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| UNITED STATES |
| | SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
| FORM 10-Q |
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2021 |
| | | or |
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from _______________ to _______________ |
| | | | Commission File Number: 001-39649 |
| GATOS SILVER, INC. |
| | | | | (Exact name of registrant as specified in its charter) |
| | Delaware | | | | 27-2654848 |
(State or other jurisdiction of incorporation or organization) | | | | | | | (I.R.S. Employer Identification No.) |
| | | | 8400 E. Crescent Parkway, Suite 600 |
| Greenwood Village, CO 80111 |
| | | | | (Address of principal executive offices) (Zip Code) |
| (303) 784-5350 |
| | | | | (Registrant’s telephone number, including area code) |
| | | N/A |
| | (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act: |
| | | | | | | | Title of each class | Trading symbol(s) | | | | | | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | | GATO | | | New York Stock Exchange |
| | | | | | Toronto Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during 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 filingrequirements 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 ofRegulation 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 anemerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growthcompany" 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 orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. |
| | | | | | | ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes | | | | | | | | | | ☐ No ☑ |
The Company has 700,000,000 shares of common stock, par value $0.001, authorized of which 68,704,201 were issued and outstanding as of August 2,2021. |
Table of Contents |
| | TABLE OF CONTENTS |
| | | | | | Page |
| | | | | | Part I - FINANCIAL INFORMATION |
Item 1. Financial Statements (Unaudited) |
| | | Condensed Consolidated Balance Sheets | | 3 |
| | | Condensed Consolidated Statements of Operations | | 4 |
| | | Condensed Consolidated Statements of Shareholders’ Equity (Deficit) | | 5 |
| | | Condensed Consolidated Statements of Cash Flows | | 6 |
| | | Notes to Condensed Consolidated Financial Statements | | 7 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | | | 17 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk | | | | | 29 |
Item 4. Controls and Procedures | | | | | 29 |
| | | | | | Part II - OTHER INFORMATION |
Item 1. Legal Proceedings | | | | | 30 |
Item 1A. Risk Factors | | | | | 30 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | | | | 30 |
Item 3. Defaults Upon Senior Securities | | | | | 30 |
Item 4. Mine Safety Disclosures | | | | | 30 |
Item 5. Other Information | | | | | 30 |
Item 6. Exhibits | | | | | 31 |
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| | PART I – FINANCIAL INFORMATION |
Item 1. Financial Statements |
GATOS SILVER, INC.CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands, except for share and per share amounts) |
| | | June 30, | December 31, |
| | | | | | 2021 | | 2020 |
ASSETS | | | | | | | | |
Current Assets | | | | | | |
| | | | |
Cash and cash equivalents | | | $ | 29,607 | $ | 150,146 |
Deferred financing costs | | | | | | | 285 | | | — |
Related party receivables | | | | 5,102 | | | 1,727 |
Other current assets | | | | 2,190 | | | 3,879 |
Total current assets | | | | 37,184 | | 155,752 |
Non‑Current Assets | | | | |
Investment in affiliates | | | | 247,326 | | 109,597 |
Other non-current assets | | | | | | | 48 | | | 61 |
Total Assets | | | $ | 284,558 | $ | 265,410 |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current Liabilities | | | | |
Accounts payable and other accrued liabilities | | | $ | 3,781 | $ | | 4,024 |
Shareholders' Equity | | | |
Common Stock, $0.001 par value; 700,000,000 shares authorized; 59,774,201 and 59,183,076 shares |
outstanding as of June 30, 2021 and December 31, 2020 | | | | | | | 108 | | | 108 |
Paid‑in capital | | | | 417,248 | | 409,728 |
Accumulated deficit | | | | (135,552) | | (147,423) |
Treasury stock, at cost, 144,589 shares as of June 30, 2021 and December 31, 2020 | | | | (1,027) | | | | | (1,027) |
Total shareholders' equity | | | | 280,777 | | 261,386 |
Total Liabilities and Shareholders' Equity | | | $ | 284,558 | $ | 265,410 |
| | | | | | | | | See accompanying notes to the condensed consolidated financial statements. |
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GATOS SILVER, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands) |
| | Six Months Ended |
| | June 30, |
| | | | 2021 | | | 2020 |
OPERATING ACTIVITIES | | | | | | |
Net income (loss) | | | $ | 11,871 | | $ | (29,965) |
Plus net loss from discontinued operations | | — | | | 3,325 |
Adjustments to reconcile net income (loss) to net cash used by operating activities: | | | | | | | | |
Amortization | | | | 14 | | | | 17 |
Stock‑based compensation expense | | | | 3,426 | | | 2,001 |
Equity (income) loss in affiliates | | | | (20,992) | | | 21,516 |
Changes in operating assets and liabilities: | | | | | | | | |
Receivables from related‑parties | | | | (3,375) | | | (3,333) |
Accounts payable and other accrued liabilities | | | | (528) | | | (766) |
Other current assets | | 1,689 | | | (70) |
Operating cash flows from discontinued operations | | — | | | (2,262) |
Net cash used by operating activities | | | | (7,895) | | | (9,537) |
INVESTING ACTIVITIES | | | | | | | | |
Investment in affiliates | | | | (116,595) | | | (7,573) |
Net cash used by investing activities | | | | (116,595) | | | (7,573) |
FINANCING ACTIVITIES | | | | | | | | |
Related‑party convertible debt | | | | — | | | 10,000 |
Financing costs | | | | (269) | | | (588) |
Issuance of common stock | | | | 4,221 | | | | — |
Other | | (1) | | | 260 |
Financing cash flows from discontinued operations | | — | | | 307 |
Net cash provided by financing activities | | | | 3,951 | | | 9,979 |
Net decrease in cash and cash equivalents | | | | (120,539) | | | (7,131) |
Cash and cash equivalents, beginning of period | | | | 150,146 | | | 9,085 |
Cash and cash equivalents, end of period | | 29,607 | | | 1,954 |
Less cash of discontinued operations | | — | | | 380 |
Cash of continuing operations, end of period | | | $ | 29,607 | | $ | 1,574 |
Supplemental disclosure of noncash transactions: | | | | | | | | |
Deferred financing costs included in accrued liabilities | | | $ | 284 | | $ | 149 |
Director compensation | | | $ | — | | $ | | 61 |
| | | | | | | See accompanying notes to the condensed consolidated financial statements. |
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GATOS SILVER, INC.NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(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 Chihuahua State, Mexico. |
| | The Company’s primary efforts are focused on the operation of the Los Gatos Joint Venture (“LGJV”) in Chihuahua, Mexico. On |
January 1, 2015, the Company entered into the LGJV to develop the Los Gatos District (“LGD”) with Dowa Metals and Mining Co., Ltd.(“Dowa”). The LGJV operating entities consist of Minera Plata Real S. de R.L. de C.V (“MPR”), Operaciones San Jose del Plata S. de R.L.de C.V. and Servicios San Jose del Plata S. de R.L. de C.V (“Servicios”). (collectively the “LGJV Entities”). Effective July 15, 2021,Servicios was merged with MPR. |
| | The LGJV completed an advanced definition drilling and decline development program in 2016, a feasibility study in January 2017 |
and a technical update to the feasibility study in July 2020. Dowa completed its $50,000 funding requirement on April 1, 2016, therebyacquiring a 30% interest in the LGJV and the right to purchase future zinc-concentrate production at market rates. In May 2019, Dowaincreased its ownership interest by 18.5% to 48.5% through the conversion of the Dowa MPR Loan (as defined in Note 9 — Commitments,Contingencies and Guarantees) to equity. On March 11, 2021, the Company repurchased the 18.5% interest from Dowa. See Note 9 —Commitments, Contingencies and Guarantees for further discussion. As of June 30, 2021, the LGJV ownership is 70.0% Gatos Silver and30.0% Dowa. |
| | 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 currently sold to third-party customers. |
| | The Company continues to perform additional definition drilling to further define and expand mineralization of the Cerro Los Gatos |
deposit, and is performing definition and exploratory drilling at the nearby Esther deposit. On December 5, 2020, the LGJV began thecurrent infill and extension drilling program at the Cerro Los Gatos deposit. On May 7, 2021, the LGJV restarted drilling at the Esther zone. |
| | The Company’s other Mexico exploration efforts are conducted through its wholly-owned subsidiary, Minera Luz del Sol S. de R.L. |
de C.V. (“MLS”). In March 2021, MLS commenced a 5,400-meter exploration program on the Santa Valeria project, located approximately15 kilometers from the Cerro Los Gatos deposit. |
Discontinued Operations |
| | In October 2020, the Company completed the distribution of its wholly-owned subsidiary, Silver Opportunity Partners LLC |
(“SOP”), and SOP has been presented as discontinued operations in the Company’s condensed consolidated financial statements. See Note10 – Discontinued Operations for additional detail. |
2. Summary of Significant Accounting Policies |
Basis of Consolidation and Presentation |
| | The financial statements represent the condensed consolidated financial position and results of operations of Gatos Silver, Inc. and |
its subsidiary, MLS. Unless the context otherwise requires, references to Gatos Silver or the Company mean Gatos Silver, Inc. and itsconsolidated subsidiary. All equity interest in the Company’s wholly-owned subsidiary, SOP, was distributed to its stockholders in October2020. The accounts for SOP have been presented as discontinued operations in the accompanying interim condensed consolidated financialstatements. |
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| | The interim condensed consolidated financial statements are unaudited, but include all adjustments, consisting of normal recurring |
entries, which are necessary for a fair presentation for the dates and periods presented. Interim results are not necessarily indicative of resultsfor a full year. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States(“GAAP”) for interim financial information. Accordingly, they do not include all financial information and disclosures required by GAAPfor complete financial statements and should be read in conjunction with the audited consolidated financial statements included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 10-K”). |
Summary of Significant Accounting Policies |
| | The consolidated financial statements for the year ended December 31, 2020, disclose those accounting policies considered |
significant in determining results of operations and financial position. There have been no material changes to, or in the application of, theaccounting policies previously identified and described in the 2020 10-K. |
Recent Accounting Pronouncements |
| | On January 1, 2021, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic |
842) and ASU No. 2019-12, Income Taxes (Topic 740). These provisions did not have a material impact on the financial statements. Therehave been no additional accounting pronouncements issued or adopted during the six months ended June 30, 2021, which are expected tohave a material impact on the financial statements. |
3. 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 the concessions are kept in good standing. For concessions toremain in good standing a semi-annual fee must be paid to the Mexican government and an annual report describing the work accomplishedon the property must be filed. These concessions may be cancelled without penalty with prior notice to the Mexican government. MLS is theconcession holder of a series of claims titles granted by the Mexican government. |
Santa Valeria Concession |
| | The Company is required to make a production royalty payment of 1% of the net smelter returns on production. The Company may |
terminate the agreement upon prior notice. |
4. Accounts Payable and Other Accrued Liabilities |
| | | June 30, | December 31, |
| | | | 2021 | | 2020 |
| | Accounts payable | $ | 369 | $ | 560 |
| | Accrued expenses | | 2,059 | | 1,240 |
| | Accrued compensation | | 1,093 | | 1,964 |
| | Other | 260 | | 260 |
| | | | | | Total accounts payable and other current liabilities | $ | 3,781 | $ | 4,024 |
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5. Related-Party Transactions |
LGJV |
| | The Company has a services agreement with the LGJV to provide certain consulting and administrative services. The Company |
earned $2,500 and $2,100 under this agreement for the six months ended June 30, 2021 and 2020, respectively. The Company did notreceive any cash from the LGJV under this agreement for the six months ended June 30, 2021 and 2020. The Company had receivablesunder this agreement of $3,700 and $6,850 as of June 30, 2021 and 2020, respectively. The Company also incurs certain LGJV costs andprovides short term advances that are reimbursed by the LGJV. |
SSMRC |
| | The Company has a Management Services Agreement with Sunshine Silver Mining & Refining Corporation (“SSMRC”) (formerly |
Silver Opportunity Partners Corporation), pursuant to which the Company provides certain limited executive and managerial advisoryservices to SSMRC until terminated by either party. SSMRC reimburses the Company for costs of such services. The Company earned $16and nil from SSMRC under this agreement for the six months ended June 30, 2021 and 2020, respectively. |
6. Net Income (Loss) per Share |
| | Basic net income (loss) per share is computed by dividing income available to common shareholders by the weighted average |
number of common shares outstanding during the period. Diluted net income (loss) per share is computed similarly, except that weightedaverage common shares is increased to reflect the potential dilution that would occur if stock options outstanding were exercised orconverted into common stock. The dilutive effects are calculated using the treasury stock method. |
| | The computation of diluted earnings per common share excludes the effect of the assumed exercise of 1,391,236 stock options for |
the three and six months ended June 30, 2021, as the exercise price of these stock options was greater than the average market value of ourcommon stock for those periods, resulting in an anti-dilutive effect. For the three and six months ended June 30, 2020, all stock optionsoutstanding have been excluded from the dilutive earnings per share calculation as their effect would be anti-dilutive. |
| | A reconciliation of basic and diluted earnings per common share for the three and six months ended June 30, 2021 and 2020, are as |
follows: |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | | 2021 | | | | | 2020 | | 2021 | | | | | 2020 |
| | Net income (loss) | | | | | | | | | | | |
| | | | | | | | | | | Continuing operations | $ | 13,491 | | | | $ | (10,599) $ | 11,871 | | | | $ | (26,640) |
| | | | | | | | | | | Discontinued operations | | — | | | | | (1,545) | — | | (3,325) |
| | | | $ | 13,491 | | | | $ | (12,144) $ | 11,871 | | | | $ | (29,965) |
| | Weighted average shares: | | | | | | | | | | | |
| | | | | | | | | | | Basic | 59,747,048 | 40,506,144 | 59,611,062 | | | | 40,505,611 |
| | | | | | | | | | | Effect of dilutive stock options | | 876,448 | | | | | | | | — | | 809,749 | | | | | | | — |
| | | | | | | | | | | Diluted | 60,623,496 | 40,506,144 | 60,420,811 | | | | 40,505,611 |
| | Net income (loss) per share: | | | | | | | | | | | |
| | | | | | | | | | | Basic: | | | | | | | | | | |
| | | | | | | | | | | Continuing operations | $ | 0.23 | | | | $ | (0.26) $ | 0.20 | | | | $ | (0.66) |
| | | | | | | | | | | Discontinued operations | | — | | | | | (0.04) | — | | (0.08) |
| | | | $ | 0.23 | | | | $ | (0.30) | $ | 0.20 | | | | $ | (0.74) |
| | | | | | | | | | | Diluted: | | | | | | | | | | |
| | | | | | | | | | | Continuing operations | $ | 0.22 | | | | $ | (0.26) $ | 0.20 | | | | $ | (0.66) |
| | | | | | | | | | | Discontinued operations | | — | | | | | (0.04) | — | | (0.08) |
| | | | $ | 0.22 | | | | $ | (0.30) | $ | 0.20 | | | | $ | (0.74) |
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7. Stockholders’ Equity |
| | The Company is authorized to issue 700,000,000 shares of $0.001 par value common stock and 50,000,000 shares of $0.001 par |
value preferred stock. |
Stock Option Transactions |
| | The Company’s stock options have a contractual term of 10 years and entitle the holder to purchase shares of the Company’s |
common stock. The options granted to the Company’s employees and LGJV personnel prior to 2020 have a requisite service period of fouryears and vest in equal annual installments. Starting in 2020, the options granted to the Company’s employees and LGJV personnel have arequisite service period of three years. The options granted to non-employee directors prior to 2020 have a requisite service period of oneyear and vest in equal monthly installments. The options granted to non-employee directors in January 2020 have a requisite service periodof one and a half years and vest in monthly installments. The options granted to non-employee directors in June 2020 have a requisiteservice period of one year and vest in semi-annual installments. |
| | The Company granted 489,719 and 798,333 stock options during the six months ended June 30, 2021 and 2020, respectively. The |
weighted-average grant-date fair value per share was $9.53 and $6.76 for the six months ended June 30, 2021 and 2020, respectively. TheCompany received $4,221 from stock options exercised during the six months ended June 30, 2021. |
| | Total unrecognized stock-based compensation expense as of June 30, 2021, was $10,483 which is expected to be recognized over a |
weighted average period of 2.0 years. |
| | Stock option activity for the six months ended June 30, 2021, is summarized in the following tables: |
| | | Weighted‑ |
| | | Average |
| | | | Director and Employee Options | | Shares | Exercise Price |
| | Outstanding at December 31, 2020 | | | 5,411,930 | $ | 12.52 |
| | Granted | | | | 489,719 | $ | 16.72 |
| | Exercised | | | | 513,950 | $ | | | 8.21 |
| | Forfeited | | | | | 15,000 | $ | | | 7.00 |
| | Outstanding at June 30, 2021 | | | 5,372,699 | $ | 13.33 |
| | Vested at June 30, 2021 | | | 3,070,896 | $ | 15.63 |
| | | Weighted‑ |
| | | Average |
| | | | LGJV Personnel Options | | Shares | Exercise Price |
| | Outstanding at December 31, 2020 | | | 43,676 | $ | | | 7.23 |
| | Outstanding and vested at June 30, 2021 | | | | 43,676 | $ | | | 7.23 |
Deferred Stock Unit Transactions |
| | Deferred stock units (“DSUs”) are awarded to directors at the discretion of the Board of Directors. The DSUs are fully vested on |
the grant date and each DSU entitles the holder to receive one share of the Company’s common stock upon the director’s cessation ofcontinuous service. The fair value of the DSUs are equal to the fair value of the Company’s common stock on the grant date. |
| | At June 30, 2021, there were 214,855 DSUs outstanding. The Company granted 109,316 and 5,103 DSUs during the six months |
ended June 30, 2021 and 2020, respectively. For the six months ended June 30, 2021, 77,175 DSUs were converted to common stock. |
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8. Fair Value Measurements |
| | The Company establishes a framework for measuring the fair value of financial assets and liabilities and nonfinancial assets and |
liabilities, which are measured at fair value on a recurring (annual) basis in the form of a fair value hierarchy that prioritizes the inputs intovaluation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority to unadjusted quoted pricesin active markets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should be classified by level in theirentirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchyare as follows: |
| | Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement |
date. |
| | Level 2: Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active |
markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data. |
| | 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 June 30, 2021, and December 31, 2020, the Company’s financial instruments consist of cash and cash equivalents, receivables, |
accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate fair value due to their shortmaturities. |
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 the fair value hierarchy, as the valuation was determined based oninternally developed assumptions that market participants would use in the pricing of such assets without observable inputs and no marketactivity. |
| | 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 based on internally developed assumptions with fewobservable inputs and no market activity. |
9. Commitments, Contingencies and Guarantees |
| | In determining its accruals and disclosures with respect to loss contingencies, the Company will charge to income an estimated loss |
if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at thedate of the financial statements and the amount of the loss can be reasonably estimated. Legal expenses associated with the commitmentsand contingencies are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingencyis made in the financial statements when it is at least reasonably possible that a material loss could be incurred. |
| | The Company’s mining and exploration activities are subject to various laws, regulations and permits governing the protection of |
the environment. These laws, regulations and permits are continually changing and are generally becoming more restrictive. The Companyhas made, and expects to make in the future, expenditures to comply with such laws, regulations and permits, but cannot predict the fullamount of such future expenditures. |
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| | 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 of December 29, 2027. Interest on the Term Loan accrued daily atLIBOR plus 2.35% per annum, with the interest added to the amount borrowed until commencement of production. During 2018, the LGJVpaid Dowa a $4,200 closing fee. Commencing June 30, 2021, repayment of the Term Loan in 14 consecutive semi-annual equal payments ofthe aggregate principal and capitalized interest began. The Company was required to pay an arrangement fee on the borrowing, calculated as2% per annum of 70% of the outstanding principal balance, payable in semi-annual installments, on that date which is two business daysprior to June 30 and December 31 each fiscal year until maturity, commencing after the initial drawdown which occurred in July 2018. TheTerm Loan also required additional principal payments equal to 70% of excess cash flows (as defined). As of June 30, 2021, the LGJV had$206,870 outstanding under the Term Loan. |
| | On July 26, 2021, the Term Loan was repaid in full through capital contributions made to the LGJV by the Company and Dowa in |
pro-rata amounts equal to their ownership in the LGJV of 70% and 30%, respectively. In conjunction with the repayment, the Company paidto Dowa a closing fee of $10,000 and the LGJV paid to Dowa a $1,585 fee. |
| | 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 accrued daily at LIBOR plus 1.5% per annum and was added tothe amount borrowed. The amount borrowed plus accrued interest was due the earlier of June 30, 2019, or upon LGD’s substantialcompletion. If the Company’s 70% portion of the Dowa MPR Loan was not repaid in full on or before the due date, Dowa could elect toconvert all or a portion of the principal amount into additional LGJV ownership at a favorable conversion rate. |
| | The Company contributed $18,200 to the LGJV in May 2019 to provide funding for a partial repayment of principal and interest |
related to the Dowa MPR Loan. In late May 2019, the Dowa MPR Loan was fully extinguished with a cash payment of $18,200 and theconversion of the remaining $50,737 of principal and interest. The conversion of the remaining principal and interest increased Dowa’sownership in the LGJV entities by 18.5% to 48.5%. On March 11, 2021, the Company repurchased the 18.5% interest from Dowa, for a totalconsideration of $71,550, including Dowa holding costs of this incremental interest, increasing the Company’s ownership in the LGJV to70.0%. These transactions resulted in a $47,400 higher basis than the underlying net assets of the LGJV Entities. This basis difference isbeing amortized over the LGJV Entities proven and probable reserves. |
| | On May 30, 2019, the LGJV entered into a working capital facility agreement (the “WCF”) with Dowa whereby the LGJV could |
borrow up to $60,000 to fund the working capital and sustaining capital requirements of the LGD. Interest on this loan accrued daily atLIBOR plus 3.0% per annum and all outstanding principal and interest was to mature on June 28, 2021. The Company was required to payan arrangement fee on the borrowing, calculated as 15.0% per annum of 70.0% of the average daily principal amount outstanding under theWCF during such fiscal quarter. On March 11, 2021, the full $60,000 amount outstanding under the WCF was extinguished of which theCompany’s pro-rata capital contribution to the LGJV was $42,000. |
| | As of June 30, 2021, the Company had guaranteed 70% of the outstanding principal and accrued interest of the Term Loan in the |
event of default by the LGJV. The Company guarantees the payment of all obligations, including accrued interest, under the LGJVequipment loan agreements. As of June 30, 2021, the LGJV had $9,617 outstanding under the LGJV equipment loan agreements, net ofunamortized debt discount of $23, with varying maturity dates through August 2023. |
10. Discontinued Operations |
| | In October 2020, the Company completed the distribution of its reportable U.S. segment, which was comprised of SOP. To effect |
the distribution, the Company distributed, on a pro rata basis, all equity interest of SOP to its stockholders of record immediately prior tocompletion of the initial public offering. Shareholders received approximately 0.10594 shares of common stock of SOP for every share ofthe Company’s common stock held. SOP became a wholly owned subsidiary of a newly created Delaware corporation named SilverOpportunity Partners Corporation, subsequently renamed SSMRC. |
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| | The results of operations for SOP have been reflected as discontinued operations in the condensed consolidated statement of |
operations for the three and six months ended June 30, 2020, and consist of the following: |
| | | Three Months Ended | Six Months Ended |
| | | | June 30, 2020 | | June 30, 2020 |
| | Operating Expenses of Discontinued Operations |
| | | | | Exploration | $ | | | 105 $ | 216 |
| | | | | Pre-development | 532 | 1,048 |
| | | | | General and administrative | 316 | 877 |
| | | | | Amortization | 593 | 1,186 |
| | | | | Total expenses | | | | 1,546 | 3,327 |
| | Other Income of Discontinued Operations |
| | | | | Other income | (1) | | | (2) |
| | Net loss of discontinued operations | $ | | | 1,545 | $ | | | 3,325 |
| | The cash flow activity from discontinued operations for the six months ended June 30, 2020, have been reflected as discontinued |
operations in the condensed consolidated statement of cash flows for the six months ended June 30, 2020, and consist of the following: |
| | | | June 30, |
| | | | | | | 2020 |
| | Discontinued Operating ActivitiesNet loss |
| | | | $ | | | (3,325) |
| | Adjustments to reconcile net loss to net cash used by operating activities: |
| | | | | Amortization | | 1,186 |
| | | | | Stock compensation expense | | 117 |
| | | | | Accretion expense | | | | 55 |
| | Changes in operating assets and liabilities: |
| | | | | Accounts payable and other accrued liabilities | | (304) |
| | | | | Other current assets | | 9 |
| | | | | Net cash used by operating activities of discontinued operations | | (2,262) |
| | Financing Activities of Discontinued Operations |
| | | | | PPP Loan proceeds | | 307 |
| | | | | Net cash provided by financing activities of discontinued operations | | 307 |
11. Segment Information |
| | The Company operates in a single industry as a corporation engaged in the acquisition, exploration and development of primarily |
silver mineral interests. The Company has mineral property interests in Mexico. The Company’s reportable segments are based on theCompany’s mineral interests and management structure and include Mexico and Corporate segments. The Mexico segment engages in thedevelopment and exploration on the Company’s Mexican mineral properties and includes the Company’s investment in the LGJV. Financialinformation relating to the Company’s segments is as follows: |
| | | | | | | | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 |
| | | | | | | | | | Mexico | | Corporate | | Total | | | | Mexico | | Corporate | | | | | | Total |
Exploration | | | | | | | | | $ | 694 | $ | | | | | | | | | | — | $ | 694 | | | | | | | | | $ | 211 | $ | | | — | $ | | | 211 |
General and administrative | | | | | | | | | | 178 | 4,233 | | 4,411 | 190 | | | 1,353 | | | 1,543 |
Amortization | | | | | | | | | | — | | | 7 | 7 | — | | | 9 | | | | | | 9 |
Equity income (loss) in affiliates | | | | | | | | | | 18,291 | | | — | 18,291 | | | (8,071) | — | | | (8,071) |
Net other income (loss) | | | | | | | | | | (5) | 317 | | 312 | (13) | | | (752) | | | (765) |
Total assets | | | | | | | | | | 59,679 | 224,879 | | 284,558 | | | 34,346 | 71,646 | | | 105,991 |
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| | LOS GATOS JOINT VENTURE |
| | | COMBINED STATEMENTS OF INCOME (LOSS) (UNAUDITED) |
| | | | (in thousands) |
| | | | | Three Months Ended | Six Months Ended |
| | | | | June 30, | June 30, |
| | | | | | | | 2021 | | | | 2020 | | 2021 | | | | | | 2020 |
Sales | | | | | $ | 75,005 | | | $ | 18,247 | $ 121,335 | | | | | $ | 37,160 |
Expenses | | | | | | | | | | | | | | |
Cost of sales | | | | | | 24,096 | | | | 9,996 | | 43,901 | | | | | | 28,272 |
Royalties | | | | | | 1,415 | | | | (272) | 2,299 | | | | | | 29 |
Exploration | | | | | | 1,261 | | | | 144 | | 1,910 | | | | | | 408 |
General and administrative | | | | | | 2,833 | | | | 1,905 | | 6,079 | | | | | | 4,650 |
Depreciation, depletion and amortization | | | | | | 12,705 | | | | 9,543 | | 23,654 | | | | | | 21,260 |
Other | | | | | | — | | | | 3,416 | | — | | | | | | 3,416 |
| | | | | | 42,310 | | | | 24,732 | | 77,843 | | | | | | 58,035 |
Other (income) expense | | | | | | | | | | | | | |
Interest expense | | | | | | 2,356 | | | | 3,390 | | 4,473 | | | | | | 6,943 |
Arrangement fee | | | | | | 2,090 | | | | 4,709 | | 2,090 | | | | | | 4,709 |
Accretion expense | | | | | | 228 | | | | 212 | | 456 | | | | | | 424 |
Other (income) expense | | | | | | 11 | | | | — | | (19) | | | | | | (108) |
Foreign exchange (gain) loss | | | | | | (1,335) | | | | (339) | 295 | | | | | | 5,522 |
| | | | | | 3,350 | | | | 7,972 | | 7,295 | | | | | | 17,490 |
Net Income (Loss) | | | | | $ | 29,345 | | | $ (14,457) $ | 36,197 | | | | | $ (38,365) |
13. Subsequent Events |
| | | | | | | | | | | | | | On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Agreement”) with Bank of Montreal. The |
Credit Agreement provides for a revolving line of credit in a principal amount of $50,000 and has an accordion feature which allows for anincrease in the total line of credit up to $100,000, subject to certain conditions. The Credit Agreement matures on July 31, 2024. The CreditAgreement contains affirmative and negative covenants that are customary for credit agreements of this nature. The affirmative covenantsconsist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, among other things,limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates.Obligations under the Credit Agreement may be accelerated upon the occurrence of certain customary events of default. Loans under theCredit Agreement will bear interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% or the U.S. BaseRate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined in accordancewith a pricing grid based upon the Company’s consolidated net leverage ratio as of the end of the applicable period. |
| | | | | | | | | | | | | | On July 19, 2021, the Company borrowed $13,000 under the Credit Agreement at a rate of LIBOR plus 3%. |
| | | | | | | | | | | | | | On July 19, 2021, the Company completed a follow-on public offering of 8,930,000 shares of common stock at a price of $14.00 |
per share, resulting in net proceeds of $118,894, after deducting underwriting discounts and commissions and expenses payable by us. |
| | | | | | | | | | | | | | The proceeds from the public offering, together with the funds borrowed under the Credit Agreement and cash on hand, were used |
to retire our 70% portion of the Dowa Term Loan at the LGJV effective July 26, 2021. |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| | The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes and |
other information included elsewhere in this Quarterly Report on Form 10-Q (the “Report”) and the Company’s audited consolidatedfinancial statements and notes thereto as of and for the year ended December 31, 2020 and the related “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” both of which are contained in our Annual Report on Form 10-K for the yearended December 31, 2020 (the “2020 10-K”), filed with the Securities and Exchange Commission (“SEC”) on March 29, 2021. |
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. 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 and other comparable terminology. These forward-looking statementsmay include, but are not limited to, those relating to projections of our future financial performance, our anticipated growth strategies andanticipated trends in our industry, production from the Cerro Los Gatos Mine (“CLG”), our expectations relating to further exploration of theLos Gatos District and the Santa Valeria property, estimated calculations of mineral reserves and resources at our properties, anticipatedexpenses, tax benefits, future strategic 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 concerning future events that are difficult to predict. Therefore, actualfuture events or results may differ materially from these statements. Important factors that could cause our actual results to differ materiallyfrom those expressed or implied by forward-looking statements include, but are not limited to, the following: |
| | ● | we have a history of negative operating cash flows and net losses and we may not sustain profitability; |
| | ● | we are dependent on two principal projects for our future operations; |
| | ● | the Los Gatos Joint Venture (“LGJV”) has historically had significant debt and may incur further debt in the future, whichcould adversely affect the LGJV’s and our financial health and ability to obtain financing in the future and pursue certainbusiness opportunities; |
| | ● | we have outstanding indebtedness and may incur further debt in the future, and the degree to which we are leveraged may havea material adverse effect on our business financial condition or results of operations and cash flows; |
| | ● | mineral reserve and mineral resource calculations at the CLG and the Los Gatos District are only estimates and actualproduction 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 from those we have anticipatedand there are no assurances that any future development activities will result 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; |
| | ● | the widespread outbreak of the COVID-19 pandemic and any other health epidemics, communicable diseases or public healthcrises could also adversely affect us, particularly in regions where we conduct our business operations; |
| | ● | the prices of silver, zinc and lead are subject to change and a substantial or extended decline in the prices of silver, zinc or leadcould materially and adversely affect our revenues and the value of our mineral properties; |
| | ● | the Mexican government, as well as local governments, extensively regulate mining operations, which impose significantactual and potential costs on us, and future regulation could increase those costs, delay receipt of regulatory refunds or limitour ability to produce silver and other metals; |
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| | ● | our operations are subject to additional political, economic and other uncertainties not generally associated with U.S.operations; and |
| | ● | we are required to obtain, maintain and renew environmental, construction and mining permits, which is often a costly andtime-consuming process and may ultimately not be possible. |
| | These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and |
information included in this Report and those described from time to time in our filings with the SEC, including, but not limited to, our 202010-K. These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material,may cause our actual future results to be materially different than those expressed in our forward-looking statements. Undue reliance shouldnot be placed on these forward-looking statements. We do not undertake any obligation to make any revisions to these forward-lookingstatements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, except asrequired by law. Certain forward-looking statements are based on assumptions, qualifications and procedures, which are set out only in thetechnical report entitled “Los Gatos Project, Chihuahua, Mexico,” dated July 1, 2020, which was prepared in accordance with therequirements of subpart 1300 of Regulation S-K and Canadian National Instrument 43-101 — Standards of Disclosure for Mineral Projects(the “Los Gatos Technical Report”). 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, which 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. |
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 continued development of the CLG and the further exploration anddevelopment of the Los Gatos District through the LGJV with Dowa: |
| | ● | The CLG, located within the Los Gatos District, Chihuahua, Mexico, consists of a 2,500 tpd polymetallic mine and processingfacility that commenced production on September 1, 2019. The Los Gatos Technical Report, which has an effective date ofJuly 1, 2020, estimates that the deposit contains approximately 9.6 million diluted tonnes of proven and probable mineralreserves (or approximately 6.7 million diluted tonnes of proven and probable mineral reserves on a 70.0% basis, representingthe Company’s current ownership interest in the LGJV), with approximately 6.4 million diluted tonnes of proven mineralreserves (or approximately 4.5 million diluted tonnes of proven mineral reserves on a 70.0% basis) and approximately 3.3million diluted tonnes of probable mineral reserves (or approximately 2.3 million diluted tonnes of probable mineral reserveson a 70.0% basis). The Los Gatos Technical Report states average proven and probable mineral reserve grades are 306 g/tsilver, 0.35 g/t gold, 2.76% lead and 5.65% zinc. |
| | ● | The Los Gatos District, located in Chihuahua, Mexico, is located approximately 120 kilometers south of Chihuahua City and iscomprised of a 103,087 hectares land position, constituting a new mining district. The Los Gatos District consists of 14mineralized zones, which include three identified silver, lead and zinc deposits that contain mineral resources—the CLG, theEsther deposit and the Amapola deposit—as well as 11 additional high priority targets defined by high grade drill intersectionsand over 150 kilometers of outcropping quartz and calcite veins. The area is characterized by a predominant silver, lead andzinc epithermal mineralization. On September 1, 2019, the LGJV commenced production at the CLG. A core component of theLGJV’s business plan is to explore the highly prospective, underexplored Los Gatos District with the objective of identifyingadditional mineral deposits that can be mined and processed, possibly utilizing the CLG plant infrastructure. |
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Operational Update |
| | In the first and second quarters of 2021, the LGJV achieved the following production from CLG: |
| | CLG Production (100% Basis) | Q2 2021 | Q1 2021 | |
| | Tonnes mined (wmt - unreconciled) | 240,047 | 209,832 |
| | Tonnes milled (dmt - reconciled) | 230,656 | 203,479 |
| | Tonnes milled per day (dmt) | | 2,535 | 2,261 |
| | Average Grades | | | | | |
| | | | | | | Silver grade (g/t) | | | | 322 | 261 |
| | | | | | | Gold grade (g/t) | | | | 0.35 | 0.32 |
| | | | | | | Lead grade (%) | | | | 2.51 | 2.00 |
| | | | | | | Zinc grade (%) | | | | 4.41 | 3.24 |
| | Contained Metal | | | | | |
| | | | | | | Silver ounces (millions) | | | | 2.1 | 1.5 |
| | | | | | | Gold ounces - in lead concentrate (thousands) | | | | 1.5 | 1.1 |
| | | | | | | Lead pounds - in lead concentrate (millions) | | | | 11.2 | 7.6 |
| | | | | | | Zinc pounds - in zinc concentrate (millions) | | | | 14.5 | 8.7 |
| | Recoveries (combined lead and zinc concentrate) | | | | | |
| | | | | | | Silver | | | | 89 % | 85 % |
| | | | | | | Gold | | | | 63 % | 60 % |
| | | | | | | Lead | | | | 90 % | 87 % |
| | | | | | | Zinc | | | | 75 % | 71 % |
| | Operating costs for the three months ended June 30, 2021, were in line with management’s expectations and trending toward life- |
of-mine feasibility operating costs. |
COVID-19 Pandemic |
| | In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic temporarily |
affected our operations in 2020 in part due to the loss of revenue resulting from the 45-day temporary suspension of all nonessentialactivities at the LGJV’s CLG site and the expenses associated with the development and implementation of COVID-19 protocols. Webelieve we have taken appropriate steps to minimize the risk to our employees and to maintain normal business operations. We may takefurther actions as may be required by government authorities or as we determine are in the best interests of our employees and businesspartners which may cause additional closures of some or all of our operations in the future. |
| | While the full impact of this pandemic is unknown, we are closely monitoring the developments of the outbreak and continually |
assessing the potential impact on our business. Any prolonged disruption of our operations and closure of facilities could result in additionalcosts incurred, production and development delays, cost overruns and operational restart costs that would negatively impact our business,financial condition and results of operations. The degree to which the pandemic impacts our business, financial condition and results ofoperations will depend on future developments, which are highly uncertain, continuously evolving and in many cases cannot be predicted,including, but not limited to, the duration and spread of the pandemic and its variants, its severity and the actions to contain the virus or treatits impact, such as the efficacy of vaccines (particularly with respect to emerging strains of the virus). Accordingly, there remains significantuncertainty about the duration and extent of the impact of the COVID-19 pandemic. See “Part I, Item 1A. Risk Factors” in the 2020 10-K foradditional risks we face due to the COVID-19 pandemic. |
Exploration Update |
| | The Company is active in three different exploration drilling programs that are collectively estimated to require 51,400 meters of |
exploration and definition drilling at an expected cost of $6.1 million. The programs are further detailed below. |
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Cerro Los Gatos Infill and Extension Drilling Program |
| | On December 5, 2020, the LGJV commenced a 90-hole, 27,000-meter fill and extension drilling program at the CLG within the |
LGJV with the goal of converting the CLG’s established 3.7 million tonnes of inferred resources to the measured and indicated category andto discover additional resources along the northwest and southeast extensions of the CLG deposit. Once completed, the Company intends toincorporate the additional measured and indicated resources into a new mine plan that will increase the proven and probable reserves andfurther support a possible expansion of the CLG’s production rate from 2,500 tpd to 3,000 tpd. The LGJV expects this program to cost about$2.8 million with completion anticipated by the third quarter of 2021. As of June 30, 2021, 48 holes have been drilled. |
Los Gatos District Resource Expansion |
| | On May 12, 2021, the LGJV commenced a second exploration program to expand resources throughout the Los Gatos District. The |
initial target is a 59-hole, 19,000-meter campaign with 50-meter spacing at the Esther deposit, to expand its initial indicated resource of 0.46million tonnes at 133 g/t silver, 2.1% zinc, 0.7% lead and inferred resource of 2.29 million tonnes at 98 g/t silver, 3.0% zinc, and 1.6% lead.Esther is located about four kilometers from the CLG and contains similar styles of mineralization and geochemistry. The LGJV expects thisprogram to cost about $2.7 million with completion anticipated by December 2021. As of June 30, 2021, six holes have been drilled. |
Santa Valeria Project |
| | In March 2021, the Company commenced an 18-hole, 5,400-meter exploration program on its wholly-owned Santa Valeria |
property. The Santa Valeria target has been developed through regional geologic work by the Company’s exploration team, which defined alarge basin structure hosting the mineralization zones within the Los Gatos District. Santa Valeria is geologically comparable to CLG, andthe Company believes it may contain similar mineral content. The Company expects this program to cost about $600,000 with completionanticipated by August 2021. As of June 30, 2021, 13 holes have been drilled. |
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 Gatos District and our other exploration properties. Our exploration expensesprimarily consist of drilling costs, lease concession payments, assay costs and other geological and support costs at our explorationproperties. |
General and Administrative Expenses |
| | Our general and administrative expenses consist of salaries and benefits, stock compensation, professional and consultant fees, |
insurance and other general administration costs. Our general and administrative expenses have increased and are expected to furtherincrease significantly as we operate as a public company. We expect higher costs related to salaries, benefits, stock compensation, legal fees,compliance and corporate governance, accounting and audit expenses, stock exchange listing fees, transfer agent and other shareholder-related fees, directors’ and officers’ and other insurance costs, and other administrative costs. We are party to a Management ServicesAgreement with SSMRC, pursuant to which we will provide certain limited executive and managerial advisory services to SSMRC. SSMRCreimburses us for costs of providing such services. |
Equity Income (Loss) in Affiliates |
| | Our equity income (loss) in affiliates relates to our proportional share of net income or loss incurred from the LGJV and the |
amortization of the basis difference between our investment in the LGJV and the net assets of the LGJV. |
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LGJV Arrangement Fee |
| | Our LGJV arrangement fee consisted of arrangement fees related to the Term Loan and the Working Capital Facility (“WCF”) with |
Dowa prior to their extinguishment on July 26, 2021, and March 11, 2021, respectively. The arrangement fees were based on a fixed 1% and15% rate for the Term Loan and the WCF, respectively, and 70% of the outstanding principal of the respective facility. These arrangementfees were solely our responsibility. We do not expect to incur LGJV arrangement fees beyond July 26, 2021, with respect to the WCF orTerm Loan. |
Income Taxes |
| | As we have incurred substantial losses from our exploration and pre-development activities, we may receive further benefits in the |
form of deferred tax assets that can reduce our future income tax liabilities, if it is more likely than not that the benefit will be realized beforeexpiration. Historically, we have not recognized these potential benefits in our financial statements and have fully reserved for such netdeferred tax assets, as we believe it is more likely than not that the full benefit of these net deferred tax assets will not be realized beforeexpiration. |
Royalties |
| | Exploration activities are conducted on the Los Gatos District mining concessions and on the Company’s 100% owned Santa |
Valeria concessions in Mexico. Mineral and concession lease payments are required to be paid to various entities to secure the appropriateclaims or surface rights. Certain of these agreements also have royalty payments that were triggered when we began producing and sellingmetal-bearing concentrate. |
Results of Operations |
| | The following table presents certain information relating to our operating results for the three and six months ended June 30, 2021 |
and 2020. In accordance with generally accepted accounting principles in the United States (‘‘GAAP’’), these financial results represent theconsolidated results of operations of our Company and its subsidiary (in thousands). |
| | | Three Months Ended | Six Months Ended |
| | | June 30, | June 30, |
| | | | 2021 | | | 2020 | | 2021 | | | | | 2020 |
Expenses | | | | | | | | | | | | | | | | | | | | | |
Exploration | | | $ | 694 | | $ | 211 | $ | 918 | | | | $ | 382 |
General and administrative | | | | 4,411 | | | 1,543 | | 8,014 | | | | | 2,380 |
Amortization | | | | 7 | | | 9 | | 14 | | | | | 17 |
Total expenses | | | | 5,112 | | | 1,763 | | 8,946 | | | | | 2,779 |
Other income (expense) | | | | | | | | | | | | | | | |
Equity income (loss) in affiliates | | | 18,291 | | | (8,071) 20,992 | | | (21,516) |
Other income (loss) | | | | 312 | | | (765) | (175) | | | | (2,345) |
Net other income (expense) | | | 18,603 | | | (8,836) 20,817 | | | (23,861) |
Net income (loss) from continuing operations | | | $ 13,491 | | $ (10,599) $ 11,871 | | | $ (26,640) |
Net loss from discontinued operations | | | | — | | | (1,545) | — | | | | | (3,325) |
Net income (loss) | | | $ 13,491 | | $ (12,144) $ 11,871 | | | $ (29,965) |
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 |
| | For the three months ended June 30, 2021, we achieved net income from continuing operations of $13,491 thousand compared to a |
net loss of $10,599 thousand for the three months ended June 30, 2020. The $24,090 thousand increase in net income from continuingoperations was primarily attributable to the $26,362 thousand change in equity income (loss) in affiliates from the LGJV operations, partiallyoffset by the $2,868 thousand increase in general and administrative expense due to higher legal and consulting costs and directors andofficer’s insurance premiums related to public company governance and reporting requirements, and increased stock-based compensationexpense. |
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| | The improvement in our equity income (loss) in the LGJV’s operating income, which is recognized using the equity method of |
accounting in our financial statements, for the three months ended June 30, 2021, resulted primarily from: the increase in our ownership inthe LGJV from 51.5% to 70.0% on March 11, 2021; mining and processing activities operating at design throughput for the three monthsended June 30, 2021, compared to the ramp-up to design throughput during the three months ended June 30, 2020; and significantly highermetals prices for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. |
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020 |
| | For the six months ended June 30, 2021, we achieved net income from continuing operations of $11,871 thousand compared to a |
net loss of $26,640 thousand for the six months ended June 30, 2020. The $38,511 thousand increase in net income from continuingoperations was primarily attributable to the $43,898 thousand change in equity income (loss) in affiliates from the LGJV operations, partiallyoffset by the $5,634 thousand increase in general and administrative expense due to higher legal and consulting costs and directors andofficer’s insurance premiums related to public company governance and reporting requirements, and increased stock-based compensationexpense. |
| | The improvement in our equity income (loss) in the LGJV’s operating income, which is recognized using the equity method of |
accounting in our financial statements, for the six months ended June 30, 2021, resulted primarily from: the increase in our ownership in theLGJV from 51.5% to 70.0% on March 11, 2021; mining and processing activities operating near design throughput for the six months endedJune 30, 2021, compared to the ramp-up to design throughput during the six months ended June 30, 2020; and significantly higher metalsprices for the six months ended June 30, 2021, compared to the six months ended June 30, 2020. |
Liquidity and Capital Resources |
| | As of June 30, 2021, and December 31, 2020, we had cash and cash equivalents of $29,607 thousand and $150,146 thousand, |
respectively, and working capital of $33,403 thousand and $151,728 thousand, respectively. The decrease in cash and cash equivalents andworking capital were primarily due to our $71,550 thousand repurchase of the 18.5% interest in the LGJV from Dowa and a $42,000thousand capital contribution to the LGJV to extinguish our 70% share of the WCF. As a result, our ownership in the LGJV increased to70.0% and Dowa’s ownership was reduced to 30% on March 11, 2021. |
| | On July 19, 2021, we completed a follow-on public offering of 8,930,000 shares of common stock at a price of $14.00 per share, |
resulting in net proceeds of $118,894 thousand, after deducting underwriting discounts and commissions and expenses payable by us. |
| | We did not have any related party debt as of June 30, 2021, or December 31, 2020. We have no outstanding lines of credit or other |
bank financing arrangements as of June 30, 2021. We guaranteed 70.0% of the Term Loan (prior to the repayment of the Term Loan on July26, 2021, as discussed further below) and all of the LGJV equipment loans as of June 30, 2021. We had certain arrangement fees obligationsrelated to the CLG as detailed in the “LGJV Arrangement Fee” above. |
| | We believe we have sufficient cash, access to borrowings 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 fixed cost structure as well as decisionsrelated to project retention, advancement and development. We may be required to raise additional capital or take other measures to fundfuture exploration and development. Significant development activities, if warranted, may require that we arrange for financing in advanceof planned expenditures. In addition, we expect to continue to increase our current financial resources with external financings as long as ourlong-term business needs require us to do so. There can be no assurance that external financing will be available to us on acceptable terms,or at all. We manage liquidity risk through our credit facility and the management of our capital structure. |
| | 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, joint venture funding or some combination thereof. There can be no assurance that additionalfunds will be available to us on acceptable terms, or at all. If we raise additional funds by issuing equity or convertible securities, substantialdilution to existing stockholders may result. Additionally, if we raise additional funds by incurring new debt obligations, the terms of thedebt may require significant cash payment obligations, as well as covenants and specific financial ratios that may restrict our ability tooperate our business. |
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Dowa Debt Agreements |
| | Dowa Term Loan |
| | On July 11, 2017, we entered into the Term Loan with Dowa whereby the LGJV could borrow up to $210,000 thousand to finance |
the development of the Los Gatos project, with a maturity date of December 29, 2027. Interest accrued daily at LIBOR plus 2.35% perannum, and the interest was added to the amount borrowed until production commenced at the Los Gatos project. The LGJV was obligatedto pay 14 consecutive semi-annual payments totaling the aggregate principal amount and capitalized interest beginning June 30, 2021, withpayments made two business days prior to the end of each June and December. We guaranteed 70.0% of the Term Loan and were required topay an arrangement fee on the borrowing, calculated as 2% per annum on 70% of the outstanding principal balance, payable in semi-annualinstallments. The Term Loan contained affirmative and negative covenants reasonably customary for similar facilities, with which the LGJVis in compliance in all material respects as of June 30, 2021. |
| | On July 26, 2021, the LGJV repaid all amounts owed to Dowa under the Term Loan. The Company advanced a loan to the LGJV in |
an aggregate amount equal to 70% of the Term Loan balance, which was converted into a capital contribution to the LGJV on July 26, 2021.In conjunction with the Term Loan repayment, the Company also paid Dowa a closing fee of $10,000 thousand, for total consideration of$154,800 thousand. Dowa’s 30% portion of the Term Loan was converted into a capital contribution on July 26, 2021. The LGJV paid $386thousand of outstanding accrued interest and a $1,585 thousand fee related to the Term Loan repayment. |
| | Los Gatos Working Capital Facility |
| | On May 30, 2019, we entered into the WCF with the LGJV and Dowa, under which Dowa agreed to provide a maximum of |
$60,000 thousand for the benefit of the LGJV, with a maturity date of June 28, 2021. Interest payable under the WCF was LIBOR plus 3%per annum and was payable by the LGJV. We guaranteed 70% of this facility and were required to pay an arrangement fee on the borrowing,calculated as 15.0% per annum on 70.0% of the average daily principal amount outstanding during the relevant fiscal quarter. The fullprincipal amount of the WCF was drawn down by the LGJV as of September 2019. On March 11, 2021, we and Dowa contributed $42,000thousand and $18,000 thousand, respectively, in capital to the LGJV extinguishing the WCF. |
Revolving Credit Facility |
| | On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Agreement”) with Bank of Montreal, Chicago |
Branch. The Credit Agreement provides for a revolving line of credit in a principal amount of $50,000 and has an accordion feature, whichallows for an increase in the total line of credit up to $100,000, subject to certain conditions. The Credit Agreement matures on July 31,2024. The Credit Agreement contains affirmative and negative covenants that are customary for credit agreements of this nature. Theaffirmative covenants consist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, amongother things, limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactionswith affiliates. Obligations under the Credit Agreement may be accelerated upon the occurrence of certain customary events of default.Loans under the Credit Agreement will bear interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% orthe U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined inaccordance with a pricing grid based upon the Company’s consolidated net leverage ratio as of the end of the applicable period. |
| | On July 19, 2021, the Company borrowed $13,000 under the Credit Agreement at a rate of LIBOR plus 3%. |
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Cash Flows |
| | The following table presents our sources and uses of cash for the periods indicated: |
| | | Six Months Ended |
| | | June 30, |
| | | | | 2021 | | | 2020 |
| | | (in thousands) |
| | Net cash provided by (used by) | | | | |
| | Operating activities | $ | (7,895) $ (9,537) |
| | Investing activities | (116,595) (7,573) |
| | Financing activities | | 3,951 | | 9,979 |
| | | | | | | Total change in cash | $ (120,539) $ (7,131) |
| | Cash used by operating activities was $7,895 thousand and $9,537 thousand for the six months ended June 30, 2021 and 2020, |
respectively. The $1,642 thousand decrease in cash usage was primarily due to the loss from discontinued operations, which were reflectedin the six months ended June 30, 2020, and lower arrangement fees associated with the extinguishment of the WCF, partially offset by highergeneral and administrative costs during the six months ended June 30, 2021. |
| | Cash used by investing activities was $116,595 thousand and $7,573 thousand for the six months ended June 30, 2021 and 2020, |
respectively. The $109,022 thousand increase was primarily due to the $71,550 thousand acquisition of the 18.5% interest in the LGJV fromDowa and the $42,000 thousand pro-rata capital contribution to the LGJV for the extinguishment of the WCF in March 2021. |
| | Cash provided by financing activities was $3,951 thousand and $9,979 thousand for the six months ended June 30, 2021 and 2020, |
respectively. The $6,028 thousand decrease was primarily related to the $10,000 thousand in proceeds from related party convertible debt forthe six months ended June 30, 2020, partially offset by $4,221 thousand in proceeds from the issuance of common stock related to theexercise of stock options during the six months ended June 30, 2021. |
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Results of LGJV Operations |
| | The following table presents information relating to the LGJV’s financial condition as of June 30, 2021, and December 31, 2020, |
and the operating results for the six months ended June 30, 2021 and 2020 in accordance with GAAP. Pursuant to the purchase of the 18.5%interest from Dowa on March 11, 2021, our current ownership of the LGJV is 70.0%. |
| | | LOS GATOS JOINT VENTURE |
| | | | COMBINED BALANCE SHEETS (UNAUDITED) |
| | | | | (in thousands) |
| | | | | | June 30, | December 31, |
| | | | | | | 2021 | | 2020 |
| | ASSETS | | | | | |
| | Current Assets | | | | | |
| | | | | | | | Cash and cash equivalents | $ | 2,242 | $ | 1,676 |
| | | | | | | | Receivables | | 23,872 | | 3,988 |
| | | | | | | | Inventories | | 10,288 | | 10,315 |
| | | | | | | | VAT receivable | | 46,088 | | 50,732 |
| | | | | | | | Other current assets | | 5,502 | | 2,891 |
| | | | | | | | Total current assets | | 87,992 | | 69,602 |
| | Non-Current Assets | | | | | | | |
| | | | | | | | Mine development, net | 213,895 | 202,874 |
| | | | | | | | Property, plant and equipment, net | 192,206 | 196,942 |
| | | | | | | | Total non-current assets | 406,101 | 399,816 |
| | Total Assets | | | | $ 494,093 | $ 469,418 |
| | LIABILITIES AND OWNERS' CAPITAL | | | | | | | |
| | Current Liabilities | | | | | | | |
| | | | | | | | Accounts payable and accrued liabilities | $ 31,995 | $ 35,767 |
| | | | | | | | Related party payable | | 5,118 | | 1,703 |
| | | | | | | | Accrued interest | | 159 | | | 101 |
| | | | | | | | Unearned revenue | | 6,034 | | 3,276 |
| | | | | | | | Equipment loans | | 6,898 | | 7,084 |
| | | | | | | | Dowa Term Loan | | 31,826 | | 31,826 |
| | | | | | | | Working Capital Facility | | — | | 60,000 |
| | | | | | | | Total current liabilities | | 82,030 | 139,757 |
| | Non-Current Liabilities | | | | | | | |
| | | | | | | | Dowa Term Loan | 172,269 | 187,767 |
| | | | | | | | Equipment loans | | 2,696 | | 6,120 |
| | | | | | | | Reclamation obligations | | 12,619 | | 12,162 |
| | | | | | | | Total non-current liabilities | 187,584 | 206,049 |
| | Owners' Capital | | | | | | | |
| | | | | | | | Capital contributions | 333,768 | 271,368 |
| | | | | | | | Paid-in capital | | 18,636 | | 16,366 |
| | | | | | | | Accumulated deficit | (127,925) (164,122) |
| | | | | | | | Total owners' capital | 224,479 | 123,612 |
| | Total Liabilities and Owners' Capital | | | | $ 494,093 | $ 469,418 |
| | At June 30, 2021, and December 31, 2020, the LGJV had current assets of $87,992 thousand and $69,602 thousand, respectively. |
The increase in total current assets was primarily due to an increase in trade receivables generated from operations on the higher salesvolumes generated in 2021, partially offset by a decrease in value added tax (“VAT”) receivables primarily from the ability to retain VATcollected from the higher concentrate sales. At June 30, 2021, and December 31, 2020, the LGJV had noncurrent assets of $406,101thousand and $399,816 thousand, respectively. The increase in noncurrent assets was due to sustaining capital expenditures, primarily formine development at the CLG, partially offset by depletion and depreciation for the six months ended June 30, 2021. |
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| | At June 30, 2021, and December 31, 2020, the LGJV had current liabilities of $82,029 thousand and $139,757 thousand, |
respectively. The decrease in current liabilities was primarily due to the extinguishment of the $60,000 thousand WCF on March 11, 2021.At June 30, 2021, and December 31, 2020, the LGJV had noncurrent liabilities of $187,584 thousand and $206,049 thousand, respectively.The decrease in non-current liabilities was primarily due to the first principal payment on the Dowa Term Loan and scheduled principalpayments on equipment loans. |
| | | LOS GATOS JOINT VENTURE |
| | | | COMBINED STATEMENTS OF INCOME (LOSS) (UNAUDITED) |
| | | | | (in thousands) |
| | | | | | Three Months Ended | Six Months Ended |
| | | | | | June 30, | June 30, |
| | | | | | | 2021 | | | 2020 | | 2021 | | | | 2020 |
Sales | | | | | | $ 75,005 | | $ 18,247 | $ 121,335 | | | $ 37,160 |
Expenses | | | | | | | | | | | | | | | |
Cost of sales | | | | | | 24,096 | | | | | | | 9,996 | 43,901 | | | 28,272 |
Royalties | | | | | | | 1,415 | | | | | | | (272) | 2,299 | | | | 29 |
Exploration | | | | | | | 1,261 | | | 144 | | 1,910 | | | | 408 |
General and administrative | | | | | | | 2,833 | | | | | | | 1,905 | | 6,079 | | | | 4,650 |
Depreciation, depletion and amortization | | | | | | 12,705 | | | | | | | 9,543 | 23,654 | | | 21,260 |
Other | | | | | | — | | | | | | | 3,416 | — | | | | 3,416 |
| | | | | | 42,310 | | 24,732 | 77,843 | | | 58,035 |
Other (income) expense | | | | | | | | | | | | | | | |
Interest expense | | | | | | | 2,356 | | | | | | | 3,390 | | 4,473 | | | | 6,943 |
Arrangement fee | | | | | | 2,090 | | | | | | | 4,709 | 2,090 | | | | 4,709 |
Accretion expense | | | | | | | 228 | | | 212 | | 456 | | | | 424 |
Other (income) expense | | | | | | | 11 | | | — | | (19) | | | | (108) |
Foreign exchange (gain) loss | | | | | | (1,335) | | | | | | | (339) | 295 | | | | 5,522 |
| | | | | | | 3,350 | | | | | | | 7,972 | | 7,295 | | | 17,490 |
Net Income (Loss) | | | | | | $ 29,345 | | $ (14,457) $ 36,197 | | $ (38,365) |
| | For the three months ended June 30, 2021, the LGJV had net income of $29,345 thousand compared to a net loss of $14,457 |
thousand for the three months ended June 30, 2020. The change in net income (loss) was primarily due to increased revenue as a result ofoperating at designed throughput for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, whichincurred a two-month Mexican government ordered temporary suspension of all “non-essential” operations nationwide in Mexico.Additionally, the three months ended June 30, 2021, incurred lower interest expense due to lower interest rates, lower borrowings and lowerarrangement fees due to the retirement of the WCF, and by higher 2020 costs incurred directly related to the two-month Mexicangovernment ordered temporary suspension. |
| | For the six months ended June 30, 2021, the LGJV had net income of $36,197 thousand compared to a net loss of $38,365 thousand |
for the six months ended June 30, 2020. The change in net income (loss) was primarily due to increased revenue as a result of 60%, 39% and17% increase in realized silver, zinc and lead prices, respectively, 75% and 61% higher production rates of lead and zinc concentrates,respectively, and 53% and 14% higher silver and zinc grades, respectively, as well as lower interest expense due to lower interest rates, lowerborrowings and lower arrangement fees due to the retirement of the WCF, partially offset by 23% lower lead grades and 2020 costs incurreddirectly related to the two-month Mexican government ordered temporary suspension. |
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| | The following table presents summarized information relating to the LGJV’s cash flows for the six months ended June 30, 2021 and |
2020. |
| | | LOS GATOS JOINT VENTURE |
| | | | COMBINED STATEMENT OF CASH FLOWS |
| | | | | (in thousands) |
| | | | | | Six Months Ended June 30, |
| | | | | | | 2021 | | 2020 |
| | Net cash provided by (used by) | | | | | | |
| | Operating activities | | | | $ 56,225 | $ | 9,115 |
| | Investing activities | | | | (38,613) (20,177) |
| | Financing activities | | | | (17,046) 15,450 |
| | | | | | | | | Total change in cash | $ | 566 | $ | 4,388 |
| | Cash provided by operating activities was $56,225 thousand and $9,115 thousand for the six months ended June 30, 2021 and 2020, |
respectively. The $47,110 thousand increase in cash provided by operating activities was primarily due to the increase in revenue for the sixmonths ended June 30, 2021, due to higher metals prices, higher ore tonnes processed and higher ore grades, compared to the prior yearperiod, partially offset by increased receivables from customers. |
| | Cash used by investing activities was $38,613 thousand and $20,177 thousand for the six months ended June 30, 2021 and 2020, |
respectively. The $18,436 thousand increase in cash used was primarily due to higher sustaining capital expenditures for property, plant andequipment and mine development. |
| | Cash (used by) provided by financing activities was $(17,046) thousand and $15,450 thousand for the six months ended June 30, |
2021 and 2020, respectively. The $32,496 thousand change in financing cash flows was primarily due to the $15,913 thousand Term Loanpayment in June 2021 and the related party loan to the LGJV during the six months ended June 30, 2020. |
Non-GAAP Financial Measures |
| | We use certain measures that are not defined by GAAP to evaluate various aspects of our business. These non-GAAP financial |
measures are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and shouldnot be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are notnecessarily indicative of operating profit or cash flow from operations as determined under GAAP. |
Cash Costs and All-In Sustaining Costs |
| | Cash costs and all-in sustaining costs (“AISC”) are non-GAAP measures. AISC was calculated based on guidance provided by the |
World Gold Council (“WGC”). WGC is not a regulatory industry organization and does not have the authority to develop accountingstandards for disclosure requirements. Other mining companies may calculate AISC differently as a result of differences in underlyingaccounting principles and policies applied, as well as definitional differences of sustaining versus expansionary (i.e. non-sustaining) capitalexpenditures based upon each company’s internal policies. Current GAAP measures used in the mining industry, such as cost of sales, do notcapture all of the expenditures incurred to discover, develop and sustain production. Therefore, we believe that cash costs and AISC are non-GAAP measures that provide additional information to management, investors and analysts that aid in the understanding of the economics ofthe Company’s operations and performance compared to other producers and provides investors visibility by better defining the total costsassociated with production. |
| | Cash costs include all direct and indirect operating cash costs related directly to the physical activities of producing metals, |
including mining, processing and other plant costs, treatment and refining costs, general and administrative costs, royalties and miningproduction taxes. AISC includes total production cash costs incurred at the LGJV’s mining operations plus sustaining capital expenditures.The Company believes this measure represents the total sustainable costs of producing silver from current operations and provides additionalinformation of the LGJV’s operational performance and ability to generate cash flows. As the measure seeks to reflect the full cost of silverproduction from current operations, new project and expansionary capital at current operations are not included. Certain cash expendituressuch as new project spending, tax payments, dividends, and financing costs are not included. |
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Reconciliation of expenses (GAAP) to non-GAAP measures |
| | The table below presents a reconciliation between the most comparable GAAP measure of expenses to the non-GAAP measures of |
(i) cash costs, (ii) cash costs, net of by-product credits, (iii) co-product all-in sustaining costs and (iv) by-product all-in sustaining costs forour operations. |
| | | Three Months Ended | Six Months Ended |
(in thousands, except unit costs) | | | | June 30, 2021 | | June 30, 2021 |
Expenses | | | $ | | 42,312 | $ | | 77,843 |
Depreciation, depletion and amortization | | | | | (12,707) | | | (23,654) |
Exploration1 | | | | | (1,261) | | | (1,910) |
Treatment and refining costs2 | | | | | 6,142 | | | 12,776 |
Cash costs | | | $ | | 34,486 | $ | | 65,055 |
Sustaining capital | | | | | 18,431 | | | 30,647 |
All-in sustaining costs | | | $ | | 52,917 | $ | | 95,702 |
By-product credits3 | | | | | (29,068) | | | (45,047) |
All-in sustaining costs, net of by-product credits | | | $ | | 23,849 | $ | | 50,655 |
Cash costs, net of by-product credits | | | $ | | 5,418 | $ | | 20,008 |
Payable ounces of silver equivalent4 | | | | | 2,998 | | | 4,947 |
Co-product cash cost per ounce of payable silver equivalent | | | $ | | 11.50 | $ | | 13.15 |
Co-product all-in sustaining cost per ounce of payable silver equivalent | | | $ | | 17.65 | $ | | 19.35 |
Payable ounces of silver | | | | | 1,888 | | | 3,173 |
By-product cash cost per ounce of payable silver | | | $ | | 2.87 | $ | | 6.31 |
By-product all-in sustaining cost per ounce of payable silver | | | $ | | 12.63 | $ | | 15.96 |
1 Exploration costs are not related to current operations.2 Represent reductions on customer invoices and included in Sales of the LGJV combined statement of income (loss).3 By-product credits reflect realized metal prices of zinc, lead and gold for the applicable period.4 Silver equivalents utilize the average realized prices during the six months ended June 30, 2021, of $25.40/oz silver, $1.22/lb zinc, $0.96/lblead and $1,819.22/oz gold and the average realized prices during the three months ended June 30, 2021, of $26.18/oz silver, $1.33/lb zinc,$1.00/lb lead and $1,829.84/oz gold. |
Off-balance sheet arrangements |
| | During the periods presented, we did not, and we currently do not, have any significant off-balance sheet arrangements that have or |
are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resources that is material to our shareholders. |
Critical Accounting Policies |
| | Please refer to Note 2 – Summary of Significant Accounting Policies in our consolidated financial statements included in this |
Report and the 2020 10-K for discussion of our critical accounting policies and estimates. |
Jumpstart Our Business Startups Act of 2012 |
| | The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to take |
advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We haveelected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates onwhich adoption of such standards is required for public companies that are not emerging growth companies. The decision to opt out of theextended transition period under the JOBS Act is irrevocable. |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
Commodity Price Risk |
| | We engage in the production of silver and concentrates containing silver, lead, zinc and gold at the CLG and commenced |
production on September 1, 2019. Accordingly, we expect the principal source of future revenue to be the sale of silver, and to a lesserextent, lead and zinc. A significant and sustained decrease in the price of these metals from current levels could have a material and negativeimpact on our business, financial condition 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, currency exchange fluctuations may impact the costs of ouroperations. |
Concentration of Risk |
| | We have placed nearly all of our cash investments with a single, high-quality financial institution. All cash equivalents are invested |
in high-quality, short-term money market instruments, including certificates of deposit. At no time have we had funds invested in asset-backed commercial paper. We have not experienced any losses on our cash investments. |
Item 4. Controls and Procedures |
Evaluation of Disclosure Controls and Procedures |
| | We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of |
1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we fileor submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules andforms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of ourChief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant toExchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of June 30, 2021. |
Changes in Internal Control over Financial Reporting |
| | There have not been any changes in the Company’s internal control over financial reporting that occurred during the second quarter |
of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. |
Limitations on Effectiveness of Controls |
| | Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and |
procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achievingthe desired control objectives. Further, the design of a control system must reflect resource constraints, which require management to applyits 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 of fraud, if any, within the Companyhave been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns canoccur because of simple error or mistake. 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. |
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| | The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there |
can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls maybecome inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Becauseof the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. |
| | | PART II – OTHER INFORMATION |
Item 1. Legal Proceedings |
| | We are, from time to time, involved in legal proceedings of a nature considered normal to our business. We believe that none of the |
litigation in which we are currently involved, or have been involved since the beginning of our most recently completed financial year,individually or in the aggregate, is material to our consolidated financial condition, cash flows or results of operations. See Note 9 –Commitments, Contingencies and Guarantees in our consolidated financial statements included in this Report for additional informationregarding our assessment of contingencies related to legal matters. |
Item 1A. Risk Factors |
| | Factors that could cause our actual results to differ materially from those in this Report include, but are not limited to, any of the |
risks described in the 2020 10-K. Any of these factors could result in a significant or material adverse effect on our results of operations orfinancial condition. Additional risk factors not currently known to us or that we currently deem immaterial may also adversely affect us. Asof the date of this Report, there have been no material changes to the risk factors disclosed in the 2020 10-K. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
Unregistered Sales of Equity Securities |
| | During the quarter ended June 30, 2021, the Company did not issue any shares of its common stock or other equity securities that |
were not registered under the Securities Act of 1933, as amended. |
Use of Proceeds |
| | On October 27, 2020, the SEC declared effective the Company’s registration statement on Form S-1 (No. 333-249224), as |
amended, filed in connection with the Company’s IPO. There has been no material change in the planned use of proceeds from the IPO asdescribed in the Company’s final prospectus, filed with the SEC on October 29, 2020, pursuant to Rule 424(b) under the Securities Act. |
| | As of June 30, 2021, the Company has used approximately $124,572 thousand of the net proceeds from the IPO, including (i) |
$71,550 thousand for the repurchase of the 18.5% interest in the LGJV from Dowa; (ii) $42,000 thousand for the capital contribution to theLGJV to extinguish the Company’s 70% share of the WCF; and (iii) $9,342 thousand for working capital and general corporate purposes. |
Purchase of Equity Securities by the Issuer and Affiliated Purchasers |
| | During the quarter ended June 30, 2021, there were no purchases made by or on behalf of the Company or any affiliated purchaser |
of the Company’s common stock. |
Item 3. Defaults Upon Senior Securities |
| | None. |
Item 4. Mine Safety Disclosures |
| | Not applicable. |
Item 5. Other Information |
| | None. |
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Item 6. Exhibits |
3.1 | | Amended and Restated Certificate of Incorporation of Gatos Silver, Inc. (incorporated by reference to Exhibit 3.1 of theCompany’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 3.2 of the Company’sCurrent Report on Form 8-K filed October 30, 2020) |
10.1* | | Employment Agreement dated as of June 1, 2021, between Minera Luz del Sol S. de R.L. de C.V. and Dale Andres |
10.2 | | Confirmation Agreement, dated July 12, 2021, among Minera Plata Real, S. de R.L. de C.V., Operaciones San Jose dePlata, S. de R.L. de C.V., Servicios San Jose de Plata, S. de R.L. de C.V., Gatos Silver, Inc. and Dowa Metals & MiningCo., Ltd. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed July 12, 2021) |
10.3 | | Revolving Credit Facility, dated July 12, 2021, between Gatos Silver, Inc. and Bank of Montreal, Chicago Branch(incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed July 12, 2021) |
31.1* | | Section 302 Certification of Chief Executive Officer |
31.2* | | Section 302 Certification of Chief Financial Officer |
32.1** | | Section 1350 Certification |
101.INS* | | XBRL Instance Document |
101.SCH* | | XBRL Taxonomy Extension Schema Document |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | | | Filed herewith |
** | | | Furnished herewith |
| 31 |
| Exhibit 10.1 |
| | EMPLOYMENT AGREEMENT |
| | | THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of June 1st, 2021, is between MINERA |
| | | | LUZ DEL SOL S DE R.L., a Mexican corporation (the “Company”) whol y owned by Gatos Silver Inc. (the “Parent |
| | | | Company”), (together the “Companies”) and DALE ANDRES (the "Executive" and together with the Company, |
| | | | the "Parties"). |
WITNESSETH: |
| | | WHEREAS: |
| | | The Parties wish to enter into the arrangements set forth herein with respect to the terms and conditions of |
| | | | the Executive's employment with the Company. |
| | | NOW, THEREFORE, in consideration of the promises and covenants contained herein, the Parties agree |
| | | | as fol ows: |
AGREEMENT |
| | | 1. Employment and Term. The Company agrees to, and does hereby, employ the Executive, and the |
| | | Executive agrees to, and does hereby accept, such employment, upon the terms and subject to the |
| | | conditions set forth in this Agreement. The Executive's employment wil begin on June 1st, 2021 (the "Start |
| | | Date") subject to the processing of any necessary work permits and visas. If for any reason or delay in the |
| | | processing of the work permits and visas the Employment may not commence on the Start Date, the |
| | | Executive shal stil be entitled to al of the rights and subject to al obligations hereunder as from the Start |
| | | Date, including but not limited to the performance of his duties and payment of his compensation; once the |
| | | necessary work permits and visas are issued, Executive’s tenure with the Company shal be deemed to |
| | | have commenced on the Start Date. The employment hereunder is at wil , which means that the Executive |
| | | or the Company may terminate the Executive's employment at any time for any reason, or for no reason, |
| | | with or without cause (the "Term"). If the Company terminates this Agreement and the Executive's |
| | | employment, the Company shal provide the Executive with notice and reason for the termination within ten |
| | | (10) calendar days of the effective date of such termination. |
| | | 2. Position and Duties. |
| | | | | (a) During the Term, the Company shal employ the Executive as Chief Executive Officer (General |
| | | Manager/Gerente General in accordance with applicable law provisions) of Minera Luz Del Sol and |
| | | President of its Parent Company, Gatos Silver, Inc. The Executive shal perform the duties and have the |
| | | responsibilities customarily associated these positions, which shal include, without limitation, the fol owing: |
| | | · | | Develop high quality business strategies and plans ensuring their alignment with short-term and |
| | | | | long-term growth and revenue objectives of the Companies; |
| | | · | | Lead and motivate the staff and al employees of the Companies, to advance employee engagement |
| | | | | and develop a high performing managerial team; |
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| · | Oversee al operations and business activities of the Companies to ensure they produce the desired |
| results and are consistent with the overal strategy and mission of the Companies; |
| · | Make high-quality investing decisions to advance the business and increase profits of the |
| Companies; |
| · | Enforce adherence to legal guidelines and in-house policies to maintain the Companies’ legality andbusiness ethics; |
| · | Review financial and non-financial reports to devise solutions or improvements; |
| · | Build trust relations with key partners and stakeholders and act as a point of contact for |
| shareholders |
| · | Analyze problematic situations and occurrences and provide guidance, strategy and solutions toadvance Companies’ overal interests and growth |
| · | Maintain a deep knowledge of the markets and industry of the Companies |
| · | Travel domestical y or international y as necessary to fulfil Executive’s duties |
| (b) The Executive shal devote his best efforts and his ful business time and attention to the business and |
| affairs of the Company and the Parent Company. |
| (c) The Executive acknowledges and agrees that (i) the Executive owes the Company and the Parent |
| Company a duty of loyalty as a fiduciary of the Company and the Parent Company, and (i ) the |
| obligations described in this Agreement are in addition to, and not in lieu of, the obligations the |
| Executive owes the Company and the Parent Company under the common or applicable law. |
| 3. Base Salary, Bonus, Equity/Options, and Benefits. |
| a) | Base Salary. During the Term, the Executive's base salary shal be US$575,000.00 per annum |
| and includes al statutory bonuses and premiums, including but not limited to the “13th month bonus” |
| (“Aguinaldo”) and vacation premium ("Annual Salary"), which salary shal be payable in regular |
| instal ments in accordance with the Company's general payrol practices. The Annual Salary wil be subject |
| to review on an annual basis and may be adjusted in accordance with the procedures set forth by the |
| Company's or Parent Company’s Compensation Committee. |
| b) | Annual Bonus. During the Term, provided that the Executive is employed by the Company or |
| the Parent Company on December 31st of the applicable year, the Executive wil be eligible to participate in |
| a bonus plan pursuant to which he wil be entitled to receive an annual target bonus in the amount of One |
| Hundred percent (100%) of his Annual Salary for the applicable year, pro-rated for any partial year (the |
| "Target Bonus"), upon achievement by the Executive and the Company (or the Parent Company as the |
| case may be) of certain targets as determined solely in the discretion of the Company's or Parent |
| Company’s Board of Directors (the "Annual Bonus"). The Annual Bonus actual y paid, if any, wil depend |
| on the actual performance of the Company (or the Parent Company as the case may be) and the Executive |
| as determined by the Compensation and Nominating Committee of the Board. In al events the Annual |
| Bonus, if earned, wil be paid no later than March 15th fol owing the applicable year for which it is earned. |
| c) | Options. The Executive wil be granted a one-time option to purchase 200,000 shares of the |
| Common Stock of the Parent Company upon commencement of employment with the Company (“Sign on |
| Option”). The exercise price per share of the Sign on Option |
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| wil be the volume weighted average price (“VWAP”) of the Common Stock of the Parent Company on the |
| Toronto Stock Exchange for the five trading days prior to the date of grant as determined by the Parent |
| Company’s Compensation and Nominating Committee (“Five Day VWAP”) . The Sign on Option wil be |
| subject to the terms and conditions applicable to options granted under the Parent Company’s Stock Option |
| Plan (the “Plan”). The Executive’s Sign on Option wil vest in three equal tranches, the first of which shal |
| vest immediately upon commencement of employment with the Company. The other tranches wil vest on |
| each anniversary of employment with the Company or the Parent Company, subject to the Executive’s |
| continued employment with the Company or Parent Company on each vesting date. The Sign on Option |
| wil be exercisable for (10) ten years from the date of grant provided you continue to be employed by the |
| Company or the Parent Company. In the event the Executive is terminated by the Company without cause, |
| the Sign on Options vested at the date of termination wil be exercisable for a period of one year from the |
| date of termination. |
| d) | In addition, upon commencement of employment with the Company, the Executive wil be |
| granted an option to purchase 150,000 shares of the Common Stock of the Parent Company (“Option”). |
| Options are issued annual y as part of the long-term incentive plan and the exercise price per share of the |
| Option wil be the Five Day VWAP. The Option wil be subject to the terms and conditions applicable to |
| options granted under the Plan. Executive’s Option wil vest in three equal tranches the first of which shal |
| vest on the first anniversary of Executive’s employment with the Company and annual y thereafter, subject |
| to Executive’s continued employment with the Company or the Parent Company on each vesting date. The |
| Option wil be exercisable for (10) ten years from the date of grant, provided the Executive continues to be |
| employed by the Company or the Parent Company. In the event Executive’s employment with the Company |
| or Parent Company ceases, the Options wil be subject to customary exercise restrictions as set out in this |
| Agreement. |
| e) | Employee Benefits. During the Term, the Executive shal be entitled to participate in the |
| Company's various employee benefit plans that are, from time to time, made general y available to the |
| Company's employees, as such plans are established and pursuant to the terms and conditions of such |
| plans. These plans include group health, vision and dental plan; short-term and long-term disability plan; life |
| insurance plans and a retirement al owance equivalent to up to the annual maximum al owed under a US |
| 401 (k) plan in lieu of such a 401(k) plan. |
| f) | Vacation. The Executive shal be entitled to four (4) weeks paid vacation time per calendar year, |
| pro-rated for any partial year of employment, in accordance with the Company's vacation time policy. |
| Executive’s Annual Salary includes the statutory vacation premium. |
| g) | Expense Reimbursement. The Executive shal receive reimbursement for direct and reasonable |
| out-of-pocket expenses, incurred by him in connection with the performance of his duties hereunder, |
| according to the policies of the Company. Al requests for reimbursement of business-related expenses |
| shal be subject to the Company's travel policy and requirements with respect to reporting and |
| documentation of expenses. |
| 4. Compensation Upon Termination, Resignation, Disability or Death. |
| | | a) Termination without Cause. If the Executive's employment is terminated by the |
Page 3 of 14 |
| Company without Cause, the Company shal pay the Executive any Annual Salary and Annual |
| Bonus from the preceding calendar year to the extent accrued but unpaid as of the effective date |
| of the Executive's termination; accrued but unused vacation in accordance with Company policy; |
| and al business expenses that were incurred and not reimbursed but eligible for reimbursement |
| (col ectively, the "Accrued Obligations"). In addition, subject to Section 19, the Company wil pay |
| the Executive an amount equal to twenty four (24) months of the Executive's Annual Salary at the |
| rate in effect on the date of termination, plus annual bonus for twenty four (24) months based upon |
| the average of the prior two years of bonus payment payable in a lump sum within sixty (60) |
| calendar days of the date of termination. This payment includes and is not in addition to al |
| statutory payments under Mexican law such as the 3 month constitutional indemnity, tenure |
| premium of 20 days per year of services, etc. and has been computed taking into consideration the |
| Annual Bonus and the Options, if applicable. Provided the Executive timely elects continuation |
| coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended |
| ("COBRA"), the Company shal also pay, on the Executive's behalf, the portion of monthly |
| premiums for the Executive's group health insurance, including coverage for the Executive's |
| dependents, that the Company paid immediately prior to the date of termination, during the twelve |
| (12) month period fol owing the date of termination, subject to the Executive's continued eligibility |
| for COBRA coverage. The Company wil pay for such COBRA coverage for eligible dependents |
| only for those dependents who were enrol ed immediately prior to the date of termination. The |
| Executive wil continue to be required to pay that portion of the premium for the Executive's health |
| coverage, including coverage for the Executive's eligible dependents, that the Executive was |
| required to pay as an active employee immediately prior to the date of termination. |
| Notwithstanding the foregoing, in the event that under applicable guidance the reimbursement of |
| COBRA premiums causes the Company's group health plan to violate any applicable |
| nondiscrimination rule, the parties agree to negotiate in good faith a mutual y agreeable alternative |
| arrangement. Upon termination under this Section 4(a), (i) the Sign on Options vested at the date |
| of termination wil be exercisable for a period of one year from the date of termination ; (i ) the |
| Options, to the extent unvested, shal immediately vest, (i i) al vested Stock Options shal remain |
| exercisable until the earlier of (x) the date one hundred eighty (180) calendar days fol owing |
| termination of employment or (y) the expiration of the original option term. |
| b) Resignation for Good Reason. If the Executive resigns for Good Reason, the Company shal pay |
| the Executive the same sums and in the same manner, and his rights to the Sign On Options and |
| Options shal be the same, as to which the Executive would be entitled if he had been terminated |
| by the Company without Cause, as set forth in subsection (a) above. The Executive shal provide |
| 30 days' prior written notice to the Company of his decision to resign for Good Reason. |
| c) Termination for Cause. If the Executive's employment is terminated by the Company for Cause, |
| the Company shal pay the Executive the Accrued Obligations. Upon termination under this |
| Section, any outstanding Stock Options shal cease to be exercisable and wil be forfeited. |
| d) Resignation without Good Reason. If the Executive resigns without Good Reason, the Company |
| shal pay the Executive the Accrued Obligations. The Executive |
Page 4 of 14 |
| shal provide 60 days' prior written notice to the Company of his decision to resign without Good |
| Reason. The Sign On Options and the Options, to the extent exercisable at the Executive's |
| termination of employment, shal remain exercisable until the earlier of (i) the date thirty (30) |
| calendar days fol owing termination of employment under this Section or (i ) the expiration of the |
| original option term. |
| e) Disability. Subject to any state or federal law or regulation governing employees with disabilities, |
| the Company may terminate the Executive's employment upon the Disability of the Executive. In |
| the event the Executive is terminated under this Section, the Company shal pay the Executive the |
| Accrued Obligations and the Executive wil be entitled to a prorated amount of the current calendar |
| year Annual Bonus, with such prorated portion determined by multiplying the Annual Bonus that |
| would otherwise have been earned by a fraction, the numerator of which is the number of days |
| that elapsed between the January 1 of the current year and the date of the Executive's termination |
| of employment, and the denominator of which is 365, with payment of such prorated Annual Bonus |
| to be made at the same time as annual bonuses are made to other executives of the Company in |
| the ordinary course (but in no event later than March 15th of the calendar year fol owing the |
| calendar year in which the termination occurs. In addition, in such event, the Company shal |
| cause Executive to ful y vest in al Sign On Options and Options referred to in Section 3(c) and (d) |
| of this Agreement, and the Sign On Options and the Options shal remain exercisable until the |
| earlier of (i) the date one (1) year fol owing termination of employment under this Section or (i ) the |
| expiration of the original option term. |
| f) Death. If the Executive's employment is terminated due to the Executive's death, the Company |
| shal pay the Executive's estate the Accrued Obligations and the Pro Rata Bonus. In addition, in |
| such event, the Company, shal cause Executive's estate to ful y vest in al Sign On Options and |
| the Options referred to in Section 3(c) and (d) of this Agreement, and the Stock Options shal |
| remain exercisable until the earlier of (i) the date one (1) year fol owing termination of employment |
| under this Section or (i ) the expiration of the original option term. |
| g) For purposes of this Agreement: |
| | i. | "Cause" means the Executive's (a) conviction of, guilty plea to or confession of guilt |
| | | | of, or plea of nolo contendere to a felony, or an act involving moral turpitude which could have a material |
| | | | adverse effect on the Company or Parent Company; (b) wil ful dishonesty, fraud or conduct that constitutes a |
| | | | felony or an act involving moral turpitude or a breach of fiduciary duty or any material misrepresentation in |
| | | | connection with the Executive's employment; (c) action that exposes the Company or Parent Company to a |
| | | | material risk of legal liability or public disgrace or disrepute including, without limitation, violation of any law, |
| | | | rule or regulation that could expose the Company or the Parent Company to a material legal or monetary |
| | | | fine or penalty; (d) neglect of his duties or substantial failure to perform duties as reasonably directed by the |
| | | | Chief Executive Officer and/or Board of Directors of the Parent Company; (e) gross negligence or wil ful |
| | | | misconduct with respect to Companies affairs or the Executive's obligations hereunder; (f) any other material |
| | | | breach of this or any other agreement with the Company or Parent Company or any material Company or |
| | | | Parent Company policy, which breach is not cured within at least fifteen (15) calendar days after receipt by |
| | | | the Executive of written notice from the Company or Parent Company of such breach, but only if such |
| | | | breach is able to be cured during such fifteen (15) calendar day period; or (g) any of the termination causes |
| | | | in accordance |
Page 5 of 14 |
| with applicable law. |
| | i . | "Good Reason" means: (a) a material change (other than a change for promotion) in |
| the Executive’s positions, duties, responsibilities, titles or offices with the Company or Parent Company (b) a |
| material diminution in the Executive's Annual Salary; (c) a material change in the geographic location of the |
| Executive's principal business office; in order for a change to be material hereunder, the Executive's |
| principal business office must be moved to a location more than fifty (50) miles from the Company's office as |
| of the Start Date, except for required travel on Company business or for a future move to the current location |
| of the Parent Company’s office in Denver; or (d) any other action or inaction by the Company or Parent |
| Company that constitutes a material breach of this Agreement or any material misrepresentation in |
| connection with the Executive's employment. The foregoing shal constitute Good Reason only if (i) the |
| Executive provides written notice to the Company or Parent Company as the case may be of any event(s) |
| al eged to constitute Good Reason within ninety (90) calendar days of the initial occurrence of the event, |
| with such notice providing a detailed description of the circumstances constituting Good Reason (a "Good |
| Reason Notice"), (i ) any such reduction, change, or breach is not remedied or cured within fifteen (15) |
| calendar days after the Company's receipt of a written Good Reason Notice from the Executive (the "Cure |
| Period") and (i i) the Executive actual y terminates employment within thirty (30) calendar days fol owing the |
| expiration of the Cure Period. |
| | i i. | "Disability" shal mean that the Executive is disabled within the meaning of the |
| Company's group long-term disability insurance policy. If no long term disability insurance is in place, then |
| Disability shal mean that the Executive, due to il ness, accident, or other physical or mental incapacity, has |
| been substantial y unable to perform his duties under this Agreement for a period of at least six (6) |
| consecutive months during the Term as established by the written opinion of a licensed independent |
| physician selected by the Company. |
| | | | h) Deemed Resignation. Unless otherwise agreed to in writing by the Company and the Executive |
| | | | prior to the termination of the Executive's employment, any termination of the Executive's |
| | | | employment shal constitute an automatic resignation of the Executive as an officer of the |
| | | | Company and each affiliate of the Company, and an automatic resignation of the Executive from |
| | | | the board of directors or similar governing body of the Company or any affiliate of the Company |
| | | | and from the board of directors or similar governing body of any corporation, limited liability |
| | | | company or other entity in which the Company or any affiliate holds an equity interest and with |
| | | | respect to which board or similar governing body the Executive serves as the Company's or such |
| | | | affiliate's designee or other representative. |
| | | | i) Clawback. The Executive agrees and acknowledges that any and al compensation the Executive |
| | | | receives pursuant to this Agreement shal be subject to clawback by the Company in the event of a |
| | | | financial restatement or in such other circumstances as may be required by applicable law or as |
| | | | may be provided in any clawback policy that is adopted by the Company or the Parent Company |
| | | | and is general y applicable to senior executives of the Company or Parent Company. |
| 5. Confidentiality, Non-Solicitation and Non-Compete Undertaking. |
Page 6 of 14 |
| a) For purposes of this Agreement, "Confidential Information" means (i) communications, data, |
| formulae and related concepts, business plans (both current and under development), profit and |
| loss statements, spreadsheets, contact or distribution lists, non-public personnel lists, promotion |
| and marketing programs, trade secrets, or any other confidential or proprietary business |
| information relating to development programs, costs, revenues, marketing, trading, investments, |
| sales activities, promotions, credit and financial data, financing methods, research, plans or the |
| business and affairs of the Company; (i ) any other information which is to be treated as |
| confidential or non-public because of any duty of confidentiality owed by the Company to a third |
| party; and (i i) any other information which the Company shal , in the ordinary course, use and not |
| release external y, except subject to restrictions on use and disclosure. Notwithstanding the |
| foregoing, Confidential Information does not include information that (A) is or becomes general y |
| publicly available other than as a result, directly or indirectly, of the Executive's disclosure or (B) is |
| or becomes available to the Executive on a non confidential basis from a source other than through |
| the Company or its representatives, provided that such source is not bound by a confidentiality |
| agreement with the Company or otherwise prohibited from transmitting the information to the |
| Executive by a contractual or legal obligation. |
| b) The Executive acknowledges the trade secret status of the Confidential Information and that the |
| Confidential Information constitutes a protectable business interest of the Company. The Executive |
| agrees (i) not to use or al ow or help another to use or access (whether for compensation or not) |
| any Confidential Information for himself or others (other than the Company); and (i ) not to take |
| any Company material or reproductions (including but not limited to writings, correspondence, |
| notes, drafts, records, invoices, technical and business policies, computer programs or disks) |
| thereof even if created, written or drafted by the Executive from the Company's offices at any time |
| during or after the Executive's employment by the Company, except as required in the execution |
| of the Executive's duties to the Company and then conditioned upon the prompt return of al |
| originals and reproductions thereof (in whatever form). |
| c) During the Term and for a period of one (1) year thereafter, the Executive shal not, directly or |
| indirectly, on behalf of himself or any other person or entity, without the prior written consent of the |
| Company solicit or induce any employee of or consultant or service provider to the Company |
| (each, a "Service Provider") to leave the employ of or cease performing services for the |
| Company, or engage in any plan or coordinate with any Service Provider to leave the employ of or |
| cease performing services for the Company, or hire, participate with or attempt to participate with |
| in any venture for any purpose any Service Provider or any Service Provider who has left the |
| employment of or ceased to perform services for the Company within one year of the termination |
| of such Service Provider's services for the Company. |
| d) For a period of twelve (12) months from separation from the Company or Parent Company as the |
| case may be, not to work or share Executive’s knowledge, directly or indirectly, in whole or in part, |
| as an employee, officer, owner, manager, advisor, consultant, agent, partner, director significant |
| shareholder (i.e. a shareholder holding more than 5% of outstanding equity in the company), |
Page 7 of 14 |
| volunteer, intern or in any other business entity engaged in the Ag, Zn and Pb mining, extraction, |
| refinement, processing, commercialization or otherwise concentrate production of such metals, |
| col ectively the “GSI’s Business”) without the prior written consent of the Board of Directors of the |
| Company or the Parent Company. The Non-Compete Undertaking shal apply throughout, and |
| shal only be limited by, the territory where the Executive perform services for the company as |
| provided in this Agreement. For the avoidance of doubt, the term “provides services for” shal not |
| be limited to ‘works at’ or any other limitation delineating where the Executive performs the actual |
| services, but instead shal relate to the entire territory where the Company or Parent Company |
| benefits and is reasonable to expect to benefit from the Executive’s services. Given the |
| Executive’s role as CEO of Minera Luz Del Sol and President of Gatos Silver, the territory for |
| purposes of this agreement shal be Mexico. |
| | If Executive’s employment is terminated pursuant to provisions of Section 7 (Change in Control event) and |
| | if Executive is paid Change in Control related compensation and receives other benefits as provided in that |
| | Section, the Executive agrees for the Non-Competition Undertaking to be extended from twelve (12) to |
| | twenty-four (24) months. |
| e) The Executive acknowledges that any breach of his obligations under this Section 5 cannot be |
| adequately compensated by damages in an action at law and may cause the Company or Parent |
| Company great and irreparable injury and damage. Accordingly, in the event that the Executive |
| breaches or threatens to breach any provisions of this Section 5, then in addition to any other |
| rights which the Company or Parent Company may have, the Company or Parent Company shal |
| be entitled, without the necessity of (i) proving irreparable harm, (i ) establishing that monetary |
| damages are inadequate or (i i) posting any bond or other security with respect thereto, to the |
| remedies of injunction, specific performance and other equitable relief to redress any breach, and |
| no proof of special damages shal be necessary for the enforcement of or for any action for breach |
| of the Executive's obligations. In the event that a proceeding is brought in equity to enforce the |
| provisions of this Section 5, the Executive shal not urge as a defense that there is an adequate |
| remedy at law nor shal the Company be prevented from seeking any other remedies which may |
| be available. Nothing contained in this Section 5(v) shal be construed as a waiver by the |
| Company of any other rights, including, without limitation, rights to damages or profits. |
| f) The Executive agrees that the period during which the covenants contained in this Section 5 shal |
| be effective shal be computed by excluding from such computation any time during which the |
| Executive is in violation of any provision of this Section 5. |
| g) The Company and the Executive agree that it was their intent to enter into a valid and enforceable |
| agreement. The Executive and the Company thereby acknowledge the reasonableness of the |
| restrictions set forth in this Section 5, including the reasonableness of the duration as to time and |
| the scope of activity restrained. The Executive agrees that if any covenant contained in Section 5 |
| of this Agreement is found by a court of competent jurisdiction to contain limitations as to time or |
| scope of activity that are not reasonable and impose a greater restraint than is necessary to |
| protect the goodwil or other |
Page 8 of 14 |
| business interests of the Company or Parent Company, then the court shal reform the covenant to |
| the extent necessary to cause the limitations contained in the covenant as to time and scope of |
| activity to be restrained to be reasonable and to impose a restraint that is not greater than |
| necessary to protect the goodwil and other business interests of the Company or Parent Company |
| and to enforce the covenants as reformed. |
| h) If the Executive's employment with the Company or Parent Company is terminated for any reason, |
| the Executive agrees to advise the Company or Parent Company if applicable of the name of the |
| Executive's new employer during the Non-Competition period. The Executive further agrees that |
| the Company or Parent Company may notify any person or entity employing the Executive or |
| evidencing an intention of employing the Executive of the existence and provisions of this |
| Agreement during that period. |
| | 6. The Executive's Representations. The Executive represents to the Company that: |
| a) the execution, delivery and performance of this Agreement by the Executive do not and shal not |
| conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, |
| judgment or decree to which the Executive is a party or by which he is bound; |
| b) upon the execution and delivery of this Agreement by the Company, this Agreement shal be the |
| valid and binding obligation of the Executive, enforceable against him in accordance with its |
| terms; |
| c) Except for agreements with third parties, restricting the use of such party’s confidential information, |
| as of the Start Date, the Executive wil not be a party to any agreement with any person, restricting |
| the Executive from providing future employment, consulting or other services to the Company or |
| Parent Company; |
| d) no prior or pending litigation, arbitration, investigation or other proceeding of any kind wil prevent |
| or hinder the Executive from performing his duties under this Agreement; and |
| e) the Executive has consulted with independent legal counsel regarding his rights and obligations |
| under this Agreement and that he ful y understands the terms and conditions contained herein. |
| | 7. Change in Control. |
| a) Definitions. |
| | | i. | For purposes of this Section 7, “Parent Company” means Gatos Silver Inc. a Delaware |
| | | corporation that owns al or substantial y al of the stock or control ing interest of the |
| | | Company; |
| | | i . "Change in Control" means (I) any merger or consolidation of the Company or the |
| | | Parent Company with or into any other corporation or other entity or person, or any other |
| | | corporate reorganization, in which the stockholders of the Company immediately prior to |
| | | such |
Page 9 of 14 |
| consolidation, merger or reorganization, own less than a control ing interest in the |
| surviving entity immediately after such consolidation, merger or reorganization; (II) any |
| transaction or series of related transactions in which control of the Company or the |
| Parent Company is acquired by a person or group of persons acting together which |
| would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act |
| of 1934, as amended or any successor provisions thereto; or (III) a sale or other |
| disposition of al or substantial y al of the assets of the Company or the Parent Company; |
| provided that in no event wil a Change in Control include any of the fol owing |
| transactions: (A) any consolidation, merger or similar transaction effected exclusively to |
| change the domicile of the Company or the Parent Company; (B) any transaction or |
| series of transactions in which voting securities of the Company or the Parent Company |
| are issued principal y for bona fide financing purposes or any successor or indebtedness |
| or equity securities of the Company or the Parent Company are cancel ed or converted or |
| a combination thereof, including, without limitation, an initial public offering or other |
| offering of the Company's or Parent Company’s capital stock or; (C) any acquisition of |
| such voting power by an individual or entity that, directly or indirectly, controls, is |
| control ed by, or is under common control with, the Company or Parent Company; |
| i i. "Control" (including its correlative meanings, the terms "control ing," "control ed by" and |
| "under common control with") means, with respect to any person, the possession, directly |
| or indirectly, of the power to direct or cause the direction of the management and policies |
| of such person, whether through the beneficial ownership of voting securities, by contract |
| or otherwise. |
| | (b) | Change in Control Severance Benefits. If there is a Change in Control, and within one (1) year |
| | | | of such Change in Control, the Executive's employment is terminated under the circumstances described in |
| | | | Sections 4(a) through 4(f) above, the Executive shal be entitled to the fol owing: (I) if such termination is a |
| | | | termination by the Company without Cause pursuant to Section 4(a) or the Executive resigns for Good Reason |
| | | | pursuant to Section 4(b), the Company shal pay the Executive the Accrued Obligations and the Pro Rata Bonus |
| | | | and, in addition, subject to the provisions of Section 19, (A) an amount equal to twenty-four (24) months of the |
| | | | Executive's Annual Salary at the rate in effect on the date of termination, plus Annual Bonus for twenty four (24) |
| | | | months based upon the average of the prior two years of bonus payment payable in a lump sum within sixty (60) |
| | | | calendar days of the date of termination. This payment includes and is not in addition to al statutory payments |
| | | | under Mexican law such as the 3 month constitutional indemnity, tenure premium of 20 days per year of services, |
| | | | etc. and has been computed taking into consideration the Annual Bonus, the Sign On Option and the Options, if |
| | | | applicable. Upon termination under this Section 7(b), (i) the Sign on Options vested at the date of termination wil |
| | | | be exercisable for a period of one year from the date of termination; (i ) the Options, to the extent unvested, shal |
| | | | immediately vest, (i i) al vested Stock Options shal remain exercisable until the earlier of (x) the date one hundred |
| | | | eighty (180) calendar days fol owing termination of employment or (y) the expiration of the original option term.and |
| | | | (B) provided the Executive timely elects continuation coverage under COBRA, the Company shal also pay, on the |
| | | | Executive's behalf, the portion of monthly premiums for the Executive's group health insurance, including coverage |
| | | | for the Executive's dependents, that the Company paid immediately prior to the date of termination |
Page 10 of 14 |
| or resignation, during the eighteen (18) month period fol owing the date of termination or resignation, subject to the |
| Executive's continued eligibility for COBRA coverage. The Company wil pay for such COBRA coverage for eligible |
| dependents only for those dependents who were enrol ed immediately prior to the date of termination or |
| resignation. The Executive wil continue to be required to pay that portion of the premium for the Executive's health |
| coverage, including coverage for the Executive's eligible dependents, that the Executive was required to pay as an |
| active employee immediately prior to the date of termination or resignation. Notwithstanding the foregoing, in the |
| event that under applicable guidance the reimbursement of COBRA premiums causes the Company's group |
| health plan to violate any applicable nondiscrimination rule, the parties agree to negotiate in good faith a mutual y |
| agreeable alternative arrangement; and (II) if such termination is a termination or resignation under the |
| circumstances described in Sections 4(c), 4(d), 4(e) or 4(f), the Executive shal be entitled to the compensation |
| and benefits for which the Executive is eligible under such sections. |
| | (c) | Termination Preceding Change in Control. Notwithstanding the provisions of the above |
| subsection 7(b), if the Executive's employment with the Company or the Parent Company is terminated by the |
| Company or the Parent Company if applicable without Cause within three (3) months preceding the occurrence of |
| a Change in Control and such termination without Cause occurred in anticipation of a Change in Control at the |
| request of the acquirer, the Executive shal be entitled to the payments and benefits described in the above |
| subsection 7(b)(A). |
| 8. Taxes. The Company shal be entitled to withhold from any payment or benefit provided under this |
| | Agreement an amount sufficient to satisfy al federal, state and local income and employment tax |
| | withholding requirements as required by applicable law. |
| 9. Notices. Any notice provided for in this Agreement shal be in writing and shal be either personal y |
| | delivered, sent by reputable overnight courier service or mailed by first class mail, return receipt requested, |
| | to the recipient at the address below indicated: |
| | | Notices to the Executive: |
| | | Dale Andres |
| | | 4050 W 39th AvenueVancouver, British Columbia V6N 3B2 |
| | | Canada |
| | | Notices to Company: |
| | | Minera Luz del Sol, S de R.L. |
| | | c/o Gatos Silver Inc |
| | | 8400 E. Crescent Pkwy |
| | | Ste 600 |
| | | Greenwood Vil age, CO 80111. |
| | | Attention: General Counsel |
| or such other address or to the attention of such other person as the recipient party shal have specified by prior |
| written notice to the sending party. Any notice under this Agreement shal be deemed to have been given when so |
| delivered, sent or mailed. |
| 10. Severability. Whenever possible, each provision of this Agreement shal be interpreted |
Page 11 of 14 |
| in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is |
| held to be invalid, il egal or unenforceable in any respect under any applicable law or rule in any jurisdiction, |
| such invalidity, il egality or unenforceability shal not affect any other provision or any action in any other |
| jurisdiction, but this Agreement shal be reformed construed and enforced in such jurisdiction as if such |
| invalid, il egal or unenforceable provision had never been contained herein. |
| 11. Complete Agreement. This Agreement contains the entire agreement of the Parties hereto with respect to |
| the terms and conditions of the Executive's employment with the Company and activities fol owing |
| termination. This Agreement supersedes any and al prior agreements and understandings, whether written |
| or oral, between the Parties with respect to the terms and conditions of the Executive's employment with the |
| Company and activities fol owing termination. This Agreement may not be changed or modified except by |
| an instrument in writing, signed by the Executive and a duly authorized officer of the Company. |
| 12. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be |
| an original and al of which taken together constitute one and the same agreement. |
| 13. Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable |
| by the Executive, the Company and their respective heirs, personal representatives, executors and |
| administrators, successors and assigns, except that the Executive may not assign his rights or delegate his |
| duties or obligations hereunder without the prior written consent of the Company. |
| 14. Choice of Law. Al issues and questions concerning the construction, validity, enforcement and |
| interpretation of this Agreement and the exhibits and schedules hereto shal be governed by, and construed |
| in accordance with, the Federal Laws of Colorado, without giving effect to any choice of law or conflict of |
| law rules or provisions that would cause the application of the laws of any jurisdiction other than the Federal |
| laws of Delaware. |
| 15. Dispute Resolution and Arbitration. Subject to Section 5(e), the Parties shal attempt in good faith to resolve |
| any dispute arising out of or relating to this Agreement promptly by negotiation. If the matter has not been |
| resolved within thirty (30) calendar days of a Party's request for negotiation, either Party may initiate |
| proceedings or arbitration only as provided herein. Subject to Section 5(e), if any dispute arising out of or |
| relating to this Agreement or the breach, termination or validity thereof has not been resolved by |
| negotiation, such dispute before it can be brought before the Colorado Courts, shal be settled by binding |
| arbitration in accordance with the then current rules of JAMS (Judicial Arbitration and Mediation Services) |
| by a single independent and impartial arbitrator who is located in Denver, Colorado. The arbitrator selected |
| must have an expertise in the matter(s) in dispute. Each party shal bear his/its own fees and costs; the |
| fees, costs and al administrative expenses of arbitration shal be borne equal y by the Company and the |
| Executive. The Parties understand and agree that the arbitration is subject to the rules of JAMS; that the |
| arbitrator's decision and award shal be final and binding as to al claims that were, or could have been, |
| raised in arbitration; and that judgment upon the award rendered by the arbitrator may be entered in any |
| court |
Page 12 of 14 |
| having competent jurisdiction. Any award rendered hereunder may include an award of attorneys' fees and |
| costs but shal not include punitive damages. The statute of limitations of the state of Colorado applicable to |
| the commencement of a lawsuit shal apply to the commencement of an arbitration. The Parties agree that |
| once the arbitration award has been rendered, the Parties shal enter a settlement agreement substantial y |
| in the same terms as the arbitration award to be ratified by the corresponding ColoradoCourts. |
| | Should any of the parties fails to submit to the arbitration referred to in this Section 15 and submits its dispute |
| | directly before the Mexican Labor Courts, the other Party may, at its option submit the dispute to arbitration as set |
| | forth in this Section and the arbiter should take into account the ruling issued by the Mexican Labor Court and any |
| | payments made under such Mexican Labor Court ruling before rendering its final arbitration award. |
| 16. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior |
| written consent of the Company and the Executive, and no course of conduct or course of dealing or failure |
| or delay by any party hereto in enforcing or exercising any of the provisions of this Agreement shal affect |
| the validity, binding effect or enforceability of this Agreement or be deemed to be an implied waiver of any |
| provision of this Agreement. |
| 17. Survival. In the event of the Executive's termination of, or resignation from, employment, Sections 4, 5, 8, 9, |
| 10, 13, 14, 15 and 16 shal survive and continue in ful force to the extent necessary to enforce their terms. |
| 18. Reserved |
| 19. Release. Any and al amounts payable and benefits or additional rights provided pursuant to Sections 3, 4 |
| and 7, other than (i) compensation accrued but unpaid as of the effective date of the Executive's |
| termination; (i ) accrued but unused vacation in accordance with Company policy; and (i i) al business |
| expenses that were incurred but not reimbursed, shal only be payable if the Executive executes and |
| delivers to the Company, within 60 days after termination of employment, in the Company's standard form, |
| a general release of al claims of the Executive up to the date of such release. |
| | IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above. |
| | | (Signature Page fol ows) |
Page 13 of 14 |
EXHIBIT 31.1 |
| CERTIFICATION OF CHIEF EXECUTIVE OFFICER |
| | I, Stephen Orr, certify that: |
| | 1. | I have reviewed this quarterly report on Form 10-Q of Gatos Silver, Inc.; |
| | 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report; |
| | 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows 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 maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; |
| | b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; |
| | c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and |
| | d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, 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 of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): |
| | a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| | b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. |
| | Date: August 9, 2021 | | By: | /s/ Stephen Orr |
| | | | Stephen OrrChief Executive Officer |
EXHIBIT 31.2 |
| CERTIFICATION OF CHIEF FINANCIAL OFFICER |
| | I, Roger Johnson, certify that: |
| | 1. | I have reviewed this quarterly report on Form 10-Q of Gatos Silver, Inc.; |
| | 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report; |
| | 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows 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 maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; |
| | b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; |
| | c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and |
| | d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, 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 of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): |
| | a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| | b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. |
| | Date: August 9, 2021 | | By: | /s/ Roger Johnson |
| | | | | | Roger JohnsonChief Financial Officer |
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 Quarterly Report on Form 10-Q of Gatos Silver, Inc. (the “Company”) for the quarterly period ended June 30, |
| | | | 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Stephen Orr, as Chief Executive Officer ofthe Company, and Roger Johnson, as Chief Financial Officer of the Company, each hereby certifies, pursuant to and solely for the purpose of18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge and belief, that: |
| | | (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of |
| | | 1934; and |
| | | (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results |
| | | of operations of the Company. |
| | | | /s/ Stephen Orr | |
| | | | Stephen Orr | |
| | | | Chief Executive Officer | |
| | | | August 9, 2021 | |
| | | | | |
| | | | | |
| | | | /s/ Roger Johnson | |
| | | | Roger Johnson | |
| | | | Chief Financial Officer | |
| | | | August 9, 2021 | |