Gatos Silver(GATO) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the period ended September 30, 2023 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change | | :-------------------------- | :-------------------------- | :-------------------------- | :----- | | Cash and cash equivalents | $33,469 | $17,004 | +$16,465 | | Total current assets | $50,499 | $35,648 | +$14,851 | | Investment in affiliates | $328,709 | $347,793 | -$19,084 | | Total Assets | $379,250 | $383,501 | -$4,251 | | Credit Facility, net | $— | $8,661 | -$8,661 | | Total Stockholders' equity | $352,887 | $348,482 | +$4,405 | Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | General and administrative | $7,494 | $5,933 | $19,157 | $16,967 | | Equity income in affiliates | $9,437 | $8,930 | $15,922 | $24,527 | | Net income | $3,288 | $3,504 | $530 | $9,785 | | Basic EPS | $0.05 | $0.05 | $0.01 | $0.14 | Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity | Metric (in thousands) | Dec 31, 2022 | Sep 30, 2023 | | :-------------------- | :----------- | :----------- | | Total Stockholders' equity | $348,482 | $352,887 | | Stock-based compensation (9 months) | N/A | $3,327 | | Net income (9 months) | N/A | $530 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | | Net cash (used) provided by operating activities | $(9,535) | $8,680 | -$18,215 | | Net cash provided (used) by investing activities | $35,000 | $(27) | +$35,027 | | Net cash used by financing activities | $(9,000) | $— | -$9,000 | | Net increase in cash and cash equivalents | $16,465 | $8,653 | +$7,812 | | Cash and cash equivalents, end of period | $33,469 | $15,269 | +$18,200 | Notes to Condensed Consolidated Financial Statements This section provides detailed notes explaining the basis of presentation and significant accounting policies Note 1. Basis of Presentation - The interim financial statements are unaudited and prepared under GAAP for interim reporting, requiring review with the 2022 10-K[17] Note 2. Summary of Significant Accounting Policies - No material changes to accounting policies from 2022 10-K[18] - Assessing impact of FASB ASU No 2023-06 on disclosure improvements, effective only if SEC removes related requirements by June 30, 2027[19] Note 3. Other Current Assets Other Current Assets | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Insurance proceeds receivable | $14,200 | $13,100 | | Total other current assets | $15,935 | $16,871 | - Insurance proceeds receivable relates to the U.S Class Action lawsuit settlement[21] Note 4. Accounts Payable and Other Accrued Liabilities Accounts Payable and Other Accrued Liabilities | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Legal settlement payable | $21,000 | $21,000 | | Total accounts payable and other current liabilities | $26,363 | $26,358 | - Legal settlement payable is for the U.S Class Action lawsuit[24] Note 5. Related Party Transactions - Company earned $1,250 thousand in management fees from LGJV for Q3 2023 and Q3 2022, and $3,750 thousand for the nine months ended Sep 30, 2023 and 2022[25] - Management fee increased to $6,000 thousand per annum effective October 24, 2023[25] Note 6. Stockholders' Equity Stock-Based Compensation | Stock-Based Compensation (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock Options | $1,873 | $682 | $2,980 | $1,936 | | Restricted share units | $187 | $— | $187 | $— | | Total stock-based compensation | $2,122 | $739 | $3,327 | $2,099 | - 1,132,520 stock options granted in Q3 2023 (weighted-average fair value $2.93), including compensation for 2022 and 2023 due to blackout[29] - 925,172 RSUs granted in Q3 2023 (fair value $5.04), with varying vesting dates due to 2022 blackout[35] - Total unrecognized stock-based compensation expense as of September 30, 2023, was $2,843 thousand, to be recognized over 2.1 years[31] Note 7. Net Income per Share Net Income per Share | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.05 | $0.05 | $0.01 | $0.14 | | Diluted EPS | $0.05 | $0.05 | $0.01 | $0.14 | - Stock options were excluded from diluted EPS calculation due to anti-dilutive effect, and PSUs were excluded as they did not meet issuance criteria[40] Note 8. Fair Value Measurements - Fair value hierarchy prioritizes inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs), Level 3 (unobservable inputs)[44][45] - Initial investment in affiliates is classified as Level 3 fair value, based on internally developed assumptions with few observable inputs[47] Note 9. Commitments, Contingencies and Guarantees - U.S Class Action lawsuit filed Feb 22, 2022, alleging false/misleading statements regarding Cerro Los Gatos mine mineral resources[50] - Agreement in principle to settle U.S Class Action for $21 million, with Gatos Silver funding no more than $6.8 million, pending court approval[52] - Canadian Class Action lawsuit filed March 11, 2022, with ongoing settlement discussions; court hearing tentatively set for March 2024[53][54] Note 10. Debt - Repaid full outstanding balance of $9,000 thousand on Credit Facility on July 21, 2023[59] - $50,000 thousand available for withdrawal under Credit Facility, with an additional $25,000 thousand accordion feature[59] - Company was in compliance with all Credit Facility covenants as of September 30, 2023[57] Note 11. Segment Information - Company operates in a single industry: acquisition, exploration, and development of primarily silver mineral interests[60] - Reportable segments are Mexico (including LGJV investment) and Corporate[60] Note 12. Investment in Affiliates Investment in Affiliates | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Equity income in affiliates | $9,437 | $8,930 | $15,922 | $24,527 | - Received $35,000 thousand capital distribution from LGJV on July 20, 2023[63] - Updated mineral reserve and resource estimate extended Cerro Los Gatos mine life by 2.75 years, reducing DDA expense by $4,331 thousand for Q3 2023[62] Note 13. Subsequent Events - LGJV made a $35,000 thousand capital distribution on October 30, 2023; Company's share was $24,500 thousand[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and operational performance for the period ended September 30, 2023 Forward-Looking Statements - Report contains forward-looking statements about future mineral production, costs, cash flows, capital expenditures, and exploration[75][76] - Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially[79][80] Third Quarter and Year to Date 2023 Highlights This section details key financial and operational results for Gatos Silver and the LGJV for Q3 and YTD 2023 Gatos Silver Highlights Gatos Silver Financials | Metric (in millions) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $3.3 | $3.5 | $0.5 | $9.8 | | EBITDA | $3.6 | $4.2 | $1.3 | $11.2 | - Cash balance at Sep 30, 2023, was $33.5 million (vs $17.0 million at Dec 31, 2022); increased to $57.7 million by Oct 31, 2023, after a $24.5 million LGJV capital distribution[82] LGJV Operational Highlights LGJV Production | Production (Q3 2023 vs Q3 2022) | 2023 | 2022 | Change | | :------------------------------ | :--- | :--- | :----- | | Silver (million oz) | 2.2 | 2.7 | -18.5% | | Lead (million lbs) | 9.5 | 12.2 | -22.1% | | Zinc (million lbs) | 13.8 | 17.8 | -22.5% | | Mill throughput (tonnes/day) | 2,916 | 2,862 | +1.9% | - Lower production primarily due to lower ore grades, as expected in the mine plan[85] - Zinc concentrate fluorine leach plant commissioned in July 2023[85] - Updated mineral reserve and resource estimate extended Cerro Los Gatos mine life by 2.75 years[85] LGJV Financial Highlights LGJV Financials | Metric (in millions) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $67.0 | $73.9 | $195.2 | $218.7 | | Cost of sales | $31.4 | $28.6 | $83.3 | $81.6 | | LGJV net income | $15.1 | $13.0 | $28.5 | $42.4 | | EBITDA | $31.2 | $39.7 | $98.4 | $117.6 | LGJV All-In Sustaining Costs | AISC per payable silver ounce | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Co-product AISC | $17.64 | $13.13 | $15.81 | $14.15 | | By-product AISC | $14.71 | $10.04 | $11.40 | $9.49 | - Q3 LGJV net income increased due to lower income tax expense and lower depreciation, depletion, and amortization expense[85] 2023 Guidance Update This section outlines the revised full-year 2023 production and cost guidance 2023 Production Guidance | Production Guidance (Full Year 2023) | Original Guidance | Revised Guidance | Change (Low End) | Change (High End) | | :----------------------------------- | :---------------- | :--------------- | :--------------- | :---------------- | | Silver (million oz) | 7.4 - 8.2 | 8.8 - 9.3 | +19% | +13% | | Silver equivalent (million oz) | 12.4 - 13.8 | 13.8 - 14.6 | +11% | +6% | - Zinc and gold production expected near low end of original guidance; lead production in upper half[90] - Full year co-product and by-product AISCs expected in lower half of original guidance ranges ($15.50-$17.50 and $11.00-$13.00, respectively)[91] Results of Operations This section provides a detailed analysis of the operational results for both Gatos Silver and the LGJV Results of operations Gatos Silver Gatos Silver Results | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | General and administrative | $7,494 | $5,933 | $19,157 | $16,967 | | Equity income in affiliates | $9,437 | $8,930 | $15,922 | $24,527 | | Net income | $3,288 | $3,504 | $530 | $9,785 | - Increase in general and administrative expenses primarily due to $1.8 million non-cash stock-based compensation in Q3 2023[94][98] - Decrease in nine-month net income mainly due to lower LGJV net income (affecting equity income) and higher G&A[99][101] Results of operations LGJV LGJV Results | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $67,038 | $73,926 | $195,162 | $218,730 | | Cost of sales | $31,446 | $28,625 | $83,255 | $81,550 | | Depreciation, depletion and amortization | $16,712 | $19,943 | $59,558 | $52,340 | | Income tax (recovery) expense | $(884) | $6,702 | $9,814 | $22,488 | | Net income | $15,053 | $12,961 | $28,500 | $42,394 | - Q3 revenue decreased by 9% due to lower sales volumes and a 29% decrease in average realized zinc price, partly offset by higher silver and lead prices[109] - Q3 DDA expense decreased by 16% due to increased mineral reserves and extended mine life[113] - Q3 income tax recovery of $0.9 million (vs $6.7 million expense in 2022) due to reduction in valuation allowance on deferred tax assets[116] - Nine-month revenue decreased by 11% due to lower sales volumes and a 36% decrease in average zinc price[120] - Nine-month DDA expense increased by 14% due to commissioning of new facilities, partly offset by Q3 reduction from mine life extension[126] Cash Flows This section analyzes the cash flow activities for both Gatos Silver and the LGJV Gatos Silver Cash Flows Gatos Silver Cash Flows | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash provided (used) by Operating activities | $(9,535) | $8,680 | | Net cash provided (used) by Investing activities | $35,000 | $(27) | | Net cash used by Financing activities | $(9,000) | $— | | Total change in cash | $16,465 | $8,653 | | Cash and cash equivalents, end of period | $33,469 | $15,269 | | Free cash flow | $25,465 | $8,653 | - Cash used by operating activities in 2023 (vs provided in 2022) largely due to a $15.9 million net dividend received from LGJV in 2022[135] - Investing activities provided $35 million cash due to capital distribution from LGJV[135] - Financing activities used $9 million for repayment of Credit Facility[136] LGJV Cash Flows LGJV Cash Flows | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $103,789 | $120,000 | | Net cash used by investing activities | $(41,160) | $(61,903) | | Net cash used by financing activities | $(50,532) | $(39,712) | | Increase in cash and cash equivalents | $12,097 | $18,385 | | Cash and cash equivalents, end of period | $47,033 | $38,665 | | Free cash flow | $62,629 | $58,097 | - Decrease in cash from operating activities primarily due to lower revenue[139] - Decrease in cash used by investing activities due to lower capital expenditures[140] - Increase in cash used by financing activities due to $50 million capital distribution to partners in July 2023[141] Liquidity and Capital Resources This section discusses the company's cash position, credit facilities, and ability to meet future obligations Cash Position | Metric (in millions) | Sep 30, 2023 | Dec 31, 2022 | Oct 31, 2023 (Subsequent Event) | | :------------------- | :----------- | :----------- | :------------------------------ | | Cash and cash equivalents | $33.5 | $17.0 | $57.7 | - Increase in cash due to $35 million capital distribution from LGJV, partly offset by $9 million Credit Facility repayment and G&A expenses[142] - $50 million available under Credit Facility, with an additional $25 million accordion feature[142] - Company believes it has sufficient cash and access to borrowings for at least the next 12 months[143] Contractual Obligations - No changes to contractual obligations from 2022 10-K[144] Critical Accounting Policies - Refer to Note 2 and 2022 10-K for critical accounting policies and estimates[146] Jumpstart Our Business Startups Act of 2012 - Gatos Silver, as an "emerging growth company," opted out of the extended transition period for new accounting standards[147] - Company will comply with new accounting standards on the same dates as other public companies; decision is irrevocable[147] Non-GAAP Financial Measures - Non-GAAP measures (EBITDA, Cash Costs, AISC) are used to evaluate operating performance and provide additional information to investors[148][149] - AISC is calculated based on World Gold Council guidance and includes direct/indirect operating costs plus sustaining capital expenditures[149][150] - Reconciliations of GAAP expenses to non-GAAP cash costs and AISC are provided[151] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Gatos Silver is not required to provide these disclosures - Company is a smaller reporting company and is not required to provide disclosure on market risk[161] Item 4. Controls and Procedures Management concluded disclosure controls were not effective due to material weaknesses in internal control over financial reporting - Disclosure controls and procedures were not effective as of September 30, 2023, due to material weaknesses in internal control over financial reporting[163] - Control and procedure enhancements were performed over the preparation and review of 2023 mineral reserves and mineral resource estimates[164] PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in two class-action lawsuits related to alleged false statements about mineral resources - U.S Class Action lawsuit filed Feb 22, 2022, alleging false/misleading statements regarding Cerro Los Gatos mine mineral resources[169] - Agreement in principle to settle U.S Class Action for $21 million, with Gatos Silver funding no more than $6.8 million, pending court approval[170] - Canadian Class Action lawsuit filed March 11, 2022, with ongoing settlement discussions; court hearing tentatively set for March 2024[171][172] Item 1A. Risk Factors There have been no material changes to the risk factors disclosed in the Company's 2022 10-K - No material changes to risk factors disclosed in the 2022 10-K[173] - Factors described in the 2022 10-K could cause actual results to differ materially from forward-looking statements[173] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and Inline XBRL documents - Exhibits include Section 302 and 1350 Certifications, and Inline XBRL documents[176]