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| UNITED STATES |
| | SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
| | | FORM |
| | | 10-Q/A |
| (Amendment No. 1) |
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | | For the quarterly period ended September 30, 2022 |
| | | 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.) |
| 925 W Georgia Street, Suite 910 |
| | | | Vancouver, British Columbia, Canada V6C 3L2 |
| | | | (Address of principal executive offices) (Zip Code) |
| (604) 424-0984 |
| | | | (Registrant’s telephone number, including area code) |
| | | N/A |
| | (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act: |
| | | | | | | | | Title of each class | Trading symbol(s) | | | | | | | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | | GATO | | | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes |
| | | | | | | | | ☐ No ☑ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes |
| | | | | | | | | | ☐ No ☑ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerginggrowth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2of 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 69,162,223 were issued and outstanding as of June 26, 2023. |
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| | EXPLANATORY NOTE |
| | | References throughout this Amendment No. 1 to the Quarterly Report on Form 10-Q to “we,” “us,” “Gatos Silver,” “Company” or “our |
Company” are to Gatos Silver Inc., unless the context otherwise indicates. |
| | | This Amendment No. 1 (“Amendment No. 1”) amends the Quarterly Report on Form 10-Q of Gatos Silver, Inc. for the three and nine |
months ended September 30, 2022 (“Affected Period”), as filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023 (the“Original Filing”). |
| | | This Amendment No. 1 contains the restated financial statements for us and the combined balance sheets and combined statements of |
income for the Los Gatos Joint Venture (“LGJV”) for the Affected Period to correct (i) the timing and recognition of net deferred tax assets andcurrent income taxes at the 70%-owned LGJV and (ii) the accounting for the priority distribution due to our LGJV partner to exclude the prioritydistribution payment from the net income of the LGJV in calculating the equity income in affiliate for the Affected Period. |
| | | This Amendment No. 1 contains the following sections: |
| | | ● | Item 1. Financial Statements |
| | | ● | Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| | | ● | Item 4. Controls and Procedures |
| | | ● | Item 1A. Risk Factors; and |
| | | ● | Exhibits 31, 32, 101 and 104 of Item 6. Exhibits. |
| | | Except as described above, this Amendment No. 1 does not amend, update or change any other items or disclosures contained in the |
Original Filing, and accordingly, this Amendment No. 1 does not reflect or purport to reflect any information or events occurring after the originalfiling date or modify or update those disclosures affected by subsequent events. Accordingly, this Amendment No. 1 should be read in conjunctionwith the Original Filing and the Company’s other filings with the SEC. Capitalized terms used but not defined herein shall have the meaningsascribed to such terms in the Original Filing. |
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| | PART I – FINANCIAL INFORMATION |
Item 1. Financial Statements |
GATOS SILVER, INC.CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands of United States dollars, except for share and per share amounts) |
| | | September 30, | December 31, |
| | | 2022 | 2021 |
| | | | | | Notes | | (restated) | |
ASSETS | | | | | | | |
Current Assets | | | | | | | |
| | | | |
Cash and cash equivalents | | | $ | 15,269 | $ | | | 6,616 |
Related party receivables | | | | | | 6 | | | | | | 586 | | | | 1,592 |
Other current assets | | | | | | 4 | | | | | | 1,077 | | | | 3,558 |
Total current assets | | | | 16,932 | | 11,766 |
Non‑Current Assets | | | | |
Investment in affiliates | | | | | | 13 | | 341,071 | | 333,447 |
Other non-current assets | | | | | | | | 39 | | | | 35 |
Total Assets | | | $ | 358,042 | $ | 345,248 |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current Liabilities | | | | |
Accounts payable and other accrued liabilities | | | | | | 5 | $ | | | | | 2,334 | $ | | | 1,406 |
Non-Current Liabilities |
Credit Facility, net of debt issuance costs | | | | | | 11 | 12,730 | 12,620 |
Shareholders’ Equity | | | |
Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,162,223 shares |
outstanding as of September 30, 2022 and December 31, 2021 | | | | | | | | 117 | | | | 117 |
Paid‑in capital | | | | 546,354 | | 544,383 |
Accumulated deficit | | | | (203,493) | | (213,278) |
Total shareholders’ equity | | | | 342,978 | | 331,222 |
Total Liabilities and Shareholders’ Equity | | | $ | 358,042 | $ | 345,248 |
| | | | | | | | | See accompanying notes to the condensed consolidated financial statements. |
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GATOS SILVER, INC.CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)(In thousands of United States dollars, except for share amounts) |
| | Number | Amount |
| | | | Common | Treasury | Common | | | | | Treasury | Paid‑in | Accumulated |
| | | | | Stock | | | | Stock | | Stock | | | | | Stock | | | | Capital | | Deficit | | | Total |
Balance at December 31, 2021 (restated) | | | | 69,162,223 | — | $ | | 117 | $ | | | | | | — | $ | 544,383 | $ | (213,278) | | $ | 331,222 |
Stock‑based compensation | | | | | — | — | | | — | | | | | | | — | | 1,482 | | | — | | 1,482 |
Net income (restated) | | — | — | | — | | | | | | — | | | — | 1,050 | 1,050 |
Balance at March 31, 2022 (restated) | | | | | 69,162,223 | — | $ | | 117 | $ | | | | | | — | $ | 545,865 | $ | (212,228) | | $ | 333,754 |
Stock‑based compensation | | | | | — | — | | | — | | | | | | | — | | (250) | | | — | | (250) |
Net income (restated) | | — | — | | — | | | | | | — | | | — | 5,231 | 5,231 |
Balance at June 30, 2022 (restated) | | | | | 69,162,223 | — | $ | | 117 | $ | | | | | | — | $ | 545,615 | $ | (206,997) | | $ | 338,735 |
Stock‑based compensation | | | | | — | — | | | — | | | | | | | — | | 739 | | | — | | 739 |
Net income (restated) | | — | — | | — | | | | | | — | | | — | 3,504 | 3,504 |
Balance at September 30, 2022 (restated) | | | | | 69,162,223 | — | $ | | 117 | $ | | | | | | — | $ | 546,354 | $ | (203,493) | | $ | 342,978 |
| | Number | Amount | | | | | | | | |
| | | | Common | Treasury | Common | | | | | Treasury | Paid-in | Accumulated |
| | | | | Stock | | | | Stock | | Stock | | | | | Stock | | | | Capital | | Deficit | | | Total |
Balance at December 31, 2020 | | | | | 59,183,076 | 144,589 | $ | | 108 | $ | | | (1,027) | $ | 409,728 | $ | (147,423) | | $ | 261,386 |
Stock-based compensation | | | | | — | — | | | — | | | | | | | — | | 1,078 | | | — | 1,078 |
Issuance of common stock | | 182,453 | — | | — | | | | | | — | 1,559 | | | — | 1,559 |
DSUs converted to common stock | | | | | 43,523 | — | | | — | | | | | | | — | | | | | | — | | | — | — |
Other———— | (262) | | | — | (262) |
Net loss | | — | — | | — | | | | | | — | | | — | (1,620) | (1,620) |
Balance at March 31, 2021 | | | | | 59,409,052 | 144,589 | $ | | 108 | $ | | | (1,027) | $ | 412,103 | $ | (149,043) | | $ | 262,141 |
Stock-based compensation | | | | | — | — | | | — | | | | | | | — | | 2,490 | | | — | 2,490 |
Issuance of common stock | | | | | 331,497 | — | | | — | | | | | | | — | | 2,662 | | | — | 2,662 |
DSUs converted to common stock | | | | | 33,652 | — | | — | | | | | | — | | | — | — | — |
Other | | | | | — | — | | | — | | | | | | | — | | | | | | (7) | | | — | | | (7) |
Net income | | | | | — | — | | | — | | | | | | | — | | | | | | — | | 13,491 | | | 13,491 |
Balance at June 30, 2021 | | | | | 59,774,201 | 144,589 | $ | | 108 | $ | | | (1,027) | $ | 417,248 | $ | (135,552) | | $ | 280,777 |
Stock-based compensation | | — | — | | — | | | - | 2,167 | | | — | 2,167 |
Issuance of common stock, net | | | | 9,288,747 | (144,589) | 9 | | | 1,027 | 121,637 | | | — | 122,673 |
DSU compensation | | — | — | | — | | | | | | — | 1,141 | | | — | 1,141 |
DSUs converted to common stock | | 71,546 | — | | — | | | | | | — | | | — | — | — |
Net loss | | — | — | | — | | | | | | — | | | — | (14,999) | | | (14,999) |
Balance at September 30, 2021 | | | | 69,134,494 | — | $ | | 117 | $ | | | | | | — | $ | 542,193 | $ | (150,551) | | $ | 391,759 |
| | | | | | | | | | | | | | 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 of United States dollars) |
| | Nine Months Ended |
| | September 30, |
| | | | 2022 | | | 2021 |
| | | | | | | | (restated) | | |
OPERATING ACTIVITIES | | | | | | | | |
Net income (loss) | | | 9,785 | | $ | (3,128) |
Adjustments to reconcile net income to net cash used by operating activities: | | | | | | | | | |
Amortization | | | 132 | | | 45 |
Stock‑based compensation expense | | | | | | | 7 | 2,099 | | | 5,755 |
Other | | | | | | | 7 | 180 | | | 65 |
Equity income in affiliates | | | | | | | (23,662) | | | (22,592) |
Dividends from affiliates, net of withholding taxes | | | | | | | 15,911 | | | — |
Changes in operating assets and liabilities: | | | | | | | | | |
Receivables from related-parties | | | 1,006 | | | 446 |
Accounts payable and other accrued liabilities | | | 748 | | | 1,094 |
Other current assets | | 2,481 | | | 2,821 |
Net cash provided by (used by) operating activities | | | 8,680 | | | (15,494) |
INVESTING ACTIVITIES | | | | | | | | | |
Purchase of property, plant and equipment | | | (27) | | | — |
Investment in affiliates | | | | | | | 13 | — | | | (261,439) |
Net cash used by investing activities | | | (27) | | | (261,439) |
FINANCING ACTIVITIES | | | | | | | | | |
Credit Facility | | — | | | 13,000 |
Financing costs | | | — | | | (7,274) |
Issuance of common stock | | | — | | | 132,873 |
Issuance of treasury stock | | — | | | 1,027 |
Other— | | | (441) |
Net cash provided by financing activities | | | — | | | 139,185 |
Net increase (decrease) in cash and cash equivalents | | 8,653 | | | (137,748) |
Cash and cash equivalents, beginning of period | | | 6,616 | | | 150,146 |
Cash and cash equivalents, end of period | | 15,269 | | | 12,398 |
Interest paid | | | 385 | | $ | 67 |
Supplemental disclosure of noncash transactions: | | | | | | | |
Director fees in accrued liabilities converted to deferred share units | | | — | | $ | 1,141 |
| | | | | | | | | 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 of United States dollars, except share, per share, option, and stock unit amounts) |
1. | | Basis of Presentation |
Basis of Consolidation and Presentation (restated) |
| | The financial statements represent the condensed consolidated financial position and results of operations of Gatos Silver, Inc. and its |
subsidiaries, Gatos Silver Canada Corporation and Minera Luz del Sol S. de R.L. de C.V. Unless the context otherwise requires, references toGatos Silver or the Company mean Gatos Silver, Inc. and its consolidated subsidiaries. |
| | 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 results for afull year. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)for interim financial information. Accordingly, they do not include all financial information and disclosures required by GAAP for completefinancial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s AnnualReport on Form 10-K/A for the year ended December 31, 2021 (the “2021 10-K/A”). |
| | As described in Note 3 – Restatement of Previously Issued Financial Statements, the Company’s financial statements for the three and |
nine months ended September 30, 2022 (“Affected Period”), are restated in this Quarterly Report on Form 10-Q/A (Amendment No. 1) (this“Quarterly Report”) to correct the recording of income taxes of the Company’s investment in affiliate and recognition of the priority distributionpayment, and the resulting adjustments to the Company’s financial statements. The restated financial statements are indicated as “Restated” in theunaudited interim financial statements and accompanying notes, as applicable. See Note 3—Restatement of Previously Issued FinancialStatements for further discussion. |
2. | | Summary of Significant Accounting Policies |
Summary of Significant Accounting Policies |
| | The consolidated financial statements for the year ended December 31, 2021, disclose those accounting policies considered significant in |
determining results of operations and financial position. There have been no material changes to, or in the application of, the accounting policiespreviously identified and described in the 2021 10-K/A. |
Recent Accounting Pronouncements |
| | There have been no accounting pronouncements issued or adopted during the nine months ended September 30, 2022, which are |
expected to have a material impact on the financial statements. |
3. | | Restatement of Previously Issued Financial Statements |
| | In accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”), the following items are treated as errors and are |
material to the 2022 interim consolidated financial statements, and, therefore, require that the consolidated financial statements be restated. |
| | Investment in affiliates – Income Taxes recorded by affiliates |
| | During the preparation of the 2022 annual financial statements the Company identified that the investment in affiliates and equity income |
in affiliates were not correctly recorded as of September 30, 2022, and for the three and nine months period then ended, respectively. TheCompany identified that its affiliate, the LGJV, did not recognize certain current and deferred tax assets and deferred tax liabilities in accordancewith ASC 740, Income Taxes. As a result, the Company determined that there were errors in the calculation of the deferred tax assets related toproperty plant and equipment, mine development and historical net operating losses. In certain cases, the tax basis was not calculated inaccordance with the Mexican tax regulations. The LGJV understated the value of the deferred tax assets and overstated the value of current taxespayable at December 31, 2021 and recognized in deferred tax assets in the quarters ended March 31, 2022, June 30, 2022 and September 30,2022. |
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| | The impact of the error on the financial statements of the LGJV was (i) a decrease in deferred tax assets of $12,221, (ii) an increase in |
income tax receivable of $25,455, (iii) a decrease in VAT receivable of $7,107 at September 30, 2022, and (iv) an increase in income tax expenseof $123 and $9,735 for the three and nine months ended September 30, 2022, respectively. |
| | The impact of the LGJV tax errors on the Company’s financial statements was (i) a decrease in the investment in affiliates of $7,425 at |
September 30, 2022, (ii) an increase of $241 in equity income in affiliates for the three months ended September 30, 2022, and (iii) a decrease of$7,425 in equity income in affiliates for the nine months ended September 30, 2022. |
| | Investment in affiliates – Priority distribution payment |
| | The Company also identified that the accounting for the priority distribution payment to our partner in the LGJV was not recorded in |
accordance with ASC 970 –323-35, Equity Method and Joint Ventures. The priority distribution payment was required to be excluded from theinitial equity income in affiliates and equity income should have been recognized after the priority distribution payment was accounted for. |
| | The impact of the error described above on the Company’s financial statements was (i) a decrease of $4,631 in the investment in |
affiliates at September 30, 2022, and (ii) a decrease in equity income in affiliates of $4,631 for the nine months ended September 30, 2022. Therewas no impact on the equity income in affiliates for the three months ended September 30, 2022. |
| | Investment in affiliates – Prior period restatements |
| | The impact on the financial statements for year December 31, 2021, is discussed in the Amendment No. 1 to the Annual Report on Form |
10-K. The impact of the restatements recorded in the three months ended December 31, 2021, as described in Form 10-K/A for the year endedDecember 31, 2021, resulted in a decrease in the investment in affiliates of $21,863. |
| | Impact of the Restatement |
| | The aggregate impact of the above-noted changes, along with the decrease of $4,403 in the basis amortization of the investment in |
affiliates for the nine months ended September 30, 2022 resulting from the above-noted changes on the basis amortization of the investment inaffiliates and other previously uncorrected immaterial misstatement to income tax expense ($865) and paid-in capital account, are included in theadjustments described in the tables below. The cumulative impact of these items was (i) a decrease in investment in affiliate of $30,381 atSeptember 30, 2022, (ii) a decrease in equity income in affiliates of $7,653, and (iii) a decrease in net income of $8,518 for nine months endedSeptember 30, 2022. For the three months ended September 30, 2022, the aggregate impact of the above-noted changes along with the decrease of$1,888 in the basis amortization of the investment in affiliates resulting from the above-noted changes and other previously uncorrectedimmaterial misstatement to income tax expense ($525) resulted in (i) an increase of $2,129 in equity income in affiliates, (ii) an increase of $525in income tax expense, and (iii) an increase of $1,604 in net income. |
| | These are considered errors in accordance with ASC 250 and are material to the consolidated financial statements for September 31, |
2022, and require that the consolidated financial statements be restated. |
| | The impact of the restatement on the Consolidated Balance Sheets, Consolidated Statement of Operations, Consolidated Statements of |
Shareholders’ Equity (Deficit) and Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2022, is presentedbelow. These adjustments related to non-cash items, accordingly there were not changes to cash flows from operations, cash flows from investingactivities or cash flows from financing activities for the nine months ended September 30, 2022. |
| | | | September 30, 2022 | | September 30, 2022 |
Consolidated Balance Sheet | | | As previously reported | | Adjustment | | As restated |
Investment in affiliates | | | | | | | 371,452 | (30,381) | 341,071 |
Total Assets | | | | | | | 388,423 | (30,381) | 358,042 |
Paid-in capital | | | | | | | 545,800 | 554 | | | 546,354 |
Accumulated deficit | | | | | | | (172,558) | (30,935) | (203,493) |
Total shareholders’ equity | | | | | | | 373,359 | (30,381) | 342,978 |
Total liabilities and shareholders’ equity | | | | | | | 388,423 | (30,381) | 358,042 |
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| | | Three Months Ended | | Three Months Ended |
| | | | | September 30, 2022 | September 30, 2022 |
Consolidated Statement of Operations | | As previously reported | Adjustment | | | As restated |
Equity income in affiliates | | | | | | | 6,801 | 2,129 | 8,930 |
Net other income (loss) | | | | | | | 7,877 | 2,129 | 10,006 |
Income (loss) before income taxes | | | | | | | 1,900 | 2,129 | 4,029 |
Income tax expense | | | — | 525 | | | | | 525 |
Net income (loss) | | | | | | | 1,900 | 1,604 | 3,504 |
Net income (loss) per share | | | | |
Basic | | | 0.03 | 0.02 | | | | | 0.05 |
Diluted | | | 0.03 | 0.02 | | | | | 0.05 |
| | | | | Nine Months Ended | | Nine Months Ended |
| | | | | September 30, 2022 | September 30, 2022 |
Consolidated Statement of Operations | | As previously reported | Adjustment | | | As restated |
Equity income in affiliates | | | | | | | 32,180 | (7,653) | | | | | 24,527 |
Net other income (loss) | | | | | | | 35,512 | (7,653) | | | | | 27,859 |
Income (loss) before income taxes | | | | | | | 18,303 | (7,653) | | | | | 10,650 |
Income tax expense | | | — | 865 | | | | | 865 |
Net income (loss) | | | | | | | 18,303 | (8,518) | | | | | 9,785 |
Net income (loss) per share | | | | |
Basic | | | 0.26 | (0.12) | | | | | 0.14 |
Diluted | | | 0.26 | (0.12) | | | | | 0.14 |
| | | | | Nine Months Ended | | Nine Months Ended |
| | | | | September 30, 2022 | September 30, 2022 |
Consolidated Statement of Shareholders’ Equity (Deficit) | | As previously reported | Adjustment | | | As restated |
Paid-in capital at March 31, 2022 | | | | | | | 545,311 | 554 | | | | | 545,865 |
Accumulated Deficit Balance at March 31, 2022 | | | | | | | (172,032) | (40,196) | (212,228) |
Total shareholders’ equity at March 31, 2022 | | | | | | | 373,396 | (39,642) | 333,754 |
Paid-in capital at June 30, 2022 | | | | | | | 545,061 | 554 | | | | | 545,615 |
Accumulated Deficit Balance at June 30, 2022 | | | | | | | (174,458) | (32,539) | (206,997) |
Total shareholders’ equity at June 30, 2022 | | | | | | | 370,720 | (31,985) | 338,735 |
Paid-in capital at September 30, 2022 | | | | | | | 545,800 | 554 | | | | | 546,354 |
Accumulated Deficit Balance at September 30, 2022 | | | | | | | (172,558) | (30,935) | (203,493) |
Total shareholders’ equity at September 30, 2022 | | | | | | | 373,359 | (30,381) | 342,978 |
| | | | | Nine Months Ended | | Nine Months Ended |
| | | | | September 30, 2022 | September 30, 2022 |
Consolidated Statement of Cash Flows | | As previously reported | Adjustment | | | As restated |
Net income (loss) | | | | | | | 18,303 | (8,518) | | | | | 9,785 |
Equity income in affiliates | | | | | | | (32,180) | 8,518 | | | | | (23,662) |
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| | The impact of the restatement on the Combined Balance Sheets and Combined Statements of Operations of the LGJV is presented below. |
| | | | September 30, 2022 | | September 30, 2022 |
Combined Balance Sheet | | | As previously reported | | Adjustment | | As restated |
VAT receivable | | | | | | | 20,749 | (7,107) | 13,642 |
Income tax receivable | | | | | — | | | 25,455 | 25,455 |
Other current assets | | | | | | | 4,727 | (24) | | | 4,703 |
Total current assets | | | | | | | 87,329 | 18,324 | 105,653 |
Deferred tax assets | | | | | | | 17,896 | (12,221) | 5,675 |
Total non-current assets | | | | | | | 446,095 | (12,221) | 433,874 |
Total assets | | | | | | | 533,424 | 6,103 | 539,527 |
Accounts payable and accrued liabilities | | | | | | | 34,715 | 6,505 | 41,220 |
Income taxes | | | | | | | 4,291 | (4,291) | — |
Total current liabilities | | | | | | | 40,815 | 2,214 | 43,029 |
Accumulated deficit | | | | | | | (82,033) | (3,889) | (78,144) |
Total owners' capital | | | | | | | 476,793 | (3,889) | 480,682 |
Total liabilities and owners' capital | | | | | | | 533,424 | 6,103 | 539,527 |
| | | | Three Months Ended | | | Three Months Ended |
| | | September 30, 2022 | | | September 30, 2022 |
Combined Statement of Operations | | | As previously reported | | Adjustment | As restated |
Foreign exchange (loss) gain | | | | | (144) | | | 467 | 323 |
Total other expense | | | | | (523) | | | 467 | (56) |
Income tax (expense) recovery | | | | | | | (6,579) | (123) | (6,702) |
Net income | | | | | | | 12,617 | 344 | 12,961 |
| | | | Nine Months Ended | | | Nine Months Ended |
| | | September 30, 2022 | | | September 30, 2022 |
| | | As previously reported | | Adjustment | | As restated |
Other (income) expense | | | | | | | (1,339) | 1,339 | — |
Foreign exchange loss (gain) | | | | | 410 | (467) | | | (57) |
Total other (income) expense | | | | | 266 | 872 | | | 1,138 |
Income before income tax (expense) recovery | | | | | | | 65,754 | (872) | | | 64,882 |
Income tax (expense) recovery | | | | | | | (12,753) | (9,735) | (22,488) |
Net income | | | | | | | 53,001 | (10,607) | 42,394 |
4. | | Other Current Assets |
| | | | September 30, 2022 December 31, 2021 |
| | Value added tax receivable | | | | | $ | 683 | | | $ | 575 |
| | Prepaid expenses | | | | | | 387 | | | | 2,976 |
| | Other | | | | | | 7 | | | | 7 |
| | | | | | | | | | Total other current assets | $ | 1,077 | | | $ | 3,558 |
5. | | Accounts Payable and Other Accrued Liabilities |
| | | | September 30, 2022 December 31, 2021 |
| | Accounts payable | | | | | $ | 887 | | | $ | 196 |
| | Accrued expenses | | | | | | 361 | | | | 623 |
| | Accrued compensation | | | | | | 1,086 | | | | 587 |
| | | | | | | | | | Total accounts payable and other current liabilities | $ | 2,334 | | | $ | 1,406 |
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6. | | Related Party Transactions |
LGJV |
| | Under the Unanimous Omnibus Partner Agreement, the Company provides certain management and administrative services to the LGJV. |
The Company earned $1,250 under this agreement for both the three months ended September 30, 2022 and 2021 and during both the ninemonths ended September 30, 2022 and 2021, the Company earned $3,750. The income from these services has been recorded on the statements ofoperations under other income. In the September 30, 2021 unaudited financial statements filed on Form 10-Q, the management fee was presentedas a reduction to general and administrative expense and is now presented in other income to be consistent with the 2021 10-K/A. The Companyalso incurs certain LGJV costs that are subsequently reimbursed by the LGJV. The Company received $4,167 and $4,117 in cash from the LGJVunder this agreement for the nine months ended September 30, 2022 and 2021, respectively. The Company had receivables under this agreementof $417 and $833 as of September 30, 2022 and December 31, 2021, respectively. |
7. | | Stockholders’ Equity |
| | The Company is authorized to issue 700,000,000 shares of $0.001 par value common stock and 50,000,000 shares of $0.001 par value |
preferred stock. |
Common Stock Transactions |
| | On July 19, 2021, the Company completed a follow-on public offering of 8,930,000 shares of common stock at a price of $14.00 per |
share, resulting in net proceeds of $118,894, after deducting underwriting discounts and commissions and expenses paid by the Company. OnAugust 18, 2021, the Company issued an additional 286,962 shares of common stock at a price of $14.00 per share, through the exercise of theover-allotment option, with net proceeds from the additional issuance of $3,837, after deducting underwriting discounts and commissions.Additionally, the Company incurred an additional $1,700 in other costs related to the offering. |
Stock-Based Compensation |
| | The Company recognized stock-based compensation expense as follows: |
| | | Three months ended September 30, Nine months ended September 30, |
| 2022 | | | | 2021 | | 2022 | | 2021 |
| | Stock Options | $ | 682 | | | $ | 2,329 | $ | 1,936 | $ | 5,755 |
| | Performance share units | | 57 | | | | | — | | 163 | | — |
| | | $ | 739 | | | $ | 2,329 | $ | 2,099 | $ | 5,755 |
Stock Option Transactions |
| | The Company granted 100,000 stock options during the nine months ended September 30, 2022, with a weighted-average grant-date fair |
value per share of $5.83. The Company received cash from the exercise of stock options of nil and $4,862 for the nine months ended September30, 2022 and 2021, respectively. |
| | Total unrecognized stock-based compensation expense as of September 30, 2022, was $3,543 which is expected to be recognized over a |
weighted average period of 1.7 years. |
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| | Stock option activity for the nine months ended September 30, 2022, is summarized in the following tables: |
| | | Weighted‑ |
| | | Average |
| | | | Employee & Director Options | | Shares | Exercise Price |
| | Outstanding at December 31, 2021 | | | 5,873,968 | $ | 13.11 |
| | Granted | | | | 100,000 | $ | 10.28 |
| | Forfeited | | | | (3,641,568) $ | 13.45 |
| | Outstanding at September 30, 2022 | | | | 2,332,400 | $ | 12.46 |
| | Vested at September 30, 2022 | | | | 1,548,981 | $ | 12.81 |
| | | Weighted‑ |
| | | Average |
| | | | LGJV Personnel Options | | Shares | Exercise Price |
| | Outstanding at December 31, 2021 | | | | 32,393 | $ | | | | 7.31 |
| | Outstanding and vested at September 30, 2022 | | | | 32,393 | $ | | | | 7.31 |
Performance Share Unit (“PSU”) Transactions |
| | On December 17, 2021, 119,790 PSUs were granted to the Company’s employees with a weighted average grant date fair value per share |
of $14.22. During the nine months ended September 30, 2022, 71,480 PSUs were forfeited. At September 30, 2022, there were 48,310 PSUsoutstanding. On September 30, 2022, unrecognized compensation expense related to the PSUs was $507 which is expected to be recognized overa weighted-average period of 2.2 years. |
Deferred Stock Unit (“DSU”) Transactions |
| | The following table summarizes the DSU activity for the nine months ended September 30, 2022: |
| | | | | | | | Weighted-Average |
| | | Grant Date Fair |
| | Employee and Director DSUs | | | Shares | Value |
| | Outstanding at December 31, 2021 | | | | 146,796 | $ | 10.88 |
| | Outstanding at September 30, 2022 | | | | 146,796 | $ | 10.88 |
8. | | Net Income (Loss) per Share |
| | Basic net income per share is computed by dividing income available to common shareholders by the weighted average number of |
common shares outstanding during the period. Diluted net income per share is computed similarly, except that weighted-average common sharesis increased to reflect the potential dilution that would occur if stock options were exercised or PSUs and DSUs were converted into commonstock. The dilutive effects are calculated using the treasury stock method. |
| | For both the three and nine months ended September 30, 2022, all stock options have been excluded from the dilutive earnings per |
common share calculation as the exercise price of these stock options was greater than the average market value of our common stock for thoseperiods, resulting in an anti-dilutive effect. Additionally, for both the three and nine months ended September 30, 2022, all PSUs were excludedfrom the diluted earnings per common share calculation as the PSUs do not currently meet the criteria for issuance. For both the three and ninemonths ended September 30, 2021, the Company experienced a net loss, thus all stock options and DSUs outstanding have been excluded as theyare anti-dilutive. |
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| | A reconciliation of basic and diluted earnings per common share for the three and nine months ended September 30, 2022 and 2021, are |
as follows: |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | 2022 | | 2021 | | 2022 | | | | | 2021 |
| | | | (restated) | (restated) |
Net income (loss) | $ | | | 3,504 | $ | (14,999) $ | | | 9,785 | $ | (3,128) |
Weighted average shares: | | | | | | | | | | | | | | | |
Basic | | | | 69,162,223 | | 67,133,205 | | 69,162,223 | | | | | 62,024,175 |
Effect of dilutive DSUs | | | | 146,796 | | | | | | | — | | 146,796 | | | | | | | — |
Diluted | | | | 69,309,019 | | 67,133,205 | | 69,309,019 | | | | | 62,024,175 |
Net income (loss) per share: | | | | | | | | | | | | | | | |
Basic | $ | | | 0.05 | $ | (0.22) $ | 0.14 | $ | (0.05) |
Diluted | $ | | | 0.05 | $ | (0.22) $ | 0.14 | $ | (0.05) |
9. | | Fair Value Measurements |
| | The Company establishes a framework for measuring the fair value of assets and liabilities in the form of a fair value hierarchy that |
prioritizes the inputs into valuation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority tounadjusted quoted prices in active markets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should beclassified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of thefair value hierarchy are as follows: |
| | Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. |
| | Level 2: Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active |
markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data. |
| | 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. |
Assets and Liabilities that are Measured at Fair Value on a Non-recurring Basis |
| | The Company discloses and recognizes its non-financial assets and liabilities at fair value on a non-recurring basis and makes |
adjustments to fair value, as needed (for example, when there is evidence of impairment). |
| | The Company recorded its initial investment in affiliates at fair value within Level 3 of the fair value hierarchy, as the valuation was |
determined based on internally developed assumptions with few observable inputs and no market activity. For the year ended December 31, 2021,the Company recorded impairment charges associated with the investment in the LGJV and reduced the carrying amount of such the investment inaffiliate to its estimated fair value. |
10. | | Commitments, Contingencies and Guarantees |
| | In determining its accruals and disclosures with respect to loss contingencies, the Company will charge to income an estimated loss if |
information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date ofthe financial statements and the amount of the loss can be reasonably estimated. Legal expenses associated with the commitments andcontingencies are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is madein the financial statements when it is at least reasonably possible that a material loss could be incurred. |
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Environmental Contingencies |
| | The Company’s mining and exploration activities are subject to various laws, regulations and permits governing the protection of the |
environment. These laws, regulations and permits are continually changing and are generally becoming more restrictive. The Company has made,and expects to make in the future, expenditures to comply with such laws, regulations and permits, but cannot predict the full amount of suchfuture expenditures. |
Legal |
| | On February 22, 2022, a purported Gatos stockholder filed a putative class action lawsuit in the United States District Court for the |
District of Colorado against the Company, certain of our former officers, and several directors (the “U.S. Class Action”). An amended complaintwas filed on August 15, 2022. The amended complaint, allegedly brought on behalf of certain purchasers of Gatos common stock and certaintraders of call and put options on Gatos common stock from December 9, 2020 through January 25, 2022, seeks, among other things, damages,costs, and expenses, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 as well as Sections 11 and 15 of theSecurities Act of 1933. The amended complaint alleges that certain individual defendants and Gatos, pursuant to the control and authority of theindividual defendants, made false and misleading statements and/or omitted certain material information regarding the mineral resources andreserves at the Cerro Los Gatos mine. Gatos and all defendants filed a motion to dismiss this action on October 14, 2022. That motion was fullybriefed as of December 23, 2022. On April 26, 2023, following a joint motion, the Court ordered that it will postpone a ruling on defendants’motion to dismiss until on or after June 16, 2023. |
| | On June 13, 2023, we entered into an agreement in principle to settle the U.S. Class Action. Subject to certain conditions, including class |
certification by the District Court, the execution of a definitive stipulation of settlement and approval of the settlement by the District Court, thesettling parties have agreed to resolve the U.S. Class Action for a payment by us and our insurers of $21,000 to a settlement fund. We are in theprocess of finalizing the amount of defense expenses that are covered under the directors’ and officers’ insurance policy which will be deductedfrom the $10,000 retention held by the Company. We expect to fund no more than $7,900 of the settlement, with the balance of the settlementpayment to be paid by insurance. We and the other defendants will not admit any liability as part of the settlement. Since the settlement of theU.S. Class Action is subject to conditions, there can be no assurance that the U.S. Class Action will be finally resolved pursuant to the agreementin principle that has been reached. |
| | By Notice of Action issued February 9, 2022 and subsequent Statement of Claim dated March 11, 2022 Izabela Przybylska commenced a |
putative class action against Gatos Silver, Inc. (“Gatos”), certain of its former officers and directors, and others in the Ontario Superior Court ofJustice on behalf of a purported class of all persons or entities, wherever they may reside or be domiciled, who acquired securities of Gatos inboth the primary and secondary markets during the period from October 28, 2020 until January 25, 2022. The action asserts claims underCanadian securities legislation and at common law and seeks unspecified monetary damages and other relief in respect of allegations thedefendants made false and misleading statements and omitted material information regarding the mineral resources and reserves of Gatos. Theplaintiff filed motion materials for leave to proceed in respect of her statutory claims and for class certification on March 3, 2023. Which materialswere amended and filed on May 1, 2023. The court has tentatively set dates in late March of 2024 for the hearing of the plaintiff’s motions. |
| | There can be no assurance that any of the foregoing matters individually or in aggregate will not result in outcomes that are materially |
adverse for us. |
Dowa Debt Agreements |
| | In July 2017, the LGJV operating entities consisting of Minera Plata Real S. de R.L. de C.V (“MPR”) and Operaciones San Jose del |
Plata S. de R.L. de C.V. (collectively, the “LGJV Entities”) entered into a loan agreement (the “Term Loan”) with Dowa whereby the LGJVEntities could borrow up to $210,000 for Los Gatos District (“LGD”) development, with a maturity date of December 29, 2027. Interest on theTerm Loan accrued daily at LIBOR plus 2.35% per annum, with the interest added to the amount borrowed until commencement of production.During 2018, the LGJV paid Dowa a $4,200 closing fee. Commencing June 30, 2021, repayment of the Term Loan in 14 consecutive semi-annualequal payments of the aggregate principal and capitalized interest began. The Company was required to pay an arrangement fee on the borrowing,calculated as 2% per annum of 70% of the outstanding principal balance, payable in semi-annual installments, on that date which was twobusiness days prior to June 30 and December 31 each fiscal year until maturity, commencing after the initial drawdown which occurred in July2018. The Term Loan also required additional principal payments equal to 70% of excess cash flows (as defined). |
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| | 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 paid a fee toDowa of $10,000, which is recorded on the statements of operations under other income (expense). |
| | On January 23, 2018, the LGJV entered into a loan agreement with Dowa (the “Dowa MPR Loan”) whereby the LGJV could borrow up |
to $65,700 to continue LGD development. Interest on this loan accrued daily at LIBOR plus 1.5% per annum and was added to the amountborrowed. The amount borrowed plus accrued interest was due the earlier of June 30, 2019, or upon the Cerro Los Gatos mine’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 to convertall or a portion of the principal amount into additional LGJV ownership at a favorable conversion rate. |
| | In connection with entering into the WCF (as defined below), the Company contributed $18,200 to the LGJV in May 2019 to provide |
funding for partial repayment of principal and interest related to the Dowa MPR Loan. In late May 2019, the Dowa MPR Loan was fullyextinguished with a cash payment of $18,200 and the conversion of the remaining $50,737 of principal and interest. The conversion of theremaining principal and interest increased Dowa’s ownership in the LGJV entities by 18.5% to 48.5%. On March 11, 2021, the Companyrepurchased the 18.5% interest from Dowa, for a total consideration of $71,550, increasing the Company’s ownership in the LGJV to 70.0%.These transactions resulted in a $47,400 higher basis than the underlying net assets of the LGJV Entities. This basis difference is being amortizedas the LGJV Entities’ proven and probable reserves are processed. |
| | On May 30, 2019, the LGJV entered into a working capital facility agreement (the “WCF”) with Dowa whereby the LGJV could borrow |
up to $60,000 to fund the working capital and sustaining capital requirements of the LGD. Interest on this loan accrued daily at LIBOR plus 3.0%per annum and all outstanding principal and interest was to mature on June 28, 2021. The Company was required to pay an arrangement fee onthe borrowing, calculated as 15.0% per annum of 70.0% of the average daily principal amount outstanding under the WCF during such fiscalquarter. On March 11, 2021, the $60,000 outstanding under the WCF was extinguished using funds contributed to the LGJV. The Company’s pro-rata capital contribution to the LGJV was $42,000. |
| | The Company guarantees the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of |
September 30, 2022, the LGJV had $1,195 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $3, withmaturity dates through August 2023. |
11. | | Debt |
| | On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Facility”). The Credit Facility provides for a |
revolving line of credit in a principal amount of $50,000 and has an accordion feature which at the time allowed for an increase in the total line ofcredit up to $100,000, subject to certain conditions. Borrowings under the Credit Facility bear interest at a rate equal to either the LIBOR rate plusa margin ranging from 3.00% to 4.00% or the U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in eachcase, with such margin determined in accordance with the Company’s consolidated net leverage ratio as of the end of the applicable period. TheCredit Facility 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 onasset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. Obligations underthe Credit Facility may be accelerated upon the occurrence of certain customary events of default. The Company was in compliance with allcovenants under the Credit Facility, as amended, as of March 31, 2022. |
| | On July 19, 2021, the Company borrowed $13,000 under the Credit Facility at a rate of LIBOR plus 3%. Debt issuance costs of $442 |
were to be amortized through July 31, 2024, prior to the amended and restated Credit Facility (see terms below). The current balance outstandingon the Credit Facility is $9,000, following a $4,000 principal repayment in December 2022. |
| | For the three and nine months ended September 30, 2022, the Company recognized interest expense of $142 and $368, respectively, with |
an effective interest rate of 4.4% and 3.8%, respectively, which has been recorded on the statements of operations under other income (expense),and $36 and $110, respectively, for amortization of debt issuance costs. The Company paid interest of $158 and $385 for the three and ninemonths ended September 30, 2022. |
| | On March 7, 2022, the Company amended the Credit Facility with the lender, Bank of Montreal (“BMO”), to address potential loan |
covenant deficiencies. The amendment included the following revisions: |
| | ● | audited financial statements were to be provided prior to November 15, 2022; |
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| | ● | the credit limit was reduced to $30,000, until the Company delivered a new LOM CLG financial model with updated mineralreserves; |
| | ● | upon assessment of the new CLG financial model, BMO, in its sole discretion, could increase the credit limit up to the original$50,000; |
| | ● | requirement to provide updated financial projections for the CLG by September 30, 2022. The financial projections were providedby the required date and were used as the basis for the amendment entered into on December 19, 2022 discussed below; and |
| | ● | waivers of certain defaults, events of default, representations and warranties and covenants arising out of the facts that led to thepotential reduction in metal content of the Company’s previously stated mineral reserve figures. |
| | On December 19, 2022, the Company entered an amended and restated Credit Facility with BMO extending the maturity date and re- |
establishing a credit limit of $50,000, with an accordion feature providing up to an additional $25,000. Key terms of the amended Credit Facilityinclude: |
| | ● | audited financial statements for fiscal year 2021 are to be provided no later than April 15, 2023, and audited financial statements forfiscal year 2022 and unaudited financial statements for the first three fiscal quarters in fiscal year 2022 are to be provided no laterthan April 30, 2023. A waiver was subsequently extended for the afore-mentioned financial statements and the unaudited financialstatements for the three months ended March 31, 2023, to be provided no later than July 15, 2023; |
| | ● | the maturity date is extended from July 31, 2024 to December 31, 2025; |
| | ● | a change in the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”); and |
| | ● | loans under the Credit Facility bear interest at a rate equal to either a term SOFR rate plus a margin ranging from 3.00% to 4.00% ora U.S. base rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company. |
12. | | Segment Information (restated) |
| | The Company operates in a single industry as a corporation engaged in the acquisition, exploration and development of primarily silver |
mineral interests. The Company has mineral property interests in Mexico. The Company’s reportable segments are based on the Company’smineral interests and management structure and include Mexico and Corporate segments. The Mexico segment engages in the exploration,development and operation of 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 September 30, 2022 (restated) | Three Months Ended September 30, 2021 |
| | | | Mexico | | | Corporate | | | | | | Total | | Mexico | | | | | | Corporate | Total |
Exploration | | | $ | | — | $ | | | | | — | $ | — | $ | 479 | | | | | $ | | — | $ | 479 |
General and administrative | | | | | 108 | 5,825 | | | | | | 5,933 | 577 | | | | | | | 6,667 | 7,244 |
Amortization | | | | | — | 44 | 44 | — | | | | | | | 31 | 31 |
Equity (income) in affiliates | | | | (8,930) | | | — | (8,930) | (1,600) | | | | | | | — | (1,600) |
Income tax expense | | | | | — | 525 | | | | | | 525 | — | | | | | | | — | — |
Net other (income) expense | | | | | 23 | (1,099) | | | | | | (1,076) | 15 | | | | | | | 8,830 | 8,845 |
Total assets | | | $ | 103,870 $ | 254,172 $ | | | | | | 358,042 $ | 61,373 $ | | | | | | | 347,012 $ | 408,385 |
| | | Nine Months Ended September 30, 2022 (restated) | Nine Months Ended September 30, 2021 |
| | | | Mexico | | | Corporate | | | | | | Total | | Mexico | | | | | | Corporate | Total |
Exploration | | | $ | | 110 | $ | | | | | — | $ | 110 | $ | 1,397 | | | | | $ | | — | $ | 1,397 |
General and administrative | | | | 1,497 | 15,470 | | | | | | 16,967 | 909 | | | | | | | 16,849 | 17,758 |
Amortization | | | | | 1 | 131 | | | | | | 132 | — | | | | | | | 45 | 45 |
Equity (income) in affiliates | | | | (24,527) | | | — | (24,527) | (22,592) | | | | | | | — | (22,592) |
Income tax expense | | | | | — | 865 | | | | | | 865 | — | | | | | | | — | — |
Net other (income) expense | | | | | 37 | (3,369) | | | | | | (3,332) | 34 | | | | | | | 6,486 | 6,520 |
Total assets | | | $ | 103,870 $ | 254,172 $ | | | | | | 358,042 $ | 61,373 $ | | | | | | | 347,012 $ | 408,385 |
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13. | | Investment in Affiliate (restated) |
| | During the three months ended September 30, 2022 and 2021, the Company recognized $8,930 (restated) and $1,600 of income, |
respectively, and during the nine months ended September 30, 2022 and 2021, the Company recognized $22,125 (restated) and $24,527 ofincome, respectively, on its investment in the LGJV Entities, representing its ownership share of the LGJV Entities’ results. The equity income orloss in affiliate includes amortization of the carrying value of the investment in excess of the underlying net assets of the LGJV Entities. Thisbasis difference is being amortized as the LGJV Entities’ proven and probable reserves are processed. |
| | The Company provided an updated technical report compliant with Regulation S-K subpart 1300 (the “Los Gatos Technical Report”) |
dated November 10, 2022. The Los Gatos Technical Report indicated a significant decrease in the mineral reserve and mineral resource from thepreviously issued technical report in 2020. The Company considered this reduction in the mineral reserve and mineral resources as an indicator ofa possible other-than-temporary impairment and as a result compared the carrying value of the LGJV on December 31, 2021 to the fair value ofthe LGJV. |
| | The fair value of the LGJV was estimated based on the net present value of the expected cash flows to be generated by the LGJV on 70% |
basis. The discount rate used was 5.00%. The fair value of the investment in the LGJV was estimated to be $333,447 (restated) and the carryingvalue at December 31, 2021 was $413,795. Since the carrying value exceeded the fair value, an impairment charge of $80,348 was recordedduring the fourth quarter of 2021. See Note 9 - Fair Value Measurements for additional detail of the assumptions used in the determination of thefair value of the long-lived assets tested for impairment. |
| | For the year ended December 31, 2021, the Company contributed $260,039 to the LGJV to repurchase 18.5% of the ownership of the |
LGJV, to retire the WCF and the Term Loan and in support of exploration activities. |
| | On March 17, 2022, we entered into a definitive agreement with Dowa to build and operate a leaching plant to reduce fluorine levels in |
zinc concentrates produced at CLG at an expected construction cost of $6,000. As part of the agreement, the initial payment of the $20,000 due toDowa under the partner’s priority distribution agreement was reduced to $10,300. The reduced priority dividend amount reflects a portion of boththe construction and future estimated operating costs of the leaching plant and is dependent on the successful construction and operation of theleaching plant. Should the leaching plant construction not be completed, or the leaching plant not operate according to certain parameters duringthe first five years, portions of the $9,700 reduction could be reinstated. |
| | In April 2022, the LGJV paid its first dividend of $20,000 to its partners. The Company’s share of the first dividend was $14,000, before |
withholding taxes of $700. A payment of $7,365 was subsequently made to Dowa to cover the full amount of the reduced initial prioritydistribution due, for a net dividend received of $5,935. In July 2022 the LGJV paid an additional dividend in the amount of $15,000 to itspartners. The Company’s share, after withholding taxes of $525 was $9,975. |
| | The LGJV Entities’ restated combined balance sheets as of September 30, 2022, and December 31, 2021, and the restated combined |
statements of income for the three and nine months ended September 30, 2022 and 2021, are as follows: |
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| | LOS GATOS JOINT VENTURE |
| | | COMBINED STATEMENTS OF INCOME (UNAUDITED) |
| | | | (in thousands) |
| | | | | Three Months Ended | Nine Months Ended |
| | | | | September 30, | September 30, |
| | | | | 2022 | | | 2021 | | 2022 | | | | | 2021 |
| | | | | | | | | | | | | (restated) | (restated) |
Revenue | | | | | $ | 73,926 | | $ | 56,991 | $ 218,730 | | | | $ 178,326 |
Expenses | | | | | | | | | | | | |
Cost of sales | | | | | | 28,625 | | | 26,374 | | 81,550 | | | | | 70,275 |
Royalties | | | | | | 327 | | | 1,181 | | 2,739 | | | | | 3,480 |
Exploration | | | | | | 1,881 | | | 1,595 | | 6,235 | | | | | 3,505 |
General and administrative | | | | | | 3,431 | | | 3,414 | | 9,846 | | | | | 9,493 |
Depreciation, depletion and amortization | | | | | | 19,943 | | | 12,734 | | 52,340 | | | | | 36,388 |
Total operating expenses | | | | | | 54,207 | | | 45,298 | | 152,710 | | | | | 123,141 |
| | | | | | | | | | | | |
Other (income) expense | | | | | | | | | | | | |
Interest expense | | | | | 103 | | | 847 | | 368 | | | | | 5,320 |
Loss on Term Loan extinguishment | | | | | — | | | 4,359 | — | | | | | 4,359 |
Arrangement fee | | | | | — | | | — | — | | | | | 2,090 |
Accretion expense | | | | | | 276 | | | 228 | | 827 | | | | | 684 |
Other income | | | | | | — | | | (61) | — | | | | | (80) |
Foreign exchange loss | | | | | | (323) | | | 47 | | (57) | | | | | 342 |
Total other expense | | | | | | 56 | | | 5,420 | | 1,138 | | | | | 12,715 |
Income before income tax expense | | | | | 19,663 | | | 6,273 | 64,882 | | | | | 42,470 |
Income tax expense | | | | | 6,702 | | | 750 | 22,488 | | | | | 750 |
Net income | | | | | $ | 12,961 | | $ | 5,523 | $ | 42,394 | | | | $ | 41,720 |
14. Subsequent Events |
| | | | | | | | | | | | | In November 2022, the LGJV paid an additional dividend in the amount of $20,000, to its partners. The Company’s share, after |
withholding taxes of $700, was $13,300. |
| | | | | | | | | | | | | On December 19, 2022, the Company entered into an amended and restated Credit Facility with BMO extending the maturity date and |
re-establishing a credit limit of $50,000, with an accordion feature, as further described above. |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| | The following discussion provides information that management believes is relevant to an assessment and understanding of the |
consolidated financial condition and results of operations of the Company and should be read in conjunction with the Company’s consolidatedfinancial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q (the “Report”) and theCompany’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2021 and the related“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are contained in our Annual Reporton Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 20, 2023 (asamended by Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on June 26, 2023,the “2021 10-K”). |
Forward-Looking Statements |
| | This Report contains statements that constitute “forward looking information” and “forward-looking statements” within the meaning of |
U.S. and Canadian securities laws, including the Private Securities Litigation Reform Act of 1995. Forward-looking statements are oftenidentified 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. Theseforward-looking statements may include, but are not limited to, the following: |
| | ● | estimates of future mineral production and sales; |
| | ● | estimates of future production costs, other expenses and taxes for specific operations and on a consolidated basis; |
| | ● | estimates of future cash flows and the sensitivity of cash flows to gold, copper, silver, lead, zinc and other metal prices; |
| | ● | estimates of future capital expenditures, construction, production or closure activities and other cash needs, for specific operationsand on a consolidated basis, and expectations as to the funding or timing thereof; |
| | ● | estimates as to the projected development of certain ore deposits, including the timing of such development, the costs of suchdevelopment and other capital costs, financing plans for these deposits and expected production commencement dates; |
| | ● | estimates of mineral reserves and mineral resources statements regarding future exploration results and mineral reserve and mineralresource replacement and the sensitivity of mineral reserves to metal price changes; |
| | ● | statements regarding the availability of, and terms and costs related to, future borrowing or financing and expectations regardingfuture debt repayments; |
| | ● | statements regarding future dividends and returns to shareholders; |
| | ● | estimates regarding future exploration expenditures, programs and discoveries; |
| | ● | statements regarding fluctuations in financial and currency markets; |
| | ● | estimates regarding potential cost savings, productivity, operating performance and ownership and cost structures; |
| | ● | expectations regarding statements regarding future transactions, including, without limitation, statements related to futureacquisitions and projected benefits, synergies and costs associated with acquisitions and related matters; |
| | ● | expectations of future equity and enterprise value; |
| | ● | expectations regarding the start-up time, design, mine life, production and costs applicable to sales and exploration potential of ourprojects; |
| | ● | statements regarding future hedge and derivative positions or modifications thereto; |
| | ● | statements regarding local, community, political, economic or governmental conditions and environments; |
| | ● | statements and expectations regarding the impacts of COVID-19 and variants thereof and other health and safety conditions; |
| | ● | statements regarding the impacts of changes in the legal and regulatory environment in which we operate, including, withoutlimitation, relating to regional, national, domestic and foreign laws; |
| | ● | statements regarding climate strategy and expectations regarding greenhouse gas emission targets and related operating costs andcapital expenditures; |
| | ● | statements regarding expected changes in the tax regimes in which we operate, including, without limitation, estimates of future taxrates and estimates of the impacts to income tax expense, valuation of deferred tax assets and liabilities, and other financial impacts; |
| | ● | estimates of income taxes and expectations relating to tax contingencies or tax audits; |
| | ● | estimates of future costs, accruals for reclamation costs and other liabilities for certain environmental matters, including withoutlimitation, in connection with water treatment and tailings management; |
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| | ● | statements relating to potential impairments, revisions or write-offs, including without limitation, the result of fluctuation in metalprices, unexpected production or capital costs, or unrealized mineral reserve potential; |
| | ● | estimates of pension and other post-retirement costs; |
| | ● | statements regarding estimates of timing of adoption of recent accounting pronouncements and expectations regarding futureimpacts to the financial statements resulting from accounting pronouncements; |
| | ● | estimates of future cost reductions, synergies, savings and efficiencies in connection with full potential programs and initiatives; and |
| | ● | expectations regarding future exploration and the development, growth and potential of operations, projects and investments,including in respect of the CLG and the LGD. |
| | Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and |
believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties and other factors, which couldcause actual results to differ materially from future results expressed, projected or implied by those forward-looking statements. |
| | All forward-looking statements speak only as of the date on which they are made. These statements are not a guarantee of future |
performance and involve certain risks, uncertainties and assumptions concerning future events that are difficult to predict. Therefore, actual futureevents or results may differ materially from these statements. Such factors should not be construed as exhaustive and should be read inconjunction with the other cautionary statements included in this Report and those described from time to time in our filings with the U.S.Securities and Exchange Commission (“SEC”), including, but not limited to, our 2021 10-K. These risks and uncertainties, as well as other risksof 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 thanthose expressed in our forward-looking statements. Undue reliance should not be placed on these forward-looking statements. We do notundertake any obligation to make any revisions to these forward-looking statements to reflect events or circumstances after the date of this filingor to reflect the occurrence of unanticipated events, except as required by law. Certain forward-looking statements are based on assumptions,qualifications and procedures which are set out only in the Los Gatos Technical Report. For a complete description of assumptions, qualificationsand procedures associated with such information, reference should be made to the full text of the Los Gatos Technical Report. |
Restatement of previously issued Consolidated Financial Statements for the correction of an understatement of Investment in affiliateand an understatement of deferred taxes assets in the combined financial statements of the LGJV |
| | In accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”), the following items are treated as errors and are |
material to the 2022 interim consolidated financial statements, and, therefore, require that the consolidated financial statements be restated. |
| | Investment in affiliates – Income taxes recorded by affiliates |
| | During the preparation of the 2022 annual financial statements the Company identified that the investment in affiliates and equity income |
in affiliates were not correctly recorded as of September 30, 2022, and for the three and nine months period then ended, respectively. TheCompany identified that its affiliate, the LGJV, did not recognize certain current and deferred tax assets and deferred tax liabilities in accordancewith ASC 740, Income Taxes. As a result, the Company determined that there were errors in the calculation of the deferred tax assets related toproperty plant and equipment, mine development and historical net operating losses. In certain cases, the tax basis was not calculated inaccordance with the Mexican tax regulations. The LGJV understated the value of the deferred tax assets and overstated the value of current taxespayable at December 31, 2021, and recognized in deferred tax assets in the quarter ended March 31, 2022, instead. As a result, the investment inaffiliates at March 31, 2022 and June 30, 2022 and September 30, 2022, was overstated. |
| | The impact of the error on the financial statements of the LGJV was (i) an decrease in deferred tax assets of $12.2 million, (ii) an |
increase in the income tax receivable of $25.5 million, (iii) a decrease in VAT receivable of $7.1 million, and (iv) an increase in income taxexpense of $0.1 million and $9.7 million for the three and nine months ended September 30, 2022, respectively. |
| | The impact of the LGJV tax errors on the Company’s financial statements was (i) a decrease in the investment in affiliates of $7.4 |
million at September 30, 2022, (ii) an increase of $0.2 million in equity income in affiliates for the three months ended September 30, 2022 and (iii) a decrease of $7.4 million in equity income in affiliates for the nine months ended September 30, 2022. |
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| | Investment in affiliates – Priority distribution payment |
| | The Company also identified that the accounting for the priority distribution payment to our partner in the LGJV was not recorded in |
accordance with ASC 970 –323-35, Equity Method and Joint Ventures. The priority distribution payment was required to be excluded from theinitial equity income in affiliates and equity income should have been recognized after the priority distribution payment was accounted for. |
| | The impact of the error described above on the Company’s financial statements was (i) a decrease of $4.6 million in the investment in |
affiliates at September 30, 2022, and (ii) a decrease in equity income in affiliates of $4.6 million for the nine months ended September 30, 2022.There was no impact on the equity income in affiliates for the three months ended September 30, 2022. |
| | Investment in affiliates – Prior period restatements |
| | The impact on the financial statements for year December 31, 2021, is discussed in the Amendment No. 1 to the Annual Report on Form |
10-K. The impact of the restatements recorded in the three months ended 2021 as described in Form 10-K/A for the year ended December 31,2021, resulted in a decrease in the investment in affiliates of $21.9 million. |
| | Impact of the Restatement |
| | The aggregate impact of the above-noted changes, along with the decrease of $4.4 million in the basis amortization of the investment in |
affiliates for the nine months ended September 30, 2022 resulting from the above-noted changes on the basis amortization of the investment inaffiliates and other previously uncorrected immaterial misstatement to income tax expense ($0.9 million) and paid-in capital account, was (i) adecrease in investment in affiliates of $30.4 million, (ii) a decrease in equity income in affiliates of $7.7 million, and (iii) a decrease in net incomeof $8.5 million for nine months ended September 30, 2022. For the three months ended September 30, 2022, the aggregate impact of the above-noted changes along with the decrease of $1.9 million in the basis amortization of the investment in affiliates resulting from the above-notedchanges and other previously uncorrected immaterial misstatement to income tax expense ($0.5 million) resulted in (i) an increase of $2.1 millionin equity income in affiliates, (ii) an increase of $0.5 million in income tax expense, and (iii) an increase of $1.6 million in net income. |
| | These adjustments related to non-cash items, accordingly there were not changes to cash flows from operations, cash flows from |
investing activities or cash flows from financing activities for the nine months ended September 30, 2022. |
| | These are considered errors in accordance with ASC 250 and are material to the consolidated financial statements for 2021 and require |
that the consolidated financial statements be restated. |
Overview |
| | We are a Canadian headquartered, Delaware incorporated precious metals exploration, development and production company with the |
objective of becoming a leading silver producer. Our primary efforts are focused on the operation of the LGJV in Chihuahua, Mexico. The LGJVwas formed on January 1, 2015, when we entered into the Unanimous Omnibus Partner Agreement with Dowa to further explore, and potentiallydevelop and operate mining properties within the LGD. The LGJV Entities own certain surface and mineral rights associated with the LGD. TheLGJV ownership is currently 70% Gatos Silver and 30% Dowa. On September 1, 2019, the LGJV commenced commercial production at CLG,which produces a silver containing lead concentrate and zinc concentrate. We are currently focused on the production and continued developmentof the CLG and the further exploration and development of the LGD. |
Third Quarter 2022 Highlights |
Gatos Silver |
| | Third Quarter and Year to date |
● | | The Company recorded net income of $3.5 million (restated) for the three months ended September 30, 2022, compared to a net loss of$15.0 million in the same period of the prior year as a result of higher equity income from affiliates earned during the third quarter of2021 and a $10.0 million fee paid to Dowa in 2021; |
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● | | The Company recorded net income of $9.8 million (restated) for the nine months ended September 30, 2022 compared to a net loss of$3.1 million for the nine months ended September 30, 2021 primarily due to $1.9 million decrease in equity income from the LGJV anda $9.9 million change in other income (expense) primarily due to a $10.0 million fee paid to Dowa in 2021; and |
● | | The cash balance at September 30, 2022 was $15.3 million compared to $6.6 million at December 31, 2021, and access to the CreditFacility was maintained albeit at a reduced level. On December 19, 2022, the Credit Facility was extended and the availability under theCredit Facility has been restored. |
LGJV |
Operational highlights |
| | Third Quarter 2022 |
● | | Silver production was 2.7 million ounces for the three months ended September 30, 2022, a 59% increase compared to the three monthsended September 30,2021. The majority of production for the quarter was sourced from the Central Zone, with the remainder sourcedfrom Northwest and Southeast Upper Zone; |
● | | The processing plant processed a record 263,331 tonnes (averaging 2,862 tonnes per day), an increase of 13% compared to the thirdquarter of 2021 as a result of continued debottlenecking efforts; |
● | | Metal recoveries exceeded design rates for payable metals with silver recovery averaging 89.6%, zinc recovery averaging 65.4% andlead recovery averaging 88.5%; |
● | | Construction progress on key infrastructure projects continued, including the installation of underground dewatering equipment, thepaste plant and a tailings dam raise. These projects are expected to support increased productivity and to help reduce unit operatingcosts. The tailings dam raise fill placement was completed during the third quarter and the paste plant was subsequently completed in thefourth quarter of 2022; and |
● | | The transition to a new 100% renewable power supply contract was completed in September, which helped to reduce operating costs andgreenhouse gas emissions. |
| | Year to date |
● | | Silver production increased 39% to 7.4 million ounces for the nine months ended September 30, 2022 primarily due to higherthroughput, higher grades and higher recovery; |
● | | The processing plant processed 709,666 tonnes (averaging 2,600 tonnes per day), an increase of 6% compared to the nine months endedSeptember 30, 2021 as a result of continued debottlenecking efforts; and |
● | | Metal recoveries exceeded design rates for payable metals with silver recovery averaging 89.9%, zinc recovery averaging 65.4% andlead recovery averaging 89.4%. |
Financial highlights |
| | Third Quarter 2022 |
● | | Revenues of $73.9 million increased 30% for the three months ended September 30, 2022 compared to the same period in 2021,primarily due the higher concentrate sales and a positive mark-to-market adjustment of provisional revenue as a result of the change incommodity prices during the third quarter 2022; |
● | | Cost of sales totaled $28.6 million for the three months ended September 30, 2022, 9% higher compared to the same period in 2021,primarily due to increased production. Compared to the three months ended September 30, 2021, co-product cash |
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| | cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 24% and 4% respectively,to $9.10 and $3.28, respectively, for the three months ended September 30, 2022; |
● | | Compared to the three months ended September 30, 2021, co-product all-in sustaining cost per ounce of payable silver equivalent andby-product all-in sustaining cost per ounce of payable silver decreased by 32% and 39% respectively, to $13.13 and $10.04, respectively,for the three months ended September 30, 2022; |
● | | LGJV net income totaled $13.0 million (restated) for the three months ended September 30, 2022 compared to $5.5 million in the sameperiod in 2021 primarily due to increased revenue and lower other expenses partially offset by increased income tax expense for thethree months ended September 30, 2022; and |
● | | The LGJV declared and paid its second dividend of $15 million in July 2022 to its partners. |
| | Year to date |
● | | Revenues of $218.7 million increased 23% for the nine months ended September 30, 2022 compared to the same period in 2021,primarily due to higher concentrate sales as a result of the increase in metal grades and increased processed tonnes; |
● | | Cost of sales totaled $81.6 million for the nine months ended September 30, 2022, 16% higher compared to the same period in 2021,primarily due to increased production. Compared to the nine months ended September 30, 2021 co-product cash cost per ounce ofpayable silver equivalent and by-product cash cost per ounce of payable silver decreased by 28% and 77% respectively, to $9.32 and$1.13, respectively, for the nine months ended September 30, 2022; |
● | | Compared to the nine months ended September 30, 2021 co-product all-in sustaining cost per ounce of payable silver equivalent and by-product all-in sustaining cost per ounce of payable silver decreased by 28% and 40% respectively, to $14.15 and $9.49, respectively, forthe nine months ended September 30, 2022; and |
● | | LGJV net income totaled $42.4 million (restated) the nine months ended September 30, 2022 compared to $41.7 million in the sameperiod in 2021. |
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Table of Contents |
Results of Operations |
| | Results of operations Gatos Silver |
| | The following table presents certain selected financial information for the three and nine months ended September 30, 2022 and 2021. In |
accordance with generally accepted accounting principles in the United States (‘‘U.S. GAAP’’), these financial results represent the restatedconsolidated results of operations of our Company and its subsidiaries (in thousands). |
| | | Three Months Ended | Nine Months Ended |
| | | September 30, | September 30, |
| | | | | | 2022 | | | | 2021 | | 2022 | | | | | | 2021 |
| | | (restated) | | | | | | (restated) | | | | | | | |
Expenses |
Exploration | | | $ | — | | | $ | 479 | $ | 110 | | | | | $ | 1,397 |
General and administrative | | | | 5,933 | | | | 7,244 | | 16,967 | | | | | | 17,758 |
Amortization | | | | 44 | | | | 31 | | 132 | | | | | | 45 |
Total expenses | | | | 5,977 | | | | 7,754 | | 17,209 | | | | | | 19,200 |
Other income (expense) | | | | | | | | | | | | | | | | |
Equity income in affiliates | | | | 8,930 | | | | 1,600 | | 24,527 | | | | | | 22,592 |
Other income (expense) | | | 1,076 | | | | (8,845) | 3,332 | | | | | | (6,520) |
Net other income (expense) | | | | 10,006 | | | | (7,245) | 27,859 | | | | | | 16,072 |
Income (loss) before taxes | | | 4,029 | | | | (14,999) | 10,650 | | | | | | (3,128) |
Income tax expense | | | 525 | | | | — | 865 | | | | | | — |
Net income (loss) | | | $ | 3,504 | | | $ | (14,999) $ | 9,785 | | | | | $ | (3,128) |
Net income (loss) per share: |
Basic | | | $ | 0.05 | | | $ | (0.22) $ | 0.14 | | | | | $ | (0.05) |
Diluted | | | $ | 0.05 | | | $ | (0.22) $ | 0.14 | | | | | $ | (0.05) |
Gatos Silver |
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 |
Exploration expenses |
| | During 2022, our exploration activities were focused on the LGJV and no exploration costs were incurred for our wholly owned |
properties outside of the first quarter of 2022. |
General and administrative expenses |
| | During the three months ended September 30, 2022, we incurred general and administration expense of $5.9 million compared to $7.2 |
million for the three months ended September 30, 2021. The $1.3 million decrease is primarily due to a $1.6 million decrease in shared-basedcompensation expense during the three months ended September 30, 2022, compared to the same period in 2021. |
Equity income in affiliates (restated) |
| | The increase in equity income resulted primarily from the LGJV recording net income of $13.0 million (restated) during the three months |
ended September 30, 2022, compared to $5.5 million for the same period in 2021. The increase in net income at the LGJV was primarily due tothe increase in concentrate sold reflecting increased production and higher zinc prices. |
Other income (expense) |
| | The $9.9 million change in other income (expense) for the quarter ended September 30, 2022, compared to the quarter ended September |
30, 2021, was mainly due to a $10.0 million fee paid to Dowa in conjunction with the Term Loan repayment in 2021. |
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Net income (loss) (restated) |
| | For the quarter ended September 30, 2022, we recorded net income of $3.5 million (restated), or $0.05 per diluted share (restated), |
compared to a net loss of $15.0 million, or $0.22 per diluted share, for the quarter ended September 30, 2021. The change was mainly due to theincrease in equity income in affiliates and the 2021 payment of a $10.0 million fee to Dowa as described above. |
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 |
Exploration expenses |
| | During 2022, our exploration activities were focused on the LGJV and no exploration costs were incurred for our wholly owned |
properties outside of the first quarter of 2022. |
General and administrative expenses |
| | During the nine months ended September 30, 2022, we incurred general and administration expense of $17.0 million compared to $17.8 |
million for the nine months ended September 30, 2021, primarily due to lower share-based compensation expense of $3.7 million and $0.7 millionof separation costs for a departing executive officer partially offset by increased legal fees of $3.3 million attributable to legal consultationregarding the mineral resource and mineral reserve errors in the July 2020 technical report for CLG. |
Equity income in affiliates (restated) |
| | The increase in equity income resulted primarily from the increase in net income at the LGJV due to the increase in concentrates sold, |
higher grades, and higher realized metals prices for the nine months ended September 30, 2022, offset by the impact of priority distributionpayment which reduced the equity income from the LGJV by $4.6 million compared to the nine months ended September 30, 2021. |
Other income (expense) |
| | The $9.9 million change in other income (expense) for the nine months ended September 30, 2022, compared to the nine months ended |
September 30, 2021, was mainly due to a $10.0 million fee paid to Dowa in conjunction with the Term Loan repayment in 2021. |
Net income (loss) (restated) |
| | For the nine months ended September 30, 2022, we recorded net income of $9.8 million (restated), or $0.14 per diluted share (restated), |
compared to net loss of $3.1 million, or $0.05 per diluted share, for the nine months ended September 30, 2021. The change was mainly due to theincrease in equity income in affiliates and fee paid to Dowa as described above. |
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Results of operations LGJV |
| | The following table presents operational information of the LGJV for the three and nine months ended September 30, 2022 and 2021, |
and select restated financial information of the LGJV for the three and nine months ended September 30, 2022 and 2021. The financial andoperational information of the LGJV and CLG is shown on a 100% basis. |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
Financial | | | 2022 | | | | 2021 | | 2022 | | | | 2021 |
Amounts in thousands | | | | | | | | | | | | |
Revenue | $ | | 73,926 $ | | | | 56,991 $ | 218,730 $ | | | | 178,326 |
Cost of sales | | | 28,625 | | | | 26,374 | 81,550 | | | | 70,275 |
Royalties | | | 327 | | | | 1,181 | 2,739 | | | | 3,480 |
Exploration | | | 1,881 | | | | 1,595 | 6,235 | | | | 3,505 |
General and administrative | | | 3,431 | | | | 3,414 | 9,846 | | | | 9,493 |
Depreciation, depletion and amortization | | | 19,943 | | | | 12,734 | 52,340 | | | | 36,388 |
Other expense | | | 56 | | | | 5,420 | 1,138 | | | | 12,715 |
Income tax expense (restated) | | | 6,702 | 750 | 22,488 | | | | 750 |
Net income (restated) | | | 12,961 | | | | 5,523 | 42,394 | | | | 41,720 |
Sustaining capital expenditures | $ | | 17,086 $ | | | | 21,180 $ | 57,036 $ | | | | 51,864 |
| | | Three Months Ended | | Nine Months Ended | | | | | |
| | | September 30, | | September 30, | | | | | |
Operating Results | | | 2022 | | | | 2021 | | 2022 | | | | 2021 | | |
Tonnes milled (dmt) | | | 263,331 | | | | 234,054 | 709,666 | | | | 668,189 |
Tonnes milled per day (dmt) | | | 2,862 | | | | 2,544 | 2,600 | | | | 2,454 |
Average Grades | | | | | | | | | | | | |
Silver (g/t) | | | 356 | | | | 256 | 361 | | | | 282 |
Zinc (%) | | | 4.70 | | | | 4.10 | 4.61 | | | | 3.95 |
Lead (%) | | | 2.38 | | | | 2.35 | 2.45 | | | | 2.30 |
Gold (g/t) | | | 0.34 | | | | 0.30 | 0.34 | | | | 0.32 |
Contained Metal | | | | | | | | | | | | |
Silver ounces (millions) | | | 2.70 | | | | 1.70 | 7.40 | | | | 5.33 |
Zinc pounds - in zinc conc. (millions) | | | 17.8 | | | | 13.5 | 47.1 | | | | 36.7 |
Lead pounds - in lead conc. (millions) | | | 12.2 | | | | 10.8 | 34.2 | | | | 29.7 |
Gold ounces - in lead conc. (thousands) | | | 1.40 | | | | 1.30 | 3.98 | | | | 3.92 |
Recoveries1 | | | | | | | | | | | | |
Silver – in both lead and zinc concentrates | | | 89.6 % | | | | 88.6 % | 89.9 % | | | | 87.7 % |
Zinc - in zinc concentrate | | | 65.4 % | | | | 63.9 % | 65.4 % | | | | 62.9 % |
Lead - in lead concentrate | | | 88.5 % | | | | 89.1 % | 89.4 % | | | | 87.3 % |
Gold - in lead concentrate | | | 48.9 % | | | | 56.5 % | 51.3 % | | | | 56.2 % |
Average realized price per silver ounce2 | | | $ | 17.69 | | | $ | 22.55 | $ | 20.48 | | | $ | 25.71 |
Average realized price per zinc pound2 | | | $ | 1.25 | | | $ | 1.41 | $ | 1.73 | | | $ | 1.34 |
Average realized price per lead pound2 | | | $ | 0.79 | | | $ | 1.06 | $ | 0.90 | | | $ | 1.01 |
Average realized price per gold ounce2 | | | $ | 1,682 | | | $ | 1,727 | $ | 1,708 | | | $ | 1,812 |
Co-product cash cost per ounce of payable silver equivalent3 | | | $ | 9.10 | | | $ | 11.92 | $ | 9.32 | | | $ | 12.89 |
By-product cash cost per ounce of payable silver3 | | | $ | 3.28 | | | $ | 3.41 | $ | 1.13 | | | $ | 4.98 |
Co-product AISC per ounce of payable silver equivalent3 | | | $ | 13.13 | | | $ | 19.23 | $ | 14.15 | | | $ | 19.59 |
By-product AISC per ounce of payable silver3 | | | $ | 10.04 | | | $ | 16.57 | $ | 9.49 | | | $ | 15.82 |
(1) Recoveries are reported for payable metals in the identified concentrate. Recoveries reported previously were based on total metal in both |
concentrates. |
(2) Realized prices include the impact of final settlement adjustments from sales of previous periods.(3) See “Non-GAAP Financial Measures” below. |
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LGJV |
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 |
Revenue |
| | The LGJV’s concentrate sales for the three months ended September 30, 2022 and 2021 are summarized below (in thousands): |
| | | Three Months Ended September 30, |
| | | | 2022 | | 2021 |
Lead concentrate revenue | | | $ | 53,619 | $ | 45,400 |
Zinc concentrate revenue | | | | 21,426 | | 19,964 |
Treatment and refining charges | | | | (6,230) | | (5,234) |
Subtotal | | | | 68,815 | | 60,130 |
Provisional revenue adjustments | | | | | | 5,111 | | (3,139) |
Total Revenue | | | $ | 73,926 | $ | 56,991 |
| | Revenue increased by 30% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, as |
a result of increased concentrate sales and positive market-to-market adjustments included in provisional revenue adjustments in the three monthsended September 30, 2022 partially offset by lower realized lead, zinc and silver prices. |
| | Lead concentrate revenue increased by 18% for the three months ended September 30, 2022 compared to the three months ended |
September 30, 2021, primarily due to an 13% increase in lead concentrate production and higher silver and lead recoveries, partially offset by an25% decrease in the realized lead prices and a 22% decrease in the realized silver price. |
| | Zinc concentrate revenue increased by 7% for the three months ended September 30, 2022 compared to the three months ended |
September 30, 2021, primarily due to a 32% increase in zinc concentrate production, partially offset by a lower silver and zinc recoveries and a22% and 11% decrease in the realized silver price and zinc price, respectively. |
| | Provisional revenue adjustments account for commodity price fluctuations in concentrate sales still subject to final settlement. |
Provisional revenue adjustments increased period over period primarily due to increases in metals prices at the end of Q3 2022 as compared to thebeginning of the period, compared to the end of Q3 2021 due to a decrease in volume subject to final settlement and lower silver prices, partiallyoffset by a slight increase in zinc and lead prices over this period. |
Cost of sales |
| | Cost of sales increased by 9% primarily as a result of an increase in processed tonnes, and increased equipment maintenance costs, cost |
of materials & supplies and higher power costs. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounceof payable silver decreased by 24% and 4%, to $9.10 and $3.28, respectively, for the three months ended September 30, 2022. |
Royalties |
| | Royalty expense decreased by $0.9 million for the three months ended September 30, 2022 due to a reduction of the royalty percentage |
on revenue based on the contractual terms. |
General and administrative |
| | The amount of general and administrative expense for Q3 2022 was consistent with the expenditure incurred during Q3 2021. |
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Depreciation, depletion and amortization |
| | Depreciation, depletion, and amortization expense increased by approximately 57% quarter over quarter primarily as a result of an |
increase in tonnes mined and also due to the decrease in the mineral reserve and the shorter mine life based on the Los Gatos Technical Reportdated November 10, 2022 which reduced the basis for depreciation. |
Exploration |
| | Exploration expense for the three months ended September 30, 2022 was $0.3 million higher as compared to the three months ended |
September 30, 2021 primarily as a result of increased surface drilling around CLG exploration targets. The dominant focus for drilling was atCLG aiming to convert Inferred Resources to Indicated and also to expand the Inferred Resource base, particularly in the South-East Deeps area. |
Other expense |
| | Other expense was lower primarily due to an 88% decrease in interest expense as a result of lower interest rates, lower borrowings and |
lower arrangement fees incurred during Q3 2022 compared to Q3 2021 which was impacted by the retirement of the WCF and the Term Loan inMarch 2021 and July 2021, respectively, and the $4.4 million loss incurred in Q3 2021 on the Term Loan extinguishment. |
Income tax (expense) recovery (restated) |
| | Income tax expense for the three months ended September 30, 2022 was $6.0 million higher as compared to the three months ended |
September 30, 2021 as a result of increased taxable income and reduced losses carried forward. |
Net Income (restated) |
| | For the three months ended September 30, 2022, the LGJV had net income of $13.0 million compared to $5.5 million for the three |
months ended September 30, 2021. The change in net income was primarily due to increased production and higher zinc prices for the threemonths ended September 30, 2022, partially offset by lower realized silver and lead prices, as well as an increase in cost of sales and depreciation,depletion and amortization costs and increased income tax expense. In addition, interest expense decreased 88% due to lower borrowings andlower arrangement fees resulting from the retirement of the WCF and Term Loan and the $4.4 million loss incurred in Q3 2021 on the Term Loanextinguishment. |
Sustaining capital expenditures |
| | During the three months ended September 30, 2022, sustaining capital expenditures primarily consisted of $7.1 million on mine |
development, $4.3 million on the construction of the paste-fill plant, $2.3 million on the construction of the raise of the tailings storage facility, $0.4 million on underground power distribution infrastructure and $0.3 million on the construction of a ventilation raise. During the three months ended September 30, 2021, major sustaining capital expenditures included $7.1 million on mine development, $3.8 million on the processing plant and tailings storage facility, $1.1 million for the construction of a ventilation raise, $0.8 million for the purchase of mining equipment, $2.2 million on underground power distribution infrastructure and $2.9 million on the construction of dewatering wells. |
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Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 |
Revenue |
| | The LGJV’s concentrate sales for the nine months ended September 30, 2022 and 2021, are summarized below (in thousands): |
| | | Nine Months Ended September 30, |
| | | | 2022 | | 2021 |
Lead concentrate revenue | | | $ | 164,706 | $ | 146,327 |
Zinc concentrate revenue | | | | 77,404 | | 52,374 |
Treatment and refining charges | | | | (16,074) | | (16,429) |
Subtotal | | | | 226,036 | | 182,272 |
Provisional revenue adjustments | | | | (7,306) | | (3,946) |
Total Revenue | | | $ | 218,730 | $ | 178,326 |
| | Revenue increased by 23% for the nine months ended September 30, 2022 compared to the nine months ended September 30 2021. The |
increase in revenue is primarily due to an increase in lead and zinc concentrate sales as a result of higher production partially offset by a negativemarket-to-market adjustment included in provisional revenue. |
| | Lead concentrate revenue increased by 13% for the nine months ended September 30, 2022 compared to the nine months ended |
September 30, 2021, primarily due to an 15% increase in lead concentrate production and higher silver recoveries, partially offset by a 11%decrease in the realized lead prices, a 20% decrease in the realized silver price and slightly lower lead recoveries. |
| | Zinc concentrate revenue increased by 48% for the nine months ended September 30, 2022 compared to the nine months ended |
September 30, 2021, primarily due to a 28% increase in zinc concentrate production and 29% increase in the realized zinc price, partially offset bya lower silver and zinc recoveries and a 20% decrease in the realized silver price. |
| | Provisional revenue adjustments account for commodity price fluctuations in concentrate sales still subject to final settlement. |
Provisional revenue adjustments were lower period over period primarily due to decreases in metals prices at the end of Q3 2022 as compared tothe beginning of the period, compared to the end of Q3 2021 due to a decrease in silver prices over that period partially offset by price increases inlead and zinc over this period. |
Cost of sales |
| | Cost of sales increased by 16% primarily as a result of an increase in production and increased equipment maintenance, materials and |
supplies and power costs. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silverdecreased by 28% and 77%, to $9.32 and $1.13, respectively, for the nine months ended September 30, 2022 compared to the nine months endedSeptember 30, 2021. |
Royalties |
| | Royalty expense decreased by $0.7 million for the nine months ended September 30, 2022, primarily due to a reduction of the royalty |
percentage on revenue based on the contractual terms in 2022 partially offset by increased revenue resulting primarily from increased productionand higher zinc and lead prices. |
General and administrative |
| | General and administrative expense for the nine months ended September 30, 2022 was 4% higher as compared to the nine months ended |
September 30, 2021 primarily due to inflation. |
Depreciation, depletion and amortization |
| | Depreciation, depletion, and amortization expense increased by approximately 44% for the nine months ended September 30, 2022 as |
compared to the nine months ended September 30, 2021, primarily as a result of an increase in tonnes mined and also due to |
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the decrease in the mineral reserve and the shorter mine life based on the Los Gatos Technical Report dated November 10, 2022 which reduced the basis for the depreciation. |
Exploration |
| | Exploration expense for the nine months ended September 30, 2022 was $2.7 million higher as compared to the nine months ended |
September 30, 2021 primarily as a result of increased surface drilling around CLG, Esther and greenfield exploration targets. The dominant focusfor drilling was at CLG aiming to convert Inferred Resources to Indicated and also to expand the Inferred Resource base, particularly in theSouth-East Deeps area. |
Other (income) expense |
| | Other (income) expense were lower primarily due to a 93% decrease in interest expense due to lower interest rates, lower borrowings and |
lower arrangement fees incurred during nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 as aresult of the retirement of the WCF and the Term Loan in March 2021 and July 2021, respectively, and the $4.4 million loss incurred in Q3 2021on the Term Loan extinguishment. |
Income tax (expense) recovery (restated) |
| | Income tax expense for the nine months ended September 30, 2022 was $22.5 million higher as compared to the nine months ended |
September 30, 2021 as a result of increased taxable income and reduced losses carried forward. |
Net income (restated) |
| | For the nine months ended September 30, 2022, the LGJV had net income of $42.4 million compared to $41.7 million for the nine |
months ended September 30, 2021. The change in net income was primarily due to the increase in revenue driven by the strong improvement inproduction during 2022, partially offset by an increase in cost of sales, exploration and depreciation, depletion and amortization and increasedincome tax expense. In addition, interest expense decreased 93% due to lower borrowings and lower arrangement fees resulting from theretirement of the WCF and Term Loan and the $4.4 million loss incurred in Q3 2021 on the Term Loan extinguishment. |
Sustaining capital expenditures |
| | During the nine months ended September 30, 2022, sustaining capital expenditures primarily consisted of $21.7 million of mine |
development, $17.9 million on the construction of the paste-fill plant, $8.1 million on the construction of the raise of the tailings storage facility,$2.0 million on underground power distribution infrastructure and $1.7 million on the construction of a ventilation raise. During the nine monthsended September 30, 2021, major sustaining capital expenditures included $21.6 million of mine development, $8.2 million on the processingplant and tailings storage facility, $2.4 million for the construction of a ventilation raise, $3.0 million for the purchase of mining equipment, $4.3million on underground power distribution infrastructure and $6.3 million on the construction of dewatering wells. |
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Cash Flows |
Gatos Silver |
| | The following table presents our cash flows for the nine months ended September 30, 2022 and 2021. |
| | | Nine Months Ended September 30, |
| | | | 2022 | | 2021 |
| | | | (in thousands) |
Net cash provided by (used by) | | | | | | |
Operating activities | | | $ | 8,680 | $ | (15,494) |
Investing activities | | | | (27) | | (261,439) |
Financing activities | | | | — | | 139,185 |
Total change in cash | | | $ | 8,653 | $ | (137,748) |
Cash and cash equivalents, beginning of period | | | $ | 6,616 | $ | 150,146 |
Cash and cash equivalents, end of period | | | $ | 15,269 | $ | 12,398 |
| | The cash balance at September 30, 2022 increased to $15.3 million compared to $12.4 million at September 30, 2021. |
Nine months ended September 30, 2022 compared to September 30, 2021 |
| | Cash provided by (used by) operating activities was $8.7 million and ($15.5) million for the nine months ended September 30, 2022 and |
2021, respectively. The $24.1 million increase in cash was primarily due to receipt of $22.7 million of dividends from the LGJV and the 2021payment of a $10.0 million fee to Dowa, partially offset by working capital changes. |
| | Cash used by investing activities was ($7.4) million and ($261.4) million for the nine months ended September 30, 2022 and 2021, |
respectively. Cash used by investing activities for the for the nine months ended September 30, 2022 was primarily due to the priority distributionpayment made to Dowa. Cash used for the nine months ended September 30, 2021, was primarily due to the $71.6 million acquisition of the18.5% interest in the LGJV from Dowa, the $42.0 million pro-rata capital contribution to the LGJV for the extinguishment of the WCF in March2021 and the $144.8 million capital contribution to the LGJV to retire the Dowa Term Loan in July 2021. |
| | Cash provided by financing activities was nil and $139.2 million for the nine months ended September 30, 2022 and 2021, respectively. |
Cash provided for the nine months ended September 30, 2021, primarily related to the $4.2 million in proceeds from the follow-on offering ofstock in July 2021 and the issuance of common stock from the exercise of stock options. |
LGJV |
| | The following table presents summarized information relating to the LGJV’s cash flows for the nine months ended September 30, 2022 |
and 2021. |
| | | Nine Months Ended September 30, |
| | | | | | | | 2022 | | 2021 |
| | | | (in thousands) |
Net cash provided by (used by)Operating activities |
| | | $ | 118,250 | $ | 84,964 |
Investing activities | | | (61,903) | | (57,698) |
Financing activities | | | (37,962) | | (19,001) |
Total change in cash | | | $ | 18,385 | $ | 8,265 |
Cash and cash equivalents, beginning of period | | | $ | 20,280 | $ | 1,676 |
Cash and cash equivalents, end of period | | | $ | 38,665 | $ | 9,941 |
| | The LGJV cash balance at September 30, 2022 was $38.7 million compared to $9.9 million at September 30, 2021. |
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Nine months ended September 30, 2022, compared to September 30, 2021 |
| | Cash provided by operating activities was $118.3 million and $85.0 million for the nine months ended September 30, 2022 and 2021, |
respectively. The $33.3 million increase in cash provided by operating activities was primarily due to the increase in revenue due to increasedproduction and higher zinc and lead prices for the nine months ended September 30, 2022, compared to the prior year period, partially offset byincreased income taxes, receivables from customers and other favorable working capital changes. |
| | Cash used by investing activities was $61.9 million and $57.7 million for the nine months ended September 30, 2022 and 2021, |
respectively. The $4.2 million increase in cash used was primarily due to $13.3 million of higher expenditures for property, plant and equipment,partially offset by $8.8 million of lower mine development expenditures. The majority of property, plant and equipment expenditures in 2022 arerelated to construction of the paste plant and continued construction of the tailings dam raise. |
| | Cash used by financing activities was $38.0 million and $19.0 million for the nine months ended September 30, 2022 and 2021, |
respectively. The $19.0 million increase in cash used was primarily due to $33.0 million of dividends paid to partners partially offset by $13.5million of capital contributions received in 2021 in excess of the $15.9 million paid on the Term Loan in June 2021, the $60.0 million paid toextinguish the Working Capital Facility and the $144.9 million paid to retire the Dowa Term Loan. |
Liquidity and Capital Resources |
| | As of September 30, 2022 and December 31, 2021, the Company had cash and cash equivalents of $15.3 million and $6.6 million, |
respectively. The increase in cash and cash equivalents was primarily due to receipt of the dividend payments in April 2022 and July 2022 of $5.9million and $10.0 million, respectively, partially offset by operating costs. |
| | On July 12, 2021, the Company entered into the Credit Facility that provides for a $50 million revolving line of credit and has an |
accordion feature, which allows for an increase in the total line of credit up to $100.0 million (reduced to $75 million per the December 19, 2022amendment), subject to certain conditions. As of September 30, 2022, $13.0 million was outstanding under the Credit Facility. As of the date ofthis report the balance outstanding on the Credit Facility is $9.0 million following a $4.0 million principal repayment in December 2022. |
| | On May 31, 2023, the Company’s cash and cash equivalents were $10.5 million and we had $41.0 million available to be drawn under |
the Credit Facility. The LGJV had cash and cash equivalents of $78.9 million on May 31, 2023. We believe we have sufficient cash and access toborrowings and other resources to carry out our business plans for at least the next 12 months. We may decide to increase our current financialresources with external financings if our long-term business needs require us to do so however there can be no assurance that the financing will beavailable to us on acceptable terms, or at all. We manage liquidity risk through our credit facility and the management of our capital structure. |
Contractual Obligations |
| | There have been no changes from the contractual obligations described in our 2021 10-K. |
Critical Accounting Policies |
| | Please refer to Note 2 – Summary of Significant Accounting Policies in our consolidated financial statements included in this Report and |
the 2021 10-K for discussion of our critical accounting policies and estimates. |
Jumpstart Our Business Startups Act of 2012 |
| | The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to take advantage of |
an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” ofthis provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standardsis required for public companies that are not emerging growth companies. The decision to opt out of the extended transition period under theJOBS Act is irrevocable. |
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Non-GAAP Financial Measures |
| | We use certain measures that are not defined by GAAP to evaluate various aspects of our business. These non-GAAP financial measures |
are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be consideredin isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative ofoperating profit or cash flow from operations as determined under GAAP. Please see “Cash Costs and All-In Sustaining Costs” and“Reconciliation of expenses (GAAP) to non-GAAP measures” below. |
Cash Costs and All-In Sustaining Costs |
| | Cash costs and all-in sustaining costs (“AISC”) are non-GAAP measures. AISC was calculated based on guidance provided by the World |
Gold Council (“WGC”). WGC is not a regulatory industry organization and does not have the authority to develop accounting standards fordisclosure requirements. Other mining companies may calculate AISC differently as a result of differences in underlying accounting principlesand policies applied, as well as definitional differences of sustaining versus expansionary (i.e. non-sustaining) capital expenditures based uponeach company’s internal policies. Current GAAP measures used in the mining industry, such as cost of sales, do not capture all of the expendituresincurred to discover, develop and sustain production. Therefore, we believe that cash costs and AISC are non-GAAP measures that provideadditional information to management, investors and analysts that aid in the understanding of the economics of the Company’s operations andperformance compared to other producers and provides investors visibility by better defining the total costs associated with production. |
| | Cash costs include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including |
mining, processing and other plant costs, treatment and refining costs, general and administrative costs, royalties and mining production taxes.AISC includes total production cash costs incurred at the LGJV’s mining operations plus sustaining capital expenditures. The Company believesthis measure represents the total sustainable costs of producing silver from current operations and provides additional information of the LGJV’soperational performance and ability to generate cash flows. As the measure seeks to reflect the full cost of silver production from currentoperations, new project and expansionary capital at current operations are not included. Certain cash expenditures such as new project spending,tax payments, dividends, and financing costs are not included. |
Reconciliation of expenses (GAAP) to non-GAAP measures |
| | The table below presents a reconciliation between the most comparable GAAP measure of the LGJV’s expenses to the non-GAAP |
measures of (i) cash costs, (ii) cash costs, net of by-product credits, (iii) co-product all-in sustaining costs and (iv) by-product all-in sustainingcosts for our operations. |
| | The calculation for determining silver equivalent ounces was updated to include final settlements in the calculation of the realized metal |
prices and cash cost and AISC per ounce was updated to include period end accruals (volume and value for payable metals). The prior periodcomparatives were updated to reflect this change however the cash cost and AISC per ounce calculated on this basis is not materially differentfrom the cash cost and AISC cost per ounce previously reported. |
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| Three Months Ended | Nine Months Ended |
(in thousands, except unit costs) | September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 |
Cost of sales | $ | 28,625 $ | | 26,374 $ | 81,550 $ | | 70,275 |
Royalties | | | | | 327 | 1,181 | 2,739 | | 3,480 |
Exploration | | | | | 1,881 | 1,595 | 6,235 | | 3,505 |
General and administrative | | | | | 3,431 | 3,414 | 9,846 | | 9,493 |
Depreciation, depletion and amortization | 19,943 | | 12,734 | 52,340 | | 36,388 |
Expenses | $ | 54,207 $ | | 45,298 $ | 152,710 $ | | 123,141 |
Depreciation, depletion and amortization | | (19,943) | | (12,734) | (52,340) | | (36,388) |
Exploration1 | | (1,881) | | (1,595) | (6,235) | | (3,505) |
Treatment and refining charges2 | | | | | 6,230 | 3,596 | 16,074 | | 16,373 |
Cash costs (A) | $ | 38,613 $ | | 34,565 $ | 110,209 $ | | 99,621 |
Sustaining capital | | 17,086 | | 21,180 | 57,036 | | 51,827 |
AISC (B) | $ | 55,699 $ | | 55,745 $ | 167,245 $ | | 151,448 |
By-product credits3 | | (30,304) | | (29,081) | (102,539) | | (75,790) |
AISC, net of by-product credits (C) | $ | 25,395 $ | | 26,664 $ | 64,706 $ | | 75,658 |
Cash costs, net of by-product credits(D) | $ | | | | 8,309 $ | 5,484 $ | 7,670 $ | | 23,831 |
Payable ounces of silver equivalent4 (E) | | | | | 4,243 | 2,899 | 11,822 | | 7,729 |
Co-product cash cost per ounce of payable silver equivalent |
(A/E) | $ | | | | 9.10 $ | 11.92 $ | 9.32 $ | | 12.89 |
Co-product AISC per ounce of payable silver equivalent (B/E) | $ | | | | 13.13 $ | 19.23 $ | 14.15 $ | | 19.59 |
Payable ounces of silver (F) | | | | | 2,529 | 1,609 | 6,815 | | 4,781 |
By-product cash cost per ounce of payable silver (D/F) | $ | | | | 3.28 $ | 3.41 $ | 1.13 $ | | 4.98 |
By-product AISC per ounce of payable silver (C/F) | $ | | | | 10.04 $ | 16.57 $ | 9.49 $ | | 15.82 |
(1) Exploration costs are not related to current operations.(2) Represent reductions on customer invoices and included in Sales of the LGJV combined statement of income (loss).(3) By-product credits reflect realized metal prices of zinc, lead and gold for the applicable period, which includes any final settlement |
adjustments from prior periods. |
(4) Silver equivalents utilize the average realized prices during the nine months ended September 30, 2022 of $20.48/oz silver, $1.73/lb zinc, |
$0.90/lb lead and $1,708/oz gold and the average realized prices during the three months ended September 30, 2022 of $17.69/oz silver,$1.25/lb zinc, $0.79/lb lead and $1,682/oz gold. Silver equivalents utilize the average realized prices during the nine months endedSeptember 30, 2021 of $25.71/oz silver, $1.34/lb zinc, $1.01/lb lead and $1,812/oz gold and the average realized prices during the threemonths ended September 30, 2021 of $22.55/oz silver, $1.41/lb zinc, $1.06/lb lead and $1,727/oz gold. Realized prices include the impact offinal settlement adjustments from sales. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
| | | | | | We are a smaller reporting company and are not required to provide disclosure pursuant to this Item. |
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Item 4. Controls and Procedures |
Evaluation of Disclosure Controls and Procedures |
| | We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Exchange Act, that are |
designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submitunder the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers asappropriate, to allow timely decisions regarding required disclosure. |
| | Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of |
our disclosure controls and procedures as of September 30, 2022. Based on this evaluation, our principal executive officer and principal financialofficer concluded that our disclosure controls and procedures were not effective as of September 30, 2022, due to the material weaknesses in ourinternal control over financial reporting described in the 2021 10-K. |
Changes in Internal Control over Financial Reporting |
| | There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) |
under the Exchange Act) that occurred during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting. |
Limitations on Effectiveness of Controls |
| | Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and |
procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that anycontrols and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desiredcontrol objectives. Further, the design of a control system must reflect resource constraints, which require management to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have beendetected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur becauseof simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more peopleor by management’s override of the control. |
| | The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can |
be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may becomeinadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherentlimitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. |
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Table of Contents |
| | PART II – OTHER INFORMATION |
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 2021 10-K/A. Any of these factors could result in a significant or material adverse effect on our results of operations or financialcondition. Additional risk factors not currently known to us or that we currently deem immaterial may also adversely affect us. As of the date ofthis Report, there have been no material changes to the risk factors disclosed in the 2021 10-K/A. |
Item 6. Exhibits |
31.1* | | | | Section 302 Certification of Chief Executive Officer |
31.2* | | | | Section 302 Certification of Chief Financial Officer |
32.1** | | | | Section 1350 Certifications |
101.INS* | | | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tagsare embedded within the Inline XBRL document |
101.SCH* | | | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | | | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | | | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | | | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | | | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104* | | | | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained inExhibits 101) |
* | | | Filed herewith |
** | | | Furnished herewith |
| 38 |
EXHIBIT 31.1 |
| CERTIFICATION OF CHIEF EXECUTIVE OFFICER |
| | I, Dale Andres, certify that: |
| | 1. I have reviewed this quarterly report on Form 10-Q/A 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 to |
| | make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; |
| | 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material |
| | respects 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 (as defined |
| | in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 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 our |
| | | supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers 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 designed under our |
| | | supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; |
| | c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the |
| | | effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most |
| | | recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely 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 financial reporting, |
| | to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| | a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are |
| | | 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’s internal |
| | | control over financial reporting. |
| | Date: June 26, 2023 | | By: | /s/ Dale Andres |
| | | | | | Dale AndresChief Executive Officer |
EXHIBIT 31.2 |
| CERTIFICATION OF CHIEF FINANCIAL OFFICER |
| | I, André van Niekerk, certify that: |
| | 1. I have reviewed this quarterly report on Form 10-Q/A 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 to make |
| | the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; |
| | 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material |
| | respects 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 (as defined |
| | in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 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 our |
| | | supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers 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 designed under our |
| | | supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; |
| | c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the |
| | | effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most |
| | | recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely 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 financial reporting, |
| | to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| | a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are |
| | | 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’s internal |
| | | control over financial reporting. |
| | Date: June 26, 2023 | | By: | /s/ André van Niekerk |
| | | | | | André van NiekerkChief 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/A of Gatos Silver, Inc. (the “Company”) for the quarterly period ended |
| | | | September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Dale Andres, as Chief ExecutiveOfficer of the Company, and André van Niekerk, as Chief Financial Officer of the Company, each hereby certifies, pursuant to and solely for thepurpose of 18 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/ Dale Andres | |
| | | | Dale Andres | |
| | | | Chief Executive Officer | |
| | | | June 26, 2023 | |
| | | | | |
| | | | | |
| | | | /s/ André van Niekerk | |
| | | | André van Niekerk | |
| | | | Chief Financial Officer | |
| | | | June 26, 2023 |