[PART I – FINANCIAL INFORMATION](index=3&type=section&id=Part%20I%20-%20FINANCIAL%20INFORMATION) This section presents Gatos Silver, Inc.'s unaudited financial statements and management's discussion of financial condition and operations [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents Gatos Silver, Inc.'s unaudited condensed consolidated financial statements and notes for the specified periods [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section summarizes the Company's financial position, detailing assets, liabilities, and shareholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $29,607 | $150,146 | | Total Assets | $284,558 | $265,410 | | Total Shareholders' Equity | $280,777 | $261,386 | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the Company's revenues, expenses, and net income or loss from continuing operations over specific periods Net Income (Loss) from Continuing Operations (in thousands) | Period | 2021 | 2020 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $13,491 | $(10,599) | +$24,090 | | Six Months Ended June 30 | $11,871 | $(26,640) | +$38,511 | Basic Net Income (Loss) per Share from Continuing Operations | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended June 30 | $0.23 | $(0.26) | | Six Months Ended June 30 | $0.20 | $(0.66) | [Condensed Consolidated Statements of Shareholders' Equity (Deficit)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity%20(Deficit)) This section outlines changes in the Company's shareholders' equity, including net income, stock-based compensation, and stock issuance - Total Shareholders' Equity increased from **$261.4 million** at December 31, 2020, to **$280.8 million** at June 30, 2021[13](index=13&type=chunk) Key Changes in Shareholders' Equity (Six Months Ended June 30, 2021, in thousands) | Item | Amount | | :--- | :--- | | Stock-based compensation | $3,568 | | Issuance of common stock | $4,221 | | Net income (Q2 2021) | $13,491 | | Net loss (Q1 2021) | $(1,620) | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents the Company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Six Months Ended June 30, in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used by operating activities | $(7,895) | $(9,537) | | Net cash used by investing activities | $(116,595) | $(7,573) | | Net cash provided by financing activities | $3,951 | $9,979 | | Net decrease in cash and cash equivalents | $(120,539) | $(7,131) | [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements [1. Description of Business](index=7&type=section&id=1.%20Description%20of%20Business) This note describes Gatos Silver's core business as a silver-dominant production and exploration company in Mexico - Gatos Silver is a silver-dominant production, development, and exploration company focused on a new silver and zinc-rich mineral district in southern Chihuahua State, Mexico[18](index=18&type=chunk) - The Company's primary efforts are focused on the Los Gatos Joint Venture (LGJV) with Dowa Metals and Mining Co., Ltd., where Gatos Silver holds a **70.0% ownership** as of June 30, 2021[19](index=19&type=chunk)[20](index=20&type=chunk) - Commercial production of lead and zinc concentrates at the LGJV commenced on September 1, 2019[21](index=21&type=chunk) - The Company distributed its wholly-owned subsidiary, Silver Opportunity Partners LLC (SOP), in October 2020, presenting it as discontinued operations[24](index=24&type=chunk) [2. Summary of Significant Accounting Policies](index=7&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the key accounting principles and policies applied in preparing the interim financial statements - The interim condensed consolidated financial statements are unaudited and prepared in accordance with GAAP for interim financial information[26](index=26&type=chunk) - No material changes to accounting policies previously identified in the 2020 10-K[27](index=27&type=chunk) - Adopted ASU No. 2016-02 (Leases) and ASU No. 2019-12 (Income Taxes) on January 1, 2021, with no material impact[28](index=28&type=chunk) [3. Property, Plant and Equipment, net](index=8&type=section&id=3.%20Property,%20Plant%20and%20Equipment,%20net) This note details the Company's mineral concessions and related property, plant, and equipment assets in Mexico - Mineral concessions in Mexico are held by Mexican-incorporated companies and are valid for **50 years**, extendable if kept in good standing[29](index=29&type=chunk) - The Santa Valeria Concession requires a **1%** production royalty payment of net smelter returns[30](index=30&type=chunk) [4. Accounts Payable and Other Accrued Liabilities](index=8&type=section&id=4.%20Accounts%20Payable%20and%20Other%20Accrued%20Liabilities) This note provides a breakdown of the Company's current liabilities, including accounts payable and accrued expenses Accounts Payable and Other Accrued Liabilities (in thousands) | Category | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Accounts payable | $369 | $560 | | Accrued expenses | $2,059 | $1,240 | | Accrued compensation | $1,093 | $1,964 | | Other | $260 | $260 | | **Total** | **$3,781** | **$4,024** | [5. Related-Party Transactions](index=9&type=section&id=5.%20Related-Party%20Transactions) This note discloses transactions and agreements between the Company and its related parties, primarily the LGJV - The Company earned **$2,500 thousand** and **$2,100 thousand** from the LGJV for consulting and administrative services for the six months ended June 30, 2021 and 2020, respectively[32](index=32&type=chunk) - Receivables from the LGJV under this agreement were **$3,700 thousand** as of June 30, 2021[32](index=32&type=chunk) - The Company provides limited executive and managerial advisory services to Sunshine Silver Mining & Refining Corporation (SSMRC) and is reimbursed for costs[33](index=33&type=chunk) [6. Net Income (Loss) per Share](index=9&type=section&id=6.%20Net%20Income%20(Loss)%20per%20Share) This note presents the basic and diluted net income or loss per share from continuing operations Net Income (Loss) per Share (Continuing Operations) | Period | Basic EPS 2021 | Basic EPS 2020 | Diluted EPS 2021 | Diluted EPS 2020 | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $0.23 | $(0.26) | $0.22 | $(0.26) | | Six Months Ended June 30 | $0.20 | $(0.66) | $0.20 | $(0.66) | - **1,391,236 shares** were excluded from diluted EPS calculation for the three and six months ended June 30, 2021, due to their anti-dilutive effect[35](index=35&type=chunk) [7. Stockholders' Equity](index=11&type=section&id=7.%20Stockholders'%20Equity) This note details the components of stockholders' equity, including common stock, stock options, and deferred stock units - The Company is authorized to issue **700,000,000 shares** of common stock and **50,000,000 shares** of preferred stock[38](index=38&type=chunk) Stock Option Activity (Six Months Ended June 30, 2021) | Activity | Shares | Weighted-Average Exercise Price | | :--- | :--- | :--- | | Granted | 489,719 | $16.72 | | Exercised | 513,950 | $8.21 | | Outstanding at June 30, 2021 | 5,372,699 | $13.33 | - Total unrecognized stock-based compensation expense as of June 30, 2021, was **$10.5 million**, expected to be recognized over a weighted average period of **2.0 years**[41](index=41&type=chunk) - **77,175 Deferred Stock Units** (DSUs) were converted to common stock during the six months ended June 30, 2021[45](index=45&type=chunk) [8. Fair Value Measurements](index=12&type=section&id=8.%20Fair%20Value%20Measurements) This note describes the Company's fair value measurements for financial and non-financial assets and liabilities - The carrying amounts of financial instruments (cash and cash equivalents, receivables, accounts payable, and other current liabilities) approximate fair value due to their short maturities[48](index=48&type=chunk) - Non-financial assets and liabilities, including the initial investment in affiliates, are classified as Level 3 in the fair value hierarchy due to unobservable inputs and lack of market activity[49](index=49&type=chunk)[50](index=50&type=chunk) [9. Commitments, Contingencies and Guarantees](index=12&type=section&id=9.%20Commitments,%20Contingencies%20and%20Guarantees) This note outlines the Company's significant contractual obligations, debt agreements, and guarantees - The LGJV Term Loan with Dowa had **$206.9 million** outstanding as of June 30, 2021, and was repaid in full on July 26, 2021, through capital contributions[53](index=53&type=chunk)[54](index=54&type=chunk) - The Dowa MPR Loan was fully extinguished in May 2019, with **$50.7 million** converted to equity, increasing Dowa's LGJV ownership to **48.5%**. Gatos Silver repurchased this **18.5% interest** for **$71.6 million** on March 11, 2021, increasing its LGJV ownership to **70.0%**[56](index=56&type=chunk) - The Working Capital Facility (WCF) with Dowa, with **$60.0 million** outstanding, was extinguished on March 11, 2021, with Gatos Silver contributing **$42.0 million**[57](index=57&type=chunk) - Gatos Silver guaranteed **70%** of the Term Loan and all LGJV equipment loan obligations[58](index=58&type=chunk) [10. Discontinued Operations](index=13&type=section&id=10.%20Discontinued%20Operations) This note provides financial information and details regarding the Company's discontinued U.S. segment - In October 2020, the Company completed the distribution of its U.S. segment, Silver Opportunity Partners LLC (SOP), which is now presented as discontinued operations[59](index=59&type=chunk) Net Loss from Discontinued Operations (in thousands) | Period | 2020 (Three Months) | 2020 (Six Months) | | :--- | :--- | :--- | | Net loss of discontinued operations | $1,545 | $3,325 | - Net cash used by operating activities of discontinued operations for the six months ended June 30, 2020, was **($2,262 thousand)**[60](index=60&type=chunk) [11. Segment Information](index=14&type=section&id=11.%20Segment%20Information) This note presents financial data for the Company's reportable segments, primarily Mexico and Corporate - The Company operates in two reportable segments: Mexico (development and exploration of Mexican mineral properties, including LGJV) and Corporate[61](index=61&type=chunk) Mexico Segment Financial Highlights (in thousands) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Equity income (loss) in affiliates | $18,291 | $(8,071) | $20,992 | $(21,516) | | Total assets | $59,679 | $34,346 | $59,679 | $34,346 | [12. Investment in Affiliate](index=15&type=section&id=12.%20Investment%20in%20Affiliate) This note details the Company's investment in the Los Gatos Joint Venture (LGJV) and its financial performance - The Company recognized **$21.0 million** of income from its investment in the LGJV Entities for the six months ended June 30, 2021, compared to a **$21.5 million** loss in the prior year period[63](index=63&type=chunk) LGJV Combined Statements of Income (Loss) (in thousands) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Sales | $75,005 | $18,247 | $121,335 | $37,160 | | Net Income (Loss) | $29,345 | $(14,457) | $36,197 | $(38,365) | LGJV Combined Balance Sheet Highlights (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $494,093 | $469,418 | | Total Current Liabilities | $82,030 | $139,757 | | Total Non-Current Liabilities | $187,584 | $206,049 | [13. Subsequent Events](index=17&type=section&id=13.%20Subsequent%20Events) This note discloses significant events that occurred after the reporting period, including financing and debt repayment - On July 12, 2021, the Company entered into a Revolving Credit Facility with Bank of Montreal for **$50.0 million**, with an accordion feature up to **$100.0 million**, maturing July 31, 2024[67](index=67&type=chunk) - On July 19, 2021, the Company borrowed **$13.0 million** under the new Credit Agreement and completed a follow-on public offering of **8,930,000 shares** at **$14.00** per share, generating net proceeds of **$118.9 million**[68](index=68&type=chunk) - Proceeds from the offering and credit facility, along with cash on hand, were used to retire the **70%** portion of the Dowa Term Loan at LGJV on July 26, 2021[69](index=69&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial condition, operational results, and liquidity [Forward-Looking Statements](index=18&type=section&id=Forward-Looking%20Statements) This section highlights statements about future performance, strategies, and potential risks, emphasizing their speculative nature - The report contains forward-looking statements regarding future financial performance, growth strategies, production, exploration, mineral reserves, expenses, and capital requirements[71](index=71&type=chunk) - Key risk factors include historical negative operating cash flows and net losses, dependence on two principal projects, significant LGJV debt, speculative nature of exploration, and commodity price volatility[72](index=72&type=chunk) [Overview](index=20&type=section&id=Overview) This section provides a high-level summary of Gatos Silver's business, its primary mining operations, and exploration focus - Gatos Silver aims to be a premier silver producer, focusing on the Cerro Los Gatos (CLG) mine and the Los Gatos District (LGD) through the LGJV[75](index=75&type=chunk) - CLG, a **2,500 tpd** polymetallic mine, commenced production on September 1, 2019, with estimated proven and probable mineral reserves of **9.6 million diluted tonnes** (**6.7 million tonnes** on a **70%** basis)[76](index=76&type=chunk) - Average proven and probable mineral reserve grades are **306 g/t** silver, **0.35 g/t** gold, **2.76%** lead, and **5.65%** zinc[76](index=76&type=chunk) - The Los Gatos District covers **103,087 hectares**, with **14 mineralized zones**, including CLG, Esther, and Amapola deposits, and ongoing exploration to identify additional deposits[76](index=76&type=chunk) [Operational Update](index=21&type=section&id=Operational%20Update) This section provides key production metrics and operational performance details for the Cerro Los Gatos mine CLG Production (100% Basis) | Metric | Q2 2021 | Q1 2021 | | :--- | :--- | :--- | | Tonnes milled (dmt) | 230,656 | 203,479 | | Tonnes milled per day (dmt) | 2,535 | 2,261 | | Average Silver grade (g/t) | 322 | 261 | | Contained Silver ounces (millions) | 2.1 | 1.5 | | Silver Recoveries | 89 % | 85 % | - Operating costs for Q2 2021 were in line with management's expectations and trending toward life-of-mine feasibility operating costs[77](index=77&type=chunk) [COVID-19 Pandemic](index=21&type=section&id=COVID-19%20Pandemic) This section discusses the impact of the COVID-19 pandemic on the Company's operations and ongoing monitoring efforts - The COVID-19 pandemic temporarily affected 2020 operations due to a **45-day** suspension of nonessential activities at the LGJV's CLG site and associated expenses[78](index=78&type=chunk) - The Company is closely monitoring developments and continually assessing the potential impact on its business, with significant uncertainty remaining about the duration and extent of the pandemic's impact[79](index=79&type=chunk) [Exploration Update](index=21&type=section&id=Exploration%20Update) This section details the Company's ongoing drilling programs aimed at resource expansion and new deposit identification - The Company is active in three exploration drilling programs collectively estimated to require **51,400 meters** of drilling at an expected cost of **$6.1 million**[80](index=80&type=chunk) - Cerro Los Gatos Infill and Extension Drilling Program: A **27,000-meter** program aiming to convert inferred resources and support a possible production rate expansion to **3,000 tpd**, with completion anticipated by Q3 2021 at an estimated cost of **$2.8 million**[81](index=81&type=chunk) - Los Gatos District Resource Expansion: A **19,000-meter** campaign at the Esther deposit to expand resources, expected completion by December 2021 at an estimated cost of **$2.7 million**[82](index=82&type=chunk) - Santa Valeria Project: An **18-hole**, **5,400-meter** exploration program on the wholly-owned property, geologically comparable to CLG, expected completion by August 2021 at an estimated cost of **$600,000**[83](index=83&type=chunk) [Components of Results of Operations](index=22&type=section&id=Components%20of%20Results%20of%20Operations) This section explains the key drivers and expected trends for various revenue and expense categories - Exploration expenses are expected to increase significantly as the Company expands its exploration activities[84](index=84&type=chunk) - General and administrative expenses have increased and are expected to further increase due to public company operating costs, including salaries, benefits, legal fees, compliance, and insurance[85](index=85&type=chunk) - Equity income (loss) in affiliates relates to the Company's proportional share of net income or loss from the LGJV and the amortization of the basis difference[86](index=86&type=chunk) - LGJV arrangement fees related to the Term Loan and WCF are not expected to be incurred beyond July 26, 2021, following their extinguishment[87](index=87&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) This section analyzes the Company's financial performance, highlighting changes in net income and key contributing factors - Net income from continuing operations for Q2 2021 was **$13.5 million**, a **$24.1 million** increase from a net loss of **$10.6 million** in Q2 2020[92](index=92&type=chunk) - Net income from continuing operations for YTD 2021 was **$11.9 million**, a **$38.5 million** increase from a net loss of **$26.6 million** in YTD 2020[94](index=94&type=chunk) - The improvement was primarily driven by a significant change in equity income (loss) in affiliates from LGJV operations, due to increased ownership (**51.5%** to **70.0%**), operations at design throughput, and significantly higher metals prices[93](index=93&type=chunk)[95](index=95&type=chunk) - This improvement was partially offset by increased general and administrative expenses due to higher legal and consulting costs, directors and officer's insurance premiums, and increased stock-based compensation expense[92](index=92&type=chunk)[94](index=94&type=chunk) [Liquidity and Capital Resources](index=25&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the Company's cash position, working capital, and ability to meet its short-term and long-term financial obligations Liquidity Metrics (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $29,607 | $150,146 | | Working capital | $33,403 | $151,728 | - The decrease in cash and working capital was primarily due to the **$71.6 million** repurchase of the **18.5% interest** in the LGJV from Dowa and a **$42.0 million** capital contribution to the LGJV to extinguish the WCF[96](index=96&type=chunk) - Subsequent to June 30, 2021, a follow-on public offering generated net proceeds of **$118.9 million**[97](index=97&type=chunk) - The Company believes it has sufficient cash, access to borrowings, and resources for at least the next **12 months** but may require additional capital for future exploration and development[99](index=99&type=chunk) [Dowa Debt Agreements](index=27&type=section&id=Dowa%20Debt%20Agreements) This section details the Company's debt arrangements with Dowa, including repayment and new credit facilities - The LGJV Term Loan with Dowa, which allowed borrowing up to **$210.0 million**, was fully repaid on July 26, 2021, through capital contributions from Gatos Silver (**70%**) and Dowa (**30%**)[101](index=101&type=chunk)[102](index=102&type=chunk) - Gatos Silver paid a **$10.0 million** closing fee in conjunction with the Term Loan repayment[102](index=102&type=chunk) - The Los Gatos Working Capital Facility (WCF) of **$60.0 million** was extinguished on March 11, 2021, with Gatos Silver contributing **$42.0 million**[103](index=103&type=chunk) - On July 12, 2021, the Company entered into a new Revolving Credit Facility of **$50.0 million** (with an accordion feature up to **$100.0 million**) with Bank of Montreal, maturing July 31, 2024[104](index=104&type=chunk) [Cash Flows](index=28&type=section&id=Cash%20Flows) This section analyzes the Company's cash flows from operating, investing, and financing activities, explaining significant changes - Net cash used by operating activities decreased by **$1,642 thousand** to **($7,895 thousand)** for the six months ended June 30, 2021, primarily due to the absence of discontinued operations and lower arrangement fees[107](index=107&type=chunk) - Net cash used by investing activities increased by **$109.0 million** to **($116.6 million)** for the six months ended June 30, 2021, mainly due to the **$71.6 million** acquisition of **18.5% LGJV interest** and **$42.0 million** WCF extinguishment contribution[108](index=108&type=chunk) - Net cash provided by financing activities decreased by **$6,028 thousand** to **$3,951 thousand** for the six months ended June 30, 2021, primarily due to the absence of related-party convertible debt proceeds from 2020, partially offset by common stock issuance proceeds[109](index=109&type=chunk) [Results of LGJV Operations](index=29&type=section&id=Results%20of%20LGJV%20Operations) This section provides a detailed financial overview of the Los Gatos Joint Venture's operational performance and financial position LGJV Combined Statements of Income (Loss) (in thousands) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Sales | $75,005 | $18,247 | $121,335 | $37,160 | | Net Income (Loss) | $29,345 | $(14,457) | $36,197 | $(38,365) | - The significant improvement in LGJV net income was driven by increased revenue from operating at designed throughput, higher metals prices (silver **+60%**, zinc **+39%**, lead **+17%**), higher production rates, and higher silver and zinc grades for YTD 2021[114](index=114&type=chunk)[115](index=115&type=chunk) - LGJV current liabilities decreased by **$57.7 million** to **$82.0 million** at June 30, 2021, primarily due to the extinguishment of the **$60.0 million** WCF[113](index=113&type=chunk) - LGJV cash provided by operating activities increased by **$47.1 million** to **$56.2 million** for the six months ended June 30, 2021[117](index=117&type=chunk) [Non-GAAP Financial Measures](index=32&type=section&id=Non-GAAP%20Financial%20Measures) This section defines and reconciles non-GAAP financial measures used to evaluate operational performance and total sustainable costs - Cash costs and All-In Sustaining Costs (AISC) are non-GAAP measures used to evaluate operational performance and total sustainable costs of production, providing additional information to management and investors[121](index=121&type=chunk)[122](index=122&type=chunk) Reconciliation of Expenses (GAAP) to Non-GAAP Measures (in thousands, except unit costs) | Metric | Q2 2021 | YTD 2021 | | :--- | :--- | :--- | | Cash costs | $34,486 | $65,055 | | All-in sustaining costs | $52,917 | $95,702 | | All-in sustaining costs, net of by-product credits | $23,849 | $50,655 | | By-product cash cost per ounce of payable silver | $2.87 | $6.31 | | By-product all-in sustaining cost per ounce of payable silver | $12.63 | $15.96 | [Off-balance sheet arrangements](index=34&type=section&id=Off-balance%20sheet%20arrangements) This section confirms the absence of significant off-balance sheet arrangements material to the Company's financial condition - The Company does not have any significant off-balance sheet arrangements that are material to its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources[128](index=128&type=chunk) [Critical Accounting Policies](index=34&type=section&id=Critical%20Accounting%20Policies) This section refers to the Company's key accounting policies and estimates as detailed in its financial statements - The Company refers to Note 2 – Summary of Significant Accounting Policies in its consolidated financial statements included in this Report and the 2020 10-K for discussion of its critical accounting policies and estimates[129](index=129&type=chunk) [Jumpstart Our Business Startups Act of 2012](index=34&type=section&id=Jumpstart%20Our%20Business%20Startups%20Act%20of%202012) This section states the Company's election to opt out of the extended transition period for new accounting standards as an emerging growth company - The Company, as an 'emerging growth company,' has elected to 'opt out' of the extended transition period for complying with new or revised financial accounting standards, and this decision is irrevocable[130](index=130&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=35&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section outlines the Company's exposure to market risks, including commodity price fluctuations, foreign currency, and cash concentration [Commodity Price Risk](index=35&type=section&id=Commodity%20Price%20Risk) This section discusses the Company's exposure to fluctuations in the prices of silver, lead, zinc, and gold, and their potential impact - The Company's principal source of future revenue is the sale of silver, and to a lesser extent, lead and zinc concentrates[131](index=131&type=chunk) - A significant and sustained decrease in the prices of these metals could have a material and negative impact on the Company's business, financial condition, and results of operations[131](index=131&type=chunk) [Foreign Currency Risk](index=35&type=section&id=Foreign%20Currency%20Risk) This section addresses the Company's exposure to currency exchange rate fluctuations, particularly involving the Mexican peso - Although most expenditures are in U.S. dollars, certain purchases of labor, operating supplies, and capital assets are denominated in other currencies, primarily the Mexican peso[132](index=132&type=chunk) - Currency exchange fluctuations may impact the costs of the Company's operations[132](index=132&type=chunk) [Concentration of Risk](index=35&type=section&id=Concentration%20of%20Risk) This section highlights the Company's concentration of cash investments with a single financial institution - The Company has placed nearly all of its cash investments with a single, high-quality financial institution[133](index=133&type=chunk) - All cash equivalents are invested in high-quality, short-term money market instruments, including certificates of deposit[133](index=133&type=chunk) [Item 4. Controls and Procedures](index=35&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the Company's evaluation of its disclosure controls and procedures and any changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=35&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section confirms management's conclusion on the effectiveness of the Company's disclosure controls and procedures - Management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2021[134](index=134&type=chunk) [Changes in Internal Control over Financial Reporting](index=35&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section reports on any material changes in the Company's internal control over financial reporting during the quarter - There have been no material changes in the Company's internal control over financial reporting that occurred during the second quarter of 2021[135](index=135&type=chunk) [Limitations on Effectiveness of Controls](index=35&type=section&id=Limitations%20on%20Effectiveness%20of%20Controls) This section acknowledges the inherent limitations of disclosure controls and procedures in providing absolute assurance - Management acknowledges that disclosure controls and procedures can provide only reasonable, not absolute, assurance of achieving desired control objectives due to inherent limitations[136](index=136&type=chunk) - Inherent limitations include faulty judgments, simple errors, circumvention by individual acts or collusion, and management's override of controls[136](index=136&type=chunk) [PART II – OTHER INFORMATION](index=36&type=section&id=Part%20II%20-%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, and other disclosures [Item 1. Legal Proceedings](index=36&type=section&id=Item%201.%20Legal%20Proceedings) The Company is involved in routine legal proceedings but believes none are individually or in aggregate material to its financial condition or operations - The Company is, from time to time, involved in legal proceedings of a nature considered normal to its business[139](index=139&type=chunk) - None of the litigation in which the Company is currently involved, or has been involved since the beginning of its most recently completed financial year, is deemed material to its consolidated financial condition, cash flows, or results of operations[139](index=139&type=chunk) [Item 1A. Risk Factors](index=36&type=section&id=Item%201A.Risk%20Factors) This section refers to previously disclosed risk factors, confirming no material changes as of the report date - As of the date of this Report, there have been no material changes to the risk factors disclosed in the 2020 10-K[140](index=140&type=chunk) - Any of the factors described in the 2020 10-K could still result in a significant or material adverse effect on the Company's results of operations or financial condition[140](index=140&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=36&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports no unregistered equity sales during the quarter and details the use of IPO proceeds for LGJV interest and debt extinguishment - During the quarter ended June 30, 2021, the Company did not issue any shares of its common stock or other equity securities that were not registered under the Securities Act of 1933[141](index=141&type=chunk) - As of June 30, 2021, approximately **$124.6 million** of the net proceeds from the IPO were used, including **$71.6 million** for the repurchase of **18.5% interest** in the LGJV from Dowa, **$42.0 million** for capital contribution to the LGJV to extinguish the WCF, and **$9,342 thousand** for working capital and general corporate purposes[143](index=143&type=chunk) - There were no purchases made by or on behalf of the Company or any affiliated purchaser of the Company's common stock during the quarter ended June 30, 2021[144](index=144&type=chunk) [Item 3. Defaults Upon Senior Securities](index=36&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The Company reported no defaults upon senior securities - The Company reported no defaults upon senior securities[145](index=145&type=chunk) [Item 4. Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the Company - This item is not applicable to the Company[146](index=146&type=chunk) [Item 5. Other Information](index=36&type=section&id=Item%205.%20Other%20Information) The Company reported no other information - The Company reported no other information[147](index=147&type=chunk) [Item 6. Exhibits](index=38&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed or furnished with the Form 10-Q, including organizational documents, employment agreements, credit facilities, and certifications - Exhibits include the Amended and Restated Certificate of Incorporation and By-Laws of Gatos Silver, Inc[148](index=148&type=chunk) - Key agreements filed are an Employment Agreement, a Confirmation Agreement, and a Revolving Credit Facility[148](index=148&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer (Section 302 and 1350) are included, along with XBRL Instance and Taxonomy Extension Documents[148](index=148&type=chunk)[149](index=149&type=chunk)

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, 2021 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number: 001-39649 GATOS SILVER, INC. (Exact name of registrant as specified in its charter) (State or other jurisdicti ...

Gatos Silver Inc. (NYSE:GATO) Q4 and Year End 2020 Earnings Conference Call March 29, 2021 12:00 PM ET Company Participants Stephen Orr – Chief Executive Officer Roger Johnson – Chief Financial Officer Adam Dubas – Chief Administrative Officer Conference Call Participants Doug Groh – Sprott Asset Management Operator Ladies and gentlemen, thank you for standing by and welcome to Gatos Silver Q4 and Year End 2020 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ prese ...

GHTOS YEAR-END & 4Q 2020 EARNINGS CALL High-Grade, Silver-Geared Producer with Exceptional Organic Growth Potential March 29 2O21 DISCLAIMER This presentation has been prepared by Gatos Silver, Inc. ("Gatos Silver" or the "Company" ) for the exclusive use of the party to whom the Company delivers this presentation. Cautionary Note Regarding Forward-Looking Statements Certain statements in this presentation may constitute "forward-looking statements". Those statements include, but are not limited to, stateme ...

TABLE OF CONTENTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-39649 GATOS SILVER, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of inco ...

Part I – FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements of Gatos Silver, Inc. and its subsidiaries, including balance sheets, statements of loss and comprehensive loss, statements of shareholders' equity, and cash flow statements, along with related notes, providing the company's financial position as of September 30, 2020, and operating results for the three and nine months ended on that date [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets (USD thousands) | Metric (USD thousands) | September 30, 2020 | December 31, 2019 | | :--------------------- | :----------------- | :---------------- | | Cash and cash equivalents | 3,627 | 9,085 | | Total current assets | 8,992 | 18,455 | | Total assets | 142,819 | 154,295 | | Total current liabilities | 19,774 | 3,465 | | Total stockholders' equity | 121,524 | 149,391 | - As of September 30, 2020, the company's **cash and cash equivalents were USD 3,627 thousand**, a decrease from USD 9,085 thousand as of December 31, 2019[10](index=10&type=chunk) - Total assets decreased from **USD 154,295 thousand** as of December 31, 2019, to **USD 142,819 thousand** as of September 30, 2020[10](index=10&type=chunk) [Condensed Consolidated Statements of Loss and Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Loss%20and%20Comprehensive%20Loss) Condensed Consolidated Statements of Loss and Comprehensive Loss (USD thousands) | Metric (USD thousands) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total expenses | 3,724 | 2,483 | 9,830 | 8,077 | | Other expenses (income) | (2,539) | 2,391 | 21,320 | 14,819 | | Net loss | 1,185 | 4,874 | 31,150 | 22,896 | | Net loss per share (basic and diluted) | 0.01 | 0.06 | 0.38 | 0.30 | - Net loss for the three months ended September 30, 2020, was **USD 1,185 thousand**, a decrease from USD 4,874 thousand in the prior-year period[12](index=12&type=chunk) - Net loss for the nine months ended September 30, 2020, increased to **USD 31,150 thousand** from USD 22,896 thousand in the prior-year period[12](index=12&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity (Deficit)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders%27%20Equity%20(Deficit)) Condensed Consolidated Statements of Shareholders' Equity (Deficit) (USD thousands) | Metric (USD thousands) | September 30, 2020 | December 31, 2019 | | :--------------------- | :----------------- | :---------------- | | Common stock | 80 | 80 | | Additional paid-in capital | 379,204 | 375,921 | | Accumulated deficit | (256,733) | (225,583) | | Treasury stock | (1,027) | (1,027) | | Total stockholders' equity | 121,524 | 149,391 | - As of September 30, 2020, total stockholders' equity was **USD 121,524 thousand**, a decrease from USD 149,391 thousand as of December 31, 2019[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (USD thousands) | Cash Flow Activity (USD thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------- | :----------------------------- | :----------------------------- | | Net cash from operating activities | (11,898) | (7,464) | | Net cash from investing activities | (8,405) | (20,273) | | Net cash from financing activities | 14,845 | 39,878 | | Net increase (decrease) in cash and cash equivalents | (5,458) | 12,141 | | Cash and cash equivalents at end of period | 3,627 | 15,598 | - Net cash outflow from operating activities increased to **USD 11,898 thousand** for the nine months ended September 30, 2020, compared to USD 7,464 thousand in the prior-year period[18](index=18&type=chunk) - Net cash outflow from investing activities decreased to **USD 8,405 thousand** from USD 20,273 thousand in the prior-year period, primarily due to reduced investments in LGJV[18](index=18&type=chunk) - Net cash inflow from financing activities decreased to **USD 14,845 thousand** from USD 39,878 thousand in the prior-year period, mainly due to higher proceeds from common stock issuance in 2019[18](index=18&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) [1. Description of Business and Basis of Preparation of Financial Statements](index=9&type=section&id=1.%20Description%20of%20Business%20and%20Basis%20of%20Preparation%20of%20Financial%20Statements) - The company completed its initial public offering (IPO) on October 30, 2020, issuing **21,430,000 shares of common stock** for total proceeds of **USD 150,010 thousand**, and listed on the NYSE and TSX[20](index=20&type=chunk) - The company's primary business focuses on the operations of the Los Gatos Joint Venture (LGJV) in Chihuahua, Mexico, which commenced commercial production of lead and zinc concentrates on September 1, 2019[21](index=21&type=chunk)[22](index=22&type=chunk) - From March 30 to May 31, 2020, LGJV suspended non-essential activities due to the COVID-19 pandemic, resuming mining operations in late May 2020[23](index=23&type=chunk) - The company has divested the Sunshine Complex to Silver Opportunity Partners Corporation, and this business will be reported as discontinued operations in post-IPO reporting periods[26](index=26&type=chunk) - Management believes that with the completion of the IPO, the company has raised sufficient capital to meet its obligations, thus eliminating substantial doubt about its ability to continue as a going concern[28](index=28&type=chunk) [2. Summary of Significant Accounting Policies](index=10&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) - The financial statements are unaudited, include all necessary adjustments, and are prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP)[29](index=29&type=chunk) - No accounting standards with a material impact on the financial statements were adopted for the nine months ended September 30, 2020[32](index=32&type=chunk) [3. Other Current Assets](index=11&type=section&id=3.%20Other%20Current%20Assets) Other Current Assets (USD thousands) | Other Current Assets (USD thousands) | September 30, 2020 | December 31, 2019 | | :----------------------------------- | :----------------- | :---------------- | | VAT receivables | 266 | 213 | | Restricted cash | 467 | 466 | | Prepaid expenses | 367 | 359 | | Deposits and other | 16 | 30 | | **Total Other Current Assets** | **1,116** | **1,068** | - Total other current assets were **USD 1,116 thousand** as of September 30, 2020, slightly higher than USD 1,068 thousand as of December 31, 2019[33](index=33&type=chunk) [4. Property, Plant and Equipment, net](index=11&type=section&id=4.%20Property%2C%20Plant%20and%20Equipment%2C%20net) Property, Plant and Equipment (USD thousands) | Property, Plant and Equipment (USD thousands) | September 30, 2020 | December 31, 2019 | | :-------------------------------------------- | :----------------- | :---------------- | | Mineral properties | 18,203 | 18,203 | | Plant and equipment | 13,643 | 13,621 | | Land | 1,814 | 1,814 | | Buildings, infrastructure, and improvements | 16,798 | 16,798 | | Furniture, fixtures, and computers | 1,565 | 1,565 | | Property, plant and equipment at cost | 52,023 | 52,001 | | Less: Accumulated amortization | (23,605) | (21,807) | | **Property, Plant and Equipment, net** | **28,418** | **30,194** | - Net property, plant and equipment was **USD 28,418 thousand** as of September 30, 2020, a decrease from USD 30,194 thousand as of December 31, 2019[34](index=34&type=chunk) - The Sunshine Mine mineral property is not currently amortized as proven and probable reserves have not been established, and the mine has not resumed operations[34](index=34&type=chunk) [5. Accounts Payable and Other Accrued Liabilities](index=12&type=section&id=5.%20Accounts%20Payable%20and%20Other%20Accrued%20Liabilities) Accounts Payable and Other Accrued Liabilities (USD thousands) | Accounts Payable and Other Accrued Liabilities (USD thousands) | September 30, 2020 | December 31, 2019 | | :------------------------------------------------------------- | :----------------- | :---------------- | | Accounts payable | 183 | 270 | | Accrued expenses | 2,542 | 1,724 | | Payroll Protection Program loan | 567 | - | | Accrued compensation | 1,482 | 1,471 | | **Total Accounts Payable and Other Current Liabilities** | **4,774** | **3,465** | - Total accounts payable and other current liabilities increased to **USD 4,774 thousand** as of September 30, 2020, from USD 3,465 thousand as of December 31, 2019, primarily due to an increase in the Payroll Protection Program loan[37](index=37&type=chunk) - The company received a **USD 567 thousand** Payroll Protection Program (PPP) loan in April 2020 for eligible expenditures and expects to obtain loan forgiveness[37](index=37&type=chunk)[38](index=38&type=chunk) [6. Related-Party Convertible Notes](index=12&type=section&id=6.%20Related-Party%20Convertible%20Notes) - In Q2 2020, the company entered into a convertible note purchase agreement with Electrum Silver US LLC, issuing **USD 15,000 thousand** in convertible notes with an annual interest rate of 5%[39](index=39&type=chunk) - These notes automatically convert into common stock in a qualified financing at 80% of the qualified financing issue price or USD 7.50 per share, whichever is lower[39](index=39&type=chunk) - As of September 30, 2020, the company had borrowed **USD 15,000 thousand** with accrued interest of **USD 187 thousand**, which converted into common stock on October 30, 2020[39](index=39&type=chunk) [7. Related-Party Transactions](index=12&type=section&id=7.%20Related-Party%20Transactions) - The company has a management agreement with LGJV to provide consulting and administrative services, receiving **USD 300 thousand** from LGJV for the nine months ended September 30, 2020[40](index=40&type=chunk) - For the nine months ended September 30, 2020, **USD 5,850 thousand** in receivables under this agreement and other outstanding receivables were converted into LGJV capital, recorded as an increase in the company's investment in affiliate[40](index=40&type=chunk) [8. Stockholders' Equity](index=12&type=section&id=8.%20Stockholders%27%20Equity) Stock Option Activity (Shares) | Stock Option Activity (Shares) | September 30, 2020 | December 31, 2019 | | :----------------------------- | :----------------- | :---------------- | | Director and employee options (end of period) | 8,723,028 | 7,102,361 | | LGJV personnel options (end of period) | 109,190 | 109,190 | - As of September 30, 2020, total unrecognized share-based compensation expense was **USD 6,704 thousand**, expected to be recognized over a weighted-average period of 1.9 years[42](index=42&type=chunk) - As of September 30, 2020, **365,421 Director Share Units (DiSUs)** were outstanding, fully vested on the grant date, entitling holders to one share of common stock upon departure[44](index=44&type=chunk)[45](index=45&type=chunk) [9. Asset Retirement Obligations](index=14&type=section&id=9.%20Asset%20Retirement%20Obligations) Asset Retirement Obligations (USD thousands) | Asset Retirement Obligations (USD thousands) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Beginning balance | 1,494 | 1,388 | 1,439 | 1,337 | | Accretion expense | 27 | 25 | 82 | 76 | | Ending balance | 1,521 | 1,413 | 1,521 | 1,413 | - The ending balance of asset retirement obligations was **USD 1,521 thousand** as of September 30, 2020, an increase from the prior-year period[46](index=46&type=chunk) - The company holds **USD 275 thousand** in restricted cash as collateral for letters of credit to secure certain reclamation obligations with government agencies[46](index=46&type=chunk) [10. Fair Value Measurements](index=14&type=section&id=10.%20Fair%20Value%20Measurements) - The company uses a three-level fair value hierarchy to measure the fair value of financial and non-financial assets and liabilities[47](index=47&type=chunk)[48](index=48&type=chunk) - As of September 30, 2020, and December 31, 2019, the carrying values of the company's financial instruments, such as cash, accounts receivable, and accounts payable, approximated their fair values due to their short-term nature[49](index=49&type=chunk) - Fair values for asset retirement obligations and the initial investment in affiliate are classified as Level 3, as their valuations are based on internally developed assumptions with limited observable inputs and market activity[50](index=50&type=chunk)[51](index=51&type=chunk) [11. Commitments, Contingencies and Guarantees](index=14&type=section&id=11.%20Commitments%2C%20Contingencies%20and%20Guarantees) - LGJV entities entered into a loan agreement ("Term Loan") with Dowa, allowing borrowing up to **USD 210,000 thousand** for LGD development, with LGJV having borrowed **USD 222,783 thousand** as of September 30, 2020[55](index=55&type=chunk) - In May 2019, the Dowa MPR loan was fully repaid through cash payments and the conversion of the remaining **USD 50,737 thousand** principal and interest, increasing Dowa's equity interest in LGJV to 48.5%[57](index=57&type=chunk) - LGJV entered into a working capital facility (WCF) with Dowa, allowing borrowing up to **USD 60,000 thousand**, with LGJV having borrowed **USD 60,000 thousand** as of September 30, 2020[58](index=58&type=chunk) - The company guarantees 70% of the outstanding principal and accrued interest under the Term Loan and WCF, as well as all obligations under LGJV's equipment loan agreements[59](index=59&type=chunk) [12. Segment Information](index=16&type=section&id=12.%20Segment%20Information) - The company operates in a single industry, focusing on the acquisition, exploration, and development of silver mining properties, with reported segments including the U.S., Mexico, and corporate levels[60](index=60&type=chunk) Segment Expenses (USD thousands) | Segment Expenses (USD thousands) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Exploration | 236 | 386 | 834 | 913 | | Pre-development | 507 | 561 | 1,555 | 1,701 | | General and administrative | 2,387 | 839 | 5,644 | 3,528 | | Amortization | 594 | 697 | 1,797 | 1,935 | | Equity in (earnings) loss of affiliate | (3,447) | 1,832 | 18,069 | 2,143 | [13. Investment in Affiliate](index=18&type=section&id=13.%20Investment%20in%20Affiliate) - For the three months ended September 30, 2020, the company recognized a **USD 3,447 thousand gain** in its investment in LGJV entities, compared to a USD 1,832 thousand loss in the prior-year period[63](index=63&type=chunk) - For the nine months ended September 30, 2020, the company recognized an **USD 18,069 thousand loss** in its investment in LGJV entities, compared to a USD 2,143 thousand loss in the prior-year period[63](index=63&type=chunk) LGJV Consolidated Statements of Loss (USD thousands) | LGJV Consolidated Statements of Loss (USD thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--------------------------------------------------- | :----------------------------- | :----------------------------- | | Sales | 81,181 | 5,870 | | Cost of sales | 45,496 | 3,392 | | Depreciation, depletion, and amortization | 33,077 | 3,394 | | Net loss | (30,576) | (3,979) | - LGJV's net loss for the nine months ended September 30, 2020, significantly increased to **USD 30,576 thousand** from USD 3,979 thousand in the prior-year period, primarily due to increased operating costs, asset depreciation, and interest and arrangement fees incurred after the start of production[67](index=67&type=chunk)[111](index=111&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses Gatos Silver's financial condition and operating results as of September 30, 2020, focusing on changes in net loss, liquidity, related-party debt agreements, and the impact of the COVID-19 pandemic, with improved liquidity post-IPO and plans to repurchase LGJV equity [Forward-Looking Statements](index=20&type=section&id=Forward-Looking%20Statements) - The report contains forward-looking information and statements regarding future financial performance, growth strategies, industry trends, production at the Cerro Los Gatos mine, and further exploration in the Los Gatos district[70](index=70&type=chunk) - Forward-looking statements involve risks, uncertainties, and assumptions that could cause actual results to differ materially from expectations, including limited operating history, reliance on key projects, mineral reserve estimates, commodity price volatility, regulatory and political risks, and the impact of the COVID-19 pandemic[71](index=71&type=chunk)[72](index=72&type=chunk) [Overview](index=21&type=section&id=Overview) - The company is a U.S. precious metals producer, developer, and explorer aiming to become a major silver producer, currently focused on production and development at the Cerro Los Gatos mine and further exploration in the Los Gatos district[74](index=74&type=chunk) - The Cerro Los Gatos mine commenced production on September 1, 2019, and for the nine months ended September 30, 2020, mined **453,392 tonnes** of ore, processed **470,559 tonnes**, with average grades of **222 g/t silver**, **0.43 g/t gold**, **2.33% lead**, and **3.63% zinc**[75](index=75&type=chunk) - The Los Gatos district contains 14 mineralized zones, including three identified silver-lead-zinc deposits (Cerro Los Gatos, Esther, and Amapola) and 11 high-priority targets[75](index=75&type=chunk) [Recent Developments](index=22&type=section&id=Recent%20Developments) - The company completed its IPO on October 30, 2020, issuing **21,430,000 shares of common stock** for total proceeds of **USD 150,010 thousand**, and changed its name to Gatos Silver, Inc[76](index=76&type=chunk) - Prior to the IPO, the Sunshine Complex was divested to Silver Opportunity Partners Corporation[76](index=76&type=chunk) - Due to the COVID-19 pandemic, the Mexican government suspended all non-essential mining activities from late March to late May 2020, leading to the suspension of operations at LGJV's Cerro Los Gatos mine, resulting in lost revenue and additional expenses[77](index=77&type=chunk)[79](index=79&type=chunk) - The Mexican government designated mining as an essential service in late May 2020, after which LGJV resumed mining and development activities, with ore processing restarting in early June[78](index=78&type=chunk) [Operating Expenses](index=22&type=section&id=Operating%20Expenses) - Exploration expenses are expected to increase significantly with expanded activities in the Los Gatos district and other exploration properties[81](index=81&type=chunk) - Pre-development expenses are primarily related to mining infrastructure improvements and maintenance activities at the Sunshine Complex, now conducted by SOP after the restructuring[82](index=82&type=chunk) - General and administrative expenses are anticipated to increase significantly as a public company, including salaries, benefits, share-based compensation, professional consulting fees, and compliance costs[83](index=83&type=chunk) - LGJV arrangement fees are the company's sole responsibility, calculated at a fixed rate on the outstanding principal of the Dowa Term Loan and Los Gatos Working Capital Facility[85](index=85&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) Results of Operations (USD thousands) | Metric (USD thousands) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss | 1,185 | 4,874 | 31,150 | 22,896 | | General and administrative expenses | 2,387 | 839 | 5,644 | 3,528 | | Equity in (earnings) loss of affiliate | (3,447) | 1,832 | 18,069 | 2,143 | | Arrangement fees | 764 | 575 | 3,049 | 1,470 | - Net loss for the three months ended September 30, 2020, decreased by **USD 3,652 thousand**, primarily due to a **USD 5,279 thousand** change in equity in (earnings) loss of affiliate, partially offset by increased general and administrative expenses and arrangement fees[90](index=90&type=chunk) - Net loss for the nine months ended September 30, 2020, increased by **USD 8,286 thousand**, mainly due to a **USD 15,926 thousand** increase in equity in loss of affiliate and higher general and administrative expenses, partially offset by a **USD 11,231 thousand** loss on dilution of affiliate equity in 2019[91](index=91&type=chunk) - LGJV's operating loss for the nine months ended September 30, 2020, was primarily attributed to the initial ramp-up of mining and processing activities, production suspension due to COVID-19, and ongoing fixed costs[91](index=91&type=chunk) [Liquidity and Capital Resources](index=25&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity and Capital Resources (USD thousands) | Metric (USD thousands) | September 30, 2020 | December 31, 2019 | | :--------------------- | :----------------- | :---------------- | | Cash and cash equivalents | 3,627 | 9,085 | | Working capital | (10,782) | 14,990 | - As of September 30, 2020, cash and cash equivalents were **USD 3,627 thousand**, and working capital was a **negative USD 10,782 thousand**, primarily due to increased investment in LGJV, deferred financing costs, and related-party convertible notes[92](index=92&type=chunk) - The company issued **USD 15,000 thousand** in related-party convertible notes, which converted into common stock upon IPO completion[93](index=93&type=chunk)[100](index=100&type=chunk) - The company guarantees 70% of the Dowa Term Loan and Los Gatos Working Capital Facility and has the right to repurchase approximately **18.5% of Dowa's equity interest in LGJV** by June 30, 2021[94](index=94&type=chunk)[99](index=99&type=chunk) - With the IPO completion, the company believes it has sufficient cash and resources to support its business plan for the next 12 months, though additional capital may be required through external financing in the future[95](index=95&type=chunk)[96](index=96&type=chunk) [Dowa Debt Agreements](index=26&type=section&id=Dowa%20Debt%20Agreements) - LGJV entered into a Term Loan agreement with Dowa, allowing borrowing up to **USD 210,000 thousand** for the Los Gatos project development, at an interest rate of LIBOR plus 2.35%, with the company guaranteeing 70% of the loan and paying arrangement fees[98](index=98&type=chunk) - The Dowa MPR loan converted into approximately **18.5% of Dowa's equity interest in LGJV** in May 2019, which the company has the right to repurchase by June 30, 2021[99](index=99&type=chunk) - LGJV entered into a Working Capital Facility (WCF) with Dowa, with a maximum of **USD 60,000 thousand**, at an interest rate of LIBOR plus 3%, with the company guaranteeing 70% of the facility and paying arrangement fees[99](index=99&type=chunk) [Convertible Notes](index=26&type=section&id=Convertible%20Notes) - On April 20, 2020, the company entered into a convertible note purchase agreement with Electrum Silver US LLC, issuing **USD 15,000 thousand** in convertible notes with an annual interest rate of 5%[100](index=100&type=chunk) - These notes mature on April 19, 2023, unless converted into common stock in a qualified financing; upon IPO completion on October 30, 2020, all outstanding principal and accrued interest converted into **2,712,003 shares of common stock**[100](index=100&type=chunk) [Cash Flows](index=27&type=section&id=Cash%20Flows) Cash Flows (USD thousands) | Cash Flow Activity (USD thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------- | :----------------------------- | :----------------------------- | | Net cash from operating activities | (11,898) | (7,464) | | Net cash from investing activities | (8,405) | (20,273) | | Net cash from financing activities | 14,845 | 39,878 | - Net cash outflow from operating activities increased by **USD 4,434 thousand** for the nine months ended September 30, 2020, primarily due to increased net loss and related-party receivables[102](index=102&type=chunk) - Net cash outflow from investing activities decreased by **USD 11,868 thousand**, mainly due to higher investments in LGJV in 2019[103](index=103&type=chunk) - Net cash inflow from financing activities decreased by **USD 25,032 thousand**, primarily due to higher proceeds from common stock issuance in 2019[104](index=104&type=chunk) [Results of LGJV Operations](index=27&type=section&id=Results%20of%20LGJV%20Operations) LGJV Consolidated Balance Sheets (USD thousands) | LGJV Consolidated Balance Sheets (USD thousands) | September 30, 2020 | December 31, 2019 | | :----------------------------------------------- | :----------------- | :---------------- | | Total current assets | 68,802 | 70,187 | | Total non-current assets | 394,231 | 398,733 | | Total assets | 463,033 | 468,920 | | Total current liabilities | 50,973 | 57,995 | | Total non-current liabilities | 298,988 | 302,026 | | Total owners' capital | 113,072 | 108,899 | LGJV Consolidated Statements of Loss (USD thousands) | LGJV Consolidated Statements of Loss (USD thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--------------------------------------------------- | :----------------------------- | :----------------------------- | | Sales | 81,181 | 5,870 | | Net loss | (30,576) | (3,979) | - As of September 30, 2020, LGJV's total current assets were **USD 68,802 thousand**, total non-current assets were **USD 394,231 thousand**, and total assets were **USD 463,033 thousand**[108](index=108&type=chunk)[109](index=109&type=chunk) - LGJV's net loss for the nine months ended September 30, 2020, significantly increased to **USD 30,576 thousand** from USD 3,979 thousand in the prior-year period, primarily due to increased operating costs, depreciation, and interest and arrangement fees incurred after the start of production[109](index=109&type=chunk)[111](index=111&type=chunk) [Off-balance sheet arrangements](index=30&type=section&id=Off-balance%20sheet%20arrangements) - The company has no off-balance sheet arrangements that have or are reasonably likely to have a material effect on its financial condition, results of operations, or liquidity[113](index=113&type=chunk) [Critical Accounting Policies](index=30&type=section&id=Critical%20Accounting%20Policies) - Discussions of critical accounting policies and estimates are provided in Note 2 to the consolidated financial statements in this report and the IPO prospectus[114](index=114&type=chunk) [Jumpstart Our Business Startups Act of 2012](index=30&type=section&id=Jumpstart%20Our%20Business%20Startups%20Act%20of%202012) - The company has elected to "opt out" of the extended transition period for complying with new or revised accounting standards under the JOBS Act and will comply with such standards as a non-emerging growth public company[115](index=115&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discloses the company's primary market risks, including commodity price risk, foreign currency risk, and concentration risk, as revenue is largely dependent on silver, lead, and zinc prices, and Mexican Peso exchange rate fluctuations can impact operating costs [Commodity Price Risk](index=30&type=section&id=Commodity%20Price%20Risk) - The company's primary revenue is derived from the sale of silver, lead, and zinc, and a significant and sustained decline in the prices of these metals could materially adversely affect its business, financial condition, and results of operations[116](index=116&type=chunk) [Foreign Currency Risk](index=30&type=section&id=Foreign%20Currency%20Risk) - Although most expenditures are denominated in U.S. dollars, some labor, operating supplies, and capital asset purchases are denominated in other currencies, primarily the Mexican Peso, so exchange rate fluctuations could impact operating costs[117](index=117&type=chunk) [Concentration of Risk](index=30&type=section&id=Concentration%20of%20Risk) - Virtually all of the company's cash investments are concentrated in a single high-quality financial institution, and all cash equivalents are invested in high-quality, short-term money market instruments[118](index=118&type=chunk) [Item 4. Controls and Procedures](index=30&type=section&id=Item%204.%20Controls%20and%20Procedures) This section assesses the effectiveness of the company's disclosure controls and procedures as of September 30, 2020, and outlines the inherent limitations of internal controls, with management concluding that disclosure controls are effective and no material changes occurred in internal controls this quarter [Evaluation of Disclosure Controls and Procedures](index=30&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - As of September 30, 2020, the company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated and concluded that its disclosure controls and procedures were effective[119](index=119&type=chunk) [Changes in Internal Control over Financial Reporting](index=30&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - No changes in the company's internal control over financial reporting occurred during the third quarter of 2020 that materially affected or are reasonably likely to materially affect internal control over financial reporting[120](index=120&type=chunk) [Limitations on Effectiveness of Controls](index=30&type=section&id=Limitations%20on%20Effectiveness%20of%20Controls) - Management acknowledges that any control system has inherent limitations and cannot provide absolute assurance, potentially failing due to errors in judgment, simple mistakes, collusion, or management override of controls[121](index=121&type=chunk)[122](index=122&type=chunk)[123](index=123&type=chunk) Part II – OTHER INFORMATION [Item 1. Legal Proceedings](index=32&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in legal proceedings related to its business but believes that no current litigation, individually or in aggregate, will have a material adverse effect on its consolidated financial position, cash flows, or results of operations - The company believes that no current legal proceedings are material or will have a material adverse effect on its financial condition, cash flows, or results of operations[126](index=126&type=chunk) [Item 1A. Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) This section refers to risk factors that could cause actual results to differ materially from forward-looking statements, noting no material changes to these factors since the IPO prospectus disclosure - Risk factors that could cause actual results to differ materially from forward-looking statements are described in the IPO prospectus, with no material changes to these factors as of the date of this quarterly report[127](index=127&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=32&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section discloses the company's unregistered equity securities sales, primarily convertible notes issued to related parties, and the use of proceeds from its initial public offering (IPO), which generated approximately USD 156.1 million net proceeds for business development [Unregistered Sales of Equity Securities](index=32&type=section&id=Unregistered%20Sales%20of%20Equity%20Securities) - On August 10 and September 21, 2020, the company issued and sold a total of **USD 5,000 thousand** in convertible notes to one or more private equity funds[128](index=128&type=chunk) - These convertible notes automatically convert into common stock in a qualified financing at 80% of the qualified financing issue price or USD 7.50 per share, whichever is lower, and were exempt from registration under Section 4(a)(2) of the Securities Act[128](index=128&type=chunk) [Use of Proceeds](index=32&type=section&id=Use%20of%20Proceeds) - The company completed its IPO on October 30, 2020, issuing **21,430,000 shares of common stock** at an offering price of **USD 7.00 per share**, for total proceeds of approximately **USD 150 million**[129](index=129&type=chunk) - The underwriters fully exercised their over-allotment option on November 10, 2020, resulting in the sale of an additional **3,214,500 shares of common stock** for total proceeds of approximately **USD 22.5 million**[130](index=130&type=chunk) - After deducting underwriting discounts, commissions, and offering expenses, the total net proceeds from the IPO (including the over-allotment) were approximately **USD 156.1 million**[131](index=131&type=chunk) - There have been no material changes in the planned use of IPO proceeds from what was described in the IPO prospectus[132](index=132&type=chunk) [Purchase of Equity Securities by the Issuer and Affiliated Purchasers](index=33&type=section&id=Purchase%20of%20Equity%20Securities%20by%20the%20Issuer%20and%20Af%20iliated%20Purchasers) - The company did not repurchase any securities for the nine months ended September 30, 2020[133](index=133&type=chunk) [Item 3. Defaults Upon Senior Securities](index=33&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports no defaults upon senior securities occurred during this quarter - No defaults upon senior securities occurred during this quarter[134](index=134&type=chunk) [Item 4. Mine Safety Disclosures](index=33&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety-related information has been disclosed in Exhibit 95.1, in accordance with Section 1503(a) of the Dodd-Frank Act - Mine safety-related information has been reported in Exhibit 95.1, in accordance with Section 1503(a) of the Dodd-Frank Act[135](index=135&type=chunk) [Item 5. Other Information](index=33&type=section&id=Item%205.%20Other%20Information) No other information requires disclosure for this quarter - No other information is disclosed for this quarter[136](index=136&type=chunk) [Item 6. Exhibits](index=33&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with this report, including articles of incorporation, management agreements, executive certifications, and XBRL files - Exhibits include articles of incorporation, management agreements, executive certifications (302 and 1350), mine safety disclosures, and XBRL taxonomy files[138](index=138&type=chunk)