Try our mobile app
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 |
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 ☐
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 ☐
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
2
EXPLANATORY NOTE
References throughout this Amendment No. 1 to the Quarterly Report on Form 10-Q to “we,” “us,” “Gatos Silver,” “Company” or “our Company” are to Gatos Silver Inc., unless the context otherwise indicates.
This Amendment No. 1 (“Amendment No. 1”) amends the Quarterly Report on Form 10-Q of Gatos Silver, Inc. for the three months ended March 31, 2022 (“Affected Period”), as filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023 (the “Original Filing”).
This Amendment No. 1 contains the restated financial statements for us and the combined balance sheets and combined statements of income for the Los Gatos Joint Venture (“LGJV”) for the Affected Period to correct (i) the timing and recognition of net deferred tax assets and current income taxes at the 70%-owned LGJV and (ii) the accounting for the priority distribution due to our LGJV partner to exclude the priority distribution payment from the net income of the LGJV in calculating the equity income (loss) in affiliate for the Affected Period.
This Amendment No. 1 contains the following sections:
| ● | Item 1. Financial Statements |
| ● | Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ● | Item 4. Controls and Procedures |
| ● | Item 1A. Risk Factors; and |
| ● | Exhibits 31, 32, 101 and 104 of Item 6. Exhibits. |
Except as described above, this Amendment No. 1 does not amend, update or change any other items or disclosures contained in the Original Filing, and accordingly, this Amendment No. 1 does not reflect or purport to reflect any information or events occurring after the original filing date or modify or update those disclosures affected by subsequent events. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and the Company’s other filings with the SEC. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Original Filing.
3
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, | |||||||
2022 | 2021 | |||||||
Notes | (restated) |
| ||||||
ASSETS |
|
|
|
| ||||
Current Assets |
|
|
|
| ||||
Cash and cash equivalents | $ | | $ | | ||||
Related party receivables | 6 |
| |
| | |||
Other current assets | 4 |
| |
| | |||
Total current assets |
| |
| | ||||
Non‑Current Assets |
|
| ||||||
Investment in affiliates | 13 |
| |
| | |||
Other non-current assets |
| |
| | ||||
Total Assets | $ | | $ | | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
| ||||||
Current Liabilities |
|
| ||||||
Accounts payable and other accrued liabilities | 5 | $ | | $ | | |||
Non-Current Liabilities | ||||||||
Credit Facility, net of debt issuance costs | 11 | | | |||||
Shareholders' Equity |
| |||||||
Common Stock, $ |
| |
| | ||||
Paid‑in capital |
| |
| | ||||
Accumulated deficit |
| ( |
| ( | ||||
Total shareholders' equity |
| |
| | ||||
Total Liabilities and Shareholders' Equity | $ | | $ | | ||||
See accompanying notes to the condensed consolidated financial statements.
4
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, | ||||||||
| 2022 |
| 2021 | |||||
Notes | (restated) | |||||||
Expenses |
|
| ||||||
Exploration | $ | $ | | |||||
General and administrative |
|
| | |||||
Amortization |
|
| | |||||
Total expenses |
|
| | |||||
Other income (expense) |
| |||||||
Equity income in affiliates | 13 |
|
| | ||||
Arrangement fees |
| — |
| ( | ||||
Other income | 6 |
|
| | ||||
Net other income |
|
| | |||||
Net income (loss) | $ | $ | ( | |||||
Net income (loss) per share: | 8 |
|
|
|
| |||
Basic | $ | | $ | ( | ||||
Diluted | $ | | $ | ( | ||||
Weighted average shares outstanding: |
|
|
|
| ||||
Basic | | |||||||
Diluted |
|
| | |||||
See accompanying notes to the condensed consolidated financial statements.
5
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(In thousands of United States dollars, except for share amounts)
Number | Amount | ||||||||||||||||||
Common | Treasury | Common | Treasury | Paid‑in | Accumulated | ||||||||||||||
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Deficit |
| Total | ||||||
Balance at December 31, 2021 (restated) |
| |
| | $ | | $ | — | $ | | $ | ( | $ | | |||||
Stock‑based compensation |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
Net income (restated) |
| — |
| — |
| — |
| — |
| — |
| | | ||||||
Balance at March 31, 2022 (restated) |
| |
| — | $ | | $ | — | $ | | $ | ( | $ | | |||||
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 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
See accompanying notes to the condensed consolidated financial statements.
5
GATOS SILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of United States dollars)
Three Months Ended | ||||||||
March 31, | ||||||||
| 2022 |
| 2021 | |||||
Notes | (restated) | |||||||
OPERATING ACTIVITIES |
|
| ||||||
Net income (loss) | $ | | $ | ( | ||||
Adjustments to reconcile net income (loss) to net cash used by operating activities: |
|
|
|
| ||||
Amortization |
| |
| | ||||
Stock‑based compensation expense | 7 |
| |
| | |||
Other | 7 |
| |
| | |||
Equity income in affiliates | 13 |
| ( |
| ( | |||
| ||||||||
Changes in operating assets and liabilities: |
|
|
|
| ||||
Receivables from related‑parties |
| |
| ( | ||||
Accounts payable and other accrued liabilities |
| |
| ( | ||||
Other current assets | | | ||||||
Net cash used by operating activities |
| ( |
| ( | ||||
INVESTING ACTIVITIES |
|
|
|
| ||||
Investment in affiliates | 13 |
| — |
| ( | |||
Net cash used by investing activities |
| — |
| ( | ||||
FINANCING ACTIVITIES |
|
|
|
| ||||
Financing costs |
| — |
| ( | ||||
Issuance of common stock |
| — |
| | ||||
Net cash provided by financing activities |
| — | | |||||
Net decrease in cash and cash equivalents | ( |
| ( | |||||
Cash and cash equivalents, beginning of period |
| |
| | ||||
Cash and cash equivalents, end of period | | | ||||||
Interest paid | $ | | $ | — | ||||
See accompanying notes to the condensed consolidated financial statements.
6
GATOS SILVER, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands of United States dollars, except share, per share, option, and stock unit amounts)
1. Basis of Presentation
Basis of Consolidation and Presentation (restated)
The financial statements represent the condensed consolidated financial position and results of operations of Gatos Silver, Inc. and its subsidiaries, Gatos Silver Canada Corporation and Minera Luz del Sol S. de R.L. de C.V. Unless the context otherwise requires, references 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/A for the year ended December 31, 2021 (the “2021 10-K/A”).
As described in Note 3 – Restatement of Previously Issued Financial Statements, the Company’s financial statements for the three months ended March 31, 2022 (“Affected Period”), are restated in this Quarterly Report on Form 10-Q/A (Amendment No. 1) (this “Quarterly Report”) to correct the recording of income taxes of the Company’s investment in affiliate and recognition of the priority distribution payment, and the resulting adjustments to the Company’s financial statements. The restated financial statements are indicated as “Restated” in the unaudited interim financial statements and accompanying notes, as applicable. See Note 3—Restatement of Previously Issued Financial Statements for further discussion.
2. Summary of Significant Accounting Policies
Significant Accounting Policies
The consolidated financial statements for the year ended December 31, 2021, disclose those accounting policies considered significant in determining results of operations and financial position. There have been no material changes to, or in the application of, the accounting policies previously identified and described in the 2021 10-K/A.
Recent Accounting Pronouncements
There have been no accounting pronouncements issued or adopted during the three months ended March 31, 2022, which are expected to have a material impact on the financial statements.
3. Restatement of Previously Issued Financial Statements
In accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”), the following items are treated as errors and are material to the 2022 interim consolidated financial statements, and, therefore, require that the consolidated financial statements be restated.
Investment in affiliates – Income Taxes recorded by affiliates
During the preparation of the 2022 annual financial statements the Company identified that the investment in affiliates and equity income in affiliates were not correctly recorded as of March 31, 2022, and for the three months period then ended, respectively. The Company identified that its affiliate, the LGJV, did not recognize certain current and deferred tax assets and liabilities in accordance with ASC 740, Income Taxes. As a result, the Company determined that there were errors in the calculation of the deferred tax assets related to property plant and equipment, mine development and historical net operating losses. In certain cases, the tax basis was not calculated in accordance with the Mexican tax regulations. The LGJV understated the value of the deferred tax assets and overstated the value of current taxes payable at December 31, 2021, and recognized deferred tax assets in the quarter ended March 31, 2022.
7
The impact of the error on the financial statements of the LGJV was (i) a decrease in deferred tax assets of $
The impact of the LGJV tax errors on the Company’s financial statements was (i) a decrease in the investment in affiliates of $
Investment in affiliates – Priority distribution payment
The Company also identified that the accounting for the priority distribution payment to our partner in the LGJV was not recorded in accordance with ASC 970 –323-35, Equity Method and Joint Ventures. The priority distribution payment was required to be excluded from the initial equity income in affiliates and equity income should have been recognized after the priority distribution payment was accounted for.
The impact of the error described above on the Company’s financial statements was (i) a decrease in investment in affiliates of $
Investment in affiliates – Prior period restatement
The impact on the financial statements for year December 31, 2021, is discussed in the Amendment No. 1 to the Annual Report on Form 10-K/A. The impact of the restatements recorded in the financial statements for year ended December 2021 as described in Form 10-K/A for the year ended December 31, 2021, resulted in an decrease in the investment in affiliates of $
Impact of the Restatement
The aggregate impact of the above-noted changes, along with the decrease of $
These are considered errors in accordance with ASC 250 and are material to the consolidated financial statements for 2021 and require that the consolidated financial statements be restated.
The impact of the restatement on the Consolidated Balance Sheets, Consolidated Statement of Operations, Consolidated Statements of Shareholders’ Equity (Deficit) and Consolidated Statement of Cash Flows for the three months ended March 31, 2022, is presented below. These adjustments related to non-cash items, accordingly there were not changes to cash flows from operations, cash flows from investing activities or cash flows from financing activities for the three months ended March 31, 2022.
| March 31, 2022 |
|
|
| March 31, 2022 | |
Consolidated Balance Sheet | As previously reported | Adjustment | As restated | |||
Investment in affiliates |
| |
| ( |
| |
Total Assets |
| |
| ( |
| |
Paid in Capital | | | | |||
Accumulated deficit |
| ( |
| ( |
| ( |
Total shareholders’ equity |
| |
| ( |
| |
Total liabilities and shareholders’ equity |
| |
| ( |
| |
8
Three Months Ended | Three Months Ended | |||||
| March 31, 2022 |
|
| March 31, 2022 | ||
Consolidated Statement of Operations | As previously reported | Adjustment | As restated | |||
Equity income in affiliates |
| |
| ( |
| |
Net other income |
| |
| ( |
| |
Net income |
| |
| ( |
| |
Net income per share |
|
|
| |||
Basic | | ( | | |||
Diluted | | ( | |
Three Months Ended | Three Months Ended | |||||
| March 31, 2022 |
|
| March 31, 2022 | ||
Consolidated Statement of Shareholders’ Equity (Deficit) | As previously reported | Adjustment | As restated | |||
Paid in Capital |
| |
| |
| ( |
Accumulated Deficit Balance at March 31, 2022 |
| ( |
| ( |
| ( |
Total shareholders’ equity at March 31, 2022 |
| |
| ( |
| |
Three Months Ended | Three Months Ended | |||||
| March 31, 2022 |
|
| March 31, 2022 | ||
Consolidated Statement of Cash Flows | As previously reported | Adjustment | As restated | |||
Net income (loss) |
| |
| ( |
| |
Equity income in affiliates |
| ( |
| |
| ( |
The impact of the restatement on the Combined Balance Sheets and Combined Statements of Operations of the LGJV is presented below.
| March 31, 2022 |
|
|
| March 31, 2022 | |
Combined Balance Sheet | As previously reported | Adjustment | As restated | |||
Income tax receivable |
| — |
| |
| |
Total current assets |
| |
| |
| |
Deferred tax assets |
| |
| ( |
| |
Total assets |
| |
| ( |
| |
Income tax liability |
| |
| ( |
| — |
Total current liabilities |
| |
| ( |
| |
Accumulated deficit |
| ( |
| |
| ( |
Total owners’ capital |
| |
| |
| |
Total liabilities and owners’ capital |
| |
| ( |
| |
Three Months Ended | Three Months Ended | |||||
| March 31, 2022 |
|
| March 31, 2022 | ||
Combined Statement of Operations | As previously reported | Adjustment | As restated | |||
Other income |
| ( |
| |
| — |
Total other income |
| ( |
| |
| ( |
Income before income tax (expense) recovery |
| |
| ( |
| |
Income tax (expense) recovery |
| ( |
| ( |
| ( |
Net income |
| |
| ( |
| |
4. Other Current Assets
| March 31, 2022 |
| December 31, 2021 | |||
Value added tax receivable | $ | | $ | | ||
Prepaid expenses |
| |
| | ||
Other |
| |
| | ||
Total other current assets | $ | | $ | | ||
9
5. Accounts Payable and Other Accrued Liabilities
March 31, 2022 | December 31, 2021 | |||||
Accounts payable | $ | $ | | |||
Accrued expenses |
|
| | |||
Accrued compensation |
|
| | |||
Total accounts payable and other current liabilities | $ | $ | | |||
10
6. Related Party Transactions
LGJV
Under the Unanimous Omnibus Partner Agreement, the Company provides certain management and administrative services to the LGJV. The Company earned $
7. Stockholders’ Equity
The Company is authorized to issue
Common Stock Transactions
On July 19, 2021, the Company completed a follow-on public offering of
Stock-Based Compensation
The Company recognized stock-based compensation expense as follows:
| Three months ended March 31, | |||||
2022 |
| 2021 | ||||
Stock options | $ | | $ | | ||
Performance share units |
| |
| — | ||
$ | | $ | | |||
Stock Option Transactions
The Company granted
Total unrecognized stock-based compensation expense as of March 31, 2022, was $
11
Stock option activity for the three months ended March 31, 2022, is summarized in the following tables:
Weighted‑ | |||||
Average | |||||
Employee & Director Options |
| Shares |
| Exercise Price | |
Outstanding at December 31, 2021 | | $ | | ||
Granted |
| $ | |||
Forfeited |
| ( | $ | ||
Outstanding at March 31, 2022 |
| $ | |||
Vested at March 31, 2022 |
| $ | |||
Weighted‑ | |||||
Average | |||||
LGJV Personnel Options |
| Shares |
| Exercise Price | |
Outstanding at December 31, 2021 | | $ | | ||
Outstanding and vested at March 31, 2022 |
| | $ | ||
Performance Share Unit (“PSU”) Transactions
On December 17, 2021,
Deferred Stock Unit (“DSU”) Transactions
The following table summarizes the DSU activity for the three months ended March 31, 2022:
|
| Weighted-Average | |||
Grant Date | |||||
Director DSUs | Shares | Fair Value | |||
Outstanding at December 31, 2021 | | $ | | ||
Outstanding at March 31, 2022 | | $ | | ||
8. Net Income (Loss) per Share (restated)
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 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, 2022, all stock options have been excluded from the dilutive earnings per common share calculation as the exercise price of these stock options was greater than the average market value of our common stock for those periods, resulting in an anti-dilutive effect. For the three months ended March 31, 2022, all PSUs were excluded from the diluted earnings per common share calculation as the PSUs do not currently meet the criteria for issuance. For the three months ended March 31, 2021, the Company experienced a net loss, thus all stock awards outstanding have been excluded as they are anti-dilutive.
12
A reconciliation of basic and diluted earnings per common share for the three months ended March 31, 2022 and 2021, are as follows:
| Three Months Ended March 31, | |||||
2022 |
| 2021 | ||||
(restated) | ||||||
Net income (loss) | $ | | $ | ( | ||
Weighted average shares: |
|
|
|
| ||
Basic |
| |
| | ||
Effect of dilutive DSUs |
| |
| — | ||
Diluted |
| |
| | ||
Net income (loss) per share: |
|
|
|
| ||
Basic | $ | | $ | ( | ||
Diluted | $ | | $ | ( | ||
9. Fair Value Measurements
The Company establishes a framework for measuring the fair value of assets and liabilities in the form of a fair value hierarchy that prioritizes the inputs into valuation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority 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. For the year ended December 31, 2021, the Company recorded impairment charges associated with the investment in the LGJV and reduced the carrying amount of such asset subject to the impairment to their estimated fair value. See Note 13 – Investment in Affiliates for additional information on the impairment.
10. Commitments, Contingencies and Guarantees
In determining its accruals and disclosures with respect to loss contingencies, the Company will charge to income an estimated loss if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date 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.
13
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 (the “U.S. Class Action”). 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 $
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.
14
Dowa Debt Agreements
In July 2017, the LGJV operating entities consisting of Minera Plata Real S. de R.L. de C.V (“MPR”) and Operaciones San Jose del Plata S. de R.L. de C.V. (collectively, the “LGJV Entities”) entered into a loan agreement (the “Term Loan”) with Dowa whereby the 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 with Dowa (the “Dowa MPR Loan”) whereby the LGJV could borrow up to $
In connection with entering into the WCF (as defined below), 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 $
The Company guarantees the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of March 31, 2022, the LGJV had $
11. Debt
On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Facility”). The Credit Facility provides for a revolving line of credit in a principal amount of $
15
On July 19, 2021, the Company borrowed $
The Company recognized interest expense of $
On March 7, 2022, the Company amended the Credit Facility with the lender, Bank of Montreal (“BMO”), to address potential loan covenant deficiencies. The amendment includes the following revisions:
| ● | audited financial statements were to be provided prior to November 15, 2022; |
| ● | the credit limit was reduced to $ |
| ● | upon assessment of the new CLG financial model, BMO, in its sole discretion, may increase the credit limit up to the original $ |
| ● | requirement to provide updated financial projections for the CLG by September 30, 2022. The financial projections were provided by the required date and it was used as the basis for the amendment entered into on December 19, 2022 discussed below; and |
| ● | waivers of certain defaults, events of default, representations and warranties and covenants arising out of the facts that led to the potential reduction in metal content of the Company’s previously stated mineral reserve figures. |
On December 19, 2022, the Company entered an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of $
| ● | 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. A waiver was subsequently extended for the afore-mentioned financial statements and the unaudited financial statements for the three months ended March 31, 2023, to be provided no later than July 15, 2023; |
| ● | the maturity date is extended from July 31, 2024 to December 31, 2025; |
| ● | a change in the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”); and |
| ● | loans under the Revolver bear interest at a rate equal to either a term SOFR rate plus a margin ranging from |
16
12. 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, 2022 (restated) | Three Months Ended March 31, 2021 | |||||||||||||||||
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total | |||||||
Exploration | $ | $ | — | $ | $ | $ | — | $ | ||||||||||
General and administrative |
|
|
|
|
|
| ||||||||||||
Amortization |
| — |
|
|
| — |
|
| ||||||||||
Arrangement fees | — | — | — | — | ||||||||||||||
Equity income in affiliates |
| ( |
| — |
| ( |
| ( |
| — |
| ( | ||||||
Net other (income) expense |
|
| ( |
| ( |
|
| ( |
| ( | ||||||||
Total assets |
| $ |
| $ |
| $ |
| $ |
| $ |
| $ | ||||||
13. Investment in Affiliate (restated)
During the three months ended March 31, 2022 and 2021, the Company recognized $
The Company provided an updated technical report compliant with Regulation S-K subpart 1300 (the “Los Gatos Technical Report”) dated November 10, 2022. The Los Gatos Technical Report indicated a significant decrease in the mineral reserve and mineral resource from the previously issued technical report in 2020. The Company considered this reduction in the mineral reserve and mineral resources as an indicator of a possible other-than-temporary impairment and as a result compared the carrying value of the LGJV on December 31, 2021 to the fair value of the LGJV.
The fair value of the LGJV was estimated based on the net present value (“NPV”) of the expected cash flows to be generated by the LGJV on
On March 17, 2022, we entered into a definitive agreement with Dowa to build and operate a leaching plant to reduce fluorine levels in zinc concentrates produced at CLG at an expected construction cost of $
For the year ended December 31, 2021, the Company contributed $
The LGJV Entities’ restated combined balance sheets as of March 31, 2022, and December 31, 2021, and the restated combined statements of income for the three months ended March 31, 2022 and 2021, are as follows:
17
LOS GATOS JOINT VENTURE
COMBINED BALANCESHEETS (UNAUDITED)
(in thousands)
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
(restated) | ||||||
ASSETS |
|
|
|
| ||
Current Assets |
|
|
|
| ||
Cash and cash equivalents | $ | $ | | |||
Receivables |
|
| | |||
Inventories |
|
| | |||
VAT receivable |
|
| | |||
Income tax receivable | | — | ||||
Other current assets |
|
| | |||
Total current assets |
|
| | |||
Non‑Current Assets |
|
|
| |||
Mine development, net |
|
| | |||
Property, plant and equipment, net |
|
| | |||
Deferred tax assets |
|
| | |||
Total non‑current assets |
|
| | |||
Total Assets | $ | $ | | |||
LIABILITIES AND OWNERS' CAPITAL |
|
|
|
| ||
Current Liabilities |
|
|
|
| ||
Accounts payable and accrued liabilities | $ | $ | | |||
Related party payable |
|
| | |||
Accrued interest |
|
| | |||
Equipment loans |
|
| | |||
Unearned Revenue |
| — |
| | ||
Total current liabilities |
|
| | |||
Non‑Current Liabilities |
|
|
|
| ||
Equipment loans |
|
| | |||
Lease liability | | — | ||||
Reclamation obligations |
|
| | |||
Total non‑current liabilities |
|
| | |||
Owners' Capital |
|
|
| |||
Capital contributions |
|
| | |||
Paid‑in capital |
|
| | |||
Accumulated deficit |
| ( |
| ( | ||
Total owners' capital |
|
| | |||
Total Liabilities and Owners' Capital | $ | $ | | |||
18
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF INCOME (UNAUDITED)
(in thousands)
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
(restated) | ||||||
Revenue | $ | $ | | |||
Expenses |
|
| ||||
Cost of sales |
|
| | |||
Royalties |
|
| | |||
Exploration |
|
| | |||
General and administrative |
|
| | |||
Depreciation, depletion and amortization |
| |
| | ||
Total operating expenses |
|
| | |||
Other expense |
|
| ||||
Interest expense |
| | ||||
Accretion expense |
|
| | |||
Other income |
| — |
| ( | ||
Foreign exchange (gain) loss |
| ( |
| | ||
Total other (income) expense |
| ( |
| | ||
Income before income tax expense | | |||||
Income tax expense | — | |||||
Net income | $ | $ | | |||
14. Subsequent Events
In April 2022, the LGJV paid its first dividend of $
In July 2022 and November 2022, the LGJV paid additional dividends in the amount of $
On December 19, 2022, the Company entered into an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of $
19
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, 2021 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, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 20, 2023 (as amended by Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on June 26, 2023, the “2021 10-K”).
Forward-Looking Statements
This Report contains statements that constitute “forward looking information” and “forward-looking statements” within the meaning of U.S. and Canadian securities laws, including the Private Securities Litigation Reform Act of 1995. Forward-looking statements are 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; |
20
| ● | 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; |
| ● | 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 2021 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.
21
Restatement of previously issued Consolidated Financial Statements for the correction of an understatement of Investment in affiliate and an understatement of deferred taxes assets in the combined financial statements of the LGJV
In accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”), the following items are treated as errors and are material to the 2022 interim consolidated financial statements, and, therefore, require that the consolidated financial statements be restated.
Investment in affiliates – Income Taxes recorded by affiliates
During the preparation of the 2022 annual financial statements the Company identified that the investment in affiliates and equity income in affiliates were not correctly recorded as of March 31, 2022, and for the three months period then ended, respectively. The Company identified that its affiliate, the LGJV, did not recognize certain current and deferred tax assets and deferred tax liabilities in accordance with ASC 740, Income Taxes. As a result, the Company determined that there were errors in the calculation of the deferred tax assets related to property plant and equipment, mine development and historical net operating losses. In certain cases, the tax basis was not calculated in accordance with the Mexican tax regulations. The LGJV understated the value of the deferred tax assets and overstated the value of current taxes payable at December 31, 2021, and recognized deferred tax assets in the quarter ended March 31, 2022.
The impact of the error on the financial statements of the LGJV was (i) a decrease in deferred tax assets of $11.8 million, (ii) a $15.5 million change from an income tax liability to an income tax receivable at March 31, 2022, (iii) an increase in income tax expense of $9.5 million, and (iv) a decrease in other income of $1.3 million for the three months ended March 31, 2022.
The impact of the LGJV tax errors on the Company’s financial statements was (i) a decrease in the investment in affiliates of $7.6 million at March 31, 2022, and (ii) a decrease of $7.6 million in equity income in affiliates for the three months ended March 31, 2022.
Investment in affiliates – Priority distribution payment
The Company also identified that the accounting for the priority distribution payment to our partner in the LGJV was not recorded in accordance with ASC 970 –323-35, Equity Method and Joint Ventures. The priority distribution payment was required to be excluded from the initial equity income in affiliates and equity income should have been recognized after the priority distribution payment was accounted for.
The impact of the error described on the Company’s financial statements was (i) a decrease in investment in affiliates of $11.4 million at March 31, 2022, and (ii) a decrease in equity income in affiliates of $11.4 million for the three months ended March 31, 2022.
Investment in affiliates – Prior period restatement
The impact on the financial statements for year December 31, 2021, is discussed in the Amendment No. 1 to the Annual Report on Form 10-K/A. The impact of the restatements recorded in the financial statements for year ended December 2021 as described in Form 10-K for the year ended December 31, 2021, resulted in a decrease in the investment in affiliates of $21.9 million.
Impact of the Restatement
The aggregate impact of the above-noted changes, along with the decrease of $1.2 million in the basis amortization of the investment in affiliates resulting from the above-noted changes and a previously uncorrected immaterial misstatement to paid in capital ($0.6 million) was (i) a decrease in investment in affiliates of $39.6 million, (ii) an increase in accumulated deficit of $40.2 million, (iii) a decrease in shareholders’ equity of $39.6 million at March 31, 2022, and (iv) a decrease in net income of $17.8 million for the three months ended March 31, 2022. These adjustments related to non-cash items, accordingly there were not changes to cash flows from operations, cash flows from investing activities or cash flows from financing activities for the three months ended March 31, 2022.
These are considered errors in accordance with ASC 250 and are material to the consolidated financial statements for 2021 and require that the consolidated financial statements be restated.
22
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 2022 Highlights
Gatos Silver
| ● | The Company recorded net income of $1.05 million (restated) in Q1 2022 compared to a net loss of $1.6 million in Q1 2021 primarily due to $4.1 million increase in equity income from the LGJV; |
| ● | On January 25, 2022, the Company announced that, during our mineral resource and mineral reserve update process for the LGJV, we concluded that there were errors in the technical report for the CLG with an effective date of July 1, 2020, as well as indications that there may be an overestimation in the resource model. The Company provided an updated technical report (the Los Gatos Technical Report) dated November 10, 2022; and |
| ● | The cash balance at March 31, 2022 was $5.3 million compared to $6.6 million at December 31, 2021, and access to the Credit Facility was maintained albeit at a reduced level. On December 19, 2022, the Credit Facility was extended and the availability under the Credit Facility has been restored. |
LGJV
Operational highlights
| ● | Silver production was 2.4 million ounces in Q1 2022, a 60% increase over the 1.5 million ounces of silver produced in Q1 2021.The bulk of production for the quarter was sourced from the Central Zone, with higher productivity long hole production from this area which was originally designed for cut and fill mining methods; |
| ● | The processing plant processed an average of 2,611 tonnes per day during the quarter, 4% greater than nameplate design capacity, while continuing to rapidly respond to threats from the COVID-19 pandemic through effective operational plans and procedures to protect our workforce; |
| ● | Metal recoveries at the LGJV exceeded design rates for payable metals with silver recovery averaging 89.7%, zinc recovery averaging 64.3% and lead recovery averaging 89.2%; |
| ● | The LGJV made significant progress on key infrastructure projects, including the installation of underground dewatering equipment, the construction of the paste plant and the construction of the tailings dam raise. These projects are designed to support increased productivity and reduce unit costs, and were subsequently completed; |
| ● | The Company signed an agreement with Dowa for the LGJV to construct a leach plant that will reduce the fluorine content of zinc concentrates. The agreement allowed for a reduction in the initial priority dividend payable to Dowa by the LGJV as a mechanism for Dowa to cover a higher proportion of the construction and operating costs for the leach plant; and |
| ● | During the quarter, the LGJV reached an agreement with a Mexican energy supplier to provide 100% of CLG’s electrical power requirements from renewable energy sources. This agreement allows CLG to significantly reduce its dependency on fossil fuels, resulting in a material reduction to CLG’s carbon footprint. |
23
Financial highlights
| ● | Revenues of $87.6 million increased 89% in Q1 2022 compared to the same period in 2021, primarily due the increase in metal production and higher realized metal prices; |
| ● | Cost of sales totaled $25.1 million in Q1 2022, 27% higher than Q1 2021, primarily due to increased production. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 41% and 102% respectively, to $9.39 and ($0.19), respectively, for the quarter ended March 31, 2022; |
| ● | 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 36% and 60% respectively, to $14.24 and $7.88, respectively, for the quarter ended March 31, 2022; and |
| ● | LGJV net income totaled $26.1 million (restated) for Q1 2022 compared to $6.9 million in Q1 2021. |
Results of Operations
Results of operations Gatos Silver
The following table presents selected financial information for the three months ended March 31, 2022 (“Q1 2022”) and 2021 (“Q1 2021”). In accordance with generally accepted accounting principles in the United States (‘‘U.S. GAAP’’), these financial results represent the restated consolidated results of operations of our Company and its subsidiaries (in thousands).
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
(restated) | ||||||
Expenses |
|
|
|
| ||
Exploration | $ | 110 | $ | 224 | ||
General and administrative |
| 6,777 |
| 4,853 | ||
Amortization |
| 44 |
| 7 | ||
Total expenses |
| 6,931 |
| 5,084 | ||
Other income (expense) |
|
|
|
| ||
Equity income in affiliates |
| 6,835 |
| 2,701 | ||
Arrangement fees | — | (506) | ||||
Other income |
| 1,146 |
| 1,269 | ||
Net other income |
| 7,981 |
| 3,464 | ||
Net income (loss) | $ | 1,050 | $ | (1,620) | ||
Net income (loss) per share: | ||||||
Basic | $ | 0.02 | $ | (0.03) | ||
Diluted | $ | 0.02 | $ | (0.03) | ||
Gatos Silver
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Exploration expenses
During 2022, our exploration activities were focused on the LGJV with limited exploration costs in our wholly owned properties outside in the first quarter of 2022.
24
General and administrative expenses
During the three months ended March 31, 2022, we incurred general and administration expense of $6.8 million compared to $4.9 million for the three months ended March 31, 2021. The $1.9 million increase is due to higher legal fees of $1.0 million attributable to legal consultation regarding the mineral resource and mineral reserve errors in the July 2020 technical report for CLG, higher consulting fees of $0.4 million and higher compensation expense of $0.3 million incurred in Q1 2022.
Equity income in affiliates (restated)
The increase in equity income resulted primarily from the LGJV recording net income of $26.1 million in Q1 2022 compared to $6.9 million in Q1 2021 partially offset by the reduction of equity income due to the priority distribution payment in the period ended March 31, 2022. The increase in net income at the LGJV was primarily due to the increase sales volumes and higher realized metals prices for Q1 2022 compared to Q1 2021. See “Results of operations LGJV” below.
Other Income
Other income for the three months ended March 31, 2022 and 2021, consist primarily of management fees of $1.3 million the Company received from the LGJV.
Net income (loss) (restated)
For the quarter ended March 31, 2022, we recorded net income of $1.05 million (restated), or $0.02 per diluted share (restated), compared to a net loss of $1.6 million, or $0.03 per diluted share, for the quarter ended March 31, 2021, mainly due to the increase in equity income in affiliates as described above.
25
Results of operations LGJV
The following table presents operational information of the LGJV for the three months ended March 31, 2022 and 2021 and select restated financial information of the LGJV for the three months ended March 31, 2022 and 2021. The financial and operational information of the LGJV and CLG is shown on a 100% basis.
For the three months ended | |||||||
March 31, | |||||||
Financial |
| 2022 |
| 2021 |
| ||
Amounts in thousands |
|
|
|
| |||
Revenue | $ | 87,608 | $ | 46,330 | |||
Cost of sales |
| 25,088 |
| 19,805 | |||
Royalties |
| 1,494 |
| 884 | |||
Exploration |
| 2,121 |
| 649 | |||
General and administrative |
| 2,820 |
| 3,246 | |||
Depreciation, depletion and amortization |
| 16,342 |
| 10,949 | |||
Other (income) expense |
| (324) |
| 3,945 | |||
Income tax expense (restated) |
| 13,988 |
| — | |||
Net income (restated) |
| 26,079 |
| 6,852 | |||
Sustaining capital | $ | 17,773 | $ | 12,216 | |||
For the three months ended | |||||||
March 31, | |||||||
Operating Results |
| 2022 |
| 2021 | |||
Tonnes milled (dmt) |
| 234,985 |
| 203,479 | |||
Tonnes milled per day (dmt) |
| 2,611 |
| 2,261 | |||
Average Grades |
|
|
|
| |||
Silver grade (g/t) |
| 353 |
| 261 | |||
Zinc grade (%) |
| 4.13 |
| 3.26 | |||
Lead grade (%) |
| 2.22 |
| 2.01 | |||
Gold grade (g/t) |
| 0.30 |
| 0.32 | |||
Contained Metal |
|
|
|
| |||
Silver ounces (millions) |
| 2.4 |
| 1.5 | |||
Zinc pounds – in zinc conc. (millions) |
| 13.8 |
| 8.7 | |||
Lead pounds – in lead conc. (millions) |
| 10.3 |
| 7.6 | |||
Gold ounces – in lead conc. (thousands) |
| 1.3 |
| 1.2 | |||
Recoveries1 |
|
|
|
| |||
Silver – in both lead and zinc concentrates |
| 89.7 | % |
| 85.5 | % | |
Zinc – in zinc concentrate |
| 64.3 | % |
| 59.4 | % | |
Lead – in lead concentrate |
| 89.2 | % |
| 84.5 | % | |
Gold – in lead concentrate |
| 57.1 | % |
| 56.5 | % | |
Average realized price per silver ounce2 | $ | 23.85 | $ | 27.69 | |||
Average realized price per zinc pound2 | $ | 2.11 | $ | 1.20 | |||
Average realized price per lead pound2 | $ | 1.01 | $ | 0.92 | |||
Average realized price per gold ounce2 | $ | 1,832 | $ | 1,764 | |||
Co-product cash cost per ounce of payable silver equivalent3 | $ | 9.39 | $ | 15.83 | |||
By-product cash cost per ounce of payable silver3 | $ | (0.19) | $ | 10.20 | |||
Co-product AISC per ounce of payable silver equivalent3 | $ | 14.24 | $ | 22.15 | |||
By-product AISC per ounce of payable silver3 | $ | 7.88 | $ | 19.52 | |||
(1) | Recoveries are reported for payable metals in the identified concentrate. Recoveries reported previously were based on total metal in both concentrates. |
(2) | Realized prices include the impact of final settlement adjustments from sales. |
(3) | See “Non-GAAP Financial Measures” below. |
26
LGJV
Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021
Revenue
The LGJV’s concentrate sales for the three months ended March 31, 2022 and 2021, are summarized below (in thousands):
Three Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Lead concentrate revenue | $ | 60,082 | $ | 41,549 | ||
Zinc concentrate revenue |
| 27,228 |
| 11,934 | ||
Treatment and refining charges |
| (4,964) |
| (6,722) | ||
Subtotal |
| 82,346 |
| 46,761 | ||
Provisional revenue adjustments |
| 5,262 |
| (431) | ||
Revenue | $ | 87,608 | $ | 46,330 | ||
Revenue increased by 89% in Q1 2022 compared to Q1 2021, primarily as a result of an increase in concentrate sales and realized metal prices in Q1 2022. The increase in concentrate sales were primarily due to higher zinc and lead concentrate production of 59% and 36%, respectively, and higher realized zinc and lead prices of 76% and 10%, respectively. In addition, silver, zinc and lead ore grades processed increased 35%, 27% and 10%, respectively. Provisional revenue represents potential future settlement adjustments based on commodity price fluctuations in concentrate sales volumes still subject to final settlement. Provisional revenue increased period over period primarily due to increases in actual and forward metals prices from the beginning of Q1 2022 to the end of Q1 2022. At the end of Q1 2021, lead prices decreased from the beginning of the period partially offset by a slight increase in silver prices over this period.
Cost of sales
Cost of sales increased by 27% primarily as a result of the increase in production and higher input costs and to a lesser extent higher input costs due to inflation. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 41% and 102% respectively, to $9.39 and ($0.19), respectively, for the quarter ended March 31, 2022, primarily attributable to higher metal production during Q1 2022.
Royalties
Royalty expense increased by $0.6 million in Q1 2022 due to increased revenue resulting primarily from the increase in metal prices and increase in sales volumes during Q1 2022.
Exploration
Exploration expense increased by $1.5 million in Q1 2022 mainly due to additional drilling for CLG, Esther and the Los Gatos District exploration targets.
General and Administrative
General and administrative expense for Q1 2022 was 13% lower as compared to Q1 2021 primarily due to reduced COVID-19 related costs.
Depreciation, depletion and amortization
Depreciation, depletion, and amortization expense increased by approximately 49% quarter over quarter primarily as a result of an increase in tonnes mined and also due to the decrease in the mineral reserve and the shorter mine life based on the Los Gatos Technical Report dated November 10, 2022. The lower mineral reserve tonnes and shorter life-of-mine reduced the basis for the depreciation and as a result increased the depreciation, depletion, and amortization expense incurred in Q1 2022.
27
Other (income) expense
Other (income) expense changed primarily due to a 96% decrease in interest expense due to lower interest rates, lower borrowings and lower arrangement fees incurred during Q1 2022 compared to Q1 2021 as a result of the retirement of the WCF and the Term Loan in March 2021 and July 2021, respectively.
Income tax (expense) recovery (restated)
The LGJV recognized an income tax expense of $14.0 million (restated) in Q1 2022, compared to $nil in Q1 2021, due to utilization of loss carryforwards in 2021 and significantly higher taxable income in 2022.
Net income (restated)
In Q1 2022, the LGJV had net income of $26.1 million (restated) compared to $6.9 million for Q1 2021. The change in net income was primarily due to the significant increase in revenue driven by the strong improvement in sales volumes and metals prices during period, partially offset by an increase in cost of sales, royalties, depreciation, depletion and amortization and income tax expense. In addition, interest expense decreased 96% due to lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan.
Sustaining capital
In 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. During Q1 2021 major sustaining capital expenditures included $6.4 million on mine development, $2.0 million on the processing plant and on the construction of a raise of the tailings storage facility, $1.1 million for the purchase of mining equipment, and $0.9 million on the drilling of dewatering wells.
Cash Flows
Gatos Silver
The following table presents our cash flows for the three months ended March 31, 2022 and 2021.
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
(in thousands) | ||||||
Net cash provided by (used by) |
|
|
|
| ||
Operating activities | $ | (1,332) | $ | (6,589) | ||
Investing activities |
| — |
| (113,823) | ||
Financing activities |
| — |
| 1,297 | ||
Total change in cash | $ | (1,332) | $ | (119,115) | ||
Cash and cash equivalents, beginning of period | $ | 6,616 | $ | 150,146 | ||
Cash and cash equivalents, end of period | $ | 5,284 | $ | 31,031 | ||
The cash balance at March 31, 2022 decreased to $5.3 million compared to $31.0 million at March 31, 2021. Subsequent to Q1 2022, the Company received $5.9 million, $10.0 million and $13.3 million, respectively, for the April 2022, July 2022 and November 2022 dividend payments from the LGJV.
Cash used by operating activities was $1.3 million and $6.6 million for the three months ended March 31, 2022 and 2021, respectively. The $5.3 million decrease in cash usage was primarily due to favorable working capital changes from operations.
Cash used by investing activities was nil and $113.8 million for the three months ended March 31, 2022 and 2021, respectively. Cash used for the three months ended March 31, 2021, was primarily due to the $71.6 million acquisition of the 18.5% interest in the LGJV from Dowa and the $42.0 million pro-rata capital contribution to the LGJV for the extinguishment of the WCF in March 2021.
28
Cash provided by financing activities was nil and $1.3 million for the three months ended March 31, 2022 and 2021, respectively. Cash provided for the three months ended March 31, 2021, primarily related to the $1.6 million in proceeds from the issuance of common stock from the exercise of stock options.
LGJV
The following table presents summarized information relating to the LGJV’s cash flows for the three months ended March 31, 2022 and 2021.
| Three Months Ended March 31, | |||||
2022 |
| 2021 | ||||
(in thousands) | ||||||
Net cash provided by (used by) | ||||||
Operating activities | $ | 42,054 | $ | 23,335 | ||
Investing activities |
| (19,166) |
| (17,596) | ||
Financing activities |
| (1,937) |
| (1,974) | ||
Total change in cash | $ | 20,951 | $ | 3,765 | ||
Cash and cash equivalents, beginning of period | $ | 20,280 | $ | 1,676 | ||
Cash and cash equivalents, end of period | $ | 41,231 | $ | 5,441 | ||
The LGJV cash balance at March 31, 2022 was $41.2 million compared to $5.4 million at March 31, 2021. Subsequent to Q1 2022, the LGJV paid dividends of $20.0 million, $15.0 million, and $20.0 million to its partners in April 2022, July 2022, and November 2022.
Cash provided by operating activities was $42.1 million and $23.3 million for the three months ended March 31, 2022 and 2021, respectively. The $18.7 million increase in cash provided by operating activities was primarily due to the increase in revenue due to higher metals prices and sales volumes for the quarter ended March 31, 2022, compared to the prior year period, partially offset by increased income taxes, receivables from customers and other favorable working capital changes.
Cash used by investing activities was $19.2 million and $17.6 million for the three months ended March 31, 2022 and 2021, respectively. The $1.6 million increase in cash used was primarily due to $5.7 million of higher expenditures for property, plant and equipment, primarily related to construction of the paste plant, partially offset by $4.0 million of lower mine development expenditures.
Cash used by financing activities was consistent quarter over quarter due to similar equipment loan payments.
Liquidity and Capital Resources
As of March 31, 2022 and December 31, 2021, the Company had cash and cash equivalents of $5.3 million and $6.6 million, respectively. The decrease in cash and cash equivalents was primarily due to corporate operating costs partially offset by cash received from the LGJV for management and administrative services.
On July 12, 2021, the Company entered into the Credit Facility that provides for a $50 million revolving line of credit and has an accordion feature, which allows for an increase in the total line of credit up to $100 million (reduced to $75 million per the December 19, 2022 amendment), subject to certain conditions. As of March 31, 2022, $13.0 million was outstanding under the Credit Facility. As of the date of this report, the balance outstanding on the Credit Facility is $9.0 million, following a $4.0 million principal repayment in December 2022.
On May 31, 2023, the Company’s cash and cash equivalents were $10.5 million and we had $41.0 million available to be drawn under the Credit Facility. The LGJV had cash and cash equivalents of $78.9 million on May 31, 2023. We believe we have sufficient cash and access to borrowings and other resources to carry out our business plans for at least the next 12 months. We may decide to increase our current financial resources with external financings if our long-term business needs require us to do so however there can be no assurance that the financing will be available to us on acceptable terms, or at all. We manage liquidity risk through the Credit Facility and the management of our capital structure.
29
Contractual Obligations
There have been no material changes from the contractual obligations described in our 2021 10-K.
Critical Accounting Policies
Please refer to Note 2 – Summary of Significant Accounting Policies in our consolidated financial statements included in this Report and the 2021 10-K for discussion of our critical accounting policies and estimates.
Jumpstart Our Business Startups Act of 2012
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” 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. Please see “Cash Costs and All-In Sustaining Costs” and “Reconciliation of expenses (GAAP) to non-GAAP measures” below.
Cash Costs and All-In Sustaining Costs
Cash costs and all-in sustaining costs (“AISC”) are non-GAAP measures. AISC was calculated based on guidance provided by the World Gold Council (“WGC”). WGC is not a regulatory industry organization and does not have the authority to develop accounting standards 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.
30
Reconciliation of expenses (GAAP) to non-GAAP measures
The table below presents a reconciliation between the most comparable GAAP measure of the LGJV’s expenses to the non-GAAP measures of (i) cash costs, (ii) cash costs, net of by-product credits, (iii) co-product AISC and (iv) by-product AISC for our operations. The calculation for determining silver equivalent ounces was updated to include final settlements in the calculation of the realized metal prices and cash cost and AISC per ounce was updated to include period end accruals (volume and value for payable metals). The prior period comparatives were updated to reflect this change however the cash cost and AISC per ounce calculated on this basis is not materially different from the cash cost and AISC cost per ounce previously reported.
| Three Months Ended |
| Three Months Ended | |||
(in thousands, except unit costs) | March 31, 2022 | March 31, 2021 | ||||
Cost of sales | $ | 25,088 | $ | 19,805 | ||
Royalties |
| 1,494 |
| 884 | ||
Exploration |
| 2,121 |
| 649 | ||
General and administrative |
| 2,820 |
| 3,246 | ||
Depreciation, depletion and amortization |
| 16,342 |
| 10,949 | ||
Expenses | $ | 47,865 | $ | 35,533 | ||
Depreciation, depletion and amortization |
| (16,342) |
| (10,949) | ||
Exploration1 |
| (2,121) |
| (649) | ||
Treatment and refining charges2 |
| 4,964 |
| 6,635 | ||
Cash costs (A) | $ | 34,366 | $ | 30,570 | ||
Sustaining capital |
| 17,773 |
| 12,216 | ||
AISC (B) | $ | 52,139 | $ | 42,786 | ||
By-product credits3 |
| (34,791) |
| (17,212) | ||
AISC, net of by-product credits (C) | $ | 17,348 | $ | 25,574 | ||
Cash costs, net of by-product credits (D) | $ | (425) | $ | 13,358 | ||
Payable ounces of silver equivalent4 (E) |
| 3,661 |
| 1,932 | ||
Co-product cash cost per ounce of payable silver equivalent (A/E) | $ | 9.39 | $ | 15.83 | ||
Co-product AISC per ounce of payable silver equivalent (B/E) | $ | 14.24 | $ | 22.15 | ||
Payable ounces of silver (F) |
| 2,202 |
| 1,310 | ||
By-product cash cost per ounce of payable silver (D/F) | $ | (0.19) | $ | 10.20 | ||
By-product AISC per ounce of payable silver (C/F) | $ | 7.88 | $ | 19.52 | ||
(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) By-product credits reflect realized metal prices of zinc, lead and gold for the applicable period, which includes any final settlement adjustments from prior periods.
(4) Silver equivalents utilize the average realized prices during the three months ended March 31, 2022, of $23.85/oz silver, $2.11/lb zinc, $1.01/lb lead and $1,832/oz gold and the average realized prices during the three months ended March 31, 2021 of $27.69/oz silver, $1.20/lb zinc, $0.92/lb lead and $1,764/oz gold. Realized prices include the impact of final settlement adjustments from sales.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or 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.
31
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, 2022, due to the material weaknesses in our internal control over financial reporting described in the 2021 10-K/A.
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, 2022, 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.
PART II – OTHER INFORMATION
Item 1A. Risk Factors
Factors that could cause our actual results to differ materially from those in this Report include, but are not limited to, any of the risks described in the 2021 10-K/A. Any of these factors could result in a significant or material adverse effect on our results of operations or 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 2021 10-K/A.
Item 6. Exhibits
31.1* | ||
31.2* | ||
32.1** | ||
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 | |
32
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104* | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) |
* | Filed herewith |
** | Furnished herewith |
33
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 26, 2023 | ||
By: | /s/ Dale Andres | |
|
| Dale Andres |
|
| Chief Executive Officer |
June 26, 2023 | ||
By: | /s/ André van Niekerk | |
|
| André van Niekerk |
|
| Chief Financial Officer |
34
