Gatos Silver(GATO) - 2022 Q3 - Quarterly Report

Part I - FINANCIAL INFORMATION Financial Statements Unaudited Q3 2022 financials report $18.3 million net income, a turnaround from prior year loss with positive cash flow Condensed Consolidated Balance Sheets Total assets grew to $388.4 million, driven by cash and affiliate investments; shareholders' equity reached $373.4 million Condensed Consolidated Balance Sheets (in thousands) | | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Current Assets | | | | Cash and cash equivalents | $15,269 | $6,616 | | Total current assets | $16,932 | $11,766 | | Non-Current Assets | | | | Investment in affiliates | $371,452 | $355,310 | | Total Assets | $388,423 | $367,111 | | Current Liabilities | $2,334 | $1,406 | | Non-Current Liabilities | $12,730 | $12,620 | | Total Shareholders' Equity | $373,359 | $353,085 | | Total Liabilities and Shareholders' Equity | $388,423 | $367,111 | Condensed Consolidated Statements of Operations Nine-month net income reached $18.3 million, a turnaround from prior year's $3.1 million net loss Condensed Consolidated Statements of Operations (in thousands, except per share data) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total expenses | $5,977 | $7,754 | $17,209 | $19,200 | | Equity income in affiliates | $6,801 | $1,600 | $32,180 | $22,592 | | Other income (expense) | $1,076 | $(8,845) | $3,332 | $(6,520) | | Net income (loss) | $1,900 | $(14,999) | $18,303 | $(3,128) | | Diluted EPS | $0.03 | $(0.22) | $0.26 | $(0.05) | Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $373.4 million, driven by $18.3 million net income for the nine-month period - Shareholders' equity grew to $373.4 million at September 30, 2022, up from $353.1 million at December 31, 2021[12] - The primary driver for the equity increase was the net income of $18.8 million for the first quarter and $1.9 million for the third quarter, partially offset by a net loss of $2.4 million in the second quarter[12] Condensed Consolidated Statements of Cash Flows Operating cash flow turned positive at $16.0 million, driven by affiliate dividends, increasing cash by $8.7 million Condensed Consolidated Statements of Cash Flows (in thousands) | | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used by) operating activities | $16,045 | $(15,494) | | Net cash used by investing activities | $(7,392) | $(261,439) | | Net cash provided by financing activities | $— | $139,185 | | Net increase (decrease) in cash | $8,653 | $(137,748) | | Cash and cash equivalents, end of period | $15,269 | $12,398 | - The positive shift in operating cash flow was primarily driven by $23.3 million in dividends received from affiliates during the nine months ended September 30, 2022[14] Notes to the Condensed Consolidated Financial Statements Notes detail related-party transactions, legal proceedings, credit facility terms, and LGJV affiliate investment performance - The company is involved in two putative class action lawsuits, one in the U.S. and one in Canada, alleging false and misleading statements regarding mineral resources and reserves at the Cerro Los Gatos mine[40][41] - The company's Revolving Credit Facility was amended multiple times to address potential covenant deficiencies, with the credit limit temporarily reduced and subsequently re-established. The maturity date was extended to December 2025[53][55][58] - An impairment charge of $51.6 million was recorded on the investment in the LGJV during the fourth quarter of 2021 after a technical report indicated a significant decrease in mineral reserves[57][60] LGJV Net Income (in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $73,926 | $56,991 | $218,730 | $178,326 | | Net income | $12,617 | $5,523 | $53,001 | $41,720 | Management's Discussion and Analysis of Financial Condition and Results of Operations Improved financial performance is driven by strong LGJV results, with Gatos Silver reporting $1.9 million net income in Q3 Overview Gatos Silver is a precious metals company, operating the Cerro Los Gatos mine through a 70% ownership stake in the LGJV - The company's primary focus is the operation of the Los Gatos Joint Venture (LGJV) in Chihuahua, Mexico[76] - Gatos Silver holds a 70% ownership stake in the LGJV, with Dowa holding the remaining 30%[76] Third Quarter 2022 Highlights Q3 2022 highlights include $1.9 million net income and 59% increase in LGJV silver production - Gatos Silver recorded net income of $1.9 million for Q3 2022, compared to a net loss of $15.0 million in Q3 2021[79] - The cash balance increased to $15.3 million at September 30, 2022, from $6.6 million at the end of 2021[79] - LGJV's silver production increased by 59% to 2.7 million ounces in Q3 2022 compared to Q3 2021[84] - LGJV's by-product all-in sustaining cost (AISC) per ounce of payable silver decreased by 41% to $9.79 for Q3 2022[82] Results of Operations Gatos Silver's net income improved due to higher LGJV equity income; LGJV revenue grew 30% in Q3 Gatos Silver - Selected Financials (in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Equity income in affiliates | $6,801 | $1,600 | $32,180 | $22,592 | | Net income (loss) | $1,900 | $(14,999) | $18,303 | $(3,128) | LGJV - Selected Financials (in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $73,926 | $56,991 | $218,730 | $178,326 | | Net income | $12,617 | $5,523 | $53,001 | $41,720 | Cash Flows Operating cash flow was $16.0 million, a reversal from prior year, driven by $23.3 million in LGJV dividends - Gatos Silver's cash from operations for the nine months ended Sep 30, 2022, was $16.0 million, compared to a use of ($15.5 million) in the prior year period[132] - The increase in operating cash flow was primarily due to the receipt of $23.3 million in dividends from the LGJV[132] - The LGJV generated $118.3 million in cash from operations and paid $33 million in dividends to its partners during the first nine months of 2022[137][139] Liquidity and Capital Resources The company held $15.3 million cash and $13.0 million outstanding on its credit facility, ensuring 12-month liquidity - The company had cash and cash equivalents of $15.3 million as of September 30, 2022[140] - As of September 30, 2022, $13.0 million was outstanding under the Credit Facility. A $4.0 million principal repayment was made in December 2022[141] - As of February 28, 2023, the company had $15.6 million in cash and $41.0 million available under its Credit Facility, while the LGJV had $55.5 million in cash[142] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, disclosure for market risk is not required - As a smaller reporting company, Gatos Silver is not required to provide disclosure under this item[154] Controls and Procedures Disclosure controls were ineffective due to material weaknesses in internal control over financial reporting from 2021 10-K - Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2022[156] - The ineffectiveness was attributed to material weaknesses in internal control over financial reporting previously identified in the 2021 10-K[156] - No material changes to internal controls over financial reporting occurred during the quarter ended September 30, 2022[157] Part II - OTHER INFORMATION Legal Proceedings The company faces two class action lawsuits alleging false statements regarding mineral resources and reserves - A putative class action lawsuit was filed in the U.S. District Court for the District of Colorado on behalf of purchasers of Gatos common stock between December 9, 2020, and January 25, 2022, alleging false and misleading statements about mineral resources and reserves[163] - A similar putative class action was commenced in the Ontario Superior Court of Justice on behalf of individuals who acquired Gatos securities between October 28, 2020, and January 25, 2022[164] Risk Factors No material changes to risk factors have occurred since the 2021 Annual Report on Form 10-K - As of the date of this report, there have been no material changes to the risk factors disclosed in the 2021 10-K[166] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were issued or purchased by the issuer or affiliates during the quarter - The Company did not issue any unregistered shares of its common stock or other equity securities during the quarter ended September 30, 2022[168] Defaults Upon Senior Securities No defaults upon senior securities occurred during the period - There were no defaults upon senior securities during the period[170] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[171] Other Information No other information to report for this item - There is no other information to report for this item[172] Exhibits This section lists exhibits including corporate documents, credit facility amendments, and officer certifications