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Published: 2023-06-28 00:00:00 ET

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ 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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☑

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☑
		Emerging growth company	☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The Company has 700,000,000 shares of common stock, par value $0.001, authorized of which 69,162,223 were issued and outstanding as of June 27, 2023.

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TABLE OF CONTENTS


		Page
	Part I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Shareholders’ Equity (Deficit)	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	25
	Part II - OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28

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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)


		March 31,		December 31,
	Notes	2023		2022
ASSETS
Current Assets
Cash and cash equivalents		$	12,901	$	17,004
Related party receivables	5		669		1,773
Other current assets	3		16,366		16,871
Total current assets			29,936		35,648
Non‑Current Assets
Investment in affiliates	12		352,844		347,793
Other non-current assets			50		60
Total Assets		$	382,830	$	383,501
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable and other accrued liabilities	4	$	24,041	$	26,358
Non-Current Liabilities
Credit Facility, net of debt issuance costs	10		8,689		8,661
Shareholders’ Equity
Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,162,223 shares outstanding as of March 31, 2023 and December 31, 2022			117		117
Paid‑in capital			547,897		547,114
Accumulated deficit			(197,914)		(198,749)
Total shareholders’ equity			350,100		348,482
Total Liabilities and Shareholders’ Equity		$	382,830	$	383,501

See accompanying notes to the condensed consolidated financial statements.

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GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands of United States dollars, except for share and per share amounts)


		Three Months Ended
		March 31,
	Notes	2023		2022

Expenses
Exploration		$	26	$	110
General and administrative			5,536		6,777
Amortization			37		44
Total expenses			5,599		6,931

Other income
Equity income in affiliates	12		5,011		6,835
Other income	5		1,423		1,146
Net other income			6,434		7,981
Net income		$	835	$	1,050
Net income per share:	7
Basic		$	0.01	$	0.02
Diluted		$	0.01	$	0.02
Weighted average shares outstanding:
Basic			69,162,223		69,162,223
Diluted			69,309,019		69,309,019

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, 2022	69,162,223	—	$	117	$	—	$	547,114	$	(198,749)	$	348,482
Stock‑based compensation	—	—		—		—		783		—		783
Net income	—	—		—		—		—		835		835
Balance at March 31, 2023	69,162,223	—	$	117	$	—	$	547,897	$	(197,914)	$	350,100


	Number		Amount
	Common	Treasury	Common		Treasury		Paid-in		Accumulated
	Stock	Stock	Stock		Stock		Capital		Deficit			Total
Balance at December 31, 2021	69,162,233	—	$	117	$	—	$	544,383	$	(213,278)	$	331,222
Stock‑based compensation	—	—		—		—		1,482		—		1,482
Net income	—	—		—		—		—		1,050		1,050
Balance at March 31, 2022	69,162,233	—	$	117	$	—	$	545,865	$	(212,228)	$	333,754

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)


		Three Months Ended
		March 31,
	Notes	2023		2022
OPERATING ACTIVITIES
Net income		$	835	$	1,050
Adjustments to reconcile net income to net cash used by operating activities:
Amortization			37		44
Stock‑based compensation expense	6		743		1,588
DSU compensation expense	6		—		64
Equity income in affiliates	12		(5,011)		(6,835)

Changes in operating assets and liabilities:
Receivables from related-parties			1,104		962
Accounts payable and other accrued liabilities			(2,289)		1,087
Other current assets			478		708
Net cash used by operating activities			(4,103)		(1,332)

INVESTING ACTIVITIES
Investment in affiliates			—		—
Net cash used by investing activities			—		—

FINANCING ACTIVITIES
Financing costs			—		—
Net cash provided by financing activities			—		—
Net decrease in cash and cash equivalents			(4,103)		(1,332)
Cash and cash equivalents, beginning of period			17,004		6,616
Cash and cash equivalents, end of period			12,901		5,284

Interest paid		$	173	$	102

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 and per share amounts)

1.Basis of Presentation

Basis of Consolidation and Presentation

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 to Gatos 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 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, 2022 (the “2022 10-K”).

2.	Summary of Significant Accounting Policies

Significant Accounting Policies

The consolidated financial statements for the year ended December 31, 2022, 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 2022 10-K.

Recent Accounting Pronouncements

There have been no accounting pronouncements issued or adopted during the three months ended March 31, 2023, that have a material impact on the financial statements.

3.Other Current Assets


	March 31, 2023		December 31, 2022
Value added tax receivable	$	786	$	730
Prepaid expenses		2,359		2,890
Insurance proceeds receivable		13,100		13,100
Other		121		151
Total other current assets	$	16,366	$	16,871

Included in other current assets is a corporate head office lease of $95 with the term until January 30, 2024. The corresponding current and non-current lease liabilities of $95 and $10, respectively, are included in accounts payable, accrued and other liabilities. The insurance proceeds receivable represents the insurance payable by the Company’s insurers to claimants on behalf of the Company related to the settlement of the U.S. class action lawsuit. See footnote 10 – Commitments, Contingencies and Guarantees, for further discussion on the U.S. class action lawsuit and related settlement discussion.

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4.Accounts Payable and Other Accrued Liabilities


	March 31, 2023		December 31, 2022
Accounts payable	$	455	$	586
Accrued expenses		1,404		2,761
Accrued compensation		1,087		1,889
Legal settlement payable		21,000		21,000
Lease liability		95		122
Total accounts payable and other current liabilities	$	24,041	$	26,358

5.Related-Party Transactions

LGJV

Under the Unanimous Omnibus Partner Agreement, the Company provides certain management and administrative services to the LGJV. The Company earned $1,250 and $1,250 under this agreement for the three months ended March 31, 2023 and 2022, respectively, which has been recorded on the statements of operations under other income. The Company received $1,250 and $1,667 in cash from the LGJV under this agreement for the three months ended March 31, 2023 and 2022, respectively. The Company had receivables under this agreement of $417 and $417 as of March 31, 2023, and December 31, 2022, respectively. The Company also incurs certain LGJV costs that are subsequently reimbursed by the LGJV.

6.Stockholders’ Equity

The Company is authorized to issue 700,000,000 shares of $0.001 par value common stock and 50,000,000 shares of $0.001 par value preferred stock.

Stock-Based Compensation

The Company recognized stock-based compensation expense as follows:


	Three months ended March 31,
	2023		2022
Stock options	$	693	$	1,448
Performance share units		50		140
	$	743	$	1,588

Stock Option Transactions

The Company granted no stock options during the three months ended March 31, 2023, and granted 100,000 stock options for three months ended March 31, 2022, with a weighted-average grant-date fair value per share of $5.83. No stock options were exercised in the three months ended March 31, 2023 and 2022.

Total unrecognized stock-based compensation expense as of March 31, 2023, was $1,802, which is expected to be recognized over a weighted average period of 1.4 years.

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Stock option activity for the three months ended March 31, 2023, is summarized in the following tables:


		Weighted‑
		Average
Employee & Director Options	Shares	Exercise Price
Outstanding at December 31, 2022	1,701,530	$	14.27
Forfeited	(55,760)	$	27.66
Outstanding at March 31, 2023	1,645,770	$	13.07
Vested at March 31, 2023	1,239,437	$	11.86


		Weighted‑
		Average
LGJV Personnel Options	Shares	Exercise Price
Outstanding at December 31, 2022	32,393	$	7.31
Outstanding and vested at March 31, 2023	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 year ended December 31, 2022, 71,480 PSUs were forfeited. At March 31, 2023, there were 48,310 PSUs outstanding. On March 31, 2023, unrecognized compensation expense related to the PSUs was $349, which is expected to be recognized over a weighted-average period of 1.7 years.

Deferred Stock Unit (“DSU”) Transactions

The following table summarizes the DSU activity for the three months ended March 31, 2023:


		Weighted-Average
		Grant Date Fair
Director DSUs	Shares	Value
Outstanding at December 31, 2022	146,796	$	10.88
Outstanding at March 31, 2023	146,796	$	10.88

7.Net Income per Share

Basic net income per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed similarly, except that weighted-average common shares are increased to reflect the potential dilution that would occur if stock options were exercised or PSUs and DSUs were converted into common stock. The dilutive effects are calculated using the treasury stock method.

For the three months ended March 31, 2023, all stock options outstanding have been excluded from the dilutive earnings per common share calculation as the exercise price of these stock options was greater than the average market value of our common stock for those periods, resulting in an anti-dilutive effect. Additionally, for the three months ended March 31, 2023 and 2022, all PSUs were excluded from the diluted earnings per common share calculation as the PSUs do not currently meet the criteria for issuance.

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A reconciliation of basic and diluted earnings per common share for the three months ended March 31, 2023 and 2022, is as follows:


	Three Months Ended March 31,
	2023		2022

Net income	$	835	$	1,050

Weighted average shares:
Basic		69,162,223		69,162,223
Effect of dilutive DSUs		146,796		146,796
Diluted		69,309,019		69,309,019

Net income per share:
Basic		0.01		0.02
Diluted		0.01		0.02

8.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 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.

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.

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.

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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 such future expenditures.

Legal

On February 22, 2022, a purported Gatos stockholder filed a putative class action lawsuit in the United States District Court for the District of Colorado against the Company, certain of our former officers, and several directors. An amended complaint was filed on August 15, 2022. The amended complaint, allegedly brought on behalf of certain purchasers of Gatos common stock and certain traders of call and put options on Gatos common stock from December 9, 2020, through January 25, 2022, seeks, among other things, damages, costs, and expenses, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 as well as Sections 11 and 15 of the Securities Act of 1933. The amended complaint alleges that certain individual defendants and Gatos, pursuant to the control and authority of the individual defendants, made false and misleading statements and/or omitted certain material information regarding the mineral resources and reserves at the Cerro Los Gatos mine. Gatos and all defendants filed a motion to dismiss this action on October 14, 2022. That motion was fully briefed as of December 23, 2022. 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, the settling 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 the process of finalizing the amount of defense expenses incurred that are covered under the directors’ and officers’ insurance policy which will be deducted from 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 settlement payment to be paid by insurance. We and the other defendants will not admit any liability as part of the settlement. Since the settlement of the U.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 agreement in 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 of Justice on behalf of a purported class of all persons or entities, wherever they may reside or be domiciled, who acquired securities of Gatos in both the primary and secondary markets during the period from October 28, 2020, until January 25, 2022. The action asserts claims under Canadian securities legislation and at common law and seeks unspecified monetary damages and other relief in respect of allegations the defendants made false and misleading statements and omitted material information regarding the mineral resources and reserves of Gatos. The plaintiff filed motion materials for leave to proceed in respect of her statutory claims and for class certification on March 3, 2023, which materials were 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.

Equipment Loan Agreements

The Company guarantees the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of March 31, 2023, the LGJV had $311 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $14, with maturity dates through August 2023.

10.Debt

On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Facility”). The Credit Facility 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.

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Obligations under the Credit Facility may be accelerated upon the occurrence of certain customary events of default. The Company was in compliance with all covenants under the Credit Facility, as amended, as of March 31, 2023.

On December 19, 2022, the Company entered an amended and restated Credit Facility with certain Bank of Montreal affiliates (“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 Facility include:

●

audited financial statements for fiscal year 2021 are to be provided no later than April 15, 2023, and audited financial statements for fiscal year 2022 and unaudited financial statements for the first three fiscal quarters in fiscal year 2022 are to be provided no later than April 30, 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 Revolver bear interest at a rate equal to either a term SOFR rate plus a margin ranging from 3.00% to 4.00% or a U.S. base rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company.

On April 13, 2023, the Company extended its waiver agreement with BMO whereby the restated audited financial statements for fiscal year 2021, the audited financial statements for fiscal year 2022 and restated unaudited financial statements for the first three fiscal quarters in fiscal year 2022 are to be provided no later than April 30, 2023. The waiver was subsequently extended to allow the financial statements, including the unaudited financial statements for the first quarter of 2023, to be provided no later than July 15, 2023.

The current balance outstanding on the Credit Facility (net of debt issuance costs) is $8,689 and the principal balance outstanding is $9,000.

For the three months ended March 31, 2023, the Company recognized interest expense of $164, which has been recorded on the statements of operations under other income, and $28 for amortization of debt issuance costs. The Company paid interest of $173 for the three months ended March 31, 2023.

11.Segment Information

The Company operates in a single industry as a corporation engaged in the acquisition, exploration and development of primarily silver mineral interests. The Company has mineral property interests in Mexico. The Company’s reportable segments are based on the Company’s mineral interests and management structure and include Mexico and Corporate segments. The Mexico segment engages in the exploration, development and operation of the Company’s Mexican mineral properties and includes the Company’s investment in the LGJV. Financial information relating to the Company’s segments is as follows:


	Three Months Ended March 31, 2023						Three Months Ended March 31, 2022
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	26	$	—	$	26	$	110	$	—	$	110
General and administrative		224		5,312		5,536		609		6,168		6,777
Amortization		—		37		37		—		44		44
Equity income in affiliates		(5,011)		—		(5,011)		(6,835)		—		(6,835)
Net other (income) expense		(14)		(1,409)		(1,423)		2		(1,148)		(1,146)
Total assets		121,623		261,207		382,830		82,710		266,258		348,968

12.Investment in Affiliate

During the three months ended March 31, 2023 and 2022, the Company recognized $5,011 and $6,835 of income, respectively, on its investment in the LGJV Entities, representing its ownership share of the LGJV Entities’ results excluding the priority distribution payment. The equity income in affiliates includes amortization of the carrying value of the investment in excess of the underlying net assets of the LGJV Entities. This basis difference is being amortized as the LGJV Entities’ proven and probable reserves are processed.

The LGJV Entities combined balance sheets as of March 31, 2022 (unaudited), and December 31, 2022, and the combined unaudited statements of income for the three months ended March 31, 2023 and 2022, are as follows:

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LOS GATOS JOINT VENTURE

COMBINED BALANCE SHEETS (UNAUDITED)

(in thousands)


	March 31,		December 31,
	2023		2022
ASSETS
Current Assets
Cash and cash equivalents	$	63,324	$	34,936
Receivables		13,378		26,655
Inventories		11,855		11,542
VAT receivable		18,511		21,531
Income tax receivable		22,852		27,039
Other current assets		6,761		4,138
Total current assets		136,681		125,841
Non‑Current Assets
Mine development, net		227,362		232,515
Property, plant and equipment, net		193,568		198,600
Total non‑current assets		420,930		431,115
Total Assets	$	557,611	$	556,956

LIABILITIES AND OWNERS’ CAPITAL
Current Liabilities
Accounts payable and accrued liabilities	$	34,905	$	46,740
Related party payable		686		1,792
Accrued interest		14		11
Equipment loans		313		480
Total current liabilities		35,918		49,023

Non‑Current Liabilities
Lease liability		254		268
Asset retirement obligation		16,116		15,809
Net deferred tax liabilities		2,121		1,354
Total non‑current liabilities		18,491		17,431

Owners’ Capital
Capital contributions		540,639		540,638
Paid‑in capital		18,186		18,186
Accumulated deficit		(55,623)		(68,322)
Total owners’ capital		503,202		490,502
Total Liabilities and Owners’ Capital	$	557,611	$	556,956

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LOS GATOS JOINT VENTURE

COMBINED STATEMENTS OF INCOME (UNAUDITED)

(in thousands)


	Three Months Ended
	March 31,
	2023		2022
Revenue	$	69,865	$	87,608

Expenses
Cost of sales		25,988		25,088
Royalties		418		1,494
Exploration		463		2,121
General and administrative		3,936		2,820
Depreciation, depletion and amortization		20,819		16,342
		51,624		47,865

Other expense
Interest expense		126		91
Accretion expense		296		276
Foreign exchange gain		(839)		(691)
Total other income		(417)		(324)

Income before income tax expense		18,658		40,067

Income tax expense		5,957		13,988

Net income	$	12,701	$	26,079

13. Subsequent Events

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, the settling 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. The Company is in the process of finalizing the amount of defense expenses incurred that are covered under the directors’ and officers’ insurance policy which will be deducted from the $10,000 retention held by the Company. The Company expects to fund no more than $7,900 of the settlement, with the balance of the settlement payment to be paid by insurance. The Company recognized the legal settlement payable of $21,000 (note 4 – Accounts payable and other accrued liabilities) and the insurance proceeds receivable of $13,100 (note 3 – Other current assets) in the fourth quarter of fiscal 2022. We and the other defendants will not admit any liability as part of the settlement. Since the settlement of the U.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 agreement in principle that has been reached.

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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 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, 2022 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, 2022 (the “2022 10-K”), filed with the Securities and Exchange Commission (“SEC”) on June 22, 2023.

Forward-Looking Statements

This Report contains statements that constitute “forward looking information” and “forward-looking statements” within the meaning of U.S. and Canadian securities laws, including the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by words such as “may,” “might,” “could,” “would,” “achieve,” “budget,” “scheduled,” “forecasts,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements may include, but are not limited to, the following:

●

estimates of future mineral production and sales;

●

estimates of future production costs, other expenses and taxes for specific operations and on a consolidated basis;

●

estimates of future cash flows and the sensitivity of cash flows to gold, copper, silver, lead, zinc and other metal prices;

●

estimates of future capital expenditures, construction, production or closure activities and other cash needs, for specific operations and on a consolidated basis, and expectations as to the funding or timing thereof;

●

estimates as to the projected development of certain ore deposits, including the timing of such development, the costs of such development and other capital costs, financing plans for these deposits and expected production commencement dates;

●

estimates of mineral reserves and mineral resources statements regarding future exploration results and mineral reserve and mineral resource replacement and the sensitivity of mineral reserves to metal price changes;

●

statements regarding the availability of, and terms and costs related to, future borrowing or financing and expectations regarding future debt repayments;

●

statements regarding future dividends and returns to shareholders;

●

estimates regarding future exploration expenditures, programs and discoveries;

●

statements regarding fluctuations in financial and currency markets;

●

estimates regarding potential cost savings, productivity, operating performance and ownership and cost structures;

●

expectations regarding statements regarding future transactions, including, without limitation, statements related to future acquisitions and projected benefits, synergies and costs associated with acquisitions and related matters;

●

expectations of future equity and enterprise value;

●

expectations regarding the start-up time, design, mine life, production and costs applicable to sales and exploration potential of our projects;

●

statements regarding future hedge and derivative positions or modifications thereto;

●

statements regarding local, community, political, economic or governmental conditions and environments;

●

statements and expectations regarding the impacts of COVID-19 and variants thereof and other health and safety conditions;

●

statements regarding the impacts of changes in the legal and regulatory environment in which we operate, including, without limitation, relating to regional, national, domestic and foreign laws;

●

statements regarding climate strategy and expectations regarding greenhouse gas emission targets and related operating costs and capital expenditures;

●

statements regarding expected changes in the tax regimes in which we operate, including, without limitation, estimates of future tax rates and estimates of the impacts to income tax expense, valuation of deferred tax assets and liabilities, and other financial impacts;

●

estimates of income taxes and expectations relating to tax contingencies or tax audits;

●

estimates of future costs, accruals for reclamation costs and other liabilities for certain environmental matters, including without limitation, in connection with water treatment and tailings management;

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●

statements relating to potential impairments, revisions or write-offs, including without limitation, the result of fluctuation in metal prices, unexpected production or capital costs, or unrealized mineral reserve potential;

●

estimates of pension and other post-retirement costs;

●

statements regarding estimates of timing of adoption of recent accounting pronouncements and expectations regarding future impacts to the financial statements resulting from accounting pronouncements;

●

estimates of future cost reductions, synergies, savings and efficiencies in connection with full potential programs and initiatives; and

●

expectations regarding future exploration and the development, growth and potential of operations, projects and investments, including in respect of the CLG and the LGD.

Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by those forward-looking statements.

All forward-looking statements speak only as of the date on which they are made. These statements are not a guarantee of future performance and involve certain risks, uncertainties and assumptions concerning future events that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. Such factors should not be construed as exhaustive and should be read in conjunction 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 2022 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 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.

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 LGJV was formed on January 1, 2015, when we entered into the Unanimous Omnibus Partner Agreement with Dowa to further explore, and potentially develop and operate mining properties within the LGD. The LGJV Entities own certain surface and mineral rights associated with the LGD. The LGJV ownership is currently 70% Gatos Silver and 30% Dowa. On September 1, 2019, the LGJV commenced commercial production at CLG, which produces a silver containing lead concentrate and zinc concentrate. We are currently focused on the production and continued development of the CLG and the further exploration and development of the LGD.

First Quarter 2023 Highlights

Gatos Silver

●

The Company recorded net income of $0.8 million in Q1 2023 compared to a net income of $1.1 million in Q1 2022 primarily due to a $1.8 million decrease in equity income in affiliates;

●

The cash balance at March 31, 2023 was $12.9 million compared to $17.0 million at December 31, 2022, and the Company had $41.0 million available for withdrawal from its Credit Facility.

LGJV

Operational highlights

●

The processing plant processed an average of 2,894 tonnes per day during Q1 2023, 11% greater than in Q1 2022 and setting a new quarterly record;

●

Silver production was 2.43 million ounces in Q1 2023, and 2.39 million ounces in Q1 2022;

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Metal recoveries at the LGJV were slightly lower in Q1 2023 compared to Q1 2022 with silver recovery averaging 88.3%, zinc recovery averaging 62.2% and lead recovery averaging 88.6% in Q1 2023 compared to silver recovery averaging 89.7%, zinc recovery averaging 64.3% and lead recovery averaging 89.2% in Q1 2022;

●

The LGJV continued the construction of the zinc concentrate fluorine leach plant and commissioning started June 2023.

Financial highlights

●

Revenues of $69.8 million decreased 20% in Q1 2023 compared to the same period in 2022, primarily due to negative provisional revenue adjustments.

●

Cost of sales totaled $26.0 million in Q1 2023, 4% higher than Q1 2022, primarily as a result of the strengthening of the Mexican peso against the US dollar and the higher input costs. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver increased by $1.08 to $10.47 and increased by $2.85 to $2.66 respectively, for the quarter ended March 31, 2023;

●

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 $1.45 to $12.79 and decreased by $1.77 to $6.11, respectively, for the quarter ended March 31, 2023;

●

LGJV net income totaled $12.7 million for Q1 2023 compared to $26.1 million in Q1 2022, primarily due to the decrease in revenue and increase in depreciation, depletion and amortization expense. EBITDA was $39.6 million in Q1 2023, compared to $56.5 million in Q1 2022; and

●

Cash flow from operating activities decreased by 5% to $40.0 million for Q1 2023 from $42.1 million in Q1 2022 and free cash flow increased by 25% to $28.7 million in Q1 2023 from $22.9 million in Q1 2022.

Results of Operations

Results of operations Gatos Silver

The following table presents certain information relating to our operating results for the three months ended March 31, 2023 (“Q1 2023”) and 2022 (“Q1 2022”). In accordance with generally accepted accounting principles in the United States (‘‘U.S. GAAP’’), these financial results represent the consolidated results of operations of our Company and its subsidiaries (in thousands).


	Three Months Ended
	March 31,
	2023		2022
Expenses
Exploration	$	26	$	110
General and administrative		5,536		6,777
Amortization		37		44
Total expenses		5,599		6,931

Other income
Equity income in affiliates		5,011		6,835
Other income		1,423		1,146
Net other income		6,434		7,981
Net income	$	835	$	1,050
Net income per share:
Basic	$	0.01	$	0.02
Diluted	$	0.01	$	0.02

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Gatos Silver

Three Months Ended March 31, 2023, Compared to Three Months Ended March 31, 2022

General and administrative expenses

During the three months ended March 31, 2023, the Company incurred general and administration expense of $5.5 million compared to $6.8 million for the three months ended March 31, 2022. The $1.3 million decrease in Q1 2023 compared to Q1 2022 is mainly due to lower compensation expenses of $1.4 million and lower legal costs of $0.1 million, partly offset by higher costs related to debt service of $0.2 million incurred in Q1 2023.

Equity income in affiliates

The decrease in equity income in affiliates resulted primarily due to the $13.4 million decrease in net income at the LGJV to $12.7 million in Q1 2023, down from $26.1 million in Q1 2022 (See “Results of operations LGJV” below) resulting in a $9.4 million reduction in equity income from affiliates. This is offset by a $7.6 million impact of the priority dividend payment recognition in Q1 2023 compared to Q1 2022.

Net income

For the quarter ended March 31, 2023, the Company recorded net income of $0.8 million, or $0.01 per basic and diluted share, compared to net income of $1.0 million, or $0.02 per basic and diluted share, for the quarter ended March 31, 2022. The decrease was mainly due to the decrease in equity income in affiliates.

Results of operations LGJV

The following table presents operational information of the LGJV for the three months ended March 31, 2023 and 2022, and select financial information of the LGJV for the three months ended March 31, 2023 and 2022. The financial information is extracted from the Combined Statements of Income for the three months ended March 31, 2023 and 2022. The financial and operational information of the LGJV and CLG is shown on a 100% basis.


	For the three months ended
	March 31,
Financial	2023		2022
Amounts in thousands
Revenue	$	69,865	$	87,608
Cost of sales		25,988		25,088
Royalties		418		1,494
Exploration		463		2,121
General and administrative		3,936		2,820
Depreciation, depletion and amortization		20,819		16,342
Total other income		(469)		(324)
Income tax expense		5,957		13,988
Net income	$	12,701	$	26,079
Sustaining capital	$	7,642	$	17,773
Resource development drilling expenditures	$	3,006	$	—

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	For the three months ended
	March 31,
Operating Results	2023			2022
Tonnes milled (dmt)		260,428			234,985
Tonnes milled per day (dmt)		2,894			2,611
Average Grades
Silver grade (g/t)		329			353
Zinc grade (%)		3.93			4.13
Lead grade (%)		1.86			2.22
Gold grade (g/t)		0.30			0.30
Contained Metal
Silver ounces (millions)		2.43			2.39
Zinc pounds – in zinc conc. (millions)		14.0			13.8
Lead pounds – in lead conc. (millions)		9.5			10.3
Gold ounces – in lead conc. (thousands)		1.38			1.30
Recoveries¹
Silver – in both lead and zinc concentrates		88.3	%		89.7	%
Zinc – in zinc concentrate		62.2	%		64.3	%
Lead – in lead concentrate		88.6	%		89.2	%
Gold – in lead concentrate		55.3	%		57.1	%
Average realized price per silver ounce³	$	26.61		$	23.85
Average realized price per zinc pound³	$	1.43		$	2.11
Average realized price per lead pound³	$	1.05		$	1.01
Average realized price per gold ounce³	$	1,787		$	1,832
Co-product cash cost per ounce of payable silver equivalent²	$	10.47		$	9.39
By-product cash cost per ounce of payable silver²	$	2.66		$	(0.19)
Co-product AISC per ounce of payable silver equivalent²	$	12.79		$	14.24
By-product AISC per ounce of payable silver²	$	6.11		$	7.88

(1)	Recoveries are reported for payable metals in the identified concentrate.

(2)	See “Non-GAAP Financial Measures” below.

(3)	Realized prices include the impact of final settlement adjustments from sales.

LGJV

Three Months Ended March 31, 2023, Compared to Three Months Ended March 31, 2022

Revenue

The LGJV’s concentrate sales for the three months ended March 31, are summarized below:


(in thousands)	2023		2022
Lead concentrate revenue	$	64,978	$	60,082
Zinc concentrate revenue		22,652		27,228
Treatment and refining charges		(4,155)		(4,964)
Subtotal		83,475		82,346
Provisional revenue adjustments		(13,610)		5,262
Revenue	$	69,865	$	87,608

Revenue decreased by 20% in Q1 2023 compared to Q1 2022, primarily as a result of provisional revenue adjustments of negative $13.6 million in Q1 2023 compared to positive $5.3 million in Q1 2022. A 12% increase in the realized silver price and 9% increase in zinc sales volume were offset by a 32% decrease in the realized zinc price. Provisional revenue adjustments represents the potential future settlement adjustments based on commodity price fluctuations in concentrate sales volumes still subject to final settlement. Provisional commodity prices decreased during the period resulting in an unfavorable provisional revenue adjustment in Q1 2023.

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Cost of sales

Cost of sales increased by 4% primarily as a result of the increase in mill throughput, the strengthening of the Mexican peso against the US dollar and higher input costs. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver increased by $1.08 to $10.47 and increased by $2.85 to $2.66, respectively, for the quarter ended March 31, 2023, primarily attributable to a lower contribution from by-products due to substantially lower realized zinc prices which impacted by-product credits in the case of by-product cash cost per ounce, and ounces of silver equivalent in the case of co-product cash cost per ounce.

Royalties

Royalty expense decreased by $1.1 million in Q1 2023 compared to Q1 2022 due to a decrease in the royalty rate from 2% to 0.5% from Q2 2022, upon reaching a payment threshold per the terms of the applicable royalty agreement.

Exploration

Exploration expense decreased by $1.7 million in Q1 2023 mainly due to the capitalization of exploration costs related to the ongoing resource expansion drilling of the South-East Deeps Zone.

General and Administrative

General and administrative expense for Q1 2023 was 40% higher as compared to Q1 2022 primarily due to an increase in insurance expenses.

Depreciation, depletion and amortization

Depreciation, depletion, and amortization expense increased by approximately 27% quarter over quarter primarily as a result of an increase in tonnes mined, the completion of the third dam raise of the tailings storage facility in Q4 2022 and the commissioning of the paste plant in Q1 2023 at a cost of $8.3 million and $19.6 million, respectively.

Other income

Other income changed primarily due to favorable fluctuation in foreign exchange rates.

Net income

In Q1 2023, the LGJV had net income of $12.7 million compared to $26.1 million for Q1 2022. The change in net income was primarily due to the decrease in revenue and the increase in depreciation, depletion and amortization expense. The revenue decrease is driven by the decrease in metal prices affecting provisional revenue adjustments. The increase in depreciation, depletion and amortization expense is a result of increased tonnes mined and completion of sustaining capital projects over the past twelve months which are now being depreciated.

Sustaining capital

In Q1 2023, the sustaining capital expenditures primarily consisted of $ 5.3 million on mine development and $2.4 million on infrastructure and equipment including construction of the fluorine leach plant. During Q1 2022, the sustaining capital expenditures primarily consisted of $7.2 million on mine development, $5.3 million on the construction of the paste-fill plant, $3.3 million on the construction of the raise of the tailings storage facility, $1.1 million on underground power distribution infrastructure and $0.6 million on the construction of a ventilation raise.

Resource development drilling expenditures

In Q1 2023, resource development drilling expenditures primarily related to resource expansion drilling of the South-East Deeps zone. There were no capitalized exploration expenditures in Q1 2022.

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Cash Flows

Gatos Silver

The following table presents our cash flows for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
	2023		2022

	(in thousands)
Net cash used by
Operating activities	$	(4,103)	$	(1,332)
Investing activities		—		—
Financing activities		—		—
Total change in cash	$	(4,103)	$	(1,332)
Cash and cash equivalents, beginning of period	$	17,004	$	6,616
Cash and cash equivalents, end of period	$	12,901	$	5,284

The cash balance at March 31, 2023, was $12.9 million compared to $5.3 million at March 31, 2022.

Cash used by operating activities was $4.1 million and $1.3 million for the three months ended March 31, 2023 and 2022, respectively. The $2.8 million increase in cash usage was primarily due to payments made to vendors.

LGJV

The following table presents summarized information relating to the LGJV’s cash flows for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
	2023		2022
Net cash provided by (used by)
Operating activities	$	40,044	$	42,054
Investing activities		(11,366)		(19,166)
Financing activities		(290)		(1,937)
Total change in cash	$	28,388	$	20,951
Cash and cash equivalents, beginning of period		34,936		20,280
Cash and cash equivalents, end of period	$	63,324	$	41,231

The LGJV cash balance at March 31, 2023 was $63.3 million compared to $41.2 million at March 31, 2022.

Cash provided by operating activities was $40.0 million and $42.1 million for the three months ended March 31, 2023 and 2022, respectively. The $2.0 million decrease in cash provided by operating activities was primarily due to working capital changes.

Cash used by investing activities was $11.4 million and $19.2 million for the three months ended March 31, 2023 and 2022, respectively. Sustaining capital expenditures and resource development drilling expenditures was $7.2 million and $3.0 million, respectively for the three months ended March 31, 2023. Sustaining capital expenditures was $17.8 million for the three months ended March 31, 2022.

Cash used by financing activities decreased for the three months ended March 31, 2023 due to lower equipment loan payments.

Liquidity and Capital Resources

As of March 31, 2023 and December 31, 2022, the Company had cash and cash equivalents of $12.9 million and $17.0 million, respectively. The decrease in cash and cash equivalents was primarily due to corporate operating costs, partly offset by cash received from the LGJV for management and administrative services.

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As at May 30, 2023, the Company’s cash and cash equivalents were $10.5 million and $41.0 million was available to be drawn under the Credit Facility. The LGJV had cash and cash equivalents of $78.9 million. We believe we have sufficient cash and access to borrowings and other resources to carry out our business plans for at least the next 12 months. We manage liquidity risk through the Credit Facility and the management of our capital structure.

Contractual Obligations

There have been no material changes from the contractual obligations described in our 2022 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 2022 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.

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.

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Reconciliation of expenses (GAAP) to non-GAAP measures (Cash Costs and All-In Sustaining Costs)

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 AISC and (iv) by-product AISC for our operations.


	Three Months Ended		Three Months Ended
(in thousands, except unit costs)	March 31, 2023		March 31, 2022
Cost of sales	$	25,988	$	25,088
Royalties		418		1,494
Exploration		463		2,121
General and administrative		3,936		2,820
Depreciation, depletion and amortization		20,819		16,342
Expenses	$	51,624	$	47,865
Depreciation, depletion and amortization		(20,819)		(16,342)
Exploration¹		(463)		(2,121)
Treatment and refining charges²		4,155		4,964
Cash costs (A)	$	34,497	$	34,366
Sustaining capital		7,642		17,773
AISC (B)	$	42,139	$	52,139
By-product credits³		(28,587)		(34,791)
AISC, net of by-product credits (C)	$	13,552	$	17,348
Cash costs, net of by-product credits (D)	$	5,910	$	(425)

Payable ounces of silver equivalent (E)		3,294		3,661
Co-product cash cost per ounce of payable silver equivalent (A/E)	$	10.47	$	9.39
Co-product AISC per ounce of payable silver equivalent (B/E)	$	12.79	$	14.24

Payable ounces of silver (F)		2,219		2,202
By-product cash cost per ounce of payable silver (D/F)	$	2.66	$	(0.19)
By-product AISC per ounce of payable silver (C/F)	$	6.11	$	7.88

1	Exploration costs are not related to current operations.

2	Represent reductions on customer invoices and are included in Sales of the LGJV combined statement of income (loss).

3	Sustaining capital excludes resource development drilling costs related to resource development drilling of the South- East Deeps zone.

4	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.

Silver equivalents utilize the average realized prices during the three months ended March 31, 2023 of $26.61/oz silver, $1.43/lb zinc, $1.05/lb lead and $1,787/oz gold and the average realized prices during the three months ended March 31, 2022 of $23.85/oz silver, $2.11/lb zinc, $1.01/lb lead and $1,832/oz gold. Realized prices include the impact of final settlement adjustments from sales.

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EBITDA

Management uses EBITDA to evaluate the Company’s operating performance, to plan and forecast its operations, and assess leverage levels and liquidity measures. The Company believes the use of EBITDA reflects the underlying operating performance of our core mining business and allows investors and analysts to compare results of the Company to similar results of other mining companies. EBITDA do not represent, and should not be considered an alternative to, net income or cash flow from operations as determined under GAAP. The table below reconciles EBITDA, a non-GAAP measure to Net Income:


	Three Months Ended		Three Months Ended
(in thousands)	March 31, 2023		March 31, 2022
Net Income	$	835	$	1,050
Interest expense		164		103
Income tax expense		—		—
Depreciation, depletion and amortization		37		44
EBITDA	$	1,036	$	1,197

The table below reconciles of EBITDA, a non-GAAP measure, to the LGJV’s Net Income:


	Three Months Ended		Three Months Ended
(in thousands)	March 31, 2023		March 31, 2022
Net Income	$	12,701	$	26,079
Interest expense		126		91
Income tax expense		5,957		13,988
Depreciation, depletion and amortization		20,819		16,342
EBITDA	$	39,603	$	56,500

Free Cash Flow

Management uses Free Cash Flow as a non-GAAP measure to analyze cash flows generated from operations. Free Cash Flow is Cash Provided By (Used In) Operating Activities less Cash flow from Investing Activities as presented on the Consolidated Statements of Cash Flows. The Company believes Free Cash Flow is also useful as one of the bases for comparing the Company’s performance with its competitors. Although Free Cash Flow and similar measures are frequently used as measures of cash flows generated from operations by other companies, the Company’s calculation of Free Cash Flow is not necessarily comparable to such other similarly titled captions of other companies.

The following table sets forth a reconciliation of Free Cash Flow, a non-GAAP financial measure, to Cash Provided By (Used In) Operating Activities, which the Company believes to be the GAAP financial measure most directly comparable to Free Cash Flow.


	Three Months Ended		Three Months Ended
(in thousands)	March 31, 2023		March 31, 2022
Cash flows used by operations	$	(4,103)	$	(1,332)
Cash flow used by investing activities		—		—
Free cash flow	$	(4,103)	$	(1,332)

The following table sets forth a reconciliation of Free Cash Flow, a non-GAAP financial measure, to Cash Provided By (used in) Operating Activities for the LGJV.


	Three Months Ended		Three Months Ended
(in thousands)	March 31, 2023		March 31, 2022
Cash flows provided by operations	$	40,044	$	42,054
Cash flow used in investing activities		(11,366)		(19,166)
Free cash flow	$	28,678	$	22,888

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 €-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 submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers as appropriate, 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 March 31, 2022. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2023, due to the material weaknesses in our internal control over financial reporting described in the 2022 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 March 31, 2023, 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.

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.

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PART II – OTHER INFORMATION

Item 1.Legal Proceedings

We are, from time to time, involved in legal proceedings of a nature considered normal to our business. We believe that other than as set out below in this Item none of the litigation in which we are currently involved, or have been involved since the beginning of our most recently completed financial year, individually or in the aggregate, is material to or potentially material to our consolidated financial condition, cash flows or results of operations.

On February 22, 2022, a purported Company stockholder filed a putative class action lawsuit in the United States District Court for the District of Colorado against the Company, certain of our former officers, and several directors. An amended complaint was filed on August 15, 2022. The amended complaint, allegedly brought on behalf of certain purchasers of the Company’s common stock and certain traders of call and put options on the Company’s common stock from December 9, 2020 through January 25, 2022, seeks, among other things, damages, costs, and expenses, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 as well as Sections 11 and 15 of the Securities Act of 1933. The amended complaint alleges that certain individual defendants and the Company, pursuant to the control and authority of the individual defendants, made false and misleading statements and/or omitted certain material information regarding the mineral resources and reserves at the Cerro Los Gatos mine. The Company and all defendants filed a motion to dismiss this action on October 14, 2022. That motion was fully briefed 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.

By Notice of Action issued February 9, 2022 and subsequent Statement of Claim dated March 11, 2022 Izabela Przybylska commenced a putative class action against the Company, certain of its former officers and directors, and others in the Ontario Superior Court of Justice on behalf of a purported class of all persons or entities, wherever they may reside or be domiciled, who acquired securities of the Company in both the primary and secondary markets during the period from October 28, 2020 until January 25, 2022. The action asserts claims under Canadian securities legislation and at common law and seeks unspecified monetary damages and other relief in respect of allegations the defendants made false and misleading statements and omitted material information regarding the mineral resources and reserves of the Company. The plaintiff filed motion materials for leave to proceed in respect of her statutory claims and for class certification on March 3, 2023, which materials were 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.

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 2022 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 2022 10-K.

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

During the quarter ended March 31, 2023, 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.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

During the quarter ended March 31, 2023, there were no purchases made by or on behalf of the Company or any affiliated purchaser of the Company’s common stock.

Item 3.Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

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Item 6. Exhibits


3.1		Amended and Restated Certificate of Incorporation of Gatos Silver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed October 30, 2020)

3.2		Amended and Restated By-Laws of Gatos Silver, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed October 30, 2020)

10.1.1		Revolving Credit Facility, dated July 12, 2021, between Gatos Silver, Inc. and Bank of Montreal, Chicago Branch (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed July 12, 2021)

10.1.2		Amendment and Waiver to the Revolving Credit Agreement, dated March 7, 2022, among Gatos Silver, Inc., certain subsidiaries of Gatos Silver, Inc. from time to time, Bank of Montreal, Chicago Branch and certain financial institutions from time to time, as lenders, Bank of Montreal, Chicago Branch, as bookrunner and mandated lead arranger, and Bank of Montreal, Chicago Branch, as administrative agent for and on behalf of the lenders (incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed March 8, 2022)

10.1.3		Amendment No. 2 to the Revolving Credit Agreement, dated August 15, 2022, among Gatos Silver, Inc., certain subsidiaries of Gatos Silver, Inc. from time to time, Bank of Montreal, Chicago Branch and certain financial institutions from time to time, as lenders, Bank of Montreal, Chicago Branch, as bookrunner and mandated lead arranger, and Bank of Montreal, Chicago Branch, as administrative agent for and on behalf of the lenders (incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed October 14, 2022)

10.1.4		Wavier No. 3 to the Revolving Credit Agreement, dated October 13, 2022, among Gatos Silver, Inc., certain subsidiaries of Gatos Silver, Inc. from time to time, Bank of Montreal, Chicago Branch and certain financial institutions from time to time, as lenders, Bank of Montreal, Chicago Branch, as bookrunner and mandated lead arranger, and Bank of Montreal, Chicago Branch, as administrative agent for and on behalf of the lenders (incorporated by reference to Exhibit 1.2 of the Company’s Current Report on Form 8-K filed October 14, 2022)

10.1.5		Amended and Restated Revolving Credit Agreement, dated December 20, 2022, among Gatos Silver, Inc., certain subsidiaries of Gatos Silver, Inc. from time to time, Bank of Montreal, Chicago Branch, as administrative agent, BMO Capital Markets, as bookrunner and mandated lead arranger, and Bank of Montreal, Chicago Branch and certain financial institutions from time to time, as lenders (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 22, 2022)

10.2.1		Leaching Plant Confirmation Agreement dated March 17, 2022 among Minera Plata Real, S. de R.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Gatos Silver, Inc. and Dowa Metals & Mining Co., Ltd. (incorporated by reference to Exhibit 10.7.1 of the Company’s Annual Report on Form 10-K filed March 20, 2023)

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 tags are 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

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104*

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

*	Filed herewith

**	Furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GATOS SILVER, INC.
	(Registrant)

June 27, 2023	By:	/s/ Dale Andres
		Dale Andres
		Chief Executive Officer

June 27, 2023	By:	/s/ André van Niekerk
		André van Niekerk
		Chief Financial Officer