnot have any effect on the stated par value of our common stock. All shares of common stock and optionsoutstanding immediately prior to the Reorganization were appropriately adjusted by dividing the number ofshares of common stock into which the options are exercisable or convertible by two and multiplying theexercise or conversion price thereof by two. |
| Impact of COVID-19 Pandemic |
| In late March 2020, the Mexican government declared a national health emergency due to increasing |
| infection rates from the COVID-19 pandemic. Pursuant to the health emergency declaration, the Mexicangovernment ordered a temporary suspension of all “non-essential” operations nationwide in Mexico,including mining operations, in order to help combat the spread of COVID-19. In response to the order, theLGJV effected a 45-day temporary suspension of all non-essential activities at the CLG site, which reducedthe number of employees and contractors at the site and at the Chihuahua corporate office. During thetemporary suspension, the LGJV implemented health protocols, allowed most administrative and technicalservices employees to work remotely, reduced mining and milling, completed project enhancements andfinalized a mine plan upon reactivation of mining activities after the temporary suspension. |
| In late May 2020, the Mexican government designated mining an essential service and allowed mines |
| to resume production, subject to deploying COVID-19 prevention protocols. Our existing COVID-19protocols exceeded those mandated by the Mexican government and, accordingly, the LGJV reactivatedmine development and mining in late May 2020 and hired additional employees. Ore processing resumed inearly June 2020 and daily production progressively increased with COVID-19 prevention protocols fullyimplemented. |
| The COVID-19 pandemic temporarily affected our financial condition in 2020, in part due to the loss |
| of revenue resulting from the 45-day temporary suspension of all non-essential activities at the LGJV’s CLGsite and the expenses associated with the development and implementation of COVID-19 protocols. Inaddition, as the LGJV reactivated mine development and mining, it implemented a scalable optimized planwith a lower employee complement and with reduced average monthly production rate at 1,750 tpd untilSeptember 2020, targeting higher ore grades. In December 2020, the average monthly production rate was at2,324 tpd. |
| We are closely monitoring the developments of the outbreak and continually assessing the potential |
| impact on our business. If the Mexican government were to reinstate the suspension order caused by theCOVID-19 pandemic, or if all mining activities at the CLG site were suspended for an undefined period oftime, there could be additional costs incurred, production and development delays, cost overruns andoperational restart costs that would negatively impact our business, financial condition and results ofoperations. The degree to which the pandemic impacts our business, financial condition and results ofoperations will depend on future developments, which are highly uncertain, continuously evolving and inmany cases cannot be predicted, including, but not limited to, the duration and spread of the pandemic, itsseverity and the actions to contain the virus or treat its impact, such as the efficacy of vaccines (particularlywith respect to emerging strains of the virus). See “Item 1A. Risk Factors” for additional risks we face dueto the COVID-19 pandemic. |
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| Exploration Drilling Program |
| In December 2020, the Company and its LGJV partner, Dowa, commenced a 27,000-meter exploration |
| program to convert the CLG’s established 3.2 million tonnes of inferred resources to the measured andindicated category and to discover additional resources along the northwest and southeast extensions of theCLG deposit. |
| In 2021, the LGJV intends to initiate a second exploration program to expand resources throughout the |
| Los Gatos District. The initial target is an estimated 19,000-meter campaign at the Esther deposit, to expandits initial NI 43-101 compliant 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 locatedabout four kilometers from Cerro Los Gatos and contains similar styles of mineralization and geochemistry.The Company believes that further drilling may materially expand the size and mineral tenor of thisresource. |
| In March 2021, the Company commenced a 5,400-meter exploration program on its wholly-owned |
| Santa Valeria property. The Santa Valeria target has been developed through regional geologic work by theCompany’s exploration team, which defined a large basin structure hosting the mineralization zones withinthe Los Gatos District. Santa Valeria is geologically comparable to Cerro Los Gatos and may contain similarmineral content. |
| Components of 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 Los GatosDistrict and our other exploration properties. Exploration expenses primarily consist of drilling costs, leaseconcession payments, assay costs and other geological and support costs at 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 andadministrative expenses are expected to increase significantly as we operate as a public company. We expecthigher costs related to salaries, benefits, stock compensation, legal fees, compliance and corporategovernance, accounting and audit expenses, stock exchange listing fees, transfer agent and otherstockholder-related fees, directors’ and officers’ and other insurance costs, and other administrative costs.We are party to a Management Services Agreement with SOP, pursuant to which we provide certainexecutive and managerial advisory services to SOP. SOP reimburses us for costs of providing such services. |
| Equity Loss in Affiliates |
| Our equity loss in affiliates relates to our proportional share of net loss incurred from the LGJV. |
| LGJV Arrangement Fee |
| Our LGJV arrangement fee consists of arrangement fees related to the Term Loan and the WCF. The |
| arrangement fees are based on fixed 2% and 15% rates for the Term Loan and the WCF, respectively, and70% of the outstanding principal of the respective facility. These arrangement fees are solely ourresponsibility. On March 11, 2021, the WCF was extinguished and thus we do not expect to incur LGJVarrangement fees in future periods with respect to the WCF but will continue to incur LGJV arrangementfees with respect to the Term Loan as long as such loan remains outstanding. |
| 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 |
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| it is more likely than not that the benefit will be realized before expiration. Historically, we have notrecognized these potential benefits in our financial statements and have fully reserved for such net deferredtax assets, as we believe it is more likely than not that the full benefit of these net deferred tax assets willnot be realized before expiration. |
| Royalties |
| Exploration activities are conducted on the Los Gatos District mining concessions in Mexico. Mineral |
| and concession lease payments are required to be paid to various entities to secure the appropriate claims orsurface rights. Certain of these agreements also have royalty payments that were triggered when we beganproducing and selling metal-bearing concentrate. |
| Results of Operations |
| The following table presents certain information relating to our operating results and discontinued SOP |
| operations for the years ended December 31, 2020 and 2019. In accordance with generally acceptedaccounting principles in the United States (“U.S. GAAP”), these financial results represent the consolidatedresults of operations of our Company and its subsidiaries (in thousands). See Note 12 — DiscontinuedOperations in our consolidated financial statements included in “Item 8. Financial Statements andSupplementary Data” for additional information. |
| | Year Ended December 31, |
| | | 2020 | | 2019 | |
| Expenses | | | |
| | | | | Exploration | $ | 785 $ | 923 |
| | | | | General and administrative | 7,765 2,903 |
| | | | | Amortization | | 30 | 34 |
| | | | | Total expenses | 8,580 3,860 |
| Other expense (income) | | | |
| | | | | Dilution loss in affiliates | | — 11,231 |
| | | | | Equity loss in affiliates | 17,585 12,865 |
| | | | | Arrangement fees | 4,843 2,988 |
| | | | | Interest expense | 4,047 | | — |
| | | | | Other income | | (28 (36 | ) | ) |
| | | | | Net other expense | 26,447 27,048 |
| | | | | Net loss from continuing operations | $35,027 $30,908 |
| | | | | Loss from discontinued operations | 5,414 6,910 |
| | | | | Net loss | $40,441 $37,818 |
| Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 |
| Loss from Continuing Operations |
| For the year ended December 31, 2020, we experienced a net loss from continuing operations of |
| $35,027 thousand compared to a net loss of $30,908 thousand for the year ended December 31, 2019. The$4,119 thousand increase in net loss from continuing operations was primarily attributable to an increase inoperating expenses. General and administrative expense increased to $7,765 thousand for the year endedDecember 31, 2020, compared to $2,903 thousand for the year ended December 31, 2019, primarily due tohigher costs associated with becoming a publicly traded company with higher legal and consulting costs,additional personnel, higher directors fees, increased directors and officers insurance premiums andincreased stock-based compensation expense related to the offering. |
| For the years ended December 31, 2020, and December 31, 2019, other expense decreased to |
| $26,447 thousand from $27,048 thousand, respectively. The decrease in other expense was primarily due to |
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| the $11,231 thousand dilution loss on affiliates in 2019, partially offset by the $4,720 thousand increase inequity loss in affiliates from LGJV operation in 2020, the $1,855 thousand increase in LGJV arrangementfees due to higher average outstanding balances on the WCF that was extinguished March 11, 2021, and$4,047 thousand in non-recurring interest expense associated with the convertible note that was converted tocapital stock as part of the IPO. |
| The LGJV’s increase in operating loss, which is picked up under the equity method of accounting in |
| our financial statements under the item ‘‘Equity loss in affiliates,’’ for the year ended December 31, 2020,resulted primarily from the continued mining and processing activities to ramp-up to design throughput, afull year of depreciation on the assets placed in service, and a full year of interest and arrangement feeexpenses. In addition, as a result of the COVID-19 pandemic, the LGJV incurred certain fixed costs duringthe April through May 2020 temporary suspension and the related ramp-up periods, which contributed to theoperating loss for the year ended December 31, 2020. |
| Loss from Discontinued Operations |
| Net loss from discontinued operations decreased to $5,414 thousand for the year ended December 31, |
| 2020 from $6,910 thousand for the year ended December 31, 2019. Our fiscal 2020 results include the SOPoperations through October 30, 2020, the effective date of the Reorganization. As a result, the 2020 resultsreflect only 10 months (83%) of discontinued SOP operations. |
| Liquidity and Capital Resources |
| As of December 31, 2020, and December 31, 2019, we had cash and cash equivalents of |
| $150,146 thousand and $8,581 thousand, respectively. The increase in cash and cash equivalents wasprimarily due to net proceeds from the IPO and from the issuance of the convertible notes, described below,partially offset by increased financing costs and higher administrative costs from being a publicly listedcompany. As of December 31, 2020, and December 31, 2019, we had working capital of $151,728 thousandand $14,990 thousand, respectively. The increase in working capital was primarily due to the higher cashand cash equivalents and an increase in prepaid expenses, partially offset by converting related-partyreceivables to capital contributions in the LGJV and a decrease in deferred financing costs. |
| Sources and Uses of Capital Resources |
| On April 20, 2020, we entered into a convertible note purchase agreement with Electrum Silver US |
| LLC, which was subsequently amended. The outstanding principal amount of the convertible notes and anyaccrued but unpaid interest was due and payable on April 19, 2023 unless converted into shares of ourcommon stock in a qualified financing. However, any conversion of the convertible notes into equitysecurities as described above was deemed a repayment of the convertible notes so converted. Theconvertible notes bore interest at a rate of 5.00% per annum, compounding annually. From April 20, 2020 toSeptember 21, 2020, we issued $15,000 thousand aggregate principal amount of convertible notes. Inconnection with the closing of the IPO on October 30, 2020, we converted all of the outstanding principalamount of the convertible notes plus $187 thousand in accrued and unpaid interest into an aggregate of2,712,003 shares of common stock. |
| On October 30, 2020, we completed our initial public offering of 21,430,000 shares of common stock |
| at a public offering price of $7.00 per share, resulting in net proceeds of $134,800 thousand, after deductingunderwriting discounts and commissions and expenses payable by us. On November 10, 2020, we issuedand sold an additional 3,214,500 shares of common stock at a public offering price of $7.00 per share,pursuant to the exercise in full of the underwriters’ over-allotment option, resulting in net proceeds of$20,900 thousand, after deducting underwriting discounts and commissions and expenses payable by us. |
| On March 11, 2021, we repurchased an approximate 18.5% interest in the LGJV, increasing our |
| ownership to 70.0% for a total consideration of $71,550 thousand, including a 70% penalty and all costsincurred by Dowa in connection with its ownership of such equity interest, including, but not limited to,legal and accounting fees, capital contributions and taxes. Additionally, we extinguished our 70% share ofthe $60,000 thousand WCF for $42,000 thousand. |
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| We believe we have sufficient cash and 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 fixedcost structure as well as decisions related to project retention, advancement and development. We will likelybe required to raise capital or take other measures to fund future exploration and development. Significantdevelopment activities, if warranted, will require that we arrange for financing in advance of plannedexpenditures. In addition, we expect to continue to increase our current financial resources with externalfinancings as long as our long-term business needs require us to do so. We manage liquidity risk through themanagement of our capital structure. |
| We may be required 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 or some combination thereof.There can be no assurance that additional funds will be available to us on acceptable terms, or at all. If weraise additional funds by issuing equity or convertible debt securities, substantial dilution to existingstockholders may result. Additionally, if we raise additional funds by incurring new debt obligations, theterms of the debt may require significant cash payment obligations, as well as covenants and specificfinancial ratios that may restrict our ability to operate our business. |
| Indebtedness and Lines of Credit |
| We had no related party debt as of December 31, 2020 or 2019. We had no outstanding lines of credit |
| or other bank financing arrangements as of December 31, 2020 or 2019. We guaranteed 70.0% of the TermLoan and the WCF as of December 31, 2020. We had certain arrangement fee obligations related to the CLGas detailed in the “LGJV Arrangement Fee” above. As of December 31, 2020, the approximate ownership ofthe LGJV entities was 51.5% in favor of the Company and 48.5% in favor of Dowa. |
| Dowa Debt Agreements |
| Dowa Term Loan |
| On July 11, 2017, we entered into the Term Loan with the LGJV and Dowa, whereby the LGJV could |
| borrow up to $210,000 thousand to finance the development of the Los Gatos project, with a maturity dateof December 29, 2027. Interest accrues daily at LIBOR plus 2.35% per annum, and the interest was added tothe amount borrowed until production commenced at the Los Gatos project. The LGJV is obligated to pay14 consecutive semi-annual payments totaling the aggregate principal amount and capitalized interestbeginning June 30, 2021, with payments made two business days prior to the end of each June andDecember. We guarantee 70.0% of the Term Loan and are required to pay an arrangement fee on theborrowing, calculated as 2% per annum on 70% of the outstanding principal balance, payable in semi-annual installments. The Term Loan contains affirmative and negative covenants reasonably customary forsimilar facilities, with which the LGJV is in compliance in all material respects as of December 31, 2020. |
| 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.The interest under the WCF was LIBOR plus 3% per annum and was payable by the LGJV. We guaranteed70% of this facility and were required to pay an arrangement fee on the borrowing, calculated as 15.0% perannum on 70.0% of the average daily principal amount outstanding during the relevant fiscal quarter. TheWCF contained affirmative and negative covenants reasonably customary for similar facilities, with whichthe LGJV was in compliance in all material respects as of December 31, 2020. The full principal amount ofthe WCF was drawn down by the LGJV as of September 2019. On March 11, 2021, the WCF wasextinguished. |
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| Cash Flows |
| The following table presents our cash flows for the years ended December 31, 2020 and 2019. |
| | Year Ended December 31, |
| | | 2020 | | 2019 | |
| | | (in thousands) | |
| Net cash provided by (used by) | | | |
| Operating activities from continuing operations | $ (18,388 $(12,295 | ) | ) |
| Investing activities from continuing operations | (12,129 (21,905 | ) | ) |
| Financing activities from continuing operations | 172,464 39,828 |
| | | | | Total change in cash | $141,947 $ 5,628 |
| Cash used by operating activities was $18,388 thousand and $12,295 thousand for the years ended |
| December 31, 2020 and 2019, respectively. The $6,093 thousand increase was primarily due to the net loss,after non-cash adjustments for equity loss in affiliates, stock-based compensation expense and interestexpense on convertible notes issued in shares, partially offset by an increase in prepaid expenses. |
| Cash used by investing activities was $12,129 thousand and $21,905 thousand for the years ended |
| December 31, 2020 and 2019, respectively. The $9,776 thousand decrease was primarily due to the$18,200 thousand investment in the LGJV in 2019 compared to the $12,298 thousand investment in theLGJV in 2020. |
| Cash provided by financing activities was $172,464 thousand and $39,828 thousand for the years ended |
| December 31, 2020 and 2019, respectively. The $132,636 thousand increase reflects the $40,465 thousandin proceeds from the issuance of common stock in 2019 in certain private placement offerings compared tothe $160,436 thousand in proceeds from the sale of common stock in the IPO and the $15,000 thousand inproceeds from the sale of convertible notes in 2020, partially offset by an increase in deferred financingcosts in 2020. |
| Results of LGJV Operations |
| The following table presents information relating to the LGJV’s financial condition and operating |
| results for years ended December 31, 2020 and 2019. In accordance with U.S. GAAP, these financialstatements represent the combined financial position and results of the LGJV. As of December 31, 2020, ourownership of the LGJV was approximately 51.5%. |
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| | LOS GATOS JOINT VENTURE |
| | COMBINING STATEMENT OF LOSS |
| | | (in thousands) |
| | | | Twelve Months Ended December 31, |
| | | | | 2020 | | 2019 | |
| Sales | | | $121,470 $ 36,508 |
| Expenses | | | | | | |
| | | | | | | | Cost of sales | 65,005 30,339 |
| | | | | | | | Royalties | 2,148 | | | 184 |
| | | | | | | | Exploration | | 841 | | 208 |
| | | | | | | | General and administrative | 9,718 2,587 |
| | | | | | | | Depreciation, depletion and amortization | 44,904 15,460 |
| | | | | | | | Other | 3,416 | | | — |
| | | | 126,032 48,778 |
| Other (income) expense | | | | | | |
| | | | | | | | Interest expense | 12,484 5,107 |
| | | | | | | | Arrangement fee | 8,888 3,524 |
| | | | | | | | Accretion expense | | 849 | | 789 |
| | | | | | | | Other (income) expense | | (109 | | 239 | ) |
| | | | | | | | Foreign exchange loss | 1,042 | | | 174 |
| | | | 23,154 9,833 |
| Net Loss | | | $ (27,716 $(22,103 | ) | | ) |
| At December 31, 2020 and 2019, the LGJV had current assets of $69,602 thousand and |
| $70,187 thousand, respectively. The decrease in total current assets was primarily due to decreases in tradereceivables and inventory, partially offset by an increase in value added tax receivables and other currentassets. At December 31, 2020 and 2019, the LGJV had noncurrent assets of $399,816 thousand and$398,733 thousand, respectively. The increase in noncurrent assets was primarily due to additional minedevelopment costs related to further development of the CLG, partially offset by depletion and depreciation. |
| At December 31, 2020 and 2019, the LGJV had current liabilities of $139,757 thousand and |
| $57,995 thousand, respectively. The increase in current liabilities was primarily due to the amounts duewithin one year under the Term Loan and the WCF becoming current liabilities, partially offset by decreasesin accounts payable, accrued liabilities and related party payables. At December 31, 2020 and 2019, theLGJV had noncurrent liabilities of $206,049 thousand and $302,026 thousand, respectively. The decrease innon-current liabilities was primarily due to the amounts due within one year under the Term Loan and theWCF becoming current liabilities. |
| For the year ended December 31, 2020, the LGJV had a $27,716 thousand net loss compared to a |
| $22,103 thousand net loss for the year ended December 31, 2019. The LGJV’s increase in operating loss forthe year ended December 31, 2020 resulted primarily from the continued mining and processing activities toramp-up to design throughput, a full year of depreciation on the assets placed in service, and a full year ofinterest and arrangement fee expenses, partially offset by increased revenue. In addition, as a result of theCOVID-19 pandemic, the LGJV incurred certain fixed costs during the April through May 2020 temporarysuspension and the related ramp-up periods, that contributed to the operating loss for the year endedDecember 31,2020. |
| The following table presents summarized information relating to the LGJV’s cash flows for years |
| ended December 31, 2020 and 2019. |
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| | LOS GATOS JOINT VENTURE |
| | | COMBINED STATEMENT OF CASH FLOWS |
| | | | (in thousands) |
| | | | | Twelve Months Ended December 31, |
| | | | | | 2020 | | 2019 | |
| Net cash provided by (used by) | | | | | | | |
| Operating activities | | | | $ 47,872 $ (16,008 | | | ) |
| Investing activities | | | | (64,436 (123,078 | ) | | ) |
| Financing activities | | | | 16,938 129,157 |
| | | | | | | | | | Total change in cash | $ | 374 $ (9,929 | | ) |
| Cash provided by (used by) operating activities was $47,872 thousand and $(16,008) thousand for |
| the years ended December 31, 2020 and 2019, respectively. The $63,880 thousand increase in cash providedby operating activities was primarily due to the net loss, after non-cash adjustments for depreciation anddepletion expense and arrangement fee expense, and a decrease in inventories, partially offset by anincrease in VAT receivables. |
| Cash used by investing activities was $64,436 thousand and $(123,078) thousand for the years ended |
| December 31, 2020 and 2019, respectively. The $58,642 thousand decrease in cash used was primarily dueto completion of the initial project construction in 2019 with reduced expenditures for property, plant andequipment and mine development in 2020. |
| Cash provided by financing activities was $16,938 thousand and $129,157 thousand for the years ended |
| December 31, 2020 and 2019, respectively. The $112,219 thousand decrease reflects the $135,000 thousandin borrowings under the Term Loan and WCF and $18,200 thousand in cash capital contributions in 2019compared to the $18,904 thousand in cash proceeds from related party capital advances and $5,000 in cashcapital contributions in 2020. |
| Contractual Obligations |
| We entered into commitments with federal and state agencies to lease surface and mineral rights in |
| Mexico related to our exploration activities. These leases are renewable annually. |
| 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 financialcondition, changes in financial condition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources that is material to our shareholders. |
| Critical Accounting Policies |
| Listed below are the accounting policies that we believe are critical to our financial statements due to |
| the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset,liability or expense that is being reported. For a discussion of recent accounting pronouncements, seeNote 2 — Summary of Significant Accounting Policies in the notes to the consolidated financial statements. |
| Equity Method Investment |
| We account for our investment in affiliates using the equity method of accounting whereby, after |
| valuing the initial investment, we recognize our proportional share of results of operations of the affiliate inits consolidated financial statements. Equity method investments are reviewed periodically for other-than-temporary decline in value. Our investment in the LGJV is presented as investment in affiliates in theconsolidated balance sheet. The difference between the carrying amount of the investment in affiliates andour equity in the LGJV’s net assets is due to value of mineral resources at MPR. We incur certain costs onbehalf of the LGJV, primarily related to a project development loan arrangement fee. Our proportional |
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| share of such costs are reported as an investment in affiliate and the residual costs, related to Dowa’sproportional ownership, are reported in the statement of loss. |
| Mineral Properties and Carrying Value of Long-Lived Assets |
| Mineral property acquisition costs are recorded at cost and are deferred until the viability of the |
| property is determined. Exploration, mineral property evaluation, option payments, related acquisition costsfor mineral properties acquired under option agreements, general overhead, administrative and holding coststo maintain a property on a care and maintenance basis are expensed in the period they are incurred. Whenproven and probable mineral reserves are determined for a property, subsequent development costs on theproperty are capitalized. If a project were to be put into production, capitalized development costs would bedepleted on the units of production basis determined by the proven and probable mineral reserves for thatproject. |
| Existing proven and probable mineral reserves and value beyond proven and probable mineral reserves, |
| including mineralization other than proven and probable mineral reserves and other material that is not partof the measured, indicated or inferred resource base, are included when determining the fair value of minesite reporting units at acquisition and, subsequently, in determining whether the assets are impaired. Theterm “recoverable minerals” refers to the estimated amount of silver and other commodities that will beobtained after taking into account losses during mining, mineral resources processing and treatment andultimate sale. Estimates of recoverable minerals from such exploration-stage mineral interests are risk-adjusted based on management’s relative confidence in such materials. In estimating future cash flows,assets are grouped at the lowest levels for which there are identifiable cash flows that are largelyindependent of future cash flows from other asset groups. We review and evaluate our long-lived assets forimpairment when events or changes in circumstances indicate that the related carrying amounts may not berecoverable. Asset impairment is considered to exist if the total estimated future cash flows on anundiscounted basis are less than the carrying amount of the asset. An impairment loss is measured andrecorded based on discounted estimated future cash flows. Future cash flows are estimated based onestimated quantities of recoverable minerals, expected silver and other commodity prices (consideringcurrent and historical prices, trends and related factors), production levels, operating costs, capitalrequirements and reclamation costs, all based on LOM plans. No impairment tests have been requiredduring the periods presented. |
| Various factors could impact our ability to achieve our forecasted production schedules from proven |
| and probable mineral reserves. Additionally, production, capital and reclamation costs could differ from theassumptions used in the cash flow models used to assess impairment. The ability to achieve the estimatedquantities of recoverable minerals from exploration-stage mineral interests involves further risks in additionto those factors applicable to mineral interests where proven and probable mineral reserves have beenidentified, due to the lower level of confidence that the identified mineral resources could ultimately bemined economically. Assets classified as exploration potential have the highest level of risk that thecarrying value of the asset can be ultimately realized, due to the still lower level of geological confidenceand economic modeling. |
| Income and Mining Taxes |
| We recognize the expected future tax benefit from deferred tax assets when the tax benefit is |
| considered to be more likely than not of being realized. Assessing the recoverability of deferred tax assetsrequires management to make significant estimates related to expectations of future taxable income.Estimates of future taxable income are based on forecasted cash flows and the application of existing taxlaws in the United States and Mexico. Refer to “— Critical Accounting Policies — Mineral Properties andCarrying Value of Long-Lived Assets” above for a discussion of the factors that could cause future cashflows to differ from estimates. To the extent that future cash flows and taxable income differ significantlyfrom estimates, our ability to realize deferred tax assets recorded at the balance sheet date could beimpacted. Additionally, future changes in tax laws in the jurisdictions in which we operate could limit ourability to obtain the future tax benefits represented by our deferred tax assets recorded at the reporting date. |
| Our properties involve dealing with uncertainties and judgments in the application of complex tax |
| regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, includingnegotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, |
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| state and Mexico tax audits. We recognize potential liabilities and record tax liabilities for anticipated taxaudit issues, if any, in the United States and other tax jurisdictions based on our estimate of whether, and theextent to which, additional taxes will be due. We adjust these reserves in light of changing facts andcircumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution mayresult in a payment that is materially different from our current estimate of the tax liabilities. If our estimateof tax liabilities proves to be less than the ultimate assessment, an additional charge to expense wouldresult. If an estimate of tax liabilities proves to be greater than the ultimate assessment, a tax benefit wouldresult. We recognize interest and penalties, if any, related to unrecognized tax benefits in income taxexpense. |
| Common Stock Valuation |
| We estimated the fair value of our common stock in 2019, and prior to October 2020, based on resource |
| multiples, discounted cash flows, comparable property values, comparable public company equity values,changes in comparable public company equity values, and a discount for a lack of marketability. Prior to theIPO, based on this market data, the corresponding fair value of our common stock was used in valuing theoptions and DSUs granted in 2019 and 2020. At and subsequent to the IPO, the fair value of our commonstock was based on the market price of our common stock on the grant date. |
| Recently Issued and Adopted Accounting Pronouncements |
| Refer to Note 2 of our consolidated financial statements included in “Item 8. Financial Statements and |
| Supplementary Data” for recently adopted accounting pronouncements and recently issued accountingpronouncements not yet adopted as of the date of this Report. |
| 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 accountingstandards applicable to public companies. We have elected to “opt out” of this provision and, as a result, wewill comply with new or revised accounting standards on the relevant dates on which adoption of suchstandards is required for public companies that are not emerging growth companies. The decision to opt outof the extended transition period under the JOBS Act is irrevocable. |
| Item 7A. Quantitative and Qualitative Disclosures about Market Risk |
| Commodity Price Risk |
| On September 1, 2019, the LGJV commenced production of silver and concentrates containing silver, |
| lead, zinc, antimony and gold at the CLG. Accordingly, we expect the principal source of future revenue tobe the sale of silver, and to a lesser extent, lead and zinc. A significant and sustained decrease in the price ofthese metals from current levels could have a material and negative impact on our business, financialcondition and results of operations. |
| 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, currencyexchange 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 ofdeposit. At no time have we had funds invested in asset-backed commercial paper. We have not experiencedany losses on our cash investments. |
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| Item 8. Financial Statements and Supplementary Data |
| | INDEX TO FINANCIAL STATEMENTS |
| Gatos Silver, Inc. Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm |
| | | 68 |
| Consolidated Balance Sheets as of December 31, 2020 and 2019 | | 69 |
| Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, |
| 2020, and 2019 | | 70 |
| Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended December 31, 2020 and |
| 2019 | | 71 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 | | 72 |
| Notes to the Consolidated Financial Statements | | 73 |
| Los Gatos Joint Venture Combined Financial StatementsReport of Independent Registered Public Accounting Firm |
| | | 90 |
| Combined Balance Sheets as of December 31, 2020 and 2019 | | 91 |
| Combined Statements of Loss for the years ended December 31, 2020, and 2019 | | 92 |
| Combined Statements of Owner’s Capital for the years ended December 31, 2020 and 2019 | | 93 |
| Combined Statements of Cash Flows for the years ended December 31, 2020 and 2019 | | 94 |
| Notes to the Combined Financial Statements | | 95 |
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| | Report of Independent Registered Public Accounting Firm |
| To the Shareholders and Board of Directors Gatos Silver, Inc.: |
| Opinion on the Consolidated Financial Statements |
| We have audited the accompanying consolidated balance sheets of Gatos Silver, Inc. and subsidiaries |
| (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations andcomprehensive loss, shareholders’ equity (deficit), and cash flows for the years then ended , and the relatednotes (collectively, the consolidated financial statements). In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position of the Company as of December 31,2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformitywith U.S. generally accepted accounting principles. |
| Basis for Opinion |
| These consolidated financial statements are the responsibility of the Company’s management. Our |
| responsibility is to express an opinion on these consolidated financial statements based on our audits. Weare a public accounting firm registered with the Public Company Accounting Oversight Board (UnitedStates) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB. |
| We conducted our audits in accordance with the standards of the PCAOB. Those standards require that |
| we plan and perform the audit to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the consolidated financial statements, whether dueto error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financialstatements. Our audits also included evaluating the accounting principles used and significant estimatesmade by management, as well as evaluating the overall presentation of the consolidated financialstatements. We believe that our audits provide a reasonable basis for our opinion. |
| | | /s/ KPMG LLP |
| We have served as the Company’s auditor since 2011. |
| Denver, Colorado March 29, 2021 |
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| | GATOS SILVER, INC. |
| | | CONSOLIDATED BALANCE SHEETS |
| | AS OF DECEMBER 31, |
| | | (In thousands, except for share and per share amounts) |
| | | | 2020 | 2019 |
| ASSETS | | | | | |
| Current Assets | | | | | |
| Cash and cash equivalents | | | | $ 150,146 | $ | 8,581 |
| Deferred financing costs | | | | | — | | 1,777 |
| Related party receivables | | | | | 1,727 | | 6,422 |
| Other current assets | | | | | 3,879 | | 552 |
| Current assets of discontinued operations | | | | | — | | 1,123 |
| Total current assets | | | | 155,752 | | 18,455 |
| Non-Current Assets | | | | | |
| Investment in affiliates | | | | 109,597 | 105,396 |
| Property, plant and equipment, net of accumulated depreciation of $948 and |
| $917, respectively | | | | | 61 | | 92 |
| Non-current assets of discontinued operations | | | | | — | | 30,352 |
| Total Assets | | | | $ 265,410 | $ 154,295 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
| Current Liabilities | | | | | |
| Accounts payable and other accrued liabilities | | | | $ | 4,024 | $ | 2,817 |
| Current liabilities of discontinued operations | | | | | — | | 648 |
| Total current liabilities | | | | $ | 4,024 | $ | 3,465 |
| Non-Current Liabilities | | | | | |
| Non-current liabilities of discontinued operations | | | | | — | | 1,439 |
| Shareholders’ Equity | | | | | |
| Common Stock, $0.001 par value; 700,000,000 shares authorized; |
| 59,183,076 and 40,323,430 shares outstanding as of December 31, 2020 and December 31, 2019 |
| | | | | 108 | | 80 | (1) |
| Paid-in capital | | | | 409,728 | 375,921 |
| Accumulated deficit | | | | (147,423 | (225,583 | ) | | | | ) |
| Treasury stock, at cost, 144,589 shares as of December 31, 2020 and |
| December 31, 2019 | | | | | (1,027 | | (1,027 | (1) | ) | | | | ) |
| Total shareholders’ equity | | | | 261,386 | 149,391 |
| Total Liabilities and Shareholders’ Equity | | | | $ 265,410 | $ 154,295 |
| (1) | Prior period results have been adjusted to reflect the two-for-one reverse split in October 2020. SeeNote 1, Description of Business for details. |
| | | | | | See accompanying notes to the consolidated financial statements. |
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| | GATOS SILVER, INC. |
| | | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS |
| | | | FOR THE YEARS ENDED DECEMBER 31, |
| | | | (In thousands, except for share and per share amounts) |
| | | | | 2020 | 2019 |
| Expenses | | | | | | |
| Exploration | | | | | $ | 785 | $ | 923 |
| General and administrative | | | | | | 7,765 | | 2,903 |
| Amortization | | | | | | 30 | | 34 |
| Total expenses | | | | | | 8,580 | | 3,860 |
| Other expense (income) | | | | | | |
| Dilution loss in affiliates | | | | | | — | | 11,231 |
| Equity loss in affiliates | | | | | | 17,585 | | 12,865 |
| Arrangement fees | | | | | | 4,843 | | 2,988 |
| Interest expense | | | | | | 4,047 | | — |
| Other income | | | | | | (28 | | (36 | | | ) | ) |
| Net other expense | | | | | | 26,447 | | 27,048 |
| Net loss from continuing operations | | | | | $ | 35,027 | $ | 30,908 |
| Loss from discontinued operations | | | | | | 5,414 | | 6,910 |
| Net loss | | | | | $ | 40,441 | $ | 37,818 |
| Other comprehensive (gain) loss | | | | | | |
| Unrealized gain on securities, net of tax, from discontinued operations | | | | | | — | | (32 | | | | ) |
| Comprehensive loss from continuing operations | | | | | | 35,027 | | 30,908 |
| Comprehensive loss from discontinued operations | | | | | | 5,414 | | 6,878 |
| Comprehensive loss | | | | | $ | 40,441 | $ | 37,786 |
| Net loss per share: | | | | | | |
| From continuing operations, basic and diluted | | | | | $ | 0.80 | $ | 0.79 | (1) |
| From discontinued operations, basic and diluted | | | | | $ | 0.13 | $ | 0.18 | | (1) |
| Basic and diluted | | | | | $ | 0.93 | $ | 0.97 | (1) |
| Weighted average shares outstanding: | | | | | | |
| Basic and diluted | | | | | 43,655,601 | 38,967,038 | (1) |
| (1) | Prior period results have been adjusted to reflect the two-for-one reverse split in October 2020. SeeNote 1, Description of Business for details. |
| | | | | | | See accompanying notes to the consolidated financial statements. |
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| | GATOS SILVER, INC. |
| | | CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) |
| | | | (In thousands, except for share and per share amounts) |
| | Number | | | Amount | (1) |
| | | | | | | | Other | Total |
| | | | | | Paid-in | Accumulated | Comprehensive | Shareholders’ | Common | Treasury | | | Common | | | | | | Treasury |
| | | | | | | Capital | Deficit | | Income (Loss) | Equity | | | Stock | | Stock | | | Stock | Stock |
| Balance at December 31, 2018 | 36,951,274 144,589 $ 74 $(1,027 $ 331,802 $(187,765 | | | | | | $(32 | $ 143,052 | ) | | ) | | | | ) |
| Stock-based compensation | | — | | | — — | — 3,219 | | — | — | 3,219 |
| Issuance of common stock | 3,372,156 | | | — 6 | — 40,459 | | — | — | 40,465 |
| Unrealized gain on investments, net of tax | | — | | | — — | — | — | — | 32 | | 32 |
| Deferred share unit compensation | | — | | | — — | — | 491 | | — | — | | 491 |
| Other | | — | | | — — | — | (50 | | — | — | | (50 | ) | | ) |
| Net loss | | — | | | — — — | | — (37,818 | — | (37,818 | ) | ) |
| Balance at December 31, 2019 | 40,323,430 144,589 $ 80 $(1,027 $ 375,921 $(225,583 | | | | | | $ — | $ 149,391 | ) | | ) |
| Stock-based compensation | | — | | | — — | — 4,563 | | — | — | 4,563 |
| Issuance of common stock, net | 24,644,500 | | | — 25 | — 155,612 | | — | — | 155,637 |
| Convertible note conversion | 2,712,003 | | | — 3 | — 18,981 | | — | — | 18,984 |
| Deferred salary conversion | | 47,061 | | | — — | — | 329 | | — | — | | 329 |
| Deferred share unit compensation | | — | | | — — | — | 61 | — | — | | 61 |
| Distribution from Reorganization | (8,543,918 | | | — — | — (145,780 118,601 | | — | (27,179 | ) | | | | | ) | | ) |
| Other | | — | | | — — | — | 41 | — | — | | 41 |
| Net loss | | — | | | — — — | | — (40,441 | — | (40,441 | ) | ) |
| Balance at December 31, 2020 | 59,183,076 144,589 $108 $(1,027 $ 409,728 $(147,423 | | | | | | $ — | $ 261,386 | ) | | ) |
| (1) | Prior period results have been adjusted to reflect the two-for-one reverse split in October 2020. SeeNote 1, Description of Business for details. |
| | | | See accompanying notes to the consolidated financial statements. |
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| | GATOS SILVER, INC. |
| | | CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | FOR THE YEARS ENDED DECEMBER 31, |
| | | (In thousands, except for share and per share amounts) |
| | | | 2020 | 2019 |
| OPERATING ACTIVITIES | | | | |
| Net loss | | | $ (40,441 | $(37,818 | ) | ) |
| Plus net loss from discontinued operations | | | $ 5,414 | $ 6,910 |
| Adjustments to reconcile net loss to net cash used by operating activities: | | | | |
| Amortization | | | | 30 | | 34 |
| Dilution loss in affiliates | | | | — | 11,231 |
| Stock compensation expense | | | | 4,368 | | 3,007 |
| Equity loss in affiliates | | | 17,585 | 12,865 |
| Interest expense on convertible notes beneficial conversion terms | | | | 3,984 | | — |
| Other | | | | 329 | | — |
| Changes in operating assets and liabilities: | | | | |
| Receivables from related-party | | | (4,752 | (5,078 | ) | ) |
| Accounts payable and other accrued liabilities | | | | 2,027 | | 549 |
| Other current assets | | | (3,479 | | 22 | )) |
| Operating cash flows from discontinued operations | | | (3,453 | (4,017 | ) |
| Net cash used by operating activities | | | (18,388 | (12,295 | ) | ) |
| INVESTING ACTIVITIES | | | | |
| Transfers of restricted cash to cash | | | | 151 | | — |
| Investment in affiliates | | | (12,298 | (21,371 | ) | )) |
| Investing cash flows from discontinued operations | | | | 18 | | (534 |
| Net cash used by investing activities | | | (12,129 | (21,905 | ) | ) |
| FINANCING ACTIVITIES | | | | |
| Issuance of common stock | | | 160,436 | 40,465 |
| Related-party convertible notes | | | 15,000 | | — |
| Deferred financing costs | | | (4,039 | | (637 | ) | ) |
| Other | | | | 260 | | — |
| Financing cash flows from discontinued operations | | | | 807 | | — |
| Net cash provided by financing activities | | | 172,464 | 39,828 |
| Net increase in cash and cash equivalents | | | 141,947 | | 5,628 |
| Cash and cash equivalents, beginning of period | | | | 9,085 | | 3,457 |
| Cash and cash equivalents, end of period | | | 151,032 | | 9,085 |
| Less cash of discontinued operations | | | | 886 | | 504 |
| Cash of continuing operations, end of period | | | $150,146 | $ 8,581 |
| Supplemental disclosure of noncash transactions: | | | | |
| Director Compensation | | | $ | 61 | $ | 491 |
| Deferred financing costs included in accrued liabilties | | | $ | — | $ 1,132 |
| Conversion of related party receivable into investment in affiliate | | | $ 9,448 | $ | — |
| Conversion of convertible notes to equity | | | $ 15,000 | $ | — |
| Deferred financing costs included in accounts payable and accrued liabilties | | | $ 1,118 | $ | — |
| Underwriting fees recorded to deferred financing costs | | | $ (12,076 | $ | — | ) |
| Deferred financing costs charged to equity | | | $ 16,874 | $ | — |
| | | See accompanying notes to the consolidated financial statements. |
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| | GATOS SILVER, INC. |
| | | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| | | (In thousands, except share, per share, option, and stock unit amounts) |
| 1. | Description 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 ChihuahuaState, 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 GatosDistrict (“LGD”) with Dowa Metals and Mining Co., Ltd. (“Dowa”). The LGJV operating entities consist ofMinera Plata Real S. de R.L. de C.V (“MPR”), Operaciones San Jose del Plata S. de R.L. de C.V. andServicios San Jose del Plata S. de R.L. de C.V. (collectively the “LGJV Entities”). The LGJV completed anadvanced definitional drilling and decline development program in 2016, a feasibility study in January 2017and a technical update to the feasibility study in July 2020. Dowa completed its $50,000 fundingrequirement on April 1, 2016 thereby initially acquiring a 30% interest in the LGJV and the right topurchase future zinc-concentrate production at market rates. In May 2019, Dowa increased its ownershipinterest by 18.5% to 48.5% through the conversion of the Dowa MPR Loan to equity. On March 11, 2021,the Company repurchased the 18.5% interest from Dowa. See Note 10 — Commitment, Contingencies andGuarantees for further discussion. The LGJV ownership is currently 70% Gatos Silver and 30% Dowa.Despite owning the majority interest in the LGJV, the Company does not exercise control over the LGJVdue to certain provisions contained in the Unanimous Omnibus Partner Agreement that currently requireunanimous partner approval of all major operating decisions. |
| On September 1, 2019, the LGJV commenced commercial production of its two concentrate products: a |
| lead concentrate and a zinc concentrate. The LGJV’s lead and zinc concentrates are sold to third-partycustomers. |
| On March 30, 2020, in response to the coronavirus pandemic, the Mexican government issued a |
| temporary suspension of all non-essential activities. Accordingly, the LGJV temporarily suspended non-essential activities. The LGJV resumed mining operations in late May 2020 as permitted by the Mexicangovernment. |
| The Company will be performing additional definitional drilling to further define and expand |
| mineralization of the CLG, as well as continuing definitional and exploratory drilling at the nearby Estherdeposit. On December 5, 2020, the LGJV began drilling the first program, an infill and extensional drillingprogram at the Cerro Los Gatos deposit. |
| The Company’s other regional Mexico exploration efforts are conducted through its wholly-owned |
| subsidiary, Minera Luz del Sol S. de R.L. de C.V. (“MLS”). |
| Discontinued Operations — Sunshine Complex |
| The Company has conducted an advanced exploration drilling program and a rehabilitation program to |
| improve certain mining infrastructure at the Sunshine Complex. The Sunshine Complex, located in theCoeur d’Alene Mining District in Idaho, is comprised of the Sunshine Mine and the Sunshine Big CreekRefinery. The Sunshine Mine is currently on care and maintenance, with a continued but reduced programof infrastructure improvement. In conjunction with the Company’s initial public offering (“ IPO”), all equityinterest in the Company's wholly-owned subsidiary, SOP, who holds an interest in the Sunshine Complex,was distributed to its stockholders, creating Silver Opportunity Partners Corporation, which subsequentlywas renamed Sunshine Silver Mining & Refining Corporation, and is presented as discontinued operationsin the Company’s consolidated financial statements for the years ended December 31, 2020 and 2019.Pursuant to the distribution and discontinued operations presentation, certain costs, assets and liabilities areremoved |
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| from the consolidated financial statements, including but not limited to, mineral properties, property, plantand equipment and asset retirement obligation. See Note 12 — Discontinued Operations for furtherdiscussion. |
| Initial Public Offering and Reorganization |
| On October 30, 2020, the Company completed an IPO of 21,430,000 shares of its common stock at a |
| price of $7.00 per share, resulting in gross proceeds from the IPO of $150,010 and its shares trading on theNew York Stock Exchange and the Toronto Stock Exchange. On November 10, 2020, the Company issuedan additional 3,214,500 shares of common stock at a price of $7.00 per share, through the exercise of theover-allotment option, with gross proceeds from the additional issuance of $22,502. The Company receivednet proceeds of approximately $155,750 thousand from these issuances of common stock, after deductingunderwriting discounts and commissions and expenses payable by us. |
| In conjunction with the IPO, we effected a reorganization (the “Reorganization”) in which (i) the |
| Company changed its name from Sunshine Silver Mining & Refining Corporation to Gatos Silver, Inc.,(ii) Silver Opportunity Partners LLC, which held the Company’s interest in the Sunshine Complex in Idaho,comprised of the Sunshine Mine and the Sunshine Big Creek Refinery, became a wholly owned subsidiaryof a newly created Delaware corporation named Silver Opportunity Partners Corporation (“SOP”), (iii) allequity interest in SOP was distributed to its shareholders, and (iv) each share of the Company’s commonstock was split at a ratio of two-for-one (the “Reverse Split”). The Reverse Split did not have any effect onthe stated par value of the Company’s common stock and the rights and privileges of the holders of sharesof Common Stock were unaffected. All common stock and options outstanding immediately prior to theReverse Split were appropriately adjusted by dividing the number of shares of common stock into which theoptions are exercisable or convertible by two and multiplying the exercise or conversion price thereof bytwo. |
| 2. | Summary of Significant Accounting Policies |
| Basis of Consolidation and Presentation |
| The accompanying consolidated financial statements of the Company have been prepared in accordance |
| with United States Generally Accepted Accounting Principles (“GAAP”) and include the accounts of GatosSilver and MLS. All Company subsidiaries are consolidated. All significant intercompany balances andtransactions have been eliminated. All equity interest in the Company’s wholly-owned subsidiary, SOP, wasdistributed to its stockholders in October 2020. The accounts for SOP have been presented as discontinuedoperations in the accompanying consolidated financial statements. Prior year amounts have also beenmodified in these financial statements to properly report amounts under current operations and discontinuedoperations. See Note 12 — Discontinued Operations for further discussion. |
| All common stock shares, options and deferred stock units amounts and prices in the consolidated |
| financial statements have been adjusted for the Reverse Split. |
| Equity method investment |
| The Company accounts for its investment in affiliates using the equity method of accounting whereby, |
| after valuing the initial investment, the Company recognizes its proportional share of results of operationsof the affiliate in its consolidated financial statements. Equity method investments are reviewed periodicallyfor other-than-temporary decline in value. The Company’s investment in the LGJV Entities is presented asInvestment in affiliates in the consolidated balance sheet. The basis difference between the carrying amountof the investment in affiliates and the Company’s equity in the LGJV Entities’ net assets is due to value ofthe LGJV mineral resources. This basis difference is amortized on a units of production basis as the mineralresource is produced. |
| The Company incurs certain costs on behalf of the LGJV, primarily related to a project development |
| loan arrangement fee. The Company’s proportional share of such costs are reported as an investment inaffiliate and the residual costs, related to Dowa’s proportional ownership, are reported in the statement ofloss as arrangement fees. |
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| Use of estimates |
| The preparation of financial statements requires management to make estimates and assumptions that |
| affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the |
| date of the consolidated financial statements and the reported amounts of revenues and expenses during the |
| reporting period. Actual results could differ from those estimates. Significant items subject to such |
| estimates and assumptions include mineral properties; environmental reclamation and closure obligations; |
| valuation of stock and stock options; valuation allowances for deferred tax assets; and the fair value of |
| financial instruments. |
| Functional currency and translation of foreign currencies |
| The U.S. dollar is the functional currency of the Company and its subsidiaries. Monetary assets and |
| liabilities denominated in foreign currencies are translated to U.S. dollars at exchange rates in effect at the |
| balance sheet date, with the resulting gains or losses reported in foreign exchange (gain) loss in the |
| statement of operations and comprehensive loss. Non-monetary assets and liabilities are translated at |
| historical exchange rates. Expenses and income items denominated in foreign currencies are translated into |
| U.S. dollars at historical exchange rates. |
| Cash and cash equivalents |
| The Company considers all highly liquid short-term investments with a maturity of three months or less |
| when purchased to be cash equivalents. Restricted cash, included in other current assets, consists of cash |
| and investments held as collateral for a letter of credit and other extensions of credit. |
| Property, plant and equipment |
| Property, plant and equipment are recorded at cost. Amortization of plant and equipment is calculated |
| on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of |
| furniture, fixtures and computers range from three to 10 years. |
| Impairment of long-lived assets |
| Long-lived assets, such as property, plant and equipment, are reviewed for impairment whenever events |
| or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If |
| circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company |
| first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying |
| value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash |
| flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair |
| value is determined through various valuation techniques including discounted cash flow models, quoted |
| market values and third-party independent appraisals, as considered necessary. There were no impairments |
| recognized for the years ended December 31, 2020 and 2019. |
| Stock-based compensation |
| The Company recognizes all employee stock-based compensation as a cost in the consolidated financial |
| statements. Equity-classified awards are measured at the grant date fair value of the award. The Company |
| estimates grant date fair value using the Black-Scholes option-pricing model using the grant date share |
| price, estimated amounts for volatility of the Company’s stock based on the historical volatility of a group |
| of peer companies’ common stock over the expected option life, the expected life of the awards, the fair |
| value of the underlying shares, the risk-free interest rate and the expected dividend yield. The Company |
| estimates forfeitures of stock-based awards based on historical data and periodically adjusts the forfeiture |
| rate. The adjustment of the forfeiture rate is recorded as a cumulative adjustment in the period the forfeiture |
| estimate is changed. Stock-based compensation expense is included as a component of either exploration or |
| general and administrative expense over the requisite service period of the award. |
| Net loss per share |
| Basic and diluted loss per share are computed by dividing the net loss available to common |
| stockholders by the weighted-average number of common stock shares outstanding, including deferredstock units |
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| (“DSUs”), for the respective period presented. For the years ended December 31, 2020 and 2019, stockoptions have been excluded from the dilutive earnings per share calculation as their effect would be anti-dilutive. |
| Income taxes |
| Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities |
| are recognized for the future tax consequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective tax basis and operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income inthe period that includes the enactment date. The Company recognizes the effect of income tax positions onlyif those positions are more likely than not of being sustained. Recognized income tax positions aremeasured at the largest amount that is greater than 50% likely of being realized. Changes in recognition ormeasurement are reflected in the period in which the change in judgment occurs. |
| Recently issued accounting standards |
| In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting |
| Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which will require lessees to recognize assetsand liabilities for the rights and obligations created by most leases on the balance sheet. These changesbecome effective for the Company’s fiscal year beginning January 1, 2022. The Company is still assessingthe impact of the standard but does not expect there will be a material impact to the Company’s financialstatements. |
| In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) to simplify and |
| enhance accounting for income taxes. This update is effective in fiscal years, beginning after December 15,2021, and interim periods within fiscal years beginning after December 15, 2022, and early adoption ispermitted. The Company is still assessing the impact of the standard but does not expect there will be amaterial impact to the Company’s financial statements. |
| 3. | Other Current Assets |
| | December 31, | December 31, |
| | 2020 | 2019 |
| Value added tax receivable | | $ 318 | $213 | |
| Restricted cash | | | — | 151 | |
| Prepaid expenses | | 3,560 | 157 | |
| Deposits and other | | | 1 | 31 | |
| Total other current assets | | $3,879 | $552 | |
| 4. | Property, Plant and Equipment, net |
| Mineral Properties |
| Mining Concessions |
| In Mexico, mineral concessions from the Mexican government can only be held by Mexican nationals |
| or Mexican-incorporated companies. The concessions are valid for 50 years and are extendable provided theconcessions are kept in good standing. For concessions to remain in good standing a semi-annual fee mustbe paid to the Mexican government and an annual report describing the work accomplished on the propertymust be filed. These concessions may be cancelled without penalty with prior notice to the Mexicangovernment. MLS is the concession holder of a series of claims titles granted by the Mexican government.The rights to certain concessions are held through exploration agreements with purchase options, asdiscussed below: |
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| Santa Valeria Concession |
| The Company was required to make monthly payments through 2020 to continue exploration activities |
| and obtain ownership of the Santa Valeria concessions, and is required to make a production royaltypayment of 1% of the net smelter returns on production. The Company may terminate the agreement uponprior notice. |
| The Company made mineral lease payments of $414 and $409 for the years ended December 31, 2020 |
| and 2019, respectively. |
| 5. | Accounts Payable and Other Accrued Liabilities |
| | December 31, | December 31, |
| | 2020 | 2019 |
| Accounts payable | | $ 560 | $ | 60 |
| Accrued expenses | | 1,240 | 1,488 |
| Accrued compensation | | 1,964 | 1,269 |
| Other | | 260 | | — |
| Total accounts payable and other accrued liabilities | | $4,024 | $2,817 |
| 6. | Related-Party Convertible Notes |
| During the second quarter of 2020, the Company entered into a convertible note purchase agreement |
| with Electrum Silver US LLC for the issuance of an aggregate of $15,000 of convertible notes. Theconvertible notes incur an annual interest of 5%. On October 30, 2020, the outstanding $15,000 inconvertible notes and $187 in accrued interest were converted into 2,712,003 shares of common stock of theCompany as a result of the IPO in accordance with the conversion terms, and the Company incurred non-cash interest expense of $3,984. |
| 7. | Related-Party Transactions |
| Service Agreement |
| The Company has a services agreement with the LGJV to provide certain consulting and administrative |
| services. The Company earned $3,900 and $5,100 under this agreement for the years ended December 31,2020 and 2019, respectively, and received $766 and $1,950 in cash from the LGJV under this agreement forthe years ended December 31, 2020 and 2019, respectively. The Company had receivables under thisagreement of $1,200 and $4,050 as of December 31, 2020 and 2019, respectively. The Company also incurscertain LGJV costs that are subsequently reimbursed by the LGJV. During the year ended December 31,2020, $5,850 of receivables under this agreement, as well as other outstanding receivables to be reimbursedby the LGJV, were converted to capital of the LGJV, increasing Investment in Affiliates. |
| Management Services Agreement |
| Upon completion of the IPO, the Company entered into a Management Services Agreement with SOP, |
| pursuant to which the Company provides certain executive and managerial advisory services to SOP untilterminated by either party. SOP reimburses the Company for costs of such services. The Company earned$41 from SOP under this agreement in 2020, all of which was receivable as of December 31, 2020. |
| 8. | 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. As of December 31, 2020, 59,183,076 shares ofcommon stock are outstanding, and no shares of preferred stock are outstanding. |
| Common Stock Transactions |
| During October 2020 in connection with the Reorganization, each share of common stock was |
| exchanged for approximately 0.39406 shares of the Company’s common stock (subject to rounding to |
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| eliminate fractional shares). In October 2020, the Company completed an IPO of 21,430,000 common stockshares, and in November 2020, the Company issued an additional 3,214,500 common stock shares throughthe underwriters’ over-allotment option, each at $7.00 per share raising an aggregate of $172,512.Underwriting fees incurred in conjunction with the IPO and issuance of additional common stock arerecorded as a reduction to Paid-in Capital. In October 2020, the Company also issued 47,061 common stockshares to executive officers for deferred salary compensation incurred in 2020 and converted theoutstanding convertible notes into 2,712,003 common stock shares, each at $7.00 per share. |
| During May 2019, the Company issued 2,083,334 common stock shares at $12.00 per share raising |
| $25,000 in a private placement. During June 2019, the Company issued 38,822 common stock shares at$12.00 per share raising $465 in a private placement. During July 2019, the Company issued 1,250,000common stock shares at $12.00 per share raising $15,000 in a private placement. |
| Equity Compensation Plan |
| The Company has a Long-Term Incentive Plan under which options and shares of the Company’s |
| common stock are authorized for grant or issuance as compensation to eligible employees, consultants, andmembers of the Board of Directors. Awards under the plan include stock options, stock appreciation rights,stock awards, deferred stock units, and performance awards. Stock options and deferred stock units havebeen granted by the Company in different periods. As of December 31, 2020, approximately 9.4 millionshares of common stock were available for grant under the plan. Stock-based compensation expense forthe years ended December 31, 2020 and 2019 was $4,368 and $3,007, respectively. |
| Stock Option Transactions |
| The Company’s stock options have a contractual term of 10 years and entitle the holder to purchase one |
| share of the Company’s common stock. The options granted to the Company’s employees and LGJVpersonnel prior to 2020 have a requisite service period of four years and vest in equal annual installments.Starting in 2020, the options granted to the Company’s employees and LGJV personnel have a requisiteservice period of three years. The options granted to non-employee directors prior to 2020 have a requisiteservice period of one year and vest in equal monthly installments. The options granted to non-employeedirectors in January 2020 have a requisite service period of one and a half years and vest in monthlyinstallments. On December 31, 2020, there was $9,377 of unrecognized stock-based compensation expensewhich is expected to be recognized over a weighted-average period of 2.2 years. |
| The following table summarizes the respective vesting start dates and number of options granted to |
| employees and directors in 2020 and 2019: |
| Recipient | Options Granted | Vesting Start Date | Grant Date |
| Employees | | | | 508,500 | December 14, 2018 | May 3, 2019 |
| Directors | | | | 93,000 | December 14, 2018 | May 3, 2019 |
| Employees | | | | 416,000 | January 20, 2020 | January 20, 2020 |
| Directors | | | | 197,666 | January 20, 2020 | January 20, 2020 |
| Employees | | | | 164,000 | January 20, 2020 | January 30, 2020 |
| Directors | | | | 20,667 | March 1, 2020 | March 1, 2020 |
| Employees | | | | 12,000 | July 31, 2020 | July 31, 2020 |
| Employees | | | | 1,127,500 | October 27, 2020 | October 27, 2020 |
| The following assumptions were used to compute the fair value of the options granted using the Black- |
| Scholes option valuation model: |
| | | | | | Grant Date |
| | | May 2019 | | | | Jan. 2020 | Mar. 2020 | Jul. 2020 | | | | Oct. 2020 |
| Risk-free interest rate | | 2.38 | | | | 1.63 | 1.63 | 1.63 | | | | 0.51 | % | | | % | % | % | | | | % |
| Dividend yield | | — | | | | — | — | — | | | | — |
| Estimated volatility | | 66.80 | | | | 62.20 | 62.20 | 62.20 | | | | 62.50 | % | | | % | % | % | | | | % |
| | Expected option life | 6 years | | | | 6 years | 6 years | 6 years | | | | 6 years |
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| Post-Reorganization, the weighted-average grant date fair value per share was $5.65 and $7.00 for |
| the years ended December 31, 2020 and 2019, respectively. |
| The following assumptions were used to compute the fair value of the LGJV Personnel options using |
| the Black-Scholes option valuation model as of December 31, 2020 and 2019: |
| | December 31, |
| | 2020 | 2019 |
| | | | Risk-free interest rate | 0.51% | 1.76% |
| | | | | Dividend yield | — | — |
| | | | Estimated volatility | 62.09% | 63.60% |
| | | | Expected option life | 6 years | 6 years |
| The Company’s estimated volatility computation was based on the historical volatility of a group of |
| peer companies’ common stock over the expected option life and included both exploration stage anddevelopment stage companies. The peer information was used because the Company was not publicly tradedand therefore did not have the market trading history required to calculate a meaningful volatility factor.The computation of the expected option life was determined based on a reasonable expectation of the optionlife prior to being exercised or forfeited. The risk-free interest rate assumption was based on the U.S.Treasury constant maturity yield at the date of the grant over the expected life of the option. No dividendsare expected to be paid. |
| The following tables summarize the stock option activity for the years ended December 31, 2020: |
| | Weighted- |
| | | | | Weighted- | Aggregate | Average |
| | | | | Average | Intrinsic | Remaining Life (Years) |
| Employee & Director Options | | | Shares | Exercise Price | Value |
| Outstanding at December 31, 2019 | | | 3,551,186 | $14.39 | | 5.96 | |
| Granted | | | 1,937,833 | $ 9.09 | | | |
| Exercised | | | | — | $ | — | | | |
| Forfeited | | | (77,089 | $12.46 | | | | ) |
| Outstanding at December 31, 2020 | | | 5,411,930 | $12.52 $17,516 | 6.62 | |
| Vested at December 31, 2020 | | | 3,251,211 | $14.71 $ 9,292 | 4.87 | |
| | Weighted- |
| | | | | Weighted- | Aggregate | Average |
| | | | | Average | Intrinsic | Remaining Life (Years) |
| LGJV Personnel Options | | | Shares | Exercise Price | Value |
| Outstanding at December 31, 2019 | | | 54,595 | $7.37 | | | | 6.11 | |
| Granted | | | | — | $ — | | | | | |
| Exercised | | | | — | $ — | | | | | |
| Forfeited | | | (10,919 | $7.92 | | | | | | ) |
| Outstanding at December 31, 2020 | | | 43,676 | $7.23 | | $253 | 4.91 | |
| Vested at December 31, 2020 | | | 43,676 | $7.23 | | $253 | 4.91 | |
| 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 one share of theCompany’s common stock upon departure from the Company. The fair value of DSUs are equal to the fairvalue of the Company’s common stock on the grant date. |
| On January 20, 2020, the Company granted 5,103 DSUs to Directors as compensation for director fees |
| from October 2019 through December 2019. At December 31, 2020 and 2019, there were 182,714 and177,611 DSUs outstanding, respectively. |
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| 9. | 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 theform of a fair value hierarchy that prioritizes the inputs into valuation techniques used to measure fair valueinto three broad levels. This hierarchy gives the highest priority to unadjusted quoted prices in activemarkets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should beclassified by level in their entirety based upon the lowest level of input that was significant to the fair valuemeasurement. 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 orliability or derived principally from corroborated observable market data. |
| 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 December 31, 2020 and 2019, the Company’s other financial instruments consist of cash and cash |
| equivalents, receivables, accounts payable and other current liabilities. The carrying amounts of thesefinancial instruments approximate fair value due to their short maturities. |
| Non-Financial Assets and Liabilities |
| The Company discloses and recognizes its non-financial assets and liabilities at fair value on a non- |
| recurring basis. The estimated fair value for these non-financial liabilities are classified as Level 3 of thefair value hierarchy, as the valuation was determined based on internally developed assumptions that marketparticipants would use in the pricing of such assets without observable inputs and no market activity. |
| The Company recorded its initial investment in affiliates at fair value. The estimated fair value for this |
| non-financial asset is classified as Level 3 of the fair value hierarchy, as the valuation was determined basedon internally developed assumptions with few observable inputs and no market activity. |
| 10. | Commitments, Contingencies and Guarantees |
| In determining 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 indicatesthat it is probable that a liability has been incurred at the date of the financial statements and the amount ofthe loss can be reasonably estimated. Legal expenses associated with the commitments and contingenciesare expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of theloss contingency is made in the combined financial statements when it is at least reasonably possible that amaterial loss could be incurred. |
| 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 changingand 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 suchfuture expenditures. |
| Legal |
| The Company is from time to time involved in various legal proceedings related to its business. |
| Management does not believe that adverse decisions in any pending or threatened proceeding or that |
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| amounts that may be required to be paid by reason thereof will have a material adverse effect of theCompany’s financial condition or results of operations. |
| Dowa Debt Agreements |
| In July 2017, the LGJV Entities entered into a loan agreement (the “Term Loan”) with Dowa whereby |
| the LGJV Entities could borrow up to $210,000 for LGD development, with a maturity date ofDecember 29, 2027. Interest on the Term Loan accrues daily at LIBOR plus 2.35%, with the interest to beadded to the amount borrowed until commencement of production. During 2018, the LGJV paid Dowa a$4,200 closing fee. Commencing June 30, 2021, 14 consecutive semi-annual equal payments of theaggregate principal and capitalized interest begin. The Company is required to pay an arrangement fee onthe borrowing, calculated as 2% per annum of 70% of the outstanding principal balance, payable in semi-annual installments, on that date which is two business days prior to June 30 and December 31 each fiscalyear until maturity, commencing after the initial drawdown which occurred in July 2018. The Term Loanalso requires additional principal payments equal to 70% of excess cash flows (as defined). As ofDecember 31, 2020, the LGJV had $222,783 outstanding under the Term Loan. |
| On January 23, 2018, the LGJV entered into a loan agreement (the “Dowa MPR Loan”) with Dowa |
| whereby the LGJV could borrow up to $65,700 to continue LGD development. Interest on this loan accrueddaily at LIBOR plus 1.5% and was added to the amount borrowed. The amount borrowed plus accruedinterest was due the earlier of June 30, 2019, or upon LGD’s substantial completion. If the Dowa MPR Loanwas not repaid in full on or before the due date, Dowa could elect to convert all or a portion of the principalamount into additional LGJV ownership at a favorable conversion rate. |
| In 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 DowaMPR Loan. In late May 2019, the Dowa MPR Loan was fully extinguished with a cash payment of $18,200and the conversion of the remaining $50,737 of principal and interest for an approximate 18.5% of theequity interest of the LGJV. The conversion of the remaining principal and interest increased Dowa’sownership in the LGJV entities to 48.5%. Due to the LGJV ownership dilution, the Company recognized adilution loss on affiliates of $11,231 in May 2019. At December 31, 2020, the ownership of the LGJVentities was 51.5% the Company and 48.5% Dowa. On March 11, 2021, the Company repurchased the18.5% interest from Dowa, for a total consideration of $71,550, including a 70% penalty and any Dowaholding costs of this incremental interest, increasing our ownership to 70.0%. |
| 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 capitalrequirements of the LGD. Interest on this loan accrues daily at LIBOR plus 3.0% and all outstandingprincipal and interest matures on June 28, 2021. The Company is required to pay an arrangement fee on theborrowing, calculated as 15.0% per annum of 70.0% of the average daily principal amount outstandingunder the WCF during such fiscal quarter. As of December 31, 2020, the LGJV had $60,000 outstandingunder the WCF. On March 11, 2021, we extinguished our portion of the WCF of $42,000. |
| The Company has guaranteed 70% of the outstanding principal and accrued interest of the Term Loan |
| and the WCF in the event of default by the LGJV. The Company has guaranteed the payment of allobligations, including accrued interest, under the LGJV equipment loan agreements. |
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| 11. | Income Taxes |
| The components of loss from continuing operations before income taxes were as follows for the years |
| ended December 31: |
| | 2020 | 2019 |
| U.S. | | $(32,964 | $(28,761 | ) | ) |
| Mexico | | (2,063 | (2,146 | ) | ) |
| Total | | $(35,027 | $(30,907 | ) | ) |
| The consolidated income tax benefit from continuing operations consisted of nil and nil, for the years |
| ended December 31, 2020 and 2019, respectively. |
| A reconciliation of the actual income tax benefit and the tax computed by applying the applicable U.S. |
| federal rate to the loss before income taxes is as follows for the years ended December 31: |
| | 2020 | 2019 |
| Tax benefit from continuing operations | | $ 7,356 | $ 6,491 |
| State tax benefit from continuing operations | | 1,577 | | 1,052 |
| Nondeductible expenses | | (773 | | (2 | ) | ) |
| Change in valuation allowance | | (8,707 | (10,111 | ) | ) |
| Effect of tax rate change | | 2,991 | | 666 |
| Effect of foreign tax rate differential | | | 49 | | 125 |
| Effect of reorganization on net operating loss | | (2,186 | | 2,100 | )) |
| Other | | (307 | | (321 | ) |
| Total income tax benefit | | $ | — | $ | — |
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| The components of the net deferred tax assets (liabilities) are summarized as follows for the year |
| ended: |
| | 2020 | 2019 |
| Deferred tax assets | | |
| Accrued compensation | $ | 457 | $ | 259 |
| Deferred share unit awards | | 218 | | 172 |
| Other accrued liabilities | | 26 | | 24 |
| Mineral properties | | 2,487 | | 2,332 |
| Exploration | | — | | 48 |
| Operating loss carryforward | 30,729 | 29,068 |
| Foreign deferred tax assets | 14,091 | | 8,736 |
| Stock options | | 8,182 | | 6,605 |
| Loan fees | | 1,303 | | 592 |
| Other | | 27 | | 26 |
| Valuation allowances | (56,320 | (47,600 | ) | ) |
| Total deferred tax assets | | 1,200 | | 262 |
| Deferred tax liabilities | | |
| Property, plant and equipment | | (276 | | (253 | ) | ) |
| Exploration and development | | (16 | | — | )) |
| Prepaid expenses | | (908 | | (9 | ) |
| Total deferred tax liabilities | (1,200 | | (262 | ) | ) |
| Net deferred income tax assets (liabilities) | $ | — | $ | — |
| Based upon the level of taxable income (loss) and projections of future taxable income (loss) over the |
| periods in which the deferred tax assets are deductible, management believes it is more likely than not thatthe Company will not realize the benefits of these deductible differences, and thus has recorded a valuationallowance from continuing operations against the United States and Mexico net deferred tax asset balancesof $56,320. If the Company is profitable for a number of years, and the prospects for the realization of thedeferred tax assets become more likely than not, the Company will then reverse all or a portion of thevaluation allowance that could result in a reduction of future reported income tax expense. |
| At December 31, 2020 the Company had $118,049 of net operating loss carryforwards from continuing |
| operations in the United States. Of the total net operating loss from continuing operations, $101,279 expireat various dates through 2037, and $16,769 may be carried forward indefinitely. There are also $5,572 of netoperating loss carryforwards (net of inflation adjustments) in Mexico which expire at various dates through2030. No assets have been recognized for net operating loss carryforwards where the Company believes it ismore likely than not that the net operating losses will not be realized. |
| The Company has adopted the provisions of ASC 740-10, Income Taxes. The Company files income |
| tax returns in the U.S. and Mexico. The statute of limitations for tax returns filed in the U.S. and Mexico isthree years and five years, respectively, from the date of filing. The Company’s 2020, 2019, 2018 and 2017U.S. tax returns are subject to examinations by U.S. tax authorities until 2024, 2023, 2022 and 2021,respectively. The Company is no longer subject to examinations by Mexico tax authorities for years prior to2016. |
| As of December 31, 2020, the Company has not recognized any increases or decreases in unrecognized |
| tax benefits, as it is more likely than not that all tax positions will be upheld by the taxing authorities. TheCompany reports tax penalties in income tax expense. No such penalties were recognized during the periodspresented. |
| Effective January 1, 2017, the Company’s Mexico assets and operations are owned by entities that have |
| elected to be treated for United States tax purposes as corporations and, as a result, the taxable income or |
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| loss and other tax attributes of such entities are stated separately from the Company’s United States assetsand operations and are not included in the Company’s United States federal consolidated income tax return.The Company’s other foreign assets and operations are owned by entities that have elected to be treated forU.S. tax purposes as unincorporated branches of a U.S. holding company and, as a result, the taxableincome or loss and other tax attributes of such entities are included in the Company’s U.S. federalconsolidated income tax return. |
| On December 22, 2017, the United States enacted comprehensive tax legislation commonly referred to |
| as the Tax Cuts and Jobs Act (the “Act”). The Act makes broad changes to the United States tax code forcorporations, including, but not limited to, (1) reducing the United States federal corporate tax rate from35% to 21%; (2) allowing immediate deductibility for 100% of expenditures for qualified property throughbonus depreciation; (3) eliminating the alternative minimum tax; and (4) changing rules related to uses andlimitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. |
| 12. | Discontinued Operations |
| On October 30, 2020 in conjunction with the IPO, Gatos Silver, Inc. (named Sunshine Silver Mining & |
| Refining Corporation prior to October 30, 2020) completed the distribution of its reportable U.S. segment,which was comprised of SOP. SOP holds an interest in the Sunshine Complex located in the Coeur d’AleneMining District in Idaho and is comprised of the Sunshine Mine and the Sunshine Big Creek Refinery. Toeffect the distribution, the Company distributed, on a pro rata basis, all equity interest of SOP to itsstockholders of record immediately prior to completion of the IPO. Shareholders received approximately0.10594 shares of common stock of SOP for every share of the Company’s common stock held. SOPbecame a wholly owned subsidiary of a newly created Delaware corporation named Silver OpportunityPartners Corporation, subsequently renamed to Sunshine Silver Mining & Refining Corporation. |
| The assets and liabilities have been reflected as discontinued operations in the consolidated balance |
| sheet as of December 31, 2019, and consist of the following: |
| | December 31, |
| | 2019 |
| Current Assets of Discontinued Operations | | | |
| Cash and cash equivalents | | $ | 504 |
| Restricted Cash | | | 315 |
| Materials and supplies inventory | | | 103 |
| Prepaid expenses | | | 201 |
| Total current assets of discontinued operations | | $ 1,123 |
| Non-Current Assets of Discontinued Operations | | | |
| Metals inventory | | $ | 250 |
| Property, plant and equipment, net | | 30,102 | | | (1) |
| Total non-current assets of discontinued operations | | $30,352 |
| Current Liabilities of Discontinued Operations | | | |
| Accounts payable and other accrued liabilities | | $ | 341 |
| Other | | | 307 |
| Total current liabilities of discontinued operations | | $ | 648 |
| Non-Current Liabilities of Discontinued Operations | | | |
| Reclamation obligations | | 1,439 |
| Total non-current liabilities of discontinued operations | | $ 1,439 |
| (1) | Property, plant and equipment of discontinued operations consisted of the following: |
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| | December 31, |
| | 2019 |
| Mineral properties | $ 18,203 |
| Plant and equipment | 13,621 |
| Land | | 1,814 |
| Buildings, infrastructure and improvements | 16,798 |
| Furniture, fixtures and computers | | 556 |
| Property, plant and equipment at cost | 50,992 |
| Less accumulated amortization | (20,890 | | ) |
| Property, plant and equipment, net | $ 30,102 |
| Mineral Properties |
| SOP conducts exploration activities on patented and unpatented mining claims in the United States. |
| SOP is required to make mineral and concession lease payments to various entities to secure the |
| appropriate claims or surface rights. Certain of these agreements also have royalty payments that aretriggered when SOP produces and sells minerals. |
| The results of discontinued operations are presented separately in the consolidated statements of |
| operations and comprehensive loss. The results of operations for this entity for the period ended October 30,2020 and year ended December 31, 2019 have been reflected as discontinued operations in the consolidatedstatements of operations and comprehensive loss for the years ended December 31, 2020 and 2019, andconsist of the following: |
| | | December 31, | December 31, |
| | | 2020 | 2019 |
| Operating Expenses of Discontinued Operations | | | | | | |
| Exploration | | $ 352 | $ 325 |
| Pre-development | | 1,700 | 2,317 |
| General and administrative | | 1,431 | 1,943 |
| Amortization | | 1,935 | 2,335 |
| Total expenses | | 5,418 | 6,920 |
| Other Income of Discontinued Operations | | | | | | |
| Other income | | | (4 | | (10 | ) | | ) |
| Net Loss of Discontinued Operations | | $5,414 | $6,910 |
| Other Comprehensive Gain of Discontinued Operations | | | | | | |
| Unrealized gain on securities, net of tax | | | — | | (32 | | ) |
| Comprehensive Loss of Discontinued Operations | | $5,414 | $6,878 |
| The Company has separately reported the cash flow activity of the discontinued operations in the |
| consolidated statements of cash flows. The cash flow activity from discontinued operations for the periodended October 30, 2020 and year ended December 31, 2019 have been reflected as discontinued operationsin the consolidated statements of cash flows for the years ended December 31, 2020 and 2019, and consistof the following: |
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| | December 31, | December 31, |
| | 2020 | 2019 |
| Discontinued Operating Activities | | | | |
| Net loss | $(5,414 | $(6,910 | ) | ) |
| Adjustments to reconcile net loss to net cash used by operating activities: | | | | |
| Amortization | 1,935 | 2,335 |
| Stock compensation expense | | 195 | | 212 |
| Accretion expense | | 91 | | 102 |
| Other | | — | | 63 |
| Changes in operating assets and liabilities: | | | | |
| Accounts payable and other accrued liabilities | (256 | | 97 | )))) |
| Materials and supplies inventory | | | | (2 | | 67 |
| Other current assets | | | | (2 | | 17 |
| Net cash used by operating activities of discontinued operations | (3,453 | (4,017 | ) |
| Investing Activities of Discontinued Operations | | | | |
| Purchase of property, plant and equipment | | (22 | (534 | ) | ) |
| Transfers of restricted cash to cash | | 40 | | — |
| Net cash provided by (used by) investing activities of discontinued |
| | | | | | operations | | 18 | (534 | ) |
| Financing Activities of Discontinued Operations | | | | |
| Related-party convertible notes | | 500 | | — |
| PPP Loan proceeds | | 307 | | — |
| Net cash provided by financing activities of discontinued operations | | 807 | | — |
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| 13. | Segment Information |
| The Company operates in a single industry as a corporation engaged in the acquisition, exploration and |
| development of silver mineral interests. The Company has mineral property interests in Mexico. TheCompany’s reportable segments are based on the Company’s mineral interests and management structureand include Mexico and Corporate segments. The Mexico segment engages in the exploration, developmentand operation of the Company’s Mexican mineral interests and includes the Company’s investment in itsLGJV. Financial information relating to the Company’s segments is as follows: |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| | Mexico | | | Corporate | Total | Mexico | Corporate | | | Total |
| Exploration | | $ | 785 | $ | | | — $ | 785 $ | 923 $ | | | | — $ | 923 |
| General and administrative | | | 549 | | | | 7,216 | 7,765 | 296 2,607 | | | 2,903 |
| Amortization | | | — | | | | 30 | 30 | — | | | | 34 | 34 |
| Arrangement fees | | | — | | | | 4,843 | 4,843 | — 2,988 | | | 2,988 |
| Interest expense | | | — | | | | 4,047 | 4,047 | — | | | | — | — |
| Equity loss in affiliates | | 17,585 | | | | — 17,585 12,865 | | | — 12,865 |
| Dilution loss on affiliates | | | — | | | | — | — 11,231 | | | | | — 11,231 |
| Net other loss (income) | | | 9 | | | | (37 | (28 | 31 | | | | (67 | (36 | ) | ) | | | | ) | ) |
| Capital expenditures | | | — | | | | — | — | — | | | | — | — |
| Total assets | | 38,326 | 227,084 265,410 55,372 67,448 122,820 |
| 14. Investment in Affiliates |
| During the years ended December 31, 2020 and 2019, the Company recognized a $17,585 and $12,865 |
| loss, respectively, on its investment in the LGJV Entities, representing its ownership share of the LGJVEntities’ operational results. The combined balance sheets and combined statements of loss of the LGJVEntities as of December 31, 2020 and 2019, and for the years ended December 31, 2020 and 2019 are asfollows: |
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| | Independent Auditors’ Report |
| The Board of Managers Los Gatos Joint Venture: |
| We have audited the accompanying combined financial statements of Los Gatos Joint Venture and its |
| subsidiaries, which comprise the combined balance sheets as of December 31, 2020 and 2019, and therelated combined statements of loss, owners’ capital, and cash flows for the years then ended, and therelated notes to the combined financial statements. |
| Management’s Responsibility for the Financial Statements |
| Management is responsible for the preparation and fair presentation of these combined financial |
| statements in accordance with U.S. generally accepted accounting principles; this includes the design,implementation, and maintenance of internal control relevant to the preparation and fair presentation ofcombined financial statements that are free from material misstatement, whether due to fraud or error. |
| Auditors’ Responsibility |
| Our responsibility is to express an opinion on these combined financial statements based on our audits. |
| We conducted our audits in accordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the combined financial statements are free from material misstatement. |
| An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in |
| the combined financial statements. The procedures selected depend on the auditors’ judgment, including theassessment of the risks of material misstatement of the combined financial statements, whether due to fraudor error. In making those risk assessments, the auditor considers internal control relevant to the entity’spreparation and fair presentation of the combined financial statements in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness of significantaccounting estimates made by management, as well as evaluating the overall presentation of the combinedfinancial statements. |
| We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for |
| our audit opinion. |
| Opinion |
| In our opinion, the combined financial statements referred to above present fairly, in all material |
| respects, the financial position of Los Gatos Joint Venture and its subsidiaries as of December 31, 2020 and2019, and the results of their operations and their cash flows for the years then ended in accordance withU.S. generally accepted accounting principles. |
| | | /S/KPMG LLP |
| Denver, Colorado March 29, 2021 |
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| | LOS GATOS JOINT VENTURE |
| | | COMBINED STATEMENTS OF CASH FLOWS |
| | FOR THE YEARS ENDED DECEMBER 31, |
| | | | (In thousands) |
| | | | | 2020 | 2019 |
| Cash flows from operating activities: | | | | | |
| Net loss | | | | $(27,716 | $ (22,103 | ) | ) |
| Adjustments to reconcile net loss to net cash provided by (used by) operating activities: | | | | | |
| Depreciation, depletion and amortization | | | | 44,905 | | 15,460 |
| Arrangement fee | | | | | 8,888 | | 3,524 |
| Accretion | | | | | 849 | | 789 |
| Unrealized loss on foreign currency rate change | | | | | 4,696 | | 272 |
| Interest expense | | | | | 111 | | — |
| Other | | | | | 77 | | (116 | ) |
| Changes in operating assets and liabilities: | | | | | |
| VAT receivable | | | | (6,071 | (19,569 | ) | ))) |
| Receivables | | | | | 1,667 | | (5,655 |
| Inventories | | | | | 5,055 | | (7,027 |
| Unearned revenue | | | | | 3,276 | | — |
| Other current assets | | | | (1,781 | | (977 | ) | ) |
| Accounts payable and other accrued liabilities | | | | | 9,569 | | 13,368 |
| Payables to related parties | | | | | 4,276 | | 3,281 |
| Accrued interest | | | | | 71 | | 2,745 |
| Net cash provided by (used by) operating activities | | | | 47,872 | (16,008 | ) |
| Cash flows from investing activities: | | | | | |
| Deposits | | | | | — | | 1,005 |
| Other current assets | | | | | — | | 2,568 |
| Mine development | | | | (50,618 | (74,630 | ) | ) |
| Purchase of property, plant and equipment | | | | (14,249 | (53,727 | ) | ) |
| Materials and supplies inventory | | | | | 431 | | — |
| Accrued interest | | | | | — | | (513 | ) |
| Transfers from restricted cash | | | | | — | | 2,219 |
| Net cash used by investing activities | | | | (64,436 | (123,078 | ) | ) |
| Cash flows from financing activities: | | | | | |
| Capital contributions | | | | | 5,000 | | 18,200 |
| Dowa MPR Loan paydown | | | | | — | (17,336 | ) |
| Equipment loan payments | | | | (6,966 | | (6,485 | ) | ) |
| Working Capital Facility advances | | | | | — | | 60,000 |
| Dowa Term Loan borrowings | | | | | — | | 75,000 |
| Related party borrowings | | | | 18,904 | | — |
| Deferred financing costs | | | | | — | | (222 | ) |
| Net cash provided by financing activities | | | | 16,938 | 129,157 |
| Net increase (decrease) in cash and cash equivalents | | | | | 374 | | (9,929 | ) |
| Cash and cash equivalents, beginning of period | | | | | 1,302 | | 11,231 |
| Cash and cash equivalents, end of period | | | | $ 1,676 | $ | 1,302 |
| Interest paid | | | | $ 7,406 | $ | 3,940 |
| Supplemental dislosure of noncash transactions: | | | | | |
| Accrued interest | | | | $ | — | $ | 8,535 |
| Equipment loan borrowings | | | | $ | — | $ | 7,679 |
| Conversion of related party payables to equity | | | | $ 9,448 | $ | — |
| Conversion of related party borrowings to equity | | | | $ 18,904 | $ | — |
| Conversion of MPR Loan to equity | | | | $ | — | $ 50,737 |
| Conversion of related party accrued interest to debt | | | | $ | 854 | $ 10,179 |
| Depreciation expense included in mine development | | | | $ | — | $ | 4,589 |
| Materials and supplies included in accrued liabilities | | | | $ 4,428 | $ | — |
| Mine development costs included in accrued liabilities | | | | $ 11,229 | $ 10,720 |
| Property, plant and equipment included in accrued liabilities | | | | $ 8,917 | $ 10,290 |
| Deferred finacning costs included in PPE and mine development | | | | $ | — | $ | 495 |
| Equity method investee portion of arrangement fee | | | | $ | — | $ | 2,634 |
| | | | | | | See accompanying notes to the combined financial statements. |
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| | LOS GATOS JOINT VENTURE |
| | | NOTES TO THE COMBINED FINANCIAL STATEMENTS |
| | | | (In thousands, except share, per share and option amounts, tonnes or as otherwise noted) |
| 1. | Description of Business and Basis of Preparation |
| These combined financial statements represent the combined financial position and results of |
| operations of the Los Gatos Joint Venture (“LGJV” or “the Company”). Unless the context otherwiserequires, references to LGJV or the Company mean the Los Gatos Joint Venture. |
| On January 1, 2015, the LGJV was established to develop the Los Gatos Project (LGP) in northern |
| Mexico. The LGJV consists of Minera Plata Real S. de R.L. de C.V. (“MPR”), Operaciones San Jose dePlata S. de R.L. de C.V. and Servicios San Jose de Plata S. de R.L. de C.V. (collectively the “LGJVEntities”). Upon completion of their $50,000 funding to the LGJV, Dowa Metals & Mining, Ltd. (“Dowa”)acquired a 30% interest in the LGJV Entities and the right to purchase future zinc-concentrate production atmarket rates. The remaining 70% interest in the LGJV entities was owned by Gatos Silver, Inc. (“GatosSilver”) (Sunshine Silver Mining & Refining Corporation prior to October 30, 2020). Gatos Silvercontributed $18,200 to OSJ in May 2019 to provide funding for a partial repayment of principal and interestrelated to the Dowa MPR Loan. In late May 2019, the Dowa MPR Loan was fully extinguished with a cashpayment of $18,200 and the conversion of the remaining $50,737 of principal and interest. The conversionof the remaining principal and interest increased Dowa’s ownership in the LGJV entities by 18.5% to48.5%. On March 11, 2021, Gatos Silver repurchased the 18.5% interest from Dowa. The current ownershipof the LGJV Entities is 70% Gatos Silver and 30% Dowa. |
| On September 1, 2019, the LGP commenced commercial production of its two concentrate products; a |
| lead concentrate and a zinc concentrate. The Company’s lead and zinc concentrates are sold to third-partycustomers. |
| 2. | Summary of Significant Accounting Policies |
| Risks and uncertainties |
| As a mining company, the Company’s revenue, profitability and future rate of growth are substantially |
| dependent on prevailing prices for silver, zinc, lead and gold. Historically, the commodity markets havebeen quite volatile, and there can be no assurance that commodity prices will not be subject to widefluctuations in the future. A substantial or extended decline in commodity prices could have a materialadverse effect on the Company’s financial position, results of operations, cash flows, and the quantities ofreserves the Company can economically produce. The carrying value of the Company’s property, plant andequipment, mine development, inventories and stockpiles are particularly sensitive to the outlook forcommodity prices. A substantial or extended decline in the Company’s price outlook could result in materialimpairment charges related to these assets. Additionally, changes in other factors such as changes in mineplans, increases in costs, geotechnical failures, and changes in social, environmental or regulatoryrequirements can adversely affect the Company’s ability to recover its investment in certain assets and resultin impairment charges. |
| The Company has considered and assessed the risk resulting from its concentrate sales arrangements |
| with its customers. In the event that the Company’s relationships with its customers are interrupted for anyreason, the Company believes that it would be able to locate another customer to purchase its metalsconcentrates; however, any interruption could temporarily disrupt the Company’s sale of its products andadversely affect operating results. |
| Our business could be adversely affected by the widespread outbreak of a health epidemic, |
| communicable disease or any other public health crisis. For example, the outbreak of COVID-19 in theUnited States, Mexico and elsewhere has created significant business disruption and adversely affected ourbusiness and operations. In late March 2020, the Mexican government declared a national health emergencydue to increasing infection rates from the COVID-19 pandemic. Pursuant to the health emergencydeclaration, the Mexican government ordered a temporary suspension of all “non-essential” operationsnationwide in Mexico, including mining operations, in order to help combat the spread of COVID-19. In |
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| late May 2020, the Mexican government designated mining an essential service and allowed mines toresume production, subject to deploying COVID-19 prevention protocols. |
| Use of estimates |
| The preparation of financial statements in conformity with accounting principles generally accepted in |
| the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of thecombined financial statements and the reported amounts of revenues and expenses during the reportingperiod. The Company bases its estimates on historical experience and various other assumptions that arebelieved to be reasonable given the specific circumstances. Actual results could differ from those estimates.Significant items subject to such estimates and assumptions include receivables; inventories; mineralproperties; reclamation and closure obligations; valuation allowances for deferred tax assets; depreciation,depletion and accretion and the fair value of financial instruments. |
| Functional currency and translation of foreign currencies |
| The U.S. dollar is the LGJV’s functional currency. Monetary assets and liabilities denominated in |
| foreign currencies are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with theresulting gains or losses reported in foreign exchange (gain) loss in the computation of net loss. Non-monetary assets and liabilities are translated into U.S. dollars at historical exchange rates. Expenses andother income and expense items in foreign currencies are translated into U.S. dollars at average or historicalexchange rates. |
| Cash and cash equivalents |
| The Company considers all highly liquid investments with a maturity of three months or less when |
| purchased to be cash equivalents. |
| Receivables |
| Trade receivables and other receivable balances are reported at outstanding principal amounts, net of an |
| allowance for doubtful accounts, if deemed necessary. Management evaluates the collectability of receivableaccount balances to determine the allowance, if any. Management considers the other party’s credit risk andfinancial condition, as well as current and projected economic and market conditions, in determining theamount of the allowance. If management determines a receivable balance is uncollectible, the uncollectableportion will be recognized as a loss. |
| Metal and Materials Inventories |
| The Company’s inventories include ore, concentrate and operating materials and supplies. The |
| classification of ore and concentrate inventories is determined by the production stage of the ore. Allinventories are stated at the lower of cost or net realizable value. Cost is determined using the average costmethod for all inventories and includes applicable taxes and freight. Ore inventory represents stockpiled orethat is available for processing. Concentrate inventory represents stockpiled lead or zinc concentrate that isavailable for shipment or in transit to customers. Ore and concentrate inventories include applicableoperating and overhead costs. |
| Mine development |
| LGP’s proven and probable reserves were established in early January 2017. Accordingly, subsequent |
| development costs were capitalized as mine development assets until September 1, 2019 when the LGPachieved production. Subsequent to September 1, 2019, costs incurred to further develop the mine includingthe building of access ways, shafts, lateral access, drifts, ramps and other infrastructure are capitalized tomine development assets. Upon the commencement of production, capitalized costs are charged tooperations using the units-of-production method in the period the applicable metal reserves are processedover the estimated proven and probable reserve tons directly benefiting from the capital expenditures. TheLGJV incurred $19,117 and $7,291 for the years ended December 31, 2020 and 2019, respectively, indepletion expense. |
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| Upon abandonment or sale of a mineral property, any remaining capitalized mine development costs |
| relating to such property will be removed from the balance sheet and a gain or loss recognized. |
| Property, plant and equipment |
| Property, plant and equipment are recorded at cost and depreciation is calculated on the straight-line |
| method over the estimated useful lives of the assets. The estimated useful lives of plant and equipment andinfrastructure range between three years and the end of the proven and probable reserves mine life. Theestimated useful lives of furniture, fixtures and computers range from three to ten years. |
| Impairment of long-lived assets |
| Long-lived assets, such as property, plant and equipment are reviewed for impairment whenever events |
| or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Ifcircumstances require a long-lived asset or asset group to be tested for possible impairment, the Companyfirst compares undiscounted cash flows expected to be generated by that asset or asset group to its carryingvalue. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cashflow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fairvalue is determined through various valuation techniques including discounted cash flow models, quotedmarket values and third-party independent appraisals, as considered necessary. There were no impairmentsrecognized for 2020 or 2019. |
| Value added tax receivable and payable |
| Value added taxes (“VAT”) are assessed on purchases of materials, services and sales of products. The |
| Company is entitled to recover the taxes they have paid related to purchases of materials and services. TheCompany collects VAT when certain products are sold to customers. VAT receivables represent refundablevalue-added taxes paid to the Mexican government on certain transactions in Mexico. The Company recordsthe VAT cash flows as operating activities in the combined statement of cash flows, given the short-term,refundable and operating characteristics of these cash flows. |
| Reclamation and remediation costs (asset retirement obligations) |
| The Company has asset retirement obligations (“ARO”) arising from regulatory requirements to |
| perform certain property and asset reclamation activities at the end of the respective asset life. An ARO isrecognized when incurred and is initially measured at fair value and subsequently adjusted for accretionexpense and changes in the amount or timing of the estimated cash flows. The corresponding assetretirement costs are capitalized as part of the carrying amount of the related long-lived asset and amortizedover the asset’s remaining useful life. The ARO is based on timing of expected spending for an existingenvironmental disturbance. The Company reviews, on an annual basis, unless otherwise deemed necessary,its reclamation obligation. |
| Revenue Recognition |
| The Company generates revenue by selling silver-bearing lead and zinc concentrates. Concentrate sales |
| are initially recorded based on 100% of the provisional sales prices, net of estimated treatment and refiningcharges, when it satisfies the performance obligation of transferring control of the concentrate to thecustomer. Concentrate revenue is initially recorded on a provisional basis based on historical prices andprovisional assays. Final settlement is based on the final assays and an applicable price as determined by afuture quotational period at the time of sale, typically one to three months. Market changes in the prices ofmetals between the delivery and final settlement dates will result in adjustments to revenues related topreviously recorded sales of concentrate. |
| Income taxes |
| The Company’s income tax jurisdiction is Mexico. Income taxes are accounted for under the asset and |
| liability method. Deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilitiesand their |
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| respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes the enactment date. The Companyrecognizes the effect of income tax positions only if those positions are more likely than not of beingsustained. Recognized income tax positions are measured at the largest amount that is greater than 50%likely of being realized. Changes in recognition or measurement are reflected in the period in which thechange in judgment occurs. The Company recognizes tax penalties in income tax expense. |
| Recently issued accounting standards |
| In February 2016, the FASB issued ASU 2016-02 which will require lessees to recognize assets and |
| liabilities for the rights and obligations created by most leases on the balance sheet. These changes becomeeffective for the Company’s fiscal year beginning January 1, 2021. The Company is still assessing theimpact of the standard but does not expect there will be a material impact to the Combined Balance Sheet,Combined Statement of Income (Loss) or the Combined Statements of Cash Flows as a result of theadoption of ASU 2016-02. The Company is in the process of assessing the required disclosures of the newstandard and expects to provide additional qualitative and quantitative disclosures related to its leasingarrangements upon adoption. |
| In December 2019, ASU No. 2019-12 was issued to simplify and enhance accounting for income taxes. |
| This update is effective in fiscal years, beginning after December 15, 2021, and interim periods withinfiscal years beginning after December 15, 2022, and early adoption is permitted. The Company iscompleting its assessment of the impact and anticipated adoption date of this guidance. |
| In March 2020, the FASB issued ASU No. 2020-04 which provides optional guidance for a limited |
| period of time to ease the potential burden in accounting for (or recognizing the effects of) reference ratereform on financial reporting associated with transitioning away from reference rates that are expected to bediscontinued, such as interbank offered rates and the London Interbank Offered Rate (“LIBOR”). Theamendments are effective as of March 12, 2020 through December 31, 2022. The Company is evaluating thepotential impact this guidance may have but does not expect there will be a material impact to theCompany’s financial statements. |
| 3. | Sales |
| The Company’s concentrate sales for the year ended December 31, are summarized below: |
| | | | 2020 | | 2019 | |
| Lead Concentrate | | $ 90,883 $28,437 |
| Zinc Concentrate | | 30,587 8,071 |
| | | $121,470 $36,508 |
| During 2020, the Company entered into an agreement with a customer for a $6,000 prepayment on |
| future sales, to be satisfied through the delivery of concentrate through March 31, 2021. Interest on theprepayment is incurred at 7% per annum, due monthly. The prepayment balance, presented as unearnedrevenue on the balance sheet, is $3,276 at December 31, 2020. |
| 4. | Inventories |
| The Company’s inventories as of December 31, are summarized below: |
| | | | 2020 | | 2019 | |
| Ore stockpiles | | $ 1,178 $ 4,863 |
| Concentrate stockpiles | | 590 1,096 |
| Material & supplies | | 8,547 5,415 |
| | | $10,315 $11,374 |
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| 5. | Other Current Assets |
| The Company’s other current assets as of December 31, are summarized below: |
| | | 2020 | 2019 |
| Prepaid expenses | | $2,179 $1,432 |
| Deposits and other | | 712 240 |
| | | $2,891 $1,672 |
| 6. | Property, Plant and Equipment, net |
| The Company’s property, plant and equipment as of December 31, are summarized below: |
| | | | 2020 | | 2019 | |
| Mineral properties | | $ | 853 $ | 853 |
| Plant & equipment | | 69,297 64,469 |
| Land | | 14,422 14,422 |
| Infrastructure & improvements | | 152,942 152,290 |
| Furniture, fixtures & computers | | | 509 | 508 |
| Property, plant & equipment at cost | | 238,023 232,542 |
| Less accumulated amortization | | (41,081 (16,411 | ) | | ) |
| | | $196,942 $216,131 |
| Mineral Properties |
| The Company conducts exploration activities under mining concessions in Mexico. |
| The Company is required to make mineral and concession lease payments to various entities to secure |
| its claims or surface rights. One of these agreements also requires royalty payments based on the productionand sale of minerals. |
| Mining Concessions and Agreement |
| In Mexico, mineral concessions from the Mexican government can only be held by Mexican nationals |
| or Mexican-incorporated companies. The concessions are valid for 50 years and are extendable provided theconcessions are kept in good standing. For concessions to remain in good standing, a semi-annual fee mustbe paid to the Mexican government and a report must be filed each year which covers the workaccomplished on the property during the previous year. These concessions may be cancelled without penaltywith prior notice to the Mexican government. |
| MPR is the concession holder of a series of mineral concessions granted by the Mexican government. |
| The rights to certain concessions are held through exploration agreements with purchase options or afinder’s fee agreement, as discussed below: |
| La Cuesta International S.A. de C.V. (La Cuesta) |
| The Company is required to pay a production royalty of a) 2% net smelter return on production from |
| the concession until all payments reach $10,000 and b) 0.5% net smelter return on production from theconcession after total payments have reached $10,000 and c) 0.5% net smelter return on production fromother property within a one-kilometer boundary of the Los Gatos concession. After total payments reach$15,000, the Los Gatos concession ownership will be transferred to the Company. The agreement has noexpiration date; however, the Company may terminate the agreement upon a 30-day notice. The agreementwas revised in 2019 to allow a portion of production royalty payments to be deferred. The Company paid$600 and $45 for this obligation for the years ended December 31, 2020 and 2019, respectively, resulting in$1,135 paid through December 31, 2020. |
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| As of December 31, 2020, the Company’s minimum remaining production royalty obligation is |
| summarized in the table below: |
| | 2021 | $ 2,000 |
| | 2022 | 575 |
| | 2023 | 100 |
| | 2024 | 100 |
| | 2025 | 100 |
| | Thereafter | 10,990 |
| | Total | $13,865 |
| 7. | Accounts Payable and Other Accrued Liabilities |
| The Company’s accounts payable and other accrued liabilities as of December 31, are summarized |
| below: |
| | | | | 2020 | | 2019 | |
| Accounts payable | | | $25,022 $29,669 |
| Accrued expenses | | | 9,408 12,580 |
| Accrued payroll & taxes | | | 1,337 1,038 |
| | | | $35,767 $43,287 |
| 8. | Related-Party Transactions |
| Effective January 1, 2015, the LGJV has a management services agreement with Gatos Silver whereby, |
| Gatos Silver provides certain consulting and administrative services. The LGJV incurred $3,900 and $5,100for the years ended December 31, 2020 and 2019, respectively, for these services. Certain expenses incurredby the owners on behalf of the LGJV are reimbursed. |
| 9. | Related Party Debt |
| On July 11, 2017, the Company entered into a loan agreement (“Term Loan”) with Dowa whereby the |
| Company can borrow up to $210,000 for LGP development, with a maturity date of December 29, 2027.Interest on this loan accrues daily at LIBOR plus 2.35%, but the interest is added to the amount borrowedfor repayment monthly until the LGP commences concentrate production. A $4,200 fee was paid to Dowaduring 2018 upon the loan closing. Commencing June 30, 2021, 14 consecutive semi-annual equal paymentsof the aggregate principal plus accrued interest on the payment date begin. The Term Loan also requiresaccelerated principal payments equal to 70% of excess cash flows (as defined) from the LGP. As ofDecember 31, 2020, the Company had $222,783 outstanding, including $12,783 of interest, under the TermLoan. Prior to production commencing in September 2019, $7,100 interest was capitalized to MineDevelopment or Property, Plant and Equipment. Subsequent to the commencement of production, interestwas expensed. Interest expense for the years ended December 31, 2020 and 2019 are $8,007 and $3,400,respectively. |
| On January 23, 2018, the Company entered into a loan agreement (“Dowa MPR Loan”) whereby the |
| Company could borrow up to $65,000 for LGP development. Interest on this loan accrues daily at LIBORplus 1.5%. but the interest is added to the amount borrowed. All interest was capitalized to MineDevelopment or Property, Plant and Equipment. The amount borrowed, including accrued and unpaidinterest, was due the earlier of June 30, 2019, or upon substantial completion of the LGP development. Ifthe Dowa MPR Loan was not repaid by the maturity date, Dowa could elect to convert all or a portion ofGatos Silver’s portion of the outstanding Dowa MPR Loan, including accrued interest, to additional equityin the LGJV Entities at 170% of Gatos Silver’s portion of the outstanding balance (“Additional Equity”). IfGatos Silver’s ownership in the LGJV Entities was diluted, for two years from the maturity date, GatosSilver can repurchase the Additional Equity for 170% of such value plus all costs and expenses incurred byDowa to acquire and hold the Additional Equity. In May 2019, Gatos Silver contributed $18,200 to OSJ toprovide funding for a partial repayment of principal and interest related to the Dowa MPR Loan. InMay 2019, the |
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| Dowa MPR Loan was fully extinguished with a principal and interest payment of $18,200 and theconversion of the remaining principal and interest of $50,737 to additional Dowa ownership in the LGJVentities. Subsequent to this transaction the ownership of the LGJV entities was 51.5% Gatos Silver and48.5% Dowa. |
| On May 30, 2019, the LGJV entered into a working capital facility agreement (“WCF”) with Dowa |
| whereby the LGJV could borrow up to $60,000 to fund the working capital and sustaining capitalrequirements of the LGP. Interest on the WCF accrues daily at LIBOR plus 3.0%. The maturity date of theWCF is June 28, 2021. As of December 31, 2020, the LGJV had $60,000 of principal and $5 of accruedinterest outstanding under this facility. The Company paid interest of $2,530 and $1,419 under this facilityfor the years ended December 31, 2020 and 2019, respectively. |
| Gatos Silver incurs certain fees on behalf of the LGJV entities related to the Term Loan and WCF. Prior |
| to production, these fees were capitalized. Subsequent to production, these fees were expensed. |
| On March 11, 2021, pursuant to the definitive agreement between Gatos Silver and Dowa, Gatos Silver |
| repurchased an additional 18.5% interest from Dowa, increasing Gatos Silver’s interest to 70% and theWCF was extinguished with partner capital contributions. |
| Scheduled minimum debt repayments for the years ending December 31 are summarized below: |
| | 2021 | $ 98,910 |
| | 2022 | 37,474 |
| | 2023 | 32,298 |
| | 2024 | 31,826 |
| | 2025 | 31,826 |
| | Thereafter | 63,652 |
| | | $295,986 |
| 10. | Owners’ Capital |
| During 2020, Gatos Silver and Dowa, contributed $17,227 and $16,236, respectively, as owners’ |
| capital to the LGJV to support limited operations during the temporary, government-mandated COVID-19suspension. A portion of Gatos Silver contributions resulted from conversion of $9,448 of LGJV payables tocapital contributions in the LGJV. |
| 11. | Asset Retirement Obligations |
| In 2015, the Company recognized an ARO related to the work performed at the LGP. The Company |
| estimated the present value of the estimated future cash flows required to revegetate the disturbed areas andperform any required monitoring. The Company used a discount rate and interest rate of 9% and 1%,respectively, to calculate the present value of this obligation, related to the disturbance of land around themine portal, waste rock dump and road to the explosives storage area. |
| In 2018, the Company recognized an ARO related to the additional development work performed at the |
| LGP. The Company estimated the present value of the estimated future cash flows required to reclaim thedisturbed areas and perform any required monitoring. The Company used a discount rate and interest rate of7.5% and 3%, respectively, to calculate the present value. |
| The Company recorded accretion expense related to the ARO of $848 and $789 for the years ended |
| December 31, 2020 and 2019, respectively. The following table summarizes activity in the Company’s AROas of December 31: |
| | | | | 2020 | | | 2019 | |
| | Balance, beginning of period | | $11,314 $10,525 |
| | Accretion expense | | 848 789 |
| | ARO additions | | | — | | — |
| | Balance, end of period | | $12,162 $11,314 |
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| 12. | 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 theform of a fair value hierarchy that prioritizes the inputs into valuation techniques used to measure fair valueinto three broad levels. This hierarchy gives the highest priority to unadjusted quoted prices in activemarkets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should beclassified by level in their entirety based upon the lowest level of input that was significant to the fair valuemeasurement. 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 theasset or liability or derived principally from corroborated observable market data. |
| | 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 orliability. |
| Financial Assets and Liabilities |
| At December 31, 2020 the Company’s financial instruments consist of cash and cash equivalents, |
| receivables, restricted cash, other current assets, accounts payable and other current liabilities. The carryingamounts of these financial instruments approximate fair value due to their short maturities. |
| The following table details the fair value of the Company’s debt obligations as of December 31, 2020 |
| and 2019 and are included in Level 2 of the fair value hierarchy. The Term Loan is carried at amortized cost.The fair value of the WCF approximates carrying value as the liability is secured, has a variable interestrate, and lacks credit concerns. The carrying value of the equipment loans approximate fair value as theliability is secured by the underlying equipment, guaranteed by Gatos Silver, and lacks significant creditconcerns. The fair value of the Term Loan was estimated using inputs directly related to the obligations. Thefollowing table summarizes the fair value as of December 31: |
| | | | | 2020 | | 2019 | |
| Term Loan | | | $219,593 $217,796 | (1) |
| WCF | | | 60,000 60,000 |
| Equipment Loans | | | 13,204 19,864 |
| | | | $292,797 $297,660 |
| (1) | Net of unamortized debt discount of $3,190 and $4,133 as of December 31, 2020 and 2019,respectively. |
| Non-Financial Assets and Liabilities |
| The Company discloses and recognizes its non-financial assets and liabilities, such as ARO, at fair |
| value on a non-recurring basis. The estimated fair value for these non-financial assets and liabilities areclassified as Level 3 of the fair value hierarchy, as the valuation was determined based on internallydeveloped assumptions that market participants would use in the pricing of such liabilities withoutobservable inputs and no market activity. |
| 13. | Commitments and Contingencies |
| In determining 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 indicatesthat it is probable that a liability has been incurred at the date of the financial statements and the amount ofthe loss can be reasonably estimated. Legal expenses associated with the commitments and contingenciesare expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of theloss |
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| contingency is made in the combined financial statements when it is at least reasonably possible that amaterial loss could be incurred. |
| The Company’s mining, development and exploration activities are subject to various laws, regulations |
| and permits governing the protection of the environment. These laws, regulations and permits arecontinually changing and are generally becoming more restrictive. The Company has made, and expects tomake in the future, expenditures to comply with such laws, regulations and permits, but cannot predict thefull amount of such future expenditures. |
| From time to time, the Company may be involved in legal proceedings related to its business. |
| Management does not believe that adverse decisions in any pending or threatened proceeding or thatamounts that may be required to be paid by reason thereof will have a material adverse effect of theCompany’s combined financial condition or results of operations. |
| 14. | Equipment Loans |
| During 2020 and 2019, the LGJV Entities entered into equipment loan agreements, with repayment |
| over four years at interest rates ranging from 5.76% to 8.67%, to finance a portion of mining equipmentpurchases. As of December 31, 2020, and 2019, the Company had outstanding loans of $13,237 and$19,915, respectively, net of unamortized debt discount of $33 and $51, respectively. For the years endedDecember 31, 2020 and 2019, we incurred $1,289 and $1,647 of interest on these loans, respectively. Priorto production in September 2019 all interest was capitalized to Property, Plant and Equipment. Subsequentto production, all interest on equipment was expensed. Gatos Silver has guaranteed the payment of allobligations, including accrued interest, under the equipment loan agreements. |
| 15. | Income Taxes |
| The combined loss before income taxes in Mexico is $27,716 and $22,103 for the years ended |
| December 31, 2020 and 2019, respectively. The combined current and deferred income tax expense forthe years ended December 31, 2020 and 2019 was nil. |
| A reconciliation of the actual income tax expense (benefit) and the tax computed by applying the |
| Mexico federal rate (30%) to the loss before income taxes for the year ended December 31, is as follows: |
| | | | 2020 | | 2019 |
| Tax benefit from continuing operations | | $(8,315 $(6,631 | ) | ) |
| Nondeductible expenses | | 6,049 2,244 |
| Change in valuation allowance | | 543 3,772 |
| NOL inflation adjustment | | 8,876 | | 41 |
| NOL expiration | | 1,454 574 |
| NOL utilization | | (1,785 | | — | )) |
| Other | | (6,822 | | — |
| | | $ | — $ | — |
| The net operating loss (NOL) inflation rate adjustment relates to historical net operating loss |
| carryforwards in Mexico from 2010 to 2019. These historical carryforwards have been inflation-adjustedbased upon an inflation factor published by the central bank of Mexico, as any inflationary adjustment willimpact the Company’s basis in the net operating losses during the carryforward period. |
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| A summary of the components of the net deferred tax assets for the year ended December 31, is as |
| follows: |
| | | | 2020 | | 2019 | |
| Deferred tax assets | | | | |
| | | | | Accrued expenses | $ 2,468 $ | | 112 |
| | | | | Unearned revenue | | 990 | — |
| | | | | Fixed assets | 3,033 | | — |
| | | | | Reclamation obligations | 3,649 | | — |
| | | | | Exploration and development | 9,958 8,451 |
| | | | | Operating loss carryforward | 26,422 35,589 |
| | | | | NOL, inflation adjustment | 4,675 5,838 |
| | | | | Valuation allowances | (50,110 (49,567 | ) | ) |
| | | 1,085 | | 423 |
| Deferred tax liabilities | | | | |
| | | | | Prepaid expenses | (1,085 (103 | ) | )) |
| | | | | Fixed assets | | — (320 |
| | | (1,085 (423 | ) | ) |
| Net deferred income tax assets (liabilities) | | $ | — $ | — |
| Based upon the level of taxable income (loss) and projections of future taxable income (loss) over the |
| periods which the deferred tax assets are deductible, management believes it is more likely than not that theCompany will not realize the benefits of these deductible differences, and thus has recorded a valuationallowance against the net deferred tax asset balance of $50,110. If the Company is profitable for a numberof years and prospects for the realization of the deferred tax assets are more likely than not, the Companywill then reverse its valuation allowance and credit income tax expense. |
| At December 31, 2020, the Company had $103,656 of net operating loss carryforwards in Mexico |
| (including inflation adjustments) which expire at various dates through 2030. The statute of limitations fortax returns filed in Mexico is five years from the date of filing. The tax returns of the Company are nolonger subject to examinations by Mexican tax authorities for years prior to 2016. |
| As of December 31, 2020, the Company has not recorded any unrecognized tax benefits, as it is more |
| likely than not that all tax positions have a high probability of being upheld by the taxing authorities. TheCompany recognizes penalties and accrued interest related to unrecognized tax benefits in interest expenseand penalties in operating expenses. No such interest or penalties were recognized. |
| 16. | Subsequent Events |
| There are no other events or transactions requiring recognition in these combined financial statements |
| through March 29, 2021. |
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| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
| None. |
| Item 9A. Controls and Procedures |
| Evaluation of Disclosure Controls and Procedures |
| We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the |
| Exchange Act) that are designed to assure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such information is accumulated and communicatedto management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosures. Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls and procedures were effective as ofDecember 31, 2020. |
| Management’s Annual Report on Internal Control Over Financial Reporting |
| This Report does not include a report of management’s assessment regarding internal control over |
| financial reporting or an attestation report of our independent registered public accounting firm due to atransition period established by rules of the SEC for newly public companies. Additionally, our independentregistered public accounting firm will not be required to issue an attestation report on our internal controlover financial reporting until we are no longer an emerging growth company (as defined in the JOBS Act)and no longer a smaller reporting company that is a non-accelerated filer. |
| 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 Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter endedDecember 31, 2020 that have materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting. |
| Limitations on Effectiveness of Controls |
| Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect |
| that our disclosure controls and procedures or our internal control over financial reporting will prevent allerrors and fraud. A control system, 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 systemmust 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 controlsystems, no evaluation of controls can provide absolute assurance that all control issues and instances offraud, if any, within the Company have been detected. These inherent limitations include the realities thatjudgments in decision making can be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion oftwo or more people or by management’s override of the control. |
| 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 itsstated goals under all potential future conditions. Over time, controls may become inadequate because ofchanges in conditions, or the degree of compliance with the policies or procedures may deteriorate. |
| Item 9B. Other Information |
| None. |
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| | PART III |
| Item 10. | | | Directors, Executive Officers and Corporate Governance |
| Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is |
| incorporated by reference to the information provided in the Company’s definitive proxy statement for the2021 Annual Meeting of Stockholders (the “2021 Proxy Statement”) to be filed with the SEC within120 days after the Company’s fiscal year ended December 31, 2020. |
| Item 11. | | | Executive Compensation |
| Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is |
| incorporated by reference to the information provided in the 2021 Proxy Statement. |
| Item 12. | | | Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters |
| Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is |
| incorporated by reference to the information provided in the 2021 Proxy Statement. |
| Item 13. | | | Certain Relationships and Related Transactions, and Director Independence |
| Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is |
| incorporated by reference to the information provided in the 2021 Proxy Statement. |
| Item 14. | | | Principal Accountant Fees and Services |
| Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is |
| incorporated by reference to the information provided in the 2021 Proxy Statement. |
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| | PART IV |
| Item 15. Exhibits and Financial Statement Schedules |
| (1) | Consolidated Financial Statements. For a list of the financial statements included herein, see Index tothe Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.” |
| (2) | Consolidated Financial Statement Schedules. Financial statement schedules have been omittedbecause they are either not required or not applicable or the information is included in the consolidatedfinancial statements or the notes thereto. |
| (3) | Exhibits. The exhibits listed below are filed or incorporated by reference as part of this Annual Reporton Form 10-K. |
| 3.1 | | | Amended and Restated Certificate of Incorporation of Gatos Silver, Inc. (incorporated byreference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed October 30, 2020) |
| 3.2 | | | Amended and Restated By-Laws of Gatos Silver, Inc. (incorporated by reference to Exhibit 3.2of the Company’s Current Report on Form 8-K filed October 30, 2020) |
| 4.1* | | | Description of Securities Registered under Section 12 of the Exchange Act |
| 10.1.1 | | | Term Loan Agreement dated as of July 11, 2017 among Minera Plata Real S. de R.L. de C.V.,Operaciones San Jose de Plata, S. de R.L. de C.V., and Servicios San Jose de Plata, S. de R.L. deC.V. as Borrowers and Dowa Metals & Mining Co., Ltd. as Lender and Sunshine Silver Miningand Refining Corporation and Los Gatos Luxembourg S.a.r.l. (incorporated by reference toExhibit 10.1.1 to the Company’s Registration Statement on Form S-1 filed on October 1, 2020) |
| 10.1.2 | | | Amendment No. 1 to Term Loan Agreement, dated as of July 11, 2018 among Minera Plata RealS. de R.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., and Servicios San Jose dePlata, S. de R.L. de C.V., the Borrowers, Dowa Metals & Mining Co., Ltd., as Lender andSunshine Silver Mining & Refining Corporation and Los Gatos Luxembourg S.a.r.l.(incorporated by reference to Exhibit 10.1.2 to the Company’s Registration Statement onForm S-1 filed on October 1, 2020) |
| 10.1.3 | | | Amendment No. 2 to Term Loan Agreement, dated as of November 30, 2018 among MineraPlata Real S. de R.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., and ServiciosSan Jose de Plata, S. de R.L. de C.V., the Borrowers, Dowa Metals & Mining Co., Ltd., asLender and Sunshine Silver Mining & Refining Corporation and Los Gatos Luxembourg S.a.r.l.(incorporated by reference to Exhibit 10.1.3 to the Company’s Registration Statement onForm S-1 filed on October 1, 2020) |
| 10.1.4 | | | Amendment No. 3 to Term Loan Agreement, dated as of January 31, 2019 among Minera PlataReal S. de R.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., and Servicios SanJose de Plata, S. de R.L. de C.V., the Borrowers, Dowa Metals & Mining Co., Ltd., as Lenderand Sunshine Silver Mining & Refining Corporation and Los Gatos Luxembourg S.a.r.l.(incorporated by reference to Exhibit 10.1.4 to the Company’s Registration Statement onForm S-1 filed on October 1, 2020) |
| 10.2.1 | | | Memorandum of Understanding as of April 16, 2019 by and among Minera Plata Real S. de R.L.de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., and Servicios San Jose de Plata, S.de R.L. de C.V., the Borrowers, Dowa Metals & Mining Co., Ltd. and Sunshine Silver Mining &Refining Corporation (incorporated by reference to Exhibit 10.3.1 to the Company’s RegistrationStatement on Form S-1 filed on October 1, 2020) |
| 10.3.1 | | | Unanimous Omnibus Partner Agreement effective as of January 1, 2015 among Minera PlataReal, S. de R.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Josede Plata, S. de R.L. de C.V., Los Gatos Luxembourg S.a.r.l., Sunshine Silver Mining & RefiningCorporation and Dowa Metals & Mining Co., Ltd. (incorporated by reference to Exhibit 10.5.1to the Company’s Registration Statement on Form S-1 filed on October 1, 2020) |
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| 10.3.2 | Agreement to Make Capital Contribution dated April 10, 2017, among Minera Plata Real, S. deR.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Jose de Plata, S.de R.L. de C.V., Los Gatos Luxembourg S.a.r.l., Sunshine Silver Mining & Refining Corporationand Dowa Metals & Mining Co., Ltd. (incorporated by reference to Exhibit 10.5.2 to theCompany’s Registration Statement on Form S-1 filed on October 1, 2020) |
| 10.3.3 | Amendment to Partner Agreement dated June 30, 2017, among Minera Plata Real, S. de R.L. deC.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Jose de Plata, S. de R.L.de C.V., Los Gatos Luxembourg S.a.r.l., Sunshine Silver Mining & Refining Corporation andDowa Metals & Mining Co., Ltd. (incorporated by reference to Exhibit 10.5.3 to the Company’sRegistration Statement on Form S-1 filed on October 1, 2020) |
| 10.3.4 | Amendment No. 3 to Partner Agreement dated March 30, 2018 among Minera Plata Real, S. deR.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Jose de Plata, S.de R.L. de C.V., Los Gatos Luxembourg S.a.r.l., Sunshine Silver Mining & Refining Corporationand Dowa Metals & Mining Co., Ltd. (incorporated by reference to Exhibit 10.5.4 to theCompany’s Registration Statement on Form S-1 filed on October 1, 2020) |
| 10.3.5 | Amendment No. 4 to Partner Agreement dated March 30, 2019 among Minera Plata Real, S. deR.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Jose de Plata, S.de R.L. de C.V., Sunshine Silver Mining & Refining Corporation and Dowa Metals & MiningCo., Ltd. (incorporated by reference to Exhibit 10.5.5 to the Company’s Registration Statementon Form S-1 filed on October 1, 2020) |
| 10.3.6 | Amendment No. 5 to Partner Agreement dated April 29, 2020 among Minera Plata Real, S. deR.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Jose de Plata, S.de R.L. de C.V., Sunshine Silver Mining & Refining Corporation and Dowa Metals & MiningCo., Ltd. (incorporated by reference to Exhibit 10.5.6 to the Company’s Registration Statementon Form S-1 filed on October 1, 2020) |
| 10.3.7 | Amendment No. 6 to Partner Agreement dated May 25, 2020 among Minera Plata Real, S. deR.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Jose de Plata, S.de R.L. de C.V., Sunshine Silver Mining & Refining Corporation and Dowa Metals & MiningCo., Ltd. (incorporated by reference to Exhibit 10.5.7 to the Company’s Registration Statementon Form S-1 filed on October 1, 2020) |
| 10.3.8 | Amendment No. 7 to Partner Agreement dated June 16, 2020 among Minera Plata Real, S. deR.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Jose de Plata, S.de R.L. de C.V., Sunshine Silver Mining & Refining Corporation and Dowa Metals & MiningCo., Ltd. (incorporated by reference to Exhibit 10.5.8 to the Company’s Registration Statementon Form S-1 filed on October 1, 2020) |
| 10.4.1 | Confirmation Agreement, dated March 9, 2021, among Minera Plata Real, S. de R.L. de C.V.,Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Jose de Plata, S. de R.L. deC.V., Gatos Silver, Inc. and Dowa Metals and Mining Co., Ltd. (incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 12, 2021) |
| 10.5.1 | Priority Distribution Agreement dated May 30, 2019 among Minera Plata Real, S. de R.L. deC.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Sunshine Silver Mining & RefiningCorporation and Dowa Metals & Mining Co., Ltd. (incorporated by reference to Exhibit 10.7.1to the Company’s Registration Statement on Form S-1 filed on October 1, 2020) |
| 10.6.1 | Exploration, Exploitation and Unilateral Promise to Sell Agreement dated May 4, 2006 betweenLa Cuesta International, S.A. de C.V. and Minera Plata Real, S.A. de C.V. (incorporated byreference to Exhibit 10.8.1 to the Company’s Registration Statement on Form S-1 filed onOctober 1, 2020) |
| 10.7.1# | Agreement dated July 15, 2019, between Ocean Partners USA. Inc. and Operaciones San Jose dePlata, S. de R.L. de C.V. (incorporated by reference to Exhibit 10.9.1 to the Company’sRegistration Statement on Form S-1 filed on October 1, 2020) |
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| 10.7.2# | Memorandum of Agreement dated July 1, 2020, between Operaciones San Jose de Plata, S. deR.L. de C.V. and Dowa Metals & Mining Co., Ltd. (incorporated by reference to Exhibit 10.9.2to the Company’s Registration Statement on Form S-1 filed on October 1, 2020) |
| 10.8.1# | Cerro Los Gatos Lead Concentrate Sales Agreement dated April 14, 2019 between OperacionesSan Jose de Plata, S. de R.L. de C.V. and Metagri S.A. de C.V. (incorporated by reference toExhibit 10.10.1 to the Company’s Registration Statement on Form S-1 filed on October 1, 2020) |
| 10.9.1† | Amended and Restated Long Term Incentive Plan (incorporated by reference to Exhibit 99.1 tothe Company’s Registration Statement on Form S-8 filed on October 30, 2020) |
| 10.9.2† | Form of Executive Nonqualified Stock Option Agreement (incorporated by reference toExhibit 10.12.2 to the Company’s Registration Statement on Form S-1/A filed on October 8,2020) |
| 10.9.3† | Form of Director Nonqualified Stock Option Agreement (incorporated by reference toExhibit 10.12.3 to the Company’s Registration Statement on Form S-1/A filed on October 8,2020) |
| 10.9.4† | Form of DiSU Award Agreement (incorporated by reference to Exhibit 10.12.4 to the Company’sRegistration Statement on Form S-1/A filed on October 8, 2020) |
| 10.9.5† | Form of DSU Award Agreement (incorporated by reference to Exhibit 10.12.5 to the Company’sRegistration Statement on Form S-1/A filed on October 8, 2020) |
| 10.10.1† | Annual Incentive Plan (incorporated by reference to Exhibit 10.13.1 to the Company’sRegistration Statement on Form S-1/A filed on October 8, 2020) |
| 10.11.1† | Non-Qualified Deferred Compensation Plan (incorporated by reference to Exhibit 10.14.1 to theCompany’s Registration Statement on Form S-1/A filed on October 8, 2020) |
| 10.12.1† | Employment Agreement dated as of May 3, 2011 between Sunshine Silver Mining & RefiningCorporation and Stephen Orr (incorporated by reference to Exhibit 10.15.1 to the Company’sRegistration Statement on Form S-1 filed on October 1, 2020) |
| 10.12.2† | Employment Agreement dated as of April 1, 2016 between Sunshine Silver Mining & RefiningCorporation and John Kinyon (incorporated by reference to Exhibit 10.15.2 to the Company’sRegistration Statement on Form S-1 filed on October 1, 2020) |
| 10.12.3† | Employment Agreement dated as of June 1, 2011 between Sunshine Silver Mining & RefiningCorporation and Philip Pyle (incorporated by reference to Exhibit 10.15.3 to the Company’sRegistration Statement on Form S-1 filed on October 1, 2020) |
| 10.13.1 | Management Services Agreement dated October 30, 2020 between Gatos Silver Inc. and SilverOpportunity Partners Corporation (incorporated by reference to Exhibit 10.1 of the Company’sCurrent Report on Form 8-K filed on October 30, 2020) |
| 10.14.1 | Shareholders Agreement dated October 30, 2020 among Gatos Silver Inc. and the stockholdersthat are signatories thereto (incorporated by reference to Exhibit 10.2 of the Company’s CurrentReport on Form 8-K filed on October 30, 2020) |
| 10.15.1 | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.18.1 to theCompany’s Registration Statement on Form S-1/A filed on October 8, 2020) |
| 10.16.1 | Registration Rights Agreement dated October 30, 2020 among Gatos Silver Inc. and thestockholders that are signatories thereto (incorporated by reference to Exhibit 10.3 of theCompany’s Current Report on Form 8-K filed on October 30, 2020) |
| 21.1* | Subsidiaries of the Registrant |
| 23.1* | Consent of KPMG LLP — Gatos Silver, Inc. |
| 23.2* | Consent of KPMG LLP — Los Gatos Joint Venture |
| 24.1* | Power of Attorney (included on signature page) |
| 31.1* | Section 302 Certification of Chief Executive Officer |
| 31.2* | Section 302 Certification of Chief Financial Officer |
| 32.1** | Section 1350 Certification |
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| | | SIGNATURES |
| | Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the |
| | registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized. |
| GATOS SILVER, INC. |
| By: | | March 29, 2021 | /s/ Stephen OrrStephen Orr Chief Executive Officer |
| | KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below |
| | constitutes and appoints Stephen Orr and Roger Johnson and each of them, their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for them and in their name, place andstead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K for thefiscal year ended December 31, 2020, and to file the same, with all exhibits thereto, and all other documentsin connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifyingand confirming all that said attorneys-in-fact and agents or either of them or their or his or her substitute orsubstitutes may lawfully do or cause to be done by virtue hereof. |
| | Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below |
| | by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
| | | | Signature | Title | | | | | Date |
| | | | /s/ Stephen Orr | | Chief Executive Officer andDirector (principal executiveofficer) |
| | | | | March 29, 2021 |
| | | | Stephen Orr |
| | | | /s/ Roger Johnson | | Chief Financial Officer (principalfinancial officer and principalaccounting officer) |
| | | | | March 29, 2021 |
| | | | Roger Johnson |
| | | | /s/ Janice Stairs |
| | | | | | Chair of the Board of Directors | March 29, 2021 |
| | | | Janice Stairs |
| | | | /s/ Ali Erfan |
| | | | | | Director | March 29, 2021 |
| | | | Ali Erfan |
| | | | /s/ Igor Gonzales |
| | | | | | Director | March 29, 2021 |
| | | | Igor Gonzales |
| | | | /s/ Karl Hanneman |
| | | | | | Director | March 29, 2021 |
| | | | Karl Hanneman |
| | | | /s/ Charles Hansard |
| | | | | | Director | March 29, 2021 |
| | | | Charles Hansard |
| | | | /s/ Igor Levental |
| | | | | | Director | March 29, 2021 |
| | | | Igor Levental |
| | | | /s/ David Peat |
| | | | | | Director | March 29, 2021 |
| | | | David Peat |
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| | EXHIBIT 4.1 |
| | | DESCRIPTION OF SECURITIES REGISTERED PURSUANT TO |
| | | SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 |
| As of December 31, 2020, Gatos Silver, Inc. (the “Company”, “we” or “us”) had one class of securities |
| registered under Section 12 of the Securities Exchange Act of 1934, as amended: common stock, par value$0.01 per share. |
| The following description of common stock does not purport to be complete and is subject to our |
| Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws and the provisionsof applicable law. Copies of these documents have been filed as exhibits to our Annual Report on Form 10-K, of which this Exhibit 4.1 is a part. |
| General |
| Our authorized capital stock consists of 700,000,000 shares of common stock, par value $0.001 per |
| share, and 50,000,000 shares of preferred stock, par value $0.001 per share. |
| Common Stock |
| Voting Rights. The holders of common stock are entitled to one vote per share on all matters to be |
| voted upon by the stockholders, except on matters relating solely to terms of preferred stock. |
| Dividend Rights. Subject to preferences that may be applicable to any outstanding preferred stock, the |
| holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from timeto time by our Board of Directors out of funds legally available therefor. |
| Rights upon Liquidation. In the event of liquidation, dissolution or winding up, the holders of common |
| stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to priordistribution rights of preferred stock, if any, then outstanding. |
| Other Rights. The holders of our common stock have no preemptive or conversion or exchange rights |
| or other subscription rights. There are no redemption, retraction, purchase for cancellation, surrender orsinking or purchase fund provisions applicable to our common stock. |
| Preferred Stock |
| Our Board of Directors has the authority to issue the preferred stock in one or more series and to fix the |
| rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversionrights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number ofshares constituting any series or the designation of such series, without further vote or action by thestockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing achange in control of our Company without further action by the stockholders and may adversely affect thevoting and other rights of the holders of common stock. |
| Certain Amended and Restated Certificate of Incorporation and Bylaw Provisions |
| Requirements for Advance Notification of Stockholder Nominations and Proposals |
| Our Amended and Restated Bylaws establish advance notice procedures with respect to stockholder |
| proposals and nomination of candidates for election as directors. |
| Limits on Actions by Written Consents |
| Any action required or permitted to be taken by the stockholders must be effected at a duly called |
| annual or special meeting of stockholders and may not be effected by any consent in writing in lieu of ameeting of such stockholders, subject to the rights of the holders of any series of preferred stock. |
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| Limits on Special Meetings |
| Special meetings of the stockholders may be called at any time only by the secretary at the direction of |
| our Board of Directors pursuant to a resolution adopted by our Board of Directors. |
| Choice of Forum |
| Our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the |
| State of Delaware is the exclusive forum for the following types of actions or proceedings under Delawarestatutory or common law: (i) any derivative action or proceeding brought on our behalf; (ii) any actionasserting a breach of fiduciary duty; (iii) any action asserting a claim against us arising under the DGCL;and (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. Theforegoing provision does not apply to claims under the U.S. Securities Act, the Exchange Act or any claimfor which the U.S. federal courts have exclusive jurisdiction. Our Amended and Restated Certificate ofIncorporation further provides that the federal district courts of the United States will, to the fullest extentpermitted by law, be the exclusive forum for resolving any complaint asserting a cause of action arisingunder the U.S. Securities Act. |
| Our Amended and Restated Certificate of Incorporation also provides that any person or entity |
| purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed tohave notice of and to have consented to these choice of forum provisions. These exclusive forum provisionsmay limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes withus or our directors, officers or other employees, which may discourage lawsuits against us and our directors,officers, and other employees, although our stockholders will not be deemed to have waived our compliancewith federal securities laws and the rules and regulations thereunder. |
| While Delaware courts have determined that choice of forum provisions are facially valid, it is possible |
| that a court of law in another jurisdiction could rule that the choice of forum provisions to be contained inour Amended and Restated Certificate of Incorporation are inapplicable or unenforceable if they arechallenged in a proceeding or otherwise. If a court were to find the choice of forum provision in ourAmended and Restated Certificate of Incorporation to be inapplicable or unenforceable in an action, we mayincur additional costs associated with resolving such action in other jurisdictions. |
| Corporate Opportunities |
| Our Amended and Restated Certificate of Incorporation provides that we renounce any interest or |
| expectancy in the business opportunities of The Electrum Group, LLC and its affiliates (collectively,“Electrum”) and the Municipal Employees’ Retirement System of Michigan (“MERS”) and of our directorswho are affiliated with Electrum or MERS, other than directors who are also our employees, and that neitherour directors affiliated with Electrum or MERS, other than directors who are also our employees, norElectrum or MERS have any obligation to offer us those opportunities. Electrum, MERS and any of ourdirectors who are affiliated with them other than directors who are also our employees may, in the past,present or future, carry out and engage in any and all activities associated with any business, including,without limitation, any mining business. |
| Amendments to Our Governing Documents |
| Generally, any amendment of our Amended and Restated Certificate of Incorporation requires approval |
| by our Board of Directors and the vote of holders of more than 66.67% of the votes entitled to be cast by theoutstanding capital stock in the election of our Board of Directors. Any amendment to our Amended andRestated Bylaws requires the approval of either a majority of our Board of Directors or holders of more than66.67% of the votes entitled to be cast by the outstanding capital stock in the election of our Board ofDirectors. |
| Board of Directors |
| Our Board of Directors consists of a single class of directors and directors serve until a successor is |
| duly elected and qualified or until a director’s earlier death, removal or resignation (other than directors thatmay be elected by holders of our preferred shares, if any). |
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| Our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws |
| provide that directors may be removed only for cause and only by the affirmative vote of the holders of66.67% of our outstanding voting stock, voting together as a single class, unless approved by our Board ofDirectors, in which case such removal for cause shall require the affirmative vote of the holders of morethan 50% of our outstanding voting stock, voting together as a single class. Our Amended and RestatedCertificate of Incorporation and our Amended and Restated Bylaws provide that any vacancy on our Boardof Directors, including a vacancy resulting from an enlargement of our Board of Directors, may be filled byvote of a majority of our directors then in office. Furthermore, our Amended and Restated Certificate ofIncorporation provides that the authorized number of directors may be changed only by resolution of ourBoard of Directors. |
| Delaware Business Combination Statute |
| We are subject to Section 203 of the DGCL, which regulates corporate acquisitions. Section 203 |
| prevents an “interested stockholder,” which is defined generally as a person owning 15% or more of acorporation’s voting stock, or any affiliate or associate of that person, from engaging in a broad range of“business combinations” with the corporation for three years after becoming an interested stockholderunless: |
| • | the board of directors of the corporation had previously approved either the business combination orthe transaction that resulted in the stockholder’s becoming an interested stockholder; |
| • | upon completion of the transaction that resulted in the stockholder’s becoming an interestedstockholder, that person owned at least 85% of the voting stock of the corporation outstanding at thetime the transaction commenced, other than statutorily excluded shares; or |
| • | following the transaction in which that person became an interested stockholder, the businesscombination is approved by the board of directors of the corporation and holders of at least two-thirds of the outstanding voting stock not owned by the interested stockholder. |
| Under Section 203, the restrictions described above also do not apply to specific business combinations |
| proposed by an interested stockholder following the announcement or notification of designatedextraordinary transactions involving the corporation and a person who had not been an interestedstockholder during the previous three years or who became an interested stockholder with the approval of amajority of the corporation’s directors, if such extraordinary transaction is approved or not opposed by amajority of the directors who were directors prior to any person becoming an interested stockholder duringthe previous three years or were recommended for election or elected to succeed such directors by amajority of such directors. |
| Section 203 may make it more difficult for a person who would be an interested stockholder to effect |
| various business combinations with a corporation for a three-year period. Section 203 also may have theeffect of preventing changes in our management and could make it more difficult to accomplish transactionswhich our stockholders may otherwise deem to be in their best interests. |
| Anti-Takeover Effects of Some Provisions |
| Some provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated |
| Bylaws could make the following more difficult: |
| • | acquisition of control of us by means of a proxy contest or otherwise, or |
| • | removal of our incumbent officers and directors. |
| These provisions, as well as our ability to issue preferred stock, are designed to discourage coercive |
| takeover practices and inadequate takeover bids. These provisions are also designed to encourage personsseeking to acquire control of us to first negotiate with our Board of Directors. We believe that the benefitsof increased protection give us the potential ability to negotiate with the proponent of an unfriendly orunsolicited proposal to acquire or restructure us, and that the benefits of this increased protection outweighthe disadvantages of discouraging those proposals, because negotiation of those proposals could result in animprovement of their terms. |
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| Registration Rights |
| Pursuant to the Registration Rights Agreement, MERS and Electrum and their permitted transferees are |
| entitled to the following rights with respect to the registration of such shares for public resale under the U.S.Securities Act. If exercised, these registration rights would enable holders to transfer these shares withoutrestriction under the U.S. Securities Act when the applicable registration statement is declared effective. |
| Demand Registration. These holders may request in writing that we effect a resale registration under |
| the U.S. Securities Act with respect to all or any portion of their shares subject to registration rights, subjectto certain exceptions. Depending on certain conditions, we may defer a demand registration on one occasionduring any six-month period for a reasonable time not exceeding 90 days. If the holders requestingregistration intend to distribute their shares by means of an underwriting, the managing underwriter of suchoffering will have the right to limit the numbers of shares to be underwritten for reasons related to themarketing of the shares. |
| Piggyback Registration. In the event that we propose to register any of our securities under the U.S. |
| Securities Act, either for our account or for the account of our other security holders, holders will beentitled to certain piggyback registration rights allowing each to include its shares in the registration,subject to certain marketing and other limitations. As a result, whenever we propose to file a registrationstatement under the U.S. Securities Act, other than with respect to a demand registration or a registrationstatement on Form S-4, F-4 or S-8, these holders will be entitled to notice of the registration and will havethe right to include their registrable securities in the registration, subject to certain limitations. |
| Shelf Registration. These holders may request that we file and keep effective a shelf registration |
| statement pursuant to Rule 415 under the U.S. Securities Act with respect to all or any portion of theirshares subject to registration rights. |
| Expenses; Indemnification. The Registration Rights Agreement provides that we must pay all |
| registration expenses in connection with effecting any demand registration, piggyback registration or shelfregistration. The Registration Rights Agreement contains customary indemnification and contributionprovisions. |
| Listing |
| Our common stock is listed on the NYSE and the TSX under the symbol “GATO.” |
| Transfer Agent and Registrar |
| The U.S. transfer agent and registrar for our common stock is EQ by Equiniti, located at 1110 Centre |
| Pointe Curve, Suite 101, Mendota Heights, Minnesota 55120 and the Canadian transfer agent and registrarfor our common stock is TSX Trust Company, located at 100 Adelaide Street West, Suite 301, Toronto,Ontario, M5H 1S3. |
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| | Exhibit 23.1 |
| | | Consent of Independent Registered Public Accounting Firm |
| The Board of Directors Gatos Silver, Inc.: |
| We consent to the incorporation by reference in the registration statements (Nos. 333-249782 and 333- |
| 249781) on Form S-8 of Gatos Silver, Inc. of our report dated March 29, 2021, with respect to theconsolidated balance sheets of Gatos Silver, Inc. as of December 31, 2020 and 2019, the relatedconsolidated statements of operations and comprehensive loss, shareholders’ equity (deficit), and cash flowsfor each of the years in the two-year period ended December 31, 2020, and the related notes, which reportappears in the December 31, 2020 annual report on Form 10-K of Gatos Silver, Inc. |
| | | | /s/ KPMG LLP |
| Denver, Colorado March 29, 2021 |
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| |
| | Exhibit 23.2 |
| | | CONSENT OF QUALIFIED PERSON |
| Tetra Tech, Inc. (“Tetra Tech”), in connection with the Annual Report on Form 10-K for the year ended |
| December 31, 2020 (and any amendments and/or exhibits thereto, the “Annual Report”) of Gatos Silver,Inc. (the “Company”), consents to: |
| • | the public filing and/or incorporation by reference by the Company and use of the technical reporttitled “Los Gatos Project, Chihuahua, Mexico” (the “Technical Report”), with an effective date ofJuly 1, 2020 and that was prepared in accordance with Subpart 1300 of Regulation S-K promulgatedby the U.S. Securities and Exchange Commission and National Instrument 43-101 — Standards ofDisclosure for Mineral Project, as an exhibit to and referenced in the Annual Report; |
| • | the use of and references to our name, including our status as an expert or “qualified person” (asdefined in Subpart 1300 of Regulation S-K promulgated by the U.S. Securities and ExchangeCommission), in connection with the Annual Report and any such Technical Report; and |
| • | any extracts from or a summary of the Technical Report in the Annual Report and the use of anyinformation derived, summarized, quoted or referenced from the Technical Report, or portionsthereof, that was prepared by us, that we supervised the preparation of and/or that was reviewed andapproved by us, that is included or incorporated by reference in the Annual Report. |
| Tetra Tech is responsible for authoring, and this consent pertains to, the Technical Report. |
| Dated: March 29, 2021 Tetra Tech, Inc. |
| By: | /s/ Guillermo Dante Ramírez-Rodríguez |
| |
| Name: Guillermo Dante Ramírez-Rodríguez Title: Principal Mining Engineer |
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| | | EXHIBIT 31.1 |
| | | | CERTIFICATION OF CHIEF EXECUTIVE OFFICER |
| I, Stephen Orr, certify that: |
| 1. | I have reviewed this Annual Report on Form 10-K of Gatos Silver, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of the circumstances under whichsuch statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in thisreport, fairly present in all material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) andinternal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) forthe registrant and have: |
| a. | | | | Designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; |
| b. | | | | Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; |
| c. | | | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as ofthe end of the period covered by this report based on such evaluation; and |
| d. | | | | Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter inthe case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalent functions): |
| a. | | | | All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability torecord, process, summarize and report financial information; and |
| b. | | | | Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting. |
| By: | | | | | | /s/ Stephen Orr |
| Date: March 29, 2021 | |
| | | | | | Stephen Orr |
| | | | | | Chief Executive Officer |
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| | | EXHIBIT 31.2 |
| | | | CERTIFICATION OF CHIEF FINANCIAL OFFICER |
| I, Roger Johnson, certify that: |
| 1. | I have reviewed this Annual Report on Form 10-K of Gatos Silver, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of the circumstances under whichsuch statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in thisreport, fairly present in all material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) andinternal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) forthe registrant and have: |
| a. | | | | Designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; |
| b. | | | | Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; |
| c. | | | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as ofthe end of the period covered by this report based on such evaluation; and |
| d. | | | | Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter inthe case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalent functions): |
| a. | | | | All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability torecord, process, summarize and report financial information; and |
| b. | | | | Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting. |
| By: | | | | | | /s/ Roger Johnson |
| Date: March 29, 2021 | |
| | | | | | Roger Johnson |
| | | | | | Chief Financial Officer |
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| | EXHIBIT 32.1 |
| | | CERTIFICATION PURSUANT TO |
| | | | 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO |
| | | | SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |
| In connection with the Annual Report of Gatos Silver, Inc. (the “Company”) on Form 10-K for the |
| fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission on the datehereof (the “Report”), Stephen Orr, as Chief Executive Officer of the Company, and Roger Johnson, asChief Financial Officer of the Company, each hereby certifies, pursuant to and solely for the purpose of 18U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of hisknowledge and belief, that: |
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financialcondition and results of operations of the Company. |
| /s/ Stephen Orr |
| Stephen Orr Chief Executive Officer March 29, 2021/s/ Roger Johnson |
| Roger Johnson Chief Financial Officer March 29, 2021 |
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| |
| | EXHIBIT 95.1 |
| | | Mine Safety Disclosure |
| The following disclosures are provided pursuant to Section 1503(a) of the Dodd-Frank Wall Street |
| Reform and Consumer Protection Act (the “Dodd-Frank Act”) and Item 104 of Regulation S-K, whichrequire certain disclosures by companies required to file periodic reports under the Securities Exchange Actof 1934, as amended, that operate mines regulated under the Federal Mine Safety and Health Act of 1977(the “Mine Act”). The disclosures reflect our U.S. mining operations only, as the requirements of the Dodd-Frank Act and Item 104 of Regulation S-K do not apply to our mines operated outside the United States. |
| Below, we present the following items regarding certain mining safety and health matters for the year |
| ended December 31, 2020: |
| • | the total number of violations of mandatory health or safety standards that could significantly andsubstantially contribute to the cause and effect of a mine safety or health hazard under section 104 ofthe Mine Act for which we have received a citation from the Mine Safety and Health Administration(“MSHA”); |
| • | the total number of orders issued under section 104(b) of the Mine Act; |
| • | the total number of citations and orders for unwarrantable failure of us to comply with mandatoryhealth and safety standards under section 104(d) of the Mine Act; |
| • | the total number of flagrant violations under section 110(b)(2) of the Mine Act; |
| • | the total number of imminent danger orders issued under section 107(a) of the Mine Act; |
| • | the dollar value of proposed assessments from the MSHA under the Mine Act relating to any type ofviolation, regardless of whether such proposed assessments were being challenged or appealed; |
| • | a list of the mines that have received written notice from the MSHA of a pattern of violations ofmandatory health or safety standards that are of such nature as could have significantly andsubstantially contributed to the cause and effect of mine health or safety standards under section104(e) of the Mine Act; |
| • | a list of mines that have received written notice from the MSHA of the potential to have such apattern; |
| • | the total number of mining-related fatalities; and |
| • | pending legal actions before the Federal Mine Safety and Health Review Commission involving ourmines as of December 31, 2020, as well as the aggregate number of legal actions instituted and theaggregate number of legal actions resolved during the year ended December 31, 2020. |
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