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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from _______________ to _______________
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(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 |
Toronto Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☑ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The Company has 700,000,000 shares of common stock, par value $0.001, authorized of which
TABLE OF CONTENTS
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3 | |||
4 | |||
Condensed Consolidated Statements of Shareholders’ Equity (Deficit) | 5 | ||
6 | |||
7 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||
29 | |||
29 | |||
30 | |||
30 | |||
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30 | |||
30 | |||
31 |
2
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
GATOS SILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except for share and per share amounts)
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
ASSETS |
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Current Assets |
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Cash and cash equivalents | $ | | $ | | ||
Deferred financing costs |
| |
| — | ||
Related party receivables |
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Other current assets |
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Total current assets |
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Non‑Current Assets |
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Investment in affiliates |
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Other non-current assets |
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Total Assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current Liabilities |
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Accounts payable and other accrued liabilities | $ | | $ | | ||
Shareholders' Equity |
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Common Stock, $ |
| |
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Paid‑in capital |
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Accumulated deficit |
| ( |
| ( | ||
Treasury stock, at cost, |
| ( |
| ( | ||
Total shareholders' equity |
| |
| | ||
Total Liabilities and Shareholders' Equity | $ | | $ | | ||
See accompanying notes to the condensed consolidated financial statements.
3
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except for share and per share amounts)
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Expenses |
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Exploration | $ | | $ | | $ | | $ | | ||||
General and administrative |
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Amortization |
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Total expenses |
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Other income (expense) |
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Equity income (loss) in affiliates |
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| ( |
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| ( | ||||
Other income (loss) |
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| ( |
| ( |
| ( | ||||
Net other income (expense) |
| |
| ( |
| |
| ( | ||||
Net income (loss) from continuing operations | $ | | $ | ( | $ | | $ | ( | ||||
Net loss from discontinued operations | — | ( | — | ( | ||||||||
Net income (loss) | $ | | $ | ( | $ | | $ | ( | ||||
Net income (loss) per share: |
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| ||||
Basic(1) | ||||||||||||
Continuing operations | $ | | $ | ( | $ | | $ | ( | ||||
Discontinued operations | $ | — | $ | ( | $ | — | $ | ( | ||||
$ | | $ | ( | $ | | $ | ( | |||||
Diluted(1) | ||||||||||||
Continuing operations | $ | | $ | ( | $ | | $ | ( | ||||
Discontinued operations | $ | — | $ | ( | $ | — | $ | ( | ||||
$ | | $ | ( | $ | | $ | ( | |||||
Weighted average shares outstanding: |
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Basic(1) | | | | | ||||||||
Diluted(1) |
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| (1) |
See accompanying notes to the condensed consolidated financial statements.
4
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except for share amounts)
Number | Amount | ||||||||||||||||||
Common | Treasury | Common | Treasury | Paid‑in | Accumulated | ||||||||||||||
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Deficit |
| Total | ||||||
Balance at December 31, 2020 | | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
Stock‑based compensation |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
Issuance of common stock | | — | — | — | | — | | ||||||||||||
DSUs converted to common stock | | — | — | — | — | — | — | ||||||||||||
Other | — | — | — | — | ( | — | ( | ||||||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Balance at March 31, 2021 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
Stock‑based compensation |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
Issuance of common stock | | — | — | — | | — | | ||||||||||||
DSUs converted to common stock | | — | — | — | — | — | — | ||||||||||||
Other | — | — | — | — | ( | — | ( | ||||||||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| | | ||||||
Balance at June 30, 2021 |
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| ( |
| |
| ( | | ||||||
Number(1) | Amount |
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Common | Treasury | Common | Treasury | Paid-in | Accumulated | ||||||||||||||
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Deficit |
| Total | ||||||
Balance at December 31, 2019 |
| |
| | $ | | $ | ( | $ | | $ | ( | | ||||||
Stock-based compensation |
| — |
| — |
| — |
| — |
| |
| — | | ||||||
DSU compensation | — | — | — | — | | — | | ||||||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| ( | ( | ||||||
Balance at March 31, 2020 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
Stock-based compensation |
| — |
| — |
| — |
| — |
| |
| — | | ||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| ( | ( | ||||||
Balance at June 30, 2020 |
| |
| |
| |
| ( |
| |
| ( | | ||||||
(1) | Prior period results have been adjusted to reflect the reverse split in October 2020. |
See accompanying notes to the condensed consolidated financial statements.
5
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended | ||||||
June 30, | ||||||
| 2021 |
| 2020 | |||
OPERATING ACTIVITIES |
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Net income (loss) | $ | | $ | ( | ||
Plus net loss from discontinued operations | — | | ||||
Adjustments to reconcile net income (loss) to net cash used by operating activities: |
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Amortization |
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Stock‑based compensation expense |
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Equity (income) loss in affiliates |
| ( |
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Changes in operating assets and liabilities: |
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Receivables from related‑parties |
| ( |
| ( | ||
Accounts payable and other accrued liabilities |
| ( |
| ( | ||
Other current assets | | ( | ||||
Operating cash flows from discontinued operations | — | ( | ||||
Net cash used by operating activities |
| ( |
| ( | ||
INVESTING ACTIVITIES |
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Investment in affiliates |
| ( |
| ( | ||
Net cash used by investing activities |
| ( |
| ( | ||
FINANCING ACTIVITIES |
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Related‑party convertible debt |
| — |
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Financing costs |
| ( |
| ( | ||
Issuance of common stock |
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| — | ||
Other | ( | | ||||
Financing cash flows from discontinued operations | — | | ||||
Net cash provided by financing activities |
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Net decrease in cash and cash equivalents |
| ( |
| ( | ||
Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | | | ||||
Less cash of discontinued operations | — | | ||||
Cash of continuing operations, end of period | $ | | $ | | ||
Supplemental disclosure of noncash transactions: |
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Deferred financing costs included in accrued liabilities | $ | | $ | | ||
Director compensation | $ | — | $ | | ||
See accompanying notes to the condensed consolidated financial statements.
6
GATOS SILVER, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share, per share, option, and stock unit amounts)
1. Description of Business
Organization and Nature of Business
Gatos Silver, Inc. (“Gatos Silver” or “the Company”) is a silver dominant production, development and exploration company that discovered a new silver and zinc-rich mineral district in southern Chihuahua State, Mexico.
The Company’s primary efforts are focused on the operation of the Los Gatos Joint Venture (“LGJV”) in Chihuahua, Mexico. On January 1, 2015, the Company entered into the LGJV to develop the Los Gatos District (“LGD”) with Dowa Metals and Mining Co., Ltd. (“Dowa”). The LGJV operating entities consist of Minera Plata Real S. de R.L. de C.V (“MPR”), Operaciones San Jose del Plata S. de R.L. de C.V. and Servicios San Jose del Plata S. de R.L. de C.V (“Servicios”). (collectively the “LGJV Entities”). Effective July 15, 2021, Servicios was merged with MPR.
The LGJV completed an advanced definition drilling and decline development program in 2016, a feasibility study in January 2017 and a technical update to the feasibility study in July 2020. Dowa completed its $
On September 1, 2019, the LGJV commenced commercial production of its
The Company continues to perform additional definition drilling to further define and expand mineralization of the Cerro Los Gatos deposit, and is performing definition and exploratory drilling at the nearby Esther deposit. On December 5, 2020, the LGJV began the current infill and extension drilling program at the Cerro Los Gatos deposit. On May 7, 2021, the LGJV restarted drilling at the Esther zone.
The Company’s other Mexico exploration efforts are conducted through its wholly-owned subsidiary, Minera Luz del Sol S. de R.L. de C.V. (“MLS”). In March 2021, MLS commenced a
Discontinued Operations
In October 2020, the Company completed the distribution of its wholly-owned subsidiary, Silver Opportunity Partners LLC (“SOP”), and SOP has been presented as discontinued operations in the Company’s condensed consolidated financial statements. See Note 10 – Discontinued Operations for additional detail.
2. Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The financial statements represent the condensed consolidated financial position and results of operations of Gatos Silver, Inc. and its subsidiary, MLS. Unless the context otherwise requires, references to Gatos Silver or the Company mean Gatos Silver, Inc. and its consolidated subsidiary. All equity interest in the Company’s wholly-owned subsidiary, SOP, was distributed to its stockholders in October 2020. The accounts for SOP have been presented as discontinued operations in the accompanying interim condensed consolidated financial statements.
7
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 a full year. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all financial information and disclosures required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 10-K”).
Summary of Significant Accounting Policies
The consolidated financial statements for the year ended December 31, 2020, disclose those accounting policies considered significant in determining results of operations and financial position. There have been no material changes to, or in the application of, the accounting policies previously identified and described in the 2020 10-K.
Recent Accounting Pronouncements
On January 1, 2021, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) and ASU No. 2019-12, Income Taxes (Topic 740). These provisions did not have a material impact on the financial statements. There have been no additional accounting pronouncements issued or adopted during the six months ended June 30, 2021, which are expected to have a material impact on the financial statements.
3. Property, Plant and Equipment, net
Mineral Properties
Mining Concessions
In Mexico, mineral concessions from the Mexican government can only be held by Mexican nationals or Mexican-incorporated companies. The concessions are valid for 50 years and are extendable provided the concessions are kept in good standing. For concessions to remain in good standing a semi-annual fee must be paid to the Mexican government and an annual report describing the work accomplished on the property must be filed. These concessions may be cancelled without penalty with prior notice to the Mexican government. MLS is the concession holder of a series of claims titles granted by the Mexican government.
Santa Valeria Concession
The Company is required to make a production royalty payment of
4. Accounts Payable and Other Accrued Liabilities
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
Accounts payable | $ | | $ | | ||
Accrued expenses |
| |
| | ||
Accrued compensation |
| |
| | ||
Other | | | ||||
Total accounts payable and other current liabilities | $ | | $ | | ||
8
5. Related-Party Transactions
LGJV
The Company has a services agreement with the LGJV to provide certain consulting and administrative services. The Company earned $
SSMRC
The Company has a Management Services Agreement with Sunshine Silver Mining & Refining Corporation (“SSMRC”) (formerly Silver Opportunity Partners Corporation), pursuant to which the Company provides certain limited executive and managerial advisory services to SSMRC until terminated by either party. SSMRC reimburses the Company for costs of such services. The Company earned $
6. Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed similarly, except that weighted average common shares is increased to reflect the potential dilution that would occur if stock options outstanding were exercised or converted into common stock. The dilutive effects are calculated using the treasury stock method.
The computation of diluted earnings per common share excludes the effect of the assumed exercise of
A reconciliation of basic and diluted earnings per common share for the three and six months ended June 30, 2021 and 2020, are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Net income (loss) |
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Continuing operations | $ | | $ | ( | $ | | $ | ( | ||||
Discontinued operations |
| — |
| ( |
| — |
| ( | ||||
$ | | $ | ( | $ | | $ | ( | |||||
Weighted average shares: |
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Basic |
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Effect of dilutive stock options |
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| — |
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| — | ||||
Diluted |
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Net income (loss) per share: |
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Basic: |
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Continuing operations | $ | | $ | ( | $ | | $ | ( | ||||
Discontinued operations |
| — |
| ( |
| — |
| ( | ||||
$ | | $ | ( | $ | | $ | ( | |||||
Diluted: |
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Continuing operations | $ | | $ | ( | $ | | $ | ( | ||||
Discontinued operations |
| — |
| ( |
| — |
| ( | ||||
$ | | $ | ( | $ | | $ | ( | |||||
9
7. Stockholders’ Equity
The Company is authorized to issue
Stock Option Transactions
The Company’s stock options have a contractual term of
The Company granted
Total unrecognized stock-based compensation expense as of June 30, 2021, was $
Stock option activity for the six months ended June 30, 2021, is summarized in the following tables:
Weighted‑ | |||||
Average | |||||
Director and Employee Options |
| Shares |
| Exercise Price | |
Outstanding at December 31, 2020 | | $ | | ||
Granted |
| | $ | | |
Exercised |
| | $ | | |
Forfeited |
| | $ | | |
Outstanding at June 30, 2021 |
| | $ | | |
Vested at June 30, 2021 |
| | $ | | |
Weighted‑ | |||||
Average | |||||
LGJV Personnel Options |
| Shares |
| Exercise Price | |
Outstanding at December 31, 2020 | | $ | | ||
Outstanding and vested at June 30, 2021 |
| | $ | | |
Deferred Stock Unit Transactions
Deferred stock units (“DSUs”) are awarded to directors at the discretion of the Board of Directors. The DSUs are fully vested on the grant date and each DSU entitles the holder to receive
At June 30, 2021, there were
10
8. Fair Value Measurements
The Company establishes a framework for measuring the fair value of financial assets and liabilities and nonfinancial assets and liabilities, which are measured at fair value on a recurring (annual) basis in the form of a fair value hierarchy that prioritizes the inputs into valuation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2: Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.
Level 3: Unobservable inputs due to the fact there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.
Financial Assets and Liabilities
At June 30, 2021, and December 31, 2020, the Company’s financial instruments consist of cash and cash equivalents, receivables, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate fair value due to their short maturities.
Non-Financial Assets and Liabilities
The Company discloses and recognizes its non-financial assets and liabilities at fair value on a non-recurring basis. The estimated fair value for these non-financial liabilities are classified as Level 3 of the fair value hierarchy, as the valuation was determined based on internally developed assumptions that market participants would use in the pricing of such assets without observable inputs and no market activity.
The Company recorded its initial investment in affiliates at fair value. The estimated fair value for this non-financial asset is classified as Level 3 of the fair value hierarchy, as the valuation was determined based on internally developed assumptions with few observable inputs and no market activity.
9. Commitments, Contingencies and Guarantees
In determining its accruals and disclosures with respect to loss contingencies, the Company will charge to income an estimated loss if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Legal expenses associated with the commitments and contingencies are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.
The Company’s mining and exploration activities are subject to various laws, regulations and permits governing the protection of the environment. These laws, regulations and permits are continually changing and are generally becoming more restrictive. The Company has made, and expects to make in the future, expenditures to comply with such laws, regulations and permits, but cannot predict the full amount of such future expenditures.
11
In July 2017, the LGJV Entities entered into a loan agreement (the “Term Loan”) with Dowa whereby the LGJV Entities could borrow up to $
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
On January 23, 2018, the LGJV entered into a loan agreement (the “Dowa MPR Loan”) with Dowa whereby the LGJV could borrow up to $
The Company contributed $
On May 30, 2019, the LGJV entered into a working capital facility agreement (the “WCF”) with Dowa whereby the LGJV could borrow up to $
As of June 30, 2021, the Company had guaranteed
10. Discontinued Operations
In October 2020, the Company completed the distribution of its reportable U.S. segment, which was comprised of SOP. To effect the distribution, the Company distributed, on a pro rata basis, all equity interest of SOP to its stockholders of record immediately prior to completion of the initial public offering. Shareholders received approximately
12
The results of operations for SOP have been reflected as discontinued operations in the condensed consolidated statement of operations for the three and six months ended June 30, 2020, and consist of the following:
Three Months Ended | Six Months Ended | |||||
| June 30, 2020 |
| June 30, 2020 | |||
Operating Expenses of Discontinued Operations | ||||||
Exploration |
| $ | |
| $ | |
Pre-development | | | ||||
General and administrative | | | ||||
Amortization | | | ||||
Total expenses |
| |
| | ||
Other Income of Discontinued Operations | ||||||
Other income | ( | ( | ||||
Net loss of discontinued operations | $ | | $ | | ||
The cash flow activity from discontinued operations for the six months ended June 30, 2020, have been reflected as discontinued operations in the condensed consolidated statement of cash flows for the six months ended June 30, 2020, and consist of the following:
June 30, | |||
| 2020 | ||
Discontinued Operating Activities | |||
Net loss |
| $ | ( |
Adjustments to reconcile net loss to net cash used by operating activities: | |||
Amortization | | ||
Stock compensation expense | | ||
Accretion expense |
| | |
Changes in operating assets and liabilities: | |||
Accounts payable and other accrued liabilities | ( | ||
Other current assets | | ||
Net cash used by operating activities of discontinued operations | ( | ||
Financing Activities of Discontinued Operations | |||
PPP Loan proceeds | | ||
Net cash provided by financing activities of discontinued operations | | ||
11. Segment Information
The Company operates in a single industry as a corporation engaged in the acquisition, exploration and development of primarily silver mineral interests. The Company has mineral property interests in Mexico. The Company’s reportable segments are based on the Company’s mineral interests and management structure and include Mexico and Corporate segments. The Mexico segment engages in the development and exploration on the Company’s Mexican mineral properties and includes the Company’s investment in the LGJV. Financial information relating to the Company’s segments is as follows:
Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | |||||||||||||||||
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total | |||||||
Exploration | $ | | $ | — | $ | | $ | | $ | — | $ | | ||||||
General and administrative |
| |
| |
| |
| |
| |
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Amortization |
| — |
| |
| |
| — |
| |
| | ||||||
Equity income (loss) in affiliates |
| |
| — |
| |
| ( |
| — |
| ( | ||||||
Net other income (loss) |
| ( |
| |
| |
| ( |
| ( |
| ( | ||||||
Total assets |
| |
| |
| |
| |
| |
| | ||||||
13
Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | |||||||||||||||||
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total | |||||||
Exploration | $ | | $ | — | $ | | $ | | $ | — | $ | | ||||||
General and administrative |
| |
| |
| |
| |
| |
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Amortization |
| — |
| |
| |
| — |
| |
| | ||||||
Equity income (loss) in affiliates |
| |
| — |
| |
| ( |
| — |
| ( | ||||||
Net other income (loss) |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | ||||||
Total assets |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
12. Investment in Affiliate
During the six months ended June 30, 2021 and 2020, the Company recognized $
14
The LGJV Entities combined balance sheets as of June 30, 2021, and December 31, 2020, and the combined statements of income (loss) for the six months ended June 30, 2021 and 2020, are as follows:
LOS GATOS JOINT VENTURE
COMBINED BALANCE SHEETS (UNAUDITED)
(in thousands)
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
ASSETS |
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Current Assets |
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Cash and cash equivalents | $ | | $ | | ||
Receivables |
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Inventories |
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VAT receivable |
| |
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Other current assets |
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Total current assets |
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Non‑Current Assets |
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Mine development, net |
| |
| | ||
Property, plant and equipment, net |
| |
| | ||
Total non‑current assets |
| |
| | ||
Total Assets | $ | | $ | | ||
LIABILITIES AND OWNERS' CAPITAL |
|
|
|
| ||
Current Liabilities |
|
|
|
| ||
Accounts payable and accrued liabilities | $ | | $ | | ||
Related party payable |
| |
| | ||
Accrued interest |
| |
| | ||
Unearned revenue |
| |
| | ||
Equipment loans |
| |
| | ||
Dowa Term Loan | | | ||||
Working Capital Facility | — | | ||||
Total current liabilities |
| |
| | ||
Non‑Current Liabilities |
|
|
|
| ||
Dowa Term Loan |
| |
| | ||
Equipment loans |
| |
| | ||
Reclamation obligations |
| |
| | ||
Total non‑current liabilities |
| |
| | ||
Owners' Capital |
|
|
| |||
Capital contributions |
| |
| | ||
Paid‑in capital |
| |
| | ||
Accumulated deficit |
| ( |
| ( | ||
Total owners' capital |
| |
| | ||
Total Liabilities and Owners' Capital | $ | | $ | | ||
15
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Sales | $ | | $ | | $ | | $ | | ||||
Expenses |
|
|
|
| ||||||||
Cost of sales |
| |
| |
| |
| | ||||
Royalties |
| |
| ( |
| |
| | ||||
Exploration |
| |
| |
| |
| | ||||
General and administrative |
| |
| |
| |
| | ||||
Depreciation, depletion and amortization |
| |
| |
| |
| | ||||
Other |
| — |
| |
| — |
| | ||||
| |
| |
| |
| | |||||
Other (income) expense |
|
|
|
|
|
| ||||||
Interest expense |
| |
| |
| |
| | ||||
Arrangement fee |
| |
| |
| |
| | ||||
Accretion expense |
| |
| |
| |
| | ||||
Other (income) expense |
| |
| — |
| ( |
| ( | ||||
Foreign exchange (gain) loss |
| ( |
| ( |
| |
| | ||||
| |
| |
| |
| | |||||
Net Income (Loss) | $ | | $ | ( | $ | | $ | ( | ||||
13. Subsequent Events
On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Agreement”) with Bank of Montreal. The Credit Agreement provides for a revolving line of credit in a principal amount of $
On July 19, 2021, the Company borrowed $
On July 19, 2021, the Company completed a follow-on public offering of
The proceeds from the public offering, together with the funds borrowed under the Credit Agreement and cash on hand, were used to retire our
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q (the “Report”) and the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 10-K”), filed with the Securities and Exchange Commission (“SEC”) on March 29, 2021.
Forward-Looking Statements
This Report contains statements that constitute “forward looking information” and “forward-looking statements” within the meaning of U.S. and Canadian securities laws. Forward-looking statements are often identified by words such as ‘‘may,’’ ‘‘might,’’ ‘‘could,’’ ‘‘would,’’ ‘‘achieve,’’ ‘‘budget,’’ ‘‘scheduled,’’ ‘‘forecasts,’’ ‘‘should,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential’’ or ‘‘continue,’’ the negative of these terms and other comparable terminology. These forward-looking statements may include, but are not limited to, those relating to projections of our future financial performance, our anticipated growth strategies and anticipated trends in our industry, production from the Cerro Los Gatos Mine (“CLG”), our expectations relating to further exploration of the Los Gatos District and the Santa Valeria property, estimated calculations of mineral reserves and resources at our properties, anticipated expenses, tax benefits, future strategic infrastructure development at the CLG and our requirements for additional capital.
All forward-looking statements speak only as of the date on which they are made. These statements are not a guarantee of future performance and involve certain risks, uncertainties and assumptions concerning future events that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. Important factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:
| ● | we have a history of negative operating cash flows and net losses and we may not sustain profitability; |
| ● | we are dependent on two principal projects for our future operations; |
| ● | the Los Gatos Joint Venture (“LGJV”) has historically had significant debt and may incur further debt in the future, which could adversely affect the LGJV’s and our financial health and ability to obtain financing in the future and pursue certain business opportunities; |
| ● | we have outstanding indebtedness and may incur further debt in the future, and the degree to which we are leveraged may have a material adverse effect on our business financial condition or results of operations and cash flows; |
| ● | mineral reserve and mineral resource calculations at the CLG and the Los Gatos District are only estimates and actual production results may vary significantly from the estimates; |
| ● | our mineral exploration efforts are highly speculative in nature and may be unsuccessful; |
| ● | actual capital costs, operating costs, production and economic returns may differ significantly from those we have anticipated and there are no assurances that any future development activities will result in profitable mining operations; |
| ● | our operations involve significant risks and hazards inherent to the mining industry; |
| ● | the title to some of the mineral properties may be uncertain or defective; |
| ● | the widespread outbreak of the COVID-19 pandemic and any other health epidemics, communicable diseases or public health crises could also adversely affect us, particularly in regions where we conduct our business operations; |
| ● | the prices of silver, zinc and lead are subject to change and a substantial or extended decline in the prices of silver, zinc or lead could materially and adversely affect our revenues and the value of our mineral properties; |
| ● | the Mexican government, as well as local governments, extensively regulate mining operations, which impose significant actual and potential costs on us, and future regulation could increase those costs, delay receipt of regulatory refunds or limit our ability to produce silver and other metals; |
17
| ● | our operations are subject to additional political, economic and other uncertainties not generally associated with U.S. operations; and |
| ● | we are required to obtain, maintain and renew environmental, construction and mining permits, which is often a costly and time-consuming process and may ultimately not be possible. |
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and information included in this Report and those described from time to time in our filings with the SEC, including, but not limited to, our 2020 10-K. These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material, may cause our actual future results to be materially different than those expressed in our forward-looking statements. Undue reliance should not be placed on these forward-looking statements. We do not undertake any obligation to make any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, except as required by law. Certain forward-looking statements are based on assumptions, qualifications and procedures, which are set out only in the technical report entitled “Los Gatos Project, Chihuahua, Mexico,” dated July 1, 2020, which was prepared in accordance with the requirements of subpart 1300 of Regulation S-K and Canadian National Instrument 43-101 — Standards of Disclosure for Mineral Projects (the “Los Gatos Technical Report”). For a complete description of assumptions, qualifications and procedures associated with such information, reference should be made to the full text of the Los Gatos Technical Report, which was filed as Exhibit 96.1 to our Registration Statement on Form S-1 (File No. 333-249224), filed with the SEC on October 1, 2020.
Overview
We are a U.S.-based precious metals production, development and exploration company with the objective of becoming a premier silver producer. We are currently focused on the production and continued development of the CLG and the further exploration and development of the Los Gatos District through the LGJV with Dowa:
| ● | The CLG, located within the Los Gatos District, Chihuahua, Mexico, consists of a 2,500 tpd polymetallic mine and processing facility that commenced production on September 1, 2019. The Los Gatos Technical Report, which has an effective date of July 1, 2020, estimates that the deposit contains approximately 9.6 million diluted tonnes of proven and probable mineral reserves (or approximately 6.7 million diluted tonnes of proven and probable mineral reserves on a 70.0% basis, representing the Company’s current ownership interest in the LGJV), with approximately 6.4 million diluted tonnes of proven mineral reserves (or approximately 4.5 million diluted tonnes of proven mineral reserves on a 70.0% basis) and approximately 3.3 million diluted tonnes of probable mineral reserves (or approximately 2.3 million diluted tonnes of probable mineral reserves on a 70.0% basis). The Los Gatos Technical Report states average proven and probable mineral reserve grades are 306 g/t silver, 0.35 g/t gold, 2.76% lead and 5.65% zinc. |
| ● | The Los Gatos District, located in Chihuahua, Mexico, is located approximately 120 kilometers south of Chihuahua City and is comprised of a 103,087 hectares land position, constituting a new mining district. The Los Gatos District consists of 14 mineralized zones, which include three identified silver, lead and zinc deposits that contain mineral resources—the CLG, the Esther deposit and the Amapola deposit—as well as 11 additional high priority targets defined by high grade drill intersections and over 150 kilometers of outcropping quartz and calcite veins. The area is characterized by a predominant silver, lead and zinc epithermal mineralization. On September 1, 2019, the LGJV commenced production at the CLG. A core component of the LGJV’s business plan is to explore the highly prospective, underexplored Los Gatos District with the objective of identifying additional mineral deposits that can be mined and processed, possibly utilizing the CLG plant infrastructure. |
18
Operational Update
In the first and second quarters of 2021, the LGJV achieved the following production from CLG:
CLG Production (100% Basis) |
| Q2 2021 |
| Q1 2021 |
|
Tonnes mined (wmt - unreconciled) |
| 240,047 |
| 209,832 | |
Tonnes milled (dmt - reconciled) |
| 230,656 |
| 203,479 | |
Tonnes milled per day (dmt) |
| 2,535 |
| 2,261 | |
Average Grades |
|
|
|
| |
Silver grade (g/t) |
| 322 |
| 261 | |
Gold grade (g/t) |
| 0.35 |
| 0.32 | |
Lead grade (%) |
| 2.51 |
| 2.00 | |
Zinc grade (%) |
| 4.41 |
| 3.24 | |
Contained Metal |
|
|
|
| |
Silver ounces (millions) |
| 2.1 |
| 1.5 | |
Gold ounces - in lead concentrate (thousands) |
| 1.5 |
| 1.1 | |
Lead pounds - in lead concentrate (millions) |
| 11.2 |
| 7.6 | |
Zinc pounds - in zinc concentrate (millions) |
| 14.5 |
| 8.7 | |
Recoveries (combined lead and zinc concentrate) |
|
|
|
| |
Silver |
| 89 | % | 85 | % |
Gold |
| 63 | % | 60 | % |
Lead |
| 90 | % | 87 | % |
Zinc |
| 75 | % | 71 | % |
Operating costs for the three months ended June 30, 2021, were in line with management’s expectations and trending toward life-of-mine feasibility operating costs.
COVID-19 Pandemic
In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic temporarily affected our operations in 2020 in part due to the loss of revenue resulting from the 45-day temporary suspension of all nonessential activities at the LGJV’s CLG site and the expenses associated with the development and implementation of COVID-19 protocols. We believe we have taken appropriate steps to minimize the risk to our employees and to maintain normal business operations. We may take further actions as may be required by government authorities or as we determine are in the best interests of our employees and business partners which may cause additional closures of some or all of our operations in the future.
While the full impact of this pandemic is unknown, we are closely monitoring the developments of the outbreak and continually assessing the potential impact on our business. Any prolonged disruption of our operations and closure of facilities could result in additional costs incurred, production and development delays, cost overruns and operational restart costs that would negatively impact our business, financial condition and results of operations. The degree to which the pandemic impacts our business, financial condition and results of operations will depend on future developments, which are highly uncertain, continuously evolving and in many cases cannot be predicted, including, but not limited to, the duration and spread of the pandemic and its variants, its severity and the actions to contain the virus or treat its impact, such as the efficacy of vaccines (particularly with respect to emerging strains of the virus). Accordingly, there remains significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. See “Part I, Item 1A. Risk Factors” in the 2020 10-K for additional risks we face due to the COVID-19 pandemic.
Exploration Update
The Company is active in three different exploration drilling programs that are collectively estimated to require 51,400 meters of exploration and definition drilling at an expected cost of $6.1 million. The programs are further detailed below.
19
Cerro Los Gatos Infill and Extension Drilling Program
On December 5, 2020, the LGJV commenced a 90-hole, 27,000-meter fill and extension drilling program at the CLG within the LGJV with the goal of converting the CLG’s established 3.7 million tonnes of inferred resources to the measured and indicated category and to discover additional resources along the northwest and southeast extensions of the CLG deposit. Once completed, the Company intends to incorporate the additional measured and indicated resources into a new mine plan that will increase the proven and probable reserves and further support a possible expansion of the CLG’s production rate from 2,500 tpd to 3,000 tpd. The LGJV expects this program to cost about $2.8 million with completion anticipated by the third quarter of 2021. As of June 30, 2021, 48 holes have been drilled.
Los Gatos District Resource Expansion
On May 12, 2021, the LGJV commenced a second exploration program to expand resources throughout the Los Gatos District. The initial target is a 59-hole, 19,000-meter campaign with 50-meter spacing at the Esther deposit, to expand its initial indicated resource of 0.46 million tonnes at 133 g/t silver, 2.1% zinc, 0.7% lead and inferred resource of 2.29 million tonnes at 98 g/t silver, 3.0% zinc, and 1.6% lead. Esther is located about four kilometers from the CLG and contains similar styles of mineralization and geochemistry. The LGJV expects this program to cost about $2.7 million with completion anticipated by December 2021. As of June 30, 2021, six holes have been drilled.
Santa Valeria Project
In March 2021, the Company commenced an 18-hole, 5,400-meter exploration program on its wholly-owned Santa Valeria property. The Santa Valeria target has been developed through regional geologic work by the Company’s exploration team, which defined a large basin structure hosting the mineralization zones within the Los Gatos District. Santa Valeria is geologically comparable to CLG, and the Company believes it may contain similar mineral content. The Company expects this program to cost about $600,000 with completion anticipated by August 2021. As of June 30, 2021, 13 holes have been drilled.
Components of Results of Operations
Operating Expenses
Exploration Expenses
We conduct exploration activities under mining concessions in Mexico. We expect exploration expenses to increase significantly as we continue to expand our exploration activities at the Los Gatos District and our other exploration properties. Our exploration expenses primarily consist of drilling costs, lease concession payments, assay costs and other geological and support costs at our exploration properties.
General and Administrative Expenses
Our general and administrative expenses consist of salaries and benefits, stock compensation, professional and consultant fees, insurance and other general administration costs. Our general and administrative expenses have increased and are expected to further increase significantly as we operate as a public company. We expect higher costs related to salaries, benefits, stock compensation, legal fees, compliance and corporate governance, accounting and audit expenses, stock exchange listing fees, transfer agent and other shareholder-related fees, directors’ and officers’ and other insurance costs, and other administrative costs. We are party to a Management Services Agreement with SSMRC, pursuant to which we will provide certain limited executive and managerial advisory services to SSMRC. SSMRC reimburses us for costs of providing such services.
Equity Income (Loss) in Affiliates
Our equity income (loss) in affiliates relates to our proportional share of net income or loss incurred from the LGJV and the amortization of the basis difference between our investment in the LGJV and the net assets of the LGJV.
20
LGJV Arrangement Fee
Our LGJV arrangement fee consisted of arrangement fees related to the Term Loan and the Working Capital Facility (“WCF”) with Dowa prior to their extinguishment on July 26, 2021, and March 11, 2021, respectively. The arrangement fees were based on a fixed 1% and 15% rate for the Term Loan and the WCF, respectively, and 70% of the outstanding principal of the respective facility. These arrangement fees were solely our responsibility. We do not expect to incur LGJV arrangement fees beyond July 26, 2021, with respect to the WCF or Term Loan.
Income Taxes
As we have incurred substantial losses from our exploration and pre-development activities, we may receive further benefits in the form of deferred tax assets that can reduce our future income tax liabilities, if it is more likely than not that the benefit will be realized before expiration. Historically, we have not recognized these potential benefits in our financial statements and have fully reserved for such net deferred tax assets, as we believe it is more likely than not that the full benefit of these net deferred tax assets will not be realized before expiration.
Royalties
Exploration activities are conducted on the Los Gatos District mining concessions and on the Company’s 100% owned Santa Valeria concessions in Mexico. Mineral and concession lease payments are required to be paid to various entities to secure the appropriate claims or surface rights. Certain of these agreements also have royalty payments that were triggered when we began producing and selling metal-bearing concentrate.
Results of Operations
The following table presents certain information relating to our operating results for the three and six months ended June 30, 2021 and 2020. In accordance with generally accepted accounting principles in the United States (‘‘GAAP’’), these financial results represent the consolidated results of operations of our Company and its subsidiary (in thousands).
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Expenses |
|
|
|
|
|
|
|
| ||||
Exploration | $ | 694 | $ | 211 | $ | 918 | $ | 382 | ||||
General and administrative |
| 4,411 |
| 1,543 |
| 8,014 |
| 2,380 | ||||
Amortization |
| 7 |
| 9 |
| 14 |
| 17 | ||||
Total expenses |
| 5,112 |
| 1,763 |
| 8,946 |
| 2,779 | ||||
Other income (expense) |
|
|
|
|
|
|
|
| ||||
Equity income (loss) in affiliates |
| 18,291 |
| (8,071) |
| 20,992 |
| (21,516) | ||||
Other income (loss) |
| 312 |
| (765) |
| (175) |
| (2,345) | ||||
Net other income (expense) |
| 18,603 |
| (8,836) |
| 20,817 |
| (23,861) | ||||
Net income (loss) from continuing operations | $ | 13,491 | $ | (10,599) | $ | 11,871 | $ | (26,640) | ||||
Net loss from discontinued operations |
| — |
| (1,545) |
| — |
| (3,325) | ||||
Net income (loss) | $ | 13,491 | $ | (12,144) | $ | 11,871 | $ | (29,965) | ||||
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
For the three months ended June 30, 2021, we achieved net income from continuing operations of $13,491 thousand compared to a net loss of $10,599 thousand for the three months ended June 30, 2020. The $24,090 thousand increase in net income from continuing operations was primarily attributable to the $26,362 thousand change in equity income (loss) in affiliates from the LGJV operations, partially offset by the $2,868 thousand increase in general and administrative expense due to higher legal and consulting costs and directors and officer’s insurance premiums related to public company governance and reporting requirements, and increased stock-based compensation expense.
21
The improvement in our equity income (loss) in the LGJV’s operating income, which is recognized using the equity method of accounting in our financial statements, for the three months ended June 30, 2021, resulted primarily from: the increase in our ownership in the LGJV from 51.5% to 70.0% on March 11, 2021; mining and processing activities operating at design throughput for the three months ended June 30, 2021, compared to the ramp-up to design throughput during the three months ended June 30, 2020; and significantly higher metals prices for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
For the six months ended June 30, 2021, we achieved net income from continuing operations of $11,871 thousand compared to a net loss of $26,640 thousand for the six months ended June 30, 2020. The $38,511 thousand increase in net income from continuing operations was primarily attributable to the $43,898 thousand change in equity income (loss) in affiliates from the LGJV operations, partially offset by the $5,634 thousand increase in general and administrative expense due to higher legal and consulting costs and directors and officer’s insurance premiums related to public company governance and reporting requirements, and increased stock-based compensation expense.
The improvement in our equity income (loss) in the LGJV’s operating income, which is recognized using the equity method of accounting in our financial statements, for the six months ended June 30, 2021, resulted primarily from: the increase in our ownership in the LGJV from 51.5% to 70.0% on March 11, 2021; mining and processing activities operating near design throughput for the six months ended June 30, 2021, compared to the ramp-up to design throughput during the six months ended June 30, 2020; and significantly higher metals prices for the six months ended June 30, 2021, compared to the six months ended June 30, 2020.
Liquidity and Capital Resources
As of June 30, 2021, and December 31, 2020, we had cash and cash equivalents of $29,607 thousand and $150,146 thousand, respectively, and working capital of $33,403 thousand and $151,728 thousand, respectively. The decrease in cash and cash equivalents and working capital were primarily due to our $71,550 thousand repurchase of the 18.5% interest in the LGJV from Dowa and a $42,000 thousand capital contribution to the LGJV to extinguish our 70% share of the WCF. As a result, our ownership in the LGJV increased to 70.0% and Dowa’s ownership was reduced to 30% on March 11, 2021.
On July 19, 2021, we completed a follow-on public offering of 8,930,000 shares of common stock at a price of $14.00 per share, resulting in net proceeds of $118,894 thousand, after deducting underwriting discounts and commissions and expenses payable by us.
We did not have any related party debt as of June 30, 2021, or December 31, 2020. We have no outstanding lines of credit or other bank financing arrangements as of June 30, 2021. We guaranteed 70.0% of the Term Loan (prior to the repayment of the Term Loan on July 26, 2021, as discussed further below) and all of the LGJV equipment loans as of June 30, 2021. We had certain arrangement fees obligations related to the CLG as detailed in the “LGJV Arrangement Fee” above.
We believe we have sufficient cash, access to borrowings and resources to carry out our business plans for at least the next 12 months. We are focused on our forward-looking liquidity needs. We are evaluating our ongoing fixed cost structure as well as decisions related to project retention, advancement and development. We may be required to raise additional capital or take other measures to fund future exploration and development. Significant development activities, if warranted, may require that we arrange for financing in advance of planned expenditures. In addition, we expect to continue to increase our current financial resources with external financings as long as our long-term business needs require us to do so. There can be no assurance that external financing will be available to us on acceptable terms, or at all. We manage liquidity risk through our credit facility and the management of our capital structure.
We may be required to provide funds to the LGJV to support operations at the CLG which, depending upon the circumstances, may be in the form of equity, various forms of debt, joint venture funding or some combination thereof. There can be no assurance that additional funds will be available to us on acceptable terms, or at all. If we raise additional funds by issuing equity or convertible securities, substantial dilution to existing stockholders may result. Additionally, if we raise additional funds by incurring new debt obligations, the terms of the debt may require significant cash payment obligations, as well as covenants and specific financial ratios that may restrict our ability to operate our business.
22
Dowa Debt Agreements
Dowa Term Loan
On July 11, 2017, we entered into the Term Loan with Dowa whereby the LGJV could borrow up to $210,000 thousand to finance the development of the Los Gatos project, with a maturity date of December 29, 2027. Interest accrued daily at LIBOR plus 2.35% per annum, and the interest was added to the amount borrowed until production commenced at the Los Gatos project. The LGJV was obligated to pay 14 consecutive semi-annual payments totaling the aggregate principal amount and capitalized interest beginning June 30, 2021, with payments made two business days prior to the end of each June and December. We guaranteed 70.0% of the Term Loan and were required to pay an arrangement fee on the borrowing, calculated as 2% per annum on 70% of the outstanding principal balance, payable in semi-annual installments. The Term Loan contained affirmative and negative covenants reasonably customary for similar facilities, with which the LGJV is in compliance in all material respects as of June 30, 2021.
On July 26, 2021, the LGJV repaid all amounts owed to Dowa under the Term Loan. The Company advanced a loan to the LGJV in an aggregate amount equal to 70% of the Term Loan balance, which was converted into a capital contribution to the LGJV on July 26, 2021. In conjunction with the Term Loan repayment, the Company also paid Dowa a closing fee of $10,000 thousand, for total consideration of $154,800 thousand. Dowa’s 30% portion of the Term Loan was converted into a capital contribution on July 26, 2021. The LGJV paid $386 thousand of outstanding accrued interest and a $1,585 thousand fee related to the Term Loan repayment.
Los Gatos Working Capital Facility
On May 30, 2019, we entered into the WCF with the LGJV and Dowa, under which Dowa agreed to provide a maximum of $60,000 thousand for the benefit of the LGJV, with a maturity date of June 28, 2021. Interest payable under the WCF was LIBOR plus 3% per annum and was payable by the LGJV. We guaranteed 70% of this facility and were required to pay an arrangement fee on the borrowing, calculated as 15.0% per annum on 70.0% of the average daily principal amount outstanding during the relevant fiscal quarter. The full principal amount of the WCF was drawn down by the LGJV as of September 2019. On March 11, 2021, we and Dowa contributed $42,000 thousand and $18,000 thousand, respectively, in capital to the LGJV extinguishing the WCF.
Revolving Credit Facility
On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Agreement”) with Bank of Montreal, Chicago Branch. The Credit Agreement provides for a revolving line of credit in a principal amount of $50,000 and has an accordion feature, which allows for an increase in the total line of credit up to $100,000, subject to certain conditions. The Credit Agreement matures on July 31, 2024. The Credit Agreement contains affirmative and negative covenants that are customary for credit agreements of this nature. The affirmative covenants consist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, among other things, limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. Obligations under the Credit Agreement may be accelerated upon the occurrence of certain customary events of default. Loans under the Credit Agreement will bear interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% or the U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined in accordance with a pricing grid based upon the Company’s consolidated net leverage ratio as of the end of the applicable period.
On July 19, 2021, the Company borrowed $13,000 under the Credit Agreement at a rate of LIBOR plus 3%.
23
Cash Flows
The following table presents our sources and uses of cash for the periods indicated:
Six Months Ended | ||||||
June 30, | ||||||
| 2021 |
| 2020 | |||
(in thousands) | ||||||
Net cash provided by (used by) |
|
|
|
| ||
Operating activities | $ | (7,895) | $ | (9,537) | ||
Investing activities |
| (116,595) |
| (7,573) | ||
Financing activities |
| 3,951 |
| 9,979 | ||
Total change in cash | $ | (120,539) | $ | (7,131) | ||
Cash used by operating activities was $7,895 thousand and $9,537 thousand for the six months ended June 30, 2021 and 2020, respectively. The $1,642 thousand decrease in cash usage was primarily due to the loss from discontinued operations, which were reflected in the six months ended June 30, 2020, and lower arrangement fees associated with the extinguishment of the WCF, partially offset by higher general and administrative costs during the six months ended June 30, 2021.
Cash used by investing activities was $116,595 thousand and $7,573 thousand for the six months ended June 30, 2021 and 2020, respectively. The $109,022 thousand increase was primarily due to the $71,550 thousand acquisition of the 18.5% interest in the LGJV from Dowa and the $42,000 thousand pro-rata capital contribution to the LGJV for the extinguishment of the WCF in March 2021.
Cash provided by financing activities was $3,951 thousand and $9,979 thousand for the six months ended June 30, 2021 and 2020, respectively. The $6,028 thousand decrease was primarily related to the $10,000 thousand in proceeds from related party convertible debt for the six months ended June 30, 2020, partially offset by $4,221 thousand in proceeds from the issuance of common stock related to the exercise of stock options during the six months ended June 30, 2021.
24
Results of LGJV Operations
The following table presents information relating to the LGJV’s financial condition as of June 30, 2021, and December 31, 2020, and the operating results for the six months ended June 30, 2021 and 2020 in accordance with GAAP. Pursuant to the purchase of the 18.5% interest from Dowa on March 11, 2021, our current ownership of the LGJV is 70.0%.
LOS GATOS JOINT VENTURE
COMBINED BALANCE SHEETS (UNAUDITED)
(in thousands)
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
ASSETS |
|
| ||||
Current Assets |
|
| ||||
Cash and cash equivalents | $ | 2,242 | $ | 1,676 | ||
Receivables |
| 23,872 |
| 3,988 | ||
Inventories |
| 10,288 |
| 10,315 | ||
VAT receivable |
| 46,088 |
| 50,732 | ||
Other current assets |
| 5,502 |
| 2,891 | ||
Total current assets |
| 87,992 |
| 69,602 | ||
Non-Current Assets |
|
|
|
| ||
Mine development, net |
| 213,895 |
| 202,874 | ||
Property, plant and equipment, net |
| 192,206 |
| 196,942 | ||
Total non-current assets |
| 406,101 |
| 399,816 | ||
Total Assets | $ | 494,093 | $ | 469,418 | ||
LIABILITIES AND OWNERS' CAPITAL |
|
|
|
| ||
Current Liabilities |
|
|
|
| ||
Accounts payable and accrued liabilities | $ | 31,995 | $ | 35,767 | ||
Related party payable |
| 5,118 |
| 1,703 | ||
Accrued interest |
| 159 |
| 101 | ||
Unearned revenue |
| 6,034 |
| 3,276 | ||
Equipment loans |
| 6,898 |
| 7,084 | ||
Dowa Term Loan |
| 31,826 |
| 31,826 | ||
Working Capital Facility |
| — |
| 60,000 | ||
Total current liabilities |
| 82,030 |
| 139,757 | ||
Non-Current Liabilities |
|
|
|
| ||
Dowa Term Loan |
| 172,269 |
| 187,767 | ||
Equipment loans |
| 2,696 |
| 6,120 | ||
Reclamation obligations |
| 12,619 |
| 12,162 | ||
Total non-current liabilities |
| 187,584 |
| 206,049 | ||
Owners' Capital |
|
|
|
| ||
Capital contributions |
| 333,768 |
| 271,368 | ||
Paid-in capital |
| 18,636 |
| 16,366 | ||
Accumulated deficit |
| (127,925) |
| (164,122) | ||
Total owners' capital |
| 224,479 |
| 123,612 | ||
Total Liabilities and Owners' Capital | $ | 494,093 | $ | 469,418 | ||
At June 30, 2021, and December 31, 2020, the LGJV had current assets of $87,992 thousand and $69,602 thousand, respectively. The increase in total current assets was primarily due to an increase in trade receivables generated from operations on the higher sales volumes generated in 2021, partially offset by a decrease in value added tax (“VAT”) receivables primarily from the ability to retain VAT collected from the higher concentrate sales. At June 30, 2021, and December 31, 2020, the LGJV had noncurrent assets of $406,101 thousand and $399,816 thousand, respectively. The increase in noncurrent assets was due to sustaining capital expenditures, primarily for mine development at the CLG, partially offset by depletion and depreciation for the six months ended June 30, 2021.
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At June 30, 2021, and December 31, 2020, the LGJV had current liabilities of $82,029 thousand and $139,757 thousand, respectively. The decrease in current liabilities was primarily due to the extinguishment of the $60,000 thousand WCF on March 11, 2021. At June 30, 2021, and December 31, 2020, the LGJV had noncurrent liabilities of $187,584 thousand and $206,049 thousand, respectively. The decrease in non-current liabilities was primarily due to the first principal payment on the Dowa Term Loan and scheduled principal payments on equipment loans.
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Sales | $ | 75,005 | $ | 18,247 | $ | 121,335 | $ | 37,160 | ||||
Expenses |
|
|
|
|
|
|
|
| ||||
Cost of sales |
| 24,096 |
| 9,996 |
| 43,901 |
| 28,272 | ||||
Royalties |
| 1,415 |
| (272) |
| 2,299 |
| 29 | ||||
Exploration |
| 1,261 |
| 144 |
| 1,910 |
| 408 | ||||
General and administrative |
| 2,833 |
| 1,905 |
| 6,079 |
| 4,650 | ||||
Depreciation, depletion and amortization |
| 12,705 |
| 9,543 |
| 23,654 |
| 21,260 | ||||
Other | — | 3,416 | — | 3,416 | ||||||||
| 42,310 |
| 24,732 |
| 77,843 |
| 58,035 | |||||
Other (income) expense |
|
|
|
|
|
|
|
| ||||
Interest expense |
| 2,356 |
| 3,390 |
| 4,473 |
| 6,943 | ||||
Arrangement fee | 2,090 | 4,709 | 2,090 | 4,709 | ||||||||
Accretion expense |
| 228 |
| 212 |
| 456 |
| 424 | ||||
Other (income) expense |
| 11 |
| — |
| (19) |
| (108) | ||||
Foreign exchange (gain) loss |
| (1,335) |
| (339) |
| 295 |
| 5,522 | ||||
| 3,350 |
| 7,972 |
| 7,295 |
| 17,490 | |||||
Net Income (Loss) | $ | 29,345 | $ | (14,457) | $ | 36,197 | $ | (38,365) | ||||
For the three months ended June 30, 2021, the LGJV had net income of $29,345 thousand compared to a net loss of $14,457 thousand for the three months ended June 30, 2020. The change in net income (loss) was primarily due to increased revenue as a result of operating at designed throughput for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, which incurred a two-month Mexican government ordered temporary suspension of all “non-essential” operations nationwide in Mexico. Additionally, the three months ended June 30, 2021, incurred lower interest expense due to lower interest rates, lower borrowings and lower arrangement fees due to the retirement of the WCF, and by higher 2020 costs incurred directly related to the two-month Mexican government ordered temporary suspension.
For the six months ended June 30, 2021, the LGJV had net income of $36,197 thousand compared to a net loss of $38,365 thousand for the six months ended June 30, 2020. The change in net income (loss) was primarily due to increased revenue as a result of 60%, 39% and 17% increase in realized silver, zinc and lead prices, respectively, 75% and 61% higher production rates of lead and zinc concentrates, respectively, and 53% and 14% higher silver and zinc grades, respectively, as well as lower interest expense due to lower interest rates, lower borrowings and lower arrangement fees due to the retirement of the WCF, partially offset by 23% lower lead grades and 2020 costs incurred directly related to the two-month Mexican government ordered temporary suspension.
26
The following table presents summarized information relating to the LGJV’s cash flows for the six months ended June 30, 2021 and 2020.
LOS GATOS JOINT VENTURE
COMBINED STATEMENT OF CASH FLOWS
(in thousands)
Six Months Ended June 30, | ||||||
| 2021 |
| 2020 | |||
Net cash provided by (used by) |
|
|
|
| ||
Operating activities | $ | 56,225 | $ | 9,115 | ||
Investing activities |
| (38,613) |
| (20,177) | ||
Financing activities |
| (17,046) |
| 15,450 | ||
Total change in cash | $ | 566 | $ | 4,388 | ||
Cash provided by operating activities was $56,225 thousand and $9,115 thousand for the six months ended June 30, 2021 and 2020, respectively. The $47,110 thousand increase in cash provided by operating activities was primarily due to the increase in revenue for the six months ended June 30, 2021, due to higher metals prices, higher ore tonnes processed and higher ore grades, compared to the prior year period, partially offset by increased receivables from customers.
Cash used by investing activities was $38,613 thousand and $20,177 thousand for the six months ended June 30, 2021 and 2020, respectively. The $18,436 thousand increase in cash used was primarily due to higher sustaining capital expenditures for property, plant and equipment and mine development.
Cash (used by) provided by financing activities was $(17,046) thousand and $15,450 thousand for the six months ended June 30, 2021 and 2020, respectively. The $32,496 thousand change in financing cash flows was primarily due to the $15,913 thousand Term Loan payment in June 2021 and the related party loan to the LGJV during the six months ended June 30, 2020.
Non-GAAP Financial Measures
We use certain measures that are not defined by GAAP to evaluate various aspects of our business. These non-GAAP financial measures are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.
Cash Costs and All-In Sustaining Costs
Cash costs and all-in sustaining costs (“AISC”) are non-GAAP measures. AISC was calculated based on guidance provided by the World Gold Council (“WGC”). WGC is not a regulatory industry organization and does not have the authority to develop accounting standards for disclosure requirements. Other mining companies may calculate AISC differently as a result of differences in underlying accounting principles and policies applied, as well as definitional differences of sustaining versus expansionary (i.e. non-sustaining) capital expenditures based upon each company’s internal policies. Current GAAP measures used in the mining industry, such as cost of sales, do not capture all of the expenditures incurred to discover, develop and sustain production. Therefore, we believe that cash costs and AISC are non-GAAP measures that provide additional information to management, investors and analysts that aid in the understanding of the economics of the Company’s operations and performance compared to other producers and provides investors visibility by better defining the total costs associated with production.
Cash costs include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, treatment and refining costs, general and administrative costs, royalties and mining production taxes. AISC includes total production cash costs incurred at the LGJV’s mining operations plus sustaining capital expenditures. The Company believes this measure represents the total sustainable costs of producing silver from current operations and provides additional information of the LGJV’s operational performance and ability to generate cash flows. As the measure seeks to reflect the full cost of silver production from current operations, new project and expansionary capital at current operations are not included. Certain cash expenditures such as new project spending, tax payments, dividends, and financing costs are not included.
27
Reconciliation of expenses (GAAP) to non-GAAP measures
The table below presents a reconciliation between the most comparable GAAP measure of expenses to the non-GAAP measures of (i) cash costs, (ii) cash costs, net of by-product credits, (iii) co-product all-in sustaining costs and (iv) by-product all-in sustaining costs for our operations.
Three Months Ended | Six Months Ended | |||||
(in thousands, except unit costs) |
| June 30, 2021 |
| June 30, 2021 | ||
Expenses | $ | 42,312 | $ | 77,843 | ||
Depreciation, depletion and amortization |
| (12,707) |
| (23,654) | ||
Exploration1 |
| (1,261) |
| (1,910) | ||
Treatment and refining costs2 |
| 6,142 |
| 12,776 | ||
Cash costs | $ | 34,486 | $ | 65,055 | ||
Sustaining capital |
| 18,431 |
| 30,647 | ||
All-in sustaining costs | $ | 52,917 | $ | 95,702 | ||
By-product credits3 |
| (29,068) |
| (45,047) | ||
All-in sustaining costs, net of by-product credits | $ | 23,849 | $ | 50,655 | ||
Cash costs, net of by-product credits | $ | 5,418 | $ | 20,008 | ||
Payable ounces of silver equivalent4 |
| 2,998 |
| 4,947 | ||
Co-product cash cost per ounce of payable silver equivalent | $ | 11.50 | $ | 13.15 | ||
Co-product all-in sustaining cost per ounce of payable silver equivalent | $ | 17.65 | $ | 19.35 | ||
Payable ounces of silver |
| 1,888 |
| 3,173 | ||
By-product cash cost per ounce of payable silver | $ | 2.87 | $ | 6.31 | ||
By-product all-in sustaining cost per ounce of payable silver | $ | 12.63 | $ | 15.96 | ||
1 Exploration costs are not related to current operations.
2 Represent reductions on customer invoices and included in Sales of the LGJV combined statement of income (loss).
3 By-product credits reflect realized metal prices of zinc, lead and gold for the applicable period.
4 Silver equivalents utilize the average realized prices during the six months ended June 30, 2021, of $25.40/oz silver, $1.22/lb zinc, $0.96/lb lead and $1,819.22/oz gold and the average realized prices during the three months ended June 30, 2021, of $26.18/oz silver, $1.33/lb zinc, $1.00/lb lead and $1,829.84/oz gold.
Off-balance sheet arrangements
During the periods presented, we did not, and we currently do not, have any significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our shareholders.
Critical Accounting Policies
Please refer to Note 2 – Summary of Significant Accounting Policies in our consolidated financial statements included in this Report and the 2020 10-K for discussion of our critical accounting policies and estimates.
Jumpstart Our Business Startups Act of 2012
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.
28
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
We engage in the production of silver and concentrates containing silver, lead, zinc and gold at the CLG and commenced production on September 1, 2019. Accordingly, we expect the principal source of future revenue to be the sale of silver, and to a lesser extent, lead and zinc. A significant and sustained decrease in the price of these metals from current levels could have a material and negative impact on our business, financial condition and results of operations.
Foreign Currency Risk
Although most of our expenditures are in U.S. dollars, certain purchases of labor, operating supplies and capital assets are denominated in other currencies, primarily the Mexican peso. As a result, currency exchange fluctuations may impact the costs of our operations.
Concentration of Risk
We have placed nearly all of our cash investments with a single, high-quality financial institution. All cash equivalents are invested in high-quality, short-term money market instruments, including certificates of deposit. At no time have we had funds invested in asset-backed commercial paper. We have not experienced any losses on our cash investments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we 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, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2021.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting that occurred during the second quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect resource constraints, which require management to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control.
29
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, involved in legal proceedings of a nature considered normal to our business. We believe that none of the litigation in which we are currently involved, or have been involved since the beginning of our most recently completed financial year, individually or in the aggregate, is material to our consolidated financial condition, cash flows or results of operations. See Note 9 – Commitments, Contingencies and Guarantees in our consolidated financial statements included in this Report for additional information regarding our assessment of contingencies related to legal matters.
Item 1A. Risk Factors
Factors that could cause our actual results to differ materially from those in this Report include, but are not limited to, any of the risks described in the 2020 10-K. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not currently known to us or that we currently deem immaterial may also adversely affect us. As of the date of this Report, there have been no material changes to the risk factors disclosed in the 2020 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During the quarter ended June 30, 2021, the Company did not issue any shares of its common stock or other equity securities that were not registered under the Securities Act of 1933, as amended.
Use of Proceeds
On October 27, 2020, the SEC declared effective the Company’s registration statement on Form S-1 (No. 333-249224), as amended, filed in connection with the Company’s IPO. There has been no material change in the planned use of proceeds from the IPO as described in the Company’s final prospectus, filed with the SEC on October 29, 2020, pursuant to Rule 424(b) under the Securities Act.
As of June 30, 2021, the Company has used approximately $124,572 thousand of the net proceeds from the IPO, including (i) $71,550 thousand for the repurchase of the 18.5% interest in the LGJV from Dowa; (ii) $42,000 thousand for the capital contribution to the LGJV to extinguish the Company’s 70% share of the WCF; and (iii) $9,342 thousand for working capital and general corporate purposes.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
During the quarter ended June 30, 2021, there were no purchases made by or on behalf of the Company or any affiliated purchaser of the Company’s common stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
30
Item 6. Exhibits
3.1 |
| |
3.2 | ||
10.1* | ||
10.2 | ||
10.3 | ||
31.1* | ||
31.2* | ||
32.1** | ||
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed herewith |
** | Furnished herewith |
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GATOS SILVER, INC. | ||
(Registrant) | ||
August 9, 2021 | ||
By: | /s/ Stephen Orr | |
|
| Stephen Orr |
|
| Chief Executive Officer |
August 9, 2021 | ||
By: | /s/ Roger Johnson | |
|
| Roger Johnson |
|
| Chief Financial Officer |
32
