Gatos Silver(US:GATO)2024-02-20 16:00PART I Business Overview Gatos Silver, Inc. is a Canadian-headquartered precious metals company focused on the Los Gatos Joint Venture (LGJV) in Chihuahua, Mexico, operating the Cerro Los Gatos (CLG) mine which commenced commercial production in September 2019 - Gatos Silver, Inc. is a Canadian-headquartered, Delaware-incorporated precious metals exploration, development, and production company, primarily focused on the LGJV in Chihuahua, Mexico, where it holds a 70% ownership and operates the CLG mine producing silver-containing lead and zinc concentrates since September 1, 20195759 - Strategic objectives include maximizing margins, extending the CLG mine life, completing key capital projects, and expanding mineral resources within the broader Los Gatos District (LGD) through exploration6364 - Key strategic developments in 2023 include LGJV capital distributions of $85.0 million ($59.5 million to Gatos Silver), extension of the Revolving Credit Facility to 2026 with no outstanding balance, updated mineral resource and reserve estimates extending CLG mine life to 2030 with a 46% increase in total silver production, 9.2 million ounces of silver production (top end of guidance) with a 10% increase in mill throughput to 2,935 tpd, and agreements in principle to settle U.S. and Canadian class action lawsuits64 2023 Production Data (CLG): | Metal | 2023 Production | 2022 Production | Change (YoY) | | :---- | :-------------- | :-------------- | :----------- | | Silver | 9.2 million oz | 10.3 million oz | -10.7% | | Zinc | 57.3 million lbs | 60.7 million lbs | -5.6% | | Lead | 38.9 million lbs | 43.9 million lbs | -11.4% | | Gold | 5.3 thousand oz | 5.4 thousand oz | -1.9% | | Mill Throughput | 2,935 tpd | 2,662 tpd | +10.2% | Competition The mining and precious metals industry is highly competitive, with larger companies often possessing greater resources and better financing access - The mining and precious metals industry is highly competitive, with larger, established companies often possessing greater resources, better financing access, and more efficient equipment65 - Gatos Silver faces competition for key personnel, particularly experienced mine construction and management staff, and for the services of mine service companies, which may offer better terms to larger industry players6667 Environmental, Health and Safety Matters The company is subject to stringent and complex environmental, health, and safety regulations in Mexico, which can incur substantial costs and risks - The company is subject to stringent and complex environmental laws, regulations, and permits in Mexico, which can incur substantial capital or operating costs and may delay or prohibit development, with violations potentially leading to litigation, fines, or permit revocations68 - Major government approvals for CLG facilities were issued in 2017, with the key MIA (Environmental Impact Assessment) valid until 2041, and while four amendments have been successfully achieved, a permit amendment for the fluorine leach project was partially disallowed for technical reasons, requiring a further application6970 - Recent significant amendments to Mexican mining laws (May 8, 2023) could materially adversely affect the mining industry and LGJV's Mexican businesses, particularly for new concessions, permits, and operations7176 - The company could be liable for environmental contamination at or from its properties or third-party disposal sites, potentially incurring substantial remediation costs, fines, and claims, regardless of fault7274 - Operations are regulated by various Mexican laws, with authorities conducting regular inspections, and violations can lead to fines, penalties, or operational closures75 Facilities and Employees The company maintains a lean corporate structure with a significant workforce at the LGJV in Mexico, prioritizing employee health and safety Employee Count (as of Feb 20, 2024): | Location | Employees | | :------- | :-------- | | United States | 0 | | Canada | 13 (full-time) | | Mexico | 6 (full-time) | | LGJV (Mexico) | ~882 (604 unionized) | - The company prioritizes employee health and safety, with over 99% of CLG employees being Mexican, maintaining a Code of Conduct, conducting annual training, and focusing on employee development6280 Risk Factors Gatos Silver faces a range of significant risks, including financial dependence on the CLG and LGD, uncertainty in mineral reserve estimates, and volatility in metal prices, alongside operational, regulatory, litigation, and cybersecurity threats, and potential stock price volatility influenced by major shareholders Risks Related to Our Financial Condition The company's financial health is highly dependent on the CLG and LGD, subject to metal price volatility, and potential debt or tax changes - The company is highly dependent on the CLG and LGD for future operations and may not successfully identify additional proven or probable mineral reserves to extend the CLG mine life8384 - While profitable in 2022 and 2023, there is no assurance of sustained profitability, which depends on successful LGJV operations and is subject to numerous risks85 - Deliveries under concentrate sales agreements can be suspended or cancelled by customers due to force majeure, potentially reducing cash flow and adversely affecting financial condition86 - The company does not currently hedge against metal price or currency fluctuations, exposing it to losses from declines in silver, lead, and zinc prices, and appreciation of Mexican pesos or Canadian dollars against the U.S. dollar878889 - Future debt incurrence by Gatos Silver or LGJV could adversely affect financial health and limit future financing or business opportunities, with the existing $50 million Credit Facility having covenants that, if not met, could lead to termination or reduction of credit9193 - The effective tax rate could be volatile and materially change due to changes in tax laws, the mix of earnings across jurisdictions (U.S., Mexico, Canada), and potential Mexican withholding taxes on LGJV distributions949596 Risks Related to Our Operations Mining operations face inherent risks including uncertain mineral reserve estimates, geological challenges, cost fluctuations, and potential title defects - Mineral reserve and resource calculations are estimates based on geological interpretation and sampling, which may be inaccurate, with actual production, future estimates, and economic viability varying significantly due to changes in metal prices, costs, recovery rates, or further exploration, and inferred resources carrying high uncertainty regarding existence and economic viability979899100101104105 - Mineral exploration is highly speculative and often unsuccessful, requiring substantial expenditures without assurance of profitable mining operations106107 - Factors like oversized material, unexpected breakage characteristics, deleterious materials, or hydrogeological challenges (e.g., underground water management at CLG) can adversely impact mining and processing efficiency, leading to lower throughput, recoveries, or increased downtime108109110 - Actual capital and operating costs may differ significantly from anticipated figures due to changes in labor, equipment, fuel prices, inflation, and regulatory requirements, potentially affecting profitability111114 - Land reclamation and mine closure are costly and uncertain, with actual expenditures potentially exceeding estimates, which could materially affect financial performance, and financial assurances (e.g., letters of credit) are required115 - Developing new mineral projects involves risks such as considerable costs and timing of construction, availability of skilled labor and equipment, appropriate smelting arrangements, obtaining necessary permits, financing, industrial accidents, natural phenomena, unusual geological conditions, and potential opposition from various groups116117 - Mining operations involve significant inherent risks and hazards, including industrial accidents, ground control problems, equipment failure, and natural phenomena, which can cause injuries, property damage, environmental contamination, and operational suspensions119 - Deepening underground mines and increasing waste/tailings deposits present geotechnical challenges, including the possibility of failure of underground openings, leading to additional expenses or negative impacts on operations and stated mineral reserves121 - Title to mineral properties in Mexico may be uncertain or defective, subject to prior unregistered agreements, interests, or native land claims, and may be terminated if concession obligations are not met, with title insurance generally unavailable122123124126 - Mining, processing, development, and exploration activities depend on adequate infrastructure (roads, power, water), and lack of availability, delays, or damage due to extreme weather or interference could adversely affect operations and profitability128 Risks Related to Our Business and Industry The company's business is exposed to volatile metal prices, labor disputes, community relations, litigation, health crises, and competitive pressures - The prices of silver, zinc, and lead are highly volatile and influenced by numerous external factors (e.g., interest rates, inflation, speculation, supply/demand), which can significantly affect LGJV's revenues and the value of mineral properties129130131 - Changes in industrial and consumer demand for silver, zinc, and lead, including technological shifts or increased substitution by alternative materials, could adversely affect future sales volumes and revenues132134 - The company is subject to the risk of labor disputes, including protests, blockades, and strikes, which could disrupt business operations and adversely affect results, especially with a unionized LGJV workforce135 - Success depends on developing and maintaining productive relationships with local communities and stakeholders; dissatisfaction can lead to legal or administrative proceedings, civil unrest, protests, or campaigns against the company136 - The company is currently and may in the future be subject to litigation, government investigations, and regulatory proceedings, which incur significant costs, divert management's time, and may not be adequately covered by insurance137 - Widespread outbreaks of health pandemics, epidemics, communicable diseases, or public health crises could adversely affect the company, particularly in regions of operation, by disrupting operations and impacting financial condition138139140 - The mining industry is highly competitive, with larger, established companies often having greater liquidity, financial resources, and more efficient equipment, which could hinder Gatos Silver's ability to compete successfully142 - The company's insurance may not provide adequate coverage for losses related to various mining risks and hazards, and certain risks (e.g., environmental) may not be insurable, potentially leading to significant uninsured costs and adverse financial impacts143144 - The business is sensitive to nature and climate conditions; increasing climate change legislation could result in higher costs, and extreme weather events may disrupt operations and require additional expenditures145 - The company's success depends significantly on retaining key members of its senior management team, and departures could negatively impact business execution due to the difficulty in finding suitable replacements in a competitive international mining industry146 - The company may fail to identify attractive acquisition candidates or strategic partners, or successfully integrate acquired properties or manage joint ventures, and the Unanimous Omnibus Partner Agreement requires Dowa's consent for major LGJV decisions, potentially impacting strategic flexibility147149150151 - Information technology systems are vulnerable to disruption and cyberattacks, which could lead to data loss, operational failure, inaccurate recordkeeping, or disclosure of confidential information, resulting in financial losses and regulatory/legal exposure152153154155 - Directors may have conflicts of interest due to their roles in other mining companies156 - The company has identified material weaknesses in its internal control over financial reporting, specifically regarding accounting for current and deferred taxes, and failure to remediate these deficiencies could lead to inaccurate financial reporting, loss of investor confidence, and a decline in common stock value157158159162163164165 - Damage to the company's reputation, resulting from actual or perceived negative events (e.g., environmental, safety, community relations), could decrease investor confidence, challenge community relations, and hinder project development166167 Risks Related to Government Regulations Operations are subject to increasingly strict and evolving Mexican regulations, political instability, and international trade policies, posing significant compliance and financial risks - Mining operations are subject to increasingly strict federal, state, and local regulations in Mexico (e.g., land use, permitting, environmental, labor), imposing significant costs and potentially restricting operations, with non-compliance leading to penalties, closures, or increased liabilities168170171172 - Recent legislative amendments by the Mexican federal government (May 8, 2023) could significantly impact the mining industry and LGJV's Mexican businesses, particularly for new concessions, by requiring public bidding, specifying minerals, reducing concession terms, imposing profit payments to communities, and increasing environmental obligations, with the company initiating 'amparo' proceedings to challenge them due to unclear retroactive effect and full implementation174175176177 - Operations in Mexico are exposed to heightened political, economic, regulatory, and social risks, including potential contract cancellations, unfavorable law changes, tax increases, expropriation, political instability, currency fluctuations, social unrest, organized crime, and uncertainty regarding contractual rights178179180 - Local and regional meteorological conditions (e.g., severe precipitation, high winds, wildfires) can increase operating costs and disrupt mining/processing, potentially impacting power supply from the national grid181 - Changes in trade agreements (e.g., USMCA) or imposition of tariffs/sanctions could increase costs, lower productivity, and adversely affect financial performance, with export of concentrates potentially depending on obtaining certain licenses or meeting quotas182183184185 - Obtaining, maintaining, and renewing environmental, construction, and mining permits is costly, time-consuming, and may not always be possible, with permit terms potentially restricting operations and applications being challenged, leading to delays or denials186187 - The company is subject to environmental and health and safety laws, regulations, and permits that may subject it to material costs, liabilities, and obligations, including for remediation of contamination, fines, or personal injury claims188190191192 - Operations are governed by anticorruption and antibribery laws (e.g., FCPA), with increased enforcement and penalties, and non-compliance by the company, employees, or third parties could result in significant penalties and reputational damage193194 - The company may be required by human rights laws to take actions, or may be subject to local or community actions, that delay operations or project advancement through legal proceedings, protests, or demands for agreements with local groups195 Risks Related to Ownership of Our Common Stock The company's common stock price is subject to volatility, anti-takeover provisions, and the significant influence of major shareholders, with no immediate plans for cash dividends - The market price of common stock has been and may continue to be volatile due to factors like failure to identify mineral reserves, production issues, metal price changes, financial results, competitor performance, capital structure changes, large stock sales, regulatory changes, litigation, and general economic conditions196198 - Anti-takeover defense provisions (e.g., blank check preferred stock, advance notice for nominations, supermajority vote for charter amendments) may make it more difficult or expensive for a third party to acquire control, potentially causing the stock to trade at a lower price200 - Sales of a substantial number of shares by existing holders or the perception of such sales could significantly drop the market price and make it harder to raise future funds201203 - The company does not intend to pay cash dividends in the foreseeable future, meaning shareholder returns depend on stock price appreciation204205 - Electrum (32%) and MERS (9%) have substantial influence, including director nomination rights and approval rights over certain major corporate actions (e.g., mergers, large indebtedness, equity issuances) as long as Electrum holds at least 35% of outstanding common stock, which could delay or prevent a change of control206207208 - As an 'emerging growth company' and 'smaller reporting company,' the company benefits from reduced disclosure requirements, which might make its common stock less attractive to some investors, potentially leading to a less active trading market and more volatile stock price209210 - The Amended and Restated Certificate of Incorporation and shareholders agreement include provisions renouncing the company's interest in certain corporate opportunities, allowing Electrum and MERS to pursue opportunities that might otherwise be available to Gatos Silver, potentially adversely affecting financial performance211212 - The Certificate of Incorporation designates Delaware courts and U.S. federal district courts as exclusive forums for certain disputes, which could limit stockholders' ability to choose a favorable judicial forum213214215216 General Risk Factors Operating as a public company incurs increased expenses and management time for compliance, and stock price is influenced by analyst reports - Operating as a public company incurs significantly increased legal, accounting, and other expenses, and requires substantial management time for compliance with SEC, NYSE, and TSX regulations, including Sarbanes-Oxley Act requirements217218220 - The trading market for common stock is influenced by research and reports from securities or industry analysts, and downgrades, inaccurate research, or cessation of coverage could lead to a decline in stock price and trading volume221222 Item 1B. Unresolved Staff Comments This item is not applicable to the company - This item is not applicable223 Item 1C. Cybersecurity Gatos Silver integrates cybersecurity risk management into its overall enterprise risk management program, with Board oversight and CFO direction, though acknowledging that all risks cannot be eliminated - Cybersecurity risk management is part of the company's overall enterprise risk management program, designed to provide a framework for handling cybersecurity threats and incidents, including those associated with third-party service providers224 - The Board of Directors has overall oversight responsibility for cybersecurity risk management, while management, under the direction of the CFO, is responsible for identifying, assessing, and mitigating risks, with significant incidents reported to the audit committee and board225 - Despite efforts, the company cannot eliminate all risks from cybersecurity threats and cannot provide assurances of not experiencing an undetected cybersecurity incident226 Item 2. Properties Gatos Silver's primary asset is its 70% interest in the Los Gatos Joint Venture (LGJV) in Chihuahua, Mexico, which operates the Cerro Los Gatos (CLG) mine and explores the broader Los Gatos District (LGD), with updated mineral reserve and resource estimates extending the CLG mine life to 2030 The CLG The CLG mine, located in Chihuahua, Mexico, is a polymetallic epithermal vein deposit processing over 2,950 tpd of silver-lead-zinc ore using conventional flotation, a newly commissioned fluorine leach plant, and a paste backfill plant, while adhering to high environmental standards and utilizing 100% renewable energy - The CLG mine, managed by Gatos Silver, is located in Chihuahua, Mexico, within the LGD, and is an epithermal vein deposit containing silver, zinc, lead, gold, and copper sulfides228 - The site includes a polymetallic mine and processing facility handling over 2,950 tpd, utilizing conventional sequential silver-lead-zinc flotation, with a paste backfill plant (commissioned Dec 2022) using 40% of tailings, and a fluorine leach plant (commissioned Q2 2023) reducing fluorine levels in zinc concentrates229 - The CLG is built to higher environmental standards than required by Mexican law, with a fully lined tailings impoundment facility and ore storage dome, and uses 100% renewable energy sources for electrical power, significantly reducing its carbon footprint231232 CLG Production and Throughput (2023 vs. 2022): | Metric | 2023 | 2022 | Change (YoY) | | :-------------------------------- | :----- | :----- | :----------- | | Silver Production (million oz) | 9.2 | 10.3 | -10.7% | | Zinc Production (million lbs) | 57.3 | 60.7 | -5.6% | | Lead Production (million lbs) | 38.9 | 43.9 | -11.4% | | Gold Production (thousand oz) | 5.3 | 5.4 | -1.9% | | Mill Throughput (tpd) | 2,935 | 2,662 | +10.3% | | Average Annual Silver Production (LOM) | 6.6 million oz | N/A | N/A | The LGD The Los Gatos District (LGD) covers approximately 103,087 hectares in Chihuahua, Mexico, with Gatos Silver holding a 70% interest in the LGJV, which is subject to a 2% net smelter return (NSR) royalty and requires Dowa's consent for major decisions, while actively conducting exploration focused on areas near the CLG mine - The Los Gatos District (LGD) covers approximately 103,087 hectares in Chihuahua, Mexico, comprising 17 claim titles held by Minera Plata Real (MPR), valid until 2054-2062, with MPR also owning surface rights covering 5,479 hectares, including the CLG and Esther Resource areas234 - The LGJV is subject to a production royalty agreement with La Cuesta International S.A. de C.V., requiring a 2% net smelter return (NSR) until $10 million in payments, then reducing to 0.5% NSR, with $11.8 million paid as of December 31, 2023, and a remaining balance of $3.2 million until concession ownership transfers to LGJV at $15 million239 - The LGD and CLG are owned and operated through the Unanimous Omnibus Partner Agreement, with Gatos Silver holding 70% and Dowa 30%, where 'Major Decisions' require Dowa's consent, limiting Gatos Silver's full control, and Dowa has the right to purchase 100% of the zinc concentrate produced240245 - In 2023, the LGJV made capital distributions totaling $85.0 million to its partners, with Gatos Silver's share being $59.5 million, following $55.0 million in dividends in 2022, where Gatos Silver received $30.8 million net of withholding taxes and a priority dividend payment to Dowa243244460 - Exploration on the LGD property includes geophysical analysis, surface mapping, rock and soil sampling, and drilling (527,815 meters across 2,090 drill holes as of December 31, 2023), with efforts prioritizing areas most proximate to the CLG to leverage existing infrastructure246247 Summary of Mineral Reserves and Resources As of July 1, 2023, the CLG mine has 8.08 Mt of Proven and Probable reserves, containing 56.3 Moz of silver, 770.3 Mlbs of zinc, and 392.3 Mlbs of lead, with additional Measured, Indicated, and Inferred resources at CLG and Esther, primarily due to extensive drilling 2023 CLG Mineral Reserves Statement (as of July 1, 2023): | Reserve Classification | Mt | Ag (g/t) | Zn (%) | Pb (%) | Au (g/t) | Cu (%) | Ag (Moz) | Zn (Mlbs) | Pb (Mlbs) | Au (koz) | Cu (Mlbs) | | :-------------------- | :--- | :------- | :----- | :----- | :------- | :----- | :------- | :-------- | :-------- | :------- | :-------- | | Proven | 3.46 | 317 | 4.39 | 2.17 | 0.31 | 0.09 | 35.3 | 335.0 | 165.7 | 34.7 | 6.9 | | Probable | 4.62 | 141 | 4.27 | 2.23 | 0.20 | 0.19 | 21.0 | 435.3 | 226.6 | 29.3 | 19.5 | | Proven and Probable | 8.08 | 217 | 4.32 | 2.20 | 0.25 | 0.15 | 56.3 | 770.3 | 392.3 | 64.0 | 26.4 | 2023 CLG Mineral Resources (Exclusive of Mineral Reserves, as of July 1, 2023): | Resource Classification | Mt | Ag (g/t) | Zn (%) | Pb (%) | Au (g/t) | Cu (%) | Ag (Moz) | Zn (Mlbs) | Pb (Mlbs) | Au (koz) | Cu (Mlbs) | | :-------------------- | :--- | :------- | :----- | :----- | :------- | :----- | :------- | :-------- | :-------- | :------- | :-------- | | Measured | 0.05 | 141 | 2.50 | 1.70 | 0.40 | 0.05 | 0.2 | 2.9 | 2.0 | 0.7 | 0.1 | | Indicated | 0.34 | 85 | 3.71 | 1.90 | 0.23 | 0.15 | 0.9 | 28.1 | 14.4 | 2.5 | 1.1 | | Measured and Indicated | 0.40 | 93 | 3.55 | 1.88 | 0.25 | 0.14 | 1.2 | 30.9 | 16.4 | 3.2 | 1.2 | | Inferred | 4.58 | 100 | 3.40 | 2.32 | 0.21 | 0.40 | 14.7 | 343.6 | 234.5 | 30.9 | 40.1 | 2023 Esther Mineral Resource Estimate (as of July 1, 2023): | Resource Classification | Mt | Ag (g/t) | Zn (%) | Pb (%) | Au (g/t) | Ag (Moz) | Zn (Mlbs) | Pb (Mlbs) | Au (koz) | | :-------------------- | :--- | :------- | :----- | :----- | :------- | :------- | :-------- | :-------- | :------- | | Indicated | 0.28 | 122 | 4.30 | 2.17 | 0.14 | 1.1 | 26.8 | 13.6 | 1.2 | | Inferred | 1.20 | 133 | 3.69 | 1.53 | 0.09 | 5.1 | 98.0 | 40.6 | 3.3 | - Additions to 2023 CLG mineral reserves and resources were primarily due to extensive additional drilling (28% increase in drill data from 2022 to March 31, 2023), partially offset by depletion from mining operations (1,071,400 tonnes processed in 2023)259 - Exploration and development drilling programs adhere to industry-standard quality control methods, including a secure sample chain-of-custody and insertion of reference and control samples, with mineral reserve and resource estimates reviewed and certified by qualified persons and the Technical Safety and Sustainability Committee268271272 Item 3. Legal Proceedings The company is involved in legal proceedings, including U.S. and Canadian class action lawsuits related to mineral resource and reserve disclosures, with agreements in principle reached to settle both, largely covered by insurance, while cooperating with ongoing investigations by the U.S. Department of Justice and the SEC - An agreement in principle was reached on June 13, 2023, to settle the U.S. Class Action for $21.0 million, subject to court approval, with the company expecting to fund no more than $2.53 million, and the balance covered by insurance441 - A term sheet was executed on January 26, 2024, to settle the Canadian Class Action for $3.0 million, subject to court approval, with the company expecting to fund $1.47 million of this settlement, based on insurance coverage443 - The company has disclosed issues related to CLG's mineral reserves and resources to the U.S. Department of Justice and the SEC and is cooperating with their investigations, though the outcome cannot be predicted444 Item 4. Mine Safety Disclosures This item is currently inapplicable to Gatos Silver as it has no operating properties in the United States - The provisions related to Item 4 are currently inapplicable to the Company as it has no operating properties in the United States274 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Gatos Silver's common stock is listed on the NYSE and TSX under "GATO," with 69,181,047 shares outstanding as of February 20, 2024, and the company has not declared dividends, intending to retain earnings for operations and expansion, while 10.3 million shares remain available for future issuance under equity compensation plans - The Company's common stock is listed on the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol "GATO"276 - As of February 20, 2024, there were 69,181,047 shares of the Company's common stock outstanding, held by approximately 36 stockholders of record7277 - The Company has not declared any dividends since incorporation and has no immediate plans to do so, intending to retain earnings for operations and business expansion, with the Credit Facility also containing restrictions on dividend payments205278 Equity Compensation Plans (as of December 31, 2023): | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | | :------------------------------------ | :----------------------------------------------------------------------- | :----------------------------------------------------------------------- | :---------------------------------------------------------- | | Equity Incentive Compensation Plan | 3,917,802 | N/A (for DSUs, PSUs, RSUs) / $8.81 (for Stock Options) | 10,301,189 | - During the year ended December 31, 2023, the Company did not issue any unregistered shares of its common stock or other equity securities, and there were no purchases made by or on behalf of the Company or any affiliated purchaser of its common stock281282 Item 6. [Reserved] This item is not applicable - This item is not applicable283 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Gatos Silver, Inc. reported a net income of $12.9 million in 2023, down from $14.5 million in 2022, primarily due to lower equity income from the LGJV, which itself saw a decrease in net income to $53.4 million in 2023 from $72.2 million in 2022, driven by lower revenues from reduced sales volumes despite higher realized prices, while maintaining a strong liquidity position with $55.5 million in cash and a $50 million undrawn credit facility Overview Gatos Silver is a Canadian-headquartered precious metals company focused on the LGJV in Chihuahua, Mexico, which operates the CLG mine, reporting a $12.9 million net income in 2023 and $59.5 million in capital distributions from LGJV, while the LGJV achieved record processing throughput of 1,071,400 tonnes and extended CLG mine life to 2030 - Gatos Silver is a Canadian-headquartered, Delaware-incorporated precious metals exploration, development, and production company focused on the LGJV in Chihuahua, Mexico, which operates the CLG mine285286 2023 Key Highlights (Gatos Silver Inc.): | Metric | Value | | :------------------------------------ | :---------- | | Net income | $12.9 million | | Basic EPS | $0.19 | | Diluted EPS | $0.18 | | EBITDA | $12.4 million | | Capital distributions from LGJV | $59.5 million | | Debt | $0 (Credit Facility available: $50 million) | | Operating cash flow used | $12.0 million | | Free cash flow generated | $47.5 million | 2023 Key Highlights (LGJV - 100% basis): | Metric | Value | | :------------------------------------------ | :---------------- | | Record processing throughput | 1,071,400 tonnes (2,935 tpd) | | Silver recovery | 89.4% | | Zinc recovery | 62.1% | | Lead recovery | 88.7% | | CLG mine life extended | 2.75 years (to 2030) | | Revenue | $268.7 million | | Net income | $53.4 million | | EBITDA | $135.8 million | | Cash flow from operations | $142.0 million | | Free cash flow | $84.9 million | | Capital distributions to partners | $85.0 million | | Co-product cash cost per oz payable Ag equiv. | $12.11 | | By-product cash cost per oz payable Ag | $6.31 | | Co-product AISC per oz payable Ag equiv. | $15.51 | | By-product AISC per oz payable Ag | $11.33 | Results of Operations Gatos Silver Gatos Silver's net income decreased to $12.9 million in 2023 from $14.5 million in 2022, primarily due to lower equity income in affiliates, despite a reduced legal settlement loss and increased interest income Consolidated Operating Results (in thousands): | Metric | 2023 | 2022 | Change | | :-------------------------- | :----- | :----- | :------- | | Exploration | $26 | $110 | -$84 | | General and administrative | $25,688 | $25,468 | +$220 | | Amortization | $79 | $180 | -$101 | | Total expenses | $25,793 | $25,758 | +$35 | | Equity income in affiliates | $33,622 | $45,230 | -$11,608 | | Legal settlement loss | $(1,500) | $(7,900) | +$6,400 | | Interest expense | $(679) | $(433) | -$246 | | Interest income | $1,332 | $154 | +$1,178 | | Other income | $5,992 | $4,801 | +$1,191 | | Total net other income | $38,767 | $41,852 | -$3,085 | | Income before taxes | $12,974 | $16,094 | -$3,120 | | Income tax expense | $114 | $1,565 | -$1,451 | | Net income | $12,860 | $14,529 | -$1,669 | - Net income decreased from $14.5 million in 2022 to $12.9 million in 2023, primarily due to lower equity income in affiliates291 - General and administrative expenses increased slightly to $25.7 million in 2023 (from $25.5 million in 2022), including higher non-cash stock-based compensation ($6.0 million vs. $2.8 million), legal defense fees, and restatement costs, with management fees from LGJV ($6.0 million in 2023 vs. $5.0 million in 2022) included in Other Income292 - Legal settlement loss was $1.5 million in 2023 (Canadian Class Action) compared to $7.9 million in 2022 (U.S. Class Action), both net of expected insurance proceeds293 - Interest income increased by $1.2 million due to a higher cash balance and an increase in the interest rate earned on cash deposits296 - Income tax expense decreased to $0.1 million in 2023 (related to Canadian subsidiary operations) from $1.6 million in 2022 (reflecting withholding tax on dividends received from the LGJV)298 Results of Operations LGJV LGJV's revenue decreased by 14% to $268.7 million in 2023, primarily due to lower sales volumes of silver, zinc, and lead, despite higher realized prices for some metals, leading to a 26% decrease in net income to $53.4 million, while cash costs and AISC per payable silver ounce increased significantly LGJV Financial and Operational Information (100% basis): | Metric | 2023 | 2022 | Change (YoY) | | :------------------------------------------ | :------- | :------- | :----------- | | Revenue | $268,671 | $311,724 | -13.9% | | Cost of sales | $111,266 | $107,075 | +3.9% | | Royalties | $1,363 | $3,069 | -55.6% | | Exploration | $2,875 | $9,800 | -70.7% | | General and administrative | $18,068 | $14,307 | +26.3% | | Depreciation, depletion and amortization | $75,110 | $69,380 | +8.3% | | Net income | $53,443 | $72,216 | -26.0% | | Tonnes milled (dmt) | 1,071,400 | 971,595 | +10.3% | | Tonnes milled per day (dmt) | 2,935 | 2,662 | +10.3% | | Average Silver grade (g/t) | 299 | 368 | -18.7% | | Average Zinc grade (%) | 3.90 | 4.37 | -10.8% | | Average Lead grade (%) | 1.85 | 2.31 | -20.0% | | Contained Silver ounces (millions) | 9.21 | 10.32 | -10.7% | | Contained Zinc pounds (millions) | 57.3 | 60.7 | -5.6% | | Contained Lead pounds (millions) | 38.9 | 43.9 | -11.4% | | Silver Recovery | 89.4% | 89.8% | -0.4 pp | | Zinc Recovery | 62.1% | 64.8% | -2.7 pp | | Lead Recovery | 88.7% | 88.7% | 0.0 pp | | Co-product cash cost per oz payable Ag equiv. | $12.11 | $9.41 | +28.7% | | By-product cash cost per oz payable Ag | $6.31 | $2.17 | +190.8% | | Co-product AISC per oz payable Ag equiv. | $15.51 | $14.33 | +8.2% | | By-product AISC per oz payable Ag | $11.33 | $10.24 | +10.6% | - Total revenue decreased by 14% in 2023 to $268.7 million, primarily due to lower sales volumes of silver, zinc, and lead (driven by lower ore grades), partly offset by higher realized prices for silver, lead, and gold, with provisional revenue adjustments also contributing to the decrease303 - Cost of sales increased by 4% in 2023 to $111.3 million, mainly due to a 10% increase in mining and milling rates, higher equipment maintenance costs, and operation of the new leaching plant304 - Cash costs increased by 1% to $147.9 million, while by-product credits decreased by 24% due to lower zinc prices and sales, consequently, co-product cash cost per ounce of payable silver equivalent increased by 29% to $12.11, and by-product cash cost per ounce of payable silver increased by 191% to $6.31, with AISC decreasing by 15% to $189.4 million305307 - Exploration expenditure decreased by $6.9 million in 2023 primarily due to reduced greenfield exploration, as the focus shifted to capitalized resource expansion drilling of the South-East Deeps Zone308 - Sustaining capital expenditures decreased to $41.6 million in 2023 from $76.5 million in 2022, with major expenditures on mine development, dewatering wells, the fluorine leaching plant, and mining equipment, and resource development drilling expenditures totaled $13.5 million in 2023, primarily for the South-East Deeps zone313314 Cash Flows Gatos Silver's operating cash flow used $12.0 million in 2023, a $26.6 million decrease from 2022, primarily due to LGJV distributions being reclassified as capital distributions (investing activities), which provided $59.5 million in 2023, while LGJV's operating cash flow decreased by $15.4 million to $142.0 million Gatos Silver Cash Flows (in thousands): | Activity | 2023 | 2022 | Change | | :-------------------- | :------- | :------- | :------- | | Operating activities | $(12,020) | $14,554 | $(26,574) | | Investing activities | $59,500 | $(60) | +$59,560 | | Financing activities | $(9,000) | $(4,106) | -$4,894 | | Total change in cash | $38,480 | $10,388 | +$28,092 | - Gatos Silver's operating cash flow used $12.0 million in 2023, a $26.6 million decrease from $14.6 million provided in 2022, primarily because LGJV distributions were classified as capital distributions (investing) in 2023 versus dividends (operating) in 2022317 - Gatos Silver's investing cash flow provided $59.5 million in 2023 (from LGJV capital distributions) compared to $0.1 million used in 2022318 - Gatos Silver's financing cash flow used $9.0 million in 2023 for full repayment of the Credit Facility, compared to $4.1 million used in 2022 for partial repayment319 LGJV Cash Flows (in thousands): | Activity | 2023 | 2022 | Change | | :-------------------- | :-------- | :-------- | :-------- | | Operating activities | $142,001 | $157,374 | -$15,373 | | Investing activities | $(57,087) | $(82,279) | +$25,192 | | Financing activities | $(85,547) | $(60,439) | -$25,108 | | Total change in cash | $(633) | $14,656 | -$15,289 | - LGJV's operating cash flow decreased by $15.4 million to $142.0 million, mainly due to lower revenue, partly offset by cash flow from working capital changes321 - LGJV's financing activities used $85.5 million in 2023 (capital distributions of $85.0 million) compared to $60.4 million in 2022 (dividends of $55.0 million)323 Liquidity and Capital Resources As of December 31, 2023, Gatos Silver had $55.5 million in cash and cash equivalents, along with a $50.0 million undrawn revolving Credit Facility, providing sufficient liquidity for the next 12 months, while the LGJV held $34.3 million in cash and made a $30.0 million capital distribution in February 2024 - As of December 31, 2023, Gatos Silver had $55.5 million in cash and cash equivalents (up from $17.0 million in 2022), primarily due to LGJV capital contributions and management fees, with cash at $53.1 million as of January 31, 2024325326 - The company has a $50.0 million revolving Credit Facility with BMO, extended to December 31, 2026, with an accordion feature up to $100.0 million, and no outstanding borrowings as of December 31, 2023326329 - The LGJV had $34.3 million in cash as of December 31, 2023, and $43.1 million as of January 31, 2024, with a $30.0 million capital distribution made on February 15, 2024326465469 - The company believes it has sufficient liquidity for the next 12 months but may seek external financing for long-term needs, which could lead to dilution or significant debt obligations326327 - The LGJV has a renewable energy supply contract with a committed purchase amount of 140,000 MW per annum until September 6, 2025, with expected purchase commitments of $11.4 million in 2024 and $9.5 million in 2025, totaling $20.9 million331 Critical Accounting Policies The company accounts for its LGJV investment using the equity method, defers mineral property acquisition costs while expensing exploration, capitalizes development costs, and recognizes deferred tax assets based on significant management estimates, while assessing the impact of new accounting standards - The company accounts for its investment in LGJV using the equity method, recognizing its proportional share of LGJV's results, with the basis difference (value of mineral resources) amortized on a units-of-production basis335 - Mineral property acquisition costs are deferred, while exploration and evaluation costs are expensed, and development costs are capitalized once proven and probable reserves are determined and depleted using the units-of-production method, with assets reviewed for impairment based on undiscounted cash flows and fair value336337338 - Deferred tax assets are recognized based on expected future taxable income, requiring significant management estimates, with recoverability assessed against forecasted cash flows and tax laws, and uncertainties in tax regulations and audits potentially leading to material differences from current estimates339340342 - The company is assessing the impact of recently issued accounting standards, including ASU 2023-06 (Disclosure Improvements), ASU 2023-07 (Segment Reporting), and ASU 2023-09 (Income Taxes)397398399 - As an 'emerging growth company' under the JOBS Act, Gatos Silver elected to opt out of the extended transition period for new accounting standards, complying with public company requirements344 Non-GAAP Financial Measures Cash costs and all-in sustaining costs (AISC) are non-GAAP measures used to evaluate business performance, providing additional information beyond GAAP measures by including direct and indirect operating cash costs, and for AISC, sustaining capital expenditures - Cash costs and all-in sustaining costs (AISC) are non-GAAP measures used to evaluate business performance and provide additional information beyond GAAP measures, with cash costs including direct and indirect operating cash costs, while AISC adds sustaining capital expenditures345346347 Reconciliation of LGJV Expenses (GAAP) to Non-GAAP Measures (in thousands, except per ounce): | Metric | 2023 | 2022 | | :-------------------------------------------------- | :------- | :------- | | Cost of sales | $111,266 | $107,075 | | Royalties | $1,363 | $3,069 | | Exploration | $2,875 | $9,800 | | General and administrative | $18,068 | $14,307 | | Depreciation, depletion and amortization | $75,110 | $69,380 | | Total expenses (GAAP) | $208,682 | $203,631 | | Cash costs (A) | $147,871 | $146,322 | | Sustaining capital | $41,571 | $76,526 | | All-in sustaining costs (B) | $189,442 | $222,848 | | By-product credits | $(95,648) | $(125,782) | | All-in sustaining costs, net of by-product credits (C) | $93,794 | $97,066 | | Cash costs, net of by-product credits (D) | $52,223 | $20,540 | | Payable ounces of silver equivalent (E) | 12,214 | 15,552 | | Co-product cash cost per ounce of payable silver equivalent (A/E) | $12.11 | $9.41 | | Co-product all-in sustaining cost per ounce of payable silver equivalent (B/E) | $15.51 | $14.33 | | Payable ounces of silver (F) | 8,282 | 9,482 | | By-product cash cost per ounce of payable silver (D/F) | $6.31 | $2.17 | | By-product all-in sustaining cost per ounce of payable silver (C/F) | $11.33 | $10.24 | Sustaining Capital and Resource Development Drilling (LGJV, in thousands): | Item | 2023 | 2022 | | :------------------------------ | :------- | :------- | | Cash flow used by investing activities | $57,087 | $82,279 | | Sustaining capital | $41,571 | $76,526 | | Resource development drilling | $13,464 | — | | Materials & supplies | $600 | $327 | | Amount included in accounts payable | $1,452 | $5,426 | | Total | $57,087 | $82,279 | EBITDA Reconciliation (Gatos Silver, in thousands): | Metric | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | Net income | $12,860 | $14,529 | | Interest expense | $679 | $433 | | Interest income | $(1,332) | $(154) | | Income tax expense | $114 | $1,565 | | Depreciation, depletion and amortization | $79 | $180 | | EBITDA | $12,400 | $16,553 | EBITDA Reconciliation (LGJV, in thousands): | Metric | 2023 | 2022 | | :------------------------------------ | :-------- | :-------- | | Net income and comprehensive income | $53,443 | $72,216 | | Interest income | $(1,567) | — | | Interest expense | $660 | $582 | | Income tax expense | $8,147 | $37,306 | | Depreciation, depletion and amortization | $75,110 | $69,380 | | EBITDA | $135,793 | $179,484 | Free Cash Flow Reconciliation (Gatos Silver, in thousands): | Metric | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | Net cash (used) provided by operating activities | $(12,020) | $14,554 | | Net cash provided (used) by investing activities | $59,500 | $(60) | | Free cash flow | $47,480 | $14,494 | Free Cash Flow Reconciliation (LGJV, in thousands): | Metric | 2023 | 2022 | | :------------------------------------ | :-------- | :-------- | | Net cash provided by operating activities | $142,001 | $157,374 | | Net cash used by investing activities | $(57,087) | $(82,279) | | Free cash flow | $84,914 | $75,095 | Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Gatos Silver is not required to provide disclosures under this item - As a smaller reporting company, Gatos Silver is not required to provide disclosure pursuant to this Item360 Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements of Gatos Silver, Inc. and the combined financial statements of the Los Gatos Joint Venture for the years ended December 31, 2023, and 2022, including the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Income and Comprehensive Income, Stockholders' Equity, Cash Flows, and detailed notes to the financial statements, providing a comprehensive view of the company's financial position, performance, and cash movements Gatos Silver, Inc. Consolidated Financial Statements Ernst & Young LLP provided an unqualified opinion on Gatos Silver's consolidated financial statements for December 31, 2023 and 2022, which include the Consolidated Balance Sheets, Statements of Income, and Cash Flows, reflecting a net income of $12.9 million in 2023 and $55.5 million in cash and cash equivalents, with $59.5 million in capital distributions from LGJV - Ernst & Young LLP provided an unqualified opinion on the consolidated financial statements for December 31, 2023 and 2022, stating they present fairly, in all material respects, the financial position, results of operations, and cash flows in accordance with U.S. generally accepted accounting principles367 Consolidated Balance Sheets (as of December 31, in thousands): | Asset/Liability/Equity | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | ASSETS | | | | Cash and cash equivalents | $55,484 | $17,004 | | Related party receivables | $560 | $1,773 | | Other current assets | $22,642 | $16,871 | | Total current assets | $78,686 | $35,648 | | Investment in affiliates | $321,914 | $347,793 | | Deferred tax assets | $266 | — | | Other non-current assets | $38 | $60 | | Total Assets | $400,904 | $383,501 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable, accrued and other liabilities | $33,357 | $26,358 | | Credit Facility, net of debt issuance costs | — | $8,661 | | Common Stock | $117 | $117 | | Paid-in capital | $553,319 | $547,114 | | Accumulated deficit | $(185,889) | $(198,749) | | Total stockholders' equity | $367,547 | $348,482 | | Total Liabilities and Stockholders' Equity | $400,904 | $383,501 | Consolidated Statements of Income (for the year ended December 31, in thousands): | Item | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | Exploration | $26 | $110 | | General and administrative | $25,688 | $25,468 | | Amortization | $79 | $180 | | Total expenses | $25,793 | $25,758 | | Equity income in affiliates | $33,622 | $45,230 | | Legal settlement loss | $(1,500) | $(7,900) | | Interest expense | $(679) | $(433) | | Interest income | $1,332 | $154 | | Other income | $5,992 | $4,801 | | Total net other income | $38,767 | $41,852 | | Income before taxes | $12,974 | $16,094 | | Income tax expense | $114 | $1,565 | | Net income and comprehensive income | $12,860 | $14,529 | | Net income per share (Basic) | $0.19 | $0.21 | | Net income per share (Diluted) | $0.18 | $0.21 | Consolidated Statements of Cash Flows (for the year ended December 31, in thousands): | Activity | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | Net cash (used) provided by operating activities | $(12,020) | $14,554 | | Net cash provided (used) by investing activities | $59,500 | $(60) | | Net cash used by financing activities | $(9,000) | $(4,106) | | Net increase in cash and cash equivalents | $38,480 | $10,388 | | Cash and cash equivalents, end of period | $55,484 | $17,004 | - The company provides management and administrative services to LGJV, earning $6.0 million in 2023 and $5.0 million in 2022, and also seconds employees to LGJV, charging $2.6 million in 2023 and $2.4 million in 2022407410 - Total stock-based compensation expense was $5.3 million in 2023 (vs. $2.8 million in 2022), including stock options, PSUs, and RSUs412 - The $50.0 million Credit Facility was fully repaid in July 2023, resulting in no outstanding balance as of December 31, 2023446 - Total income tax expense was $0.1 million in 2023 (related to Canadian subsidiary operations) compared to $1.6 million in 2022 (reflecting withholding tax on LGJV dividends), with deferred tax assets of $2.996 million (net of $38.672 million valuation allowance) recognized in 2023449451452 - Equity income from LGJV was $33.6 million in 2023 (vs. $45.2 million in 2022), and the updated mineral reserve and resource estimate in September 2023 (effective July 1, 2023) resulted in a reduction of depletion, depreciation, and amortization expense by $9.4 million and deferred tax expense by $3.7 million for LGJV457458 - Gatos Silver received $59.5 million in capital distributions from LGJV in 2023459 Los Gatos Joint Venture Combined Financial Statements Ernst & Young LLP provided an unqualified opinion on the LGJV's combined financial statements for December 31, 2023 and 2022, which include Combined Balance Sheets, Statements of Operations, and Cash Flows, reflecting a net income of $53.4 million in 2023, $34.3 million in cash, and $268.7 million in revenue, with a $30 million capital distribution made in February 2024 - Ernst & Young LLP provided an unqualified opinion on the combined financial statements of Los Gatos Joint Venture for December 31, 2023 and 2022, confirming fair presentation in accordance with U.S. GAAP471 Combined Balance Sheets (as of December 31, in thousands): | Asset/Liability/Equity | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | ASSETS | | | | Cash and cash equivalents | $34,303 | $34,936 | | Receivables | $12,634 | $26,655 | | Inventories | $16,397 | $11,542 | | VAT receivable | $12,610 | $21,531 | | Income tax receivable | $20,185 | $27,039 | | Other current assets | $1,253 | $4,138 | | Total current assets | $97,382 | $125,841 | | Mine development, net | $234,980 | $232,515 | | Property, plant and equipment, net | $171,965 | $198,600 | | Deferred tax assets | $9,568 | — | | Total non-current assets | $416,513 | $431,115 | | Total Assets | $513,895 | $556,956 | | LIABILITIES AND OWNERS' CAPITAL | | | | Accounts payable and accrued liabilities | $38,704 | $46,751 | | Related party payable | $560 | $1,792 | | Equipment loans | — | $480 | | Total current liabilities | $39,264 | $49,023 | | Lease liability | $208 | $268 | | Asset retirement obligation | $11,593 | $15,809 | | Deferred tax liabilities | $3,885 | $1,354 | | Total non-current liabilities | $15,686 | $17,431 | | Capital contributions | $455,638 | $540,638 | | Paid-in capital | $18,186 | $18,186 | | Accumulated deficit | $(14,879) | $(68,322) | | Total owners' capital | $458,945 | $490,502 | | Total Liabilities and Owners' Capital | $513,895 | $556,956 | Combined Statements of Operations (for the year ended December 31, in thousands): | Item | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | Revenue | $268,671 | $311,724 | | Cost of sales | $111,266 | $107,075 | | Royalties | $1,363 | $3,069 | | Exploration | $2,875 | $9,800 | | General and administrative | $18,068 | $14,307 | | Depreciation, depletion and amortization | $75,110 | $69,380 | | Total expenses | $208,682 | $203,631 | | Interest expense | $660 | $582 | | Interest income | $(1,567) | — | | Accretion expense | $1,145 | $1,103 | | Other expense (income) | $741 | $(766) | | Foreign exchange gain | $(2,580) | $(2,348) | | Income before taxes | $61,590 | $109,522 | | Income tax expense | $8,147 | $37,306 | | Net income and comprehensive income | $53,443 | $72,216 | Combined Statements of Cash Flows (for the year ended December 31, in thousands): | Activity | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | Net cash provided by operating activities | $142,001 | $157,374 | | Net cash used by investing activities | $(57,087) | $(82,279) | | Net cash used by financing activities | $(85,547) | $(60,439) | | Net increase (decrease) in cash and cash equivalents | $(633) | $14,656 | | Cash and cash equivalents, end of period | $34,303 | $34,936 | Revenue Breakdown (in thousands): | Item | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | Lead Concentrate | $227,121 | $226,494 | | Zinc Concentrate | $69,989 | $95,794 | | Treatment and refining charges and penalties | $(17,174) | $(21,871) | | Provisional revenue adjustments | $(11,265) | $11,307 | | Total revenue | $268,671 | $311,724 | Inventories (as of December 31, in thousands): | Item | 2023 | 2022 | | :-------------------- | :------- | :------- | | Ore stockpiles | $2,006 | $843 | | Concentrate stockpiles | $3,850 | $941 | | Material & supplies | $10,541 | $9,758 | | Total inventories | $16,397 | $11,542 | Property, Plant and Equipment, net (as of December 31, in thousands): | Item | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | Mineral properties | $832 | $853 | | Plant & equipment | $95,861 | $112,456 | | Land | $14,422 | $14,422 | | Infrastructure & improvements | $190,290 | $168,007 | | Furniture, fixtures & computers | $870 | $779 | | Right of use asset | $268 | $328 | | Property, plant & equipment at cost | $302,543 | $296,845 | | Less accumulated amortization | $(130,578) | $(98,245) | | Total property, plant & equipment, net | $171,965 | $198,600 | - The LGJV's minimum remaining production royalty obligation to La Cuesta International S.A. de C.V. is $3.158 million as of December 31, 2023521522 Asset Retirement Obligations (ARO) (in thousands): | Item | 2023 | 2022 | | :-------------------- | :------- | :------- | | Balance, beginning of period | $15,809 | $14,706 | | Change in estimate | $(5,361) | — | | Accretion expense | $1,145 | $1,103 | | Balance, end of period | $11,593 | $15,809 | - The LGJV had no outstanding equipment loan balances as of December 31, 2023 (vs. $480 thousand in 2022)542 Income Taxes (in thousands): | Item | 2023 | 2022 | | :------------------------------------ | :------- | :------- | | Income before taxes | $61,590 | $109,522 | | Deferred tax benefit (expense) | $7,841 | $(19,586) | | Current tax expense | $(15,988) | $(17,720) | | Income tax expense | $(8,147) | $(37,306) | - As of December 31, 2023, the LGJV had $35.37 million of net operati