Gatos Silver(GATO) - 2022 Q1 - Quarterly Report

Part I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Gatos Silver, Inc.'s unaudited condensed consolidated financial statements for Q1 2022, including balance sheets, operations, equity, and cash flows, showing a net income of $18.8 million driven by LGJV equity income Condensed Consolidated Balance Sheets The balance sheet as of March 31, 2022, shows total assets increased to $388.6 million from $367.1 million at year-end 2021, primarily due to the 'Investment in affiliates' (LGJV), with total shareholders' equity also rising to $373.4 million Condensed Consolidated Balance Sheet Highlights (as of March 31, 2022 vs. December 31, 2021) | Account | March 31, 2022 ($ thousands) | December 31, 2021 ($ thousands) | | :--- | :--- | :--- | | Total Current Assets | 8,764 | 11,766 | | Cash and cash equivalents | 5,284 | 6,616 | | Investment in affiliates | 379,818 | 355,310 | | Total Assets | 388,610 | 367,111 | | Total Current Liabilities | 2,557 | 1,406 | | Credit Facility, net | 12,657 | 12,620 | | Total Shareholders' Equity | 373,396 | 353,085 | Condensed Consolidated Statements of Operations For Q1 2022, the company reported a net income of $18.8 million, a significant turnaround from a $1.6 million net loss in Q1 2021, primarily due to a substantial increase in equity income from its LGJV affiliate to $24.6 million Statement of Operations Summary (Three Months Ended March 31) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | | :--- | :--- | :--- | | Total Expenses | 6,931 | 5,084 | | General and administrative | 6,777 | 4,853 | | Equity income in affiliates | 24,614 | 2,701 | | Net Income (Loss) | 18,829 | (1,620) | | Diluted EPS | $0.27 | ($0.03) | Condensed Consolidated Statements of Cash Flows Net cash used by operating activities improved to $1.3 million for Q1 2022 from $6.6 million in Q1 2021, with no investing activities this quarter, and cash and cash equivalents ending at $5.3 million Cash Flow Summary (Three Months Ended March 31) | Activity | 2022 ($ thousands) | 2021 ($ thousands) | | :--- | :--- | :--- | | Net cash used by operating activities | (1,332) | (6,589) | | Net cash used by investing activities | — | (113,823) | | Net cash provided by financing activities | — | 1,297 | | Net decrease in cash | (1,332) | (119,115) | | Cash and cash equivalents, end of period | 5,284 | 31,031 | Notes to Condensed Consolidated Financial Statements These notes detail financial statements, including related-party transactions with LGJV, ongoing legal proceedings regarding mineral reserve disclosures, credit facility amendments, and LGJV's financial performance, which drives company results - The company is facing 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[42][43] - On March 7, 2022, the Company amended its Revolving Credit Facility to address potential covenant deficiencies, reducing the credit limit to $30 million until a new financial model with updated mineral reserves is delivered[54] - The company recognized $24.6 million in equity income from its LGJV investment in Q1 2022, compared to $2.7 million in Q1 2021, following an impairment charge of $51.6 million against this investment in Q4 2021 due to a significant decrease in the mineral reserve estimate[58][59][60] - Subsequent to the quarter, the LGJV paid its first dividend of $20 million in April 2022, with Gatos Silver's net share being $5.9 million after withholdings and a payment to partner Dowa[66] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Gatos Silver's Q1 2022 financial performance, highlighting the LGJV's operational success with 60% silver production growth and 89% revenue increase, driving Gatos Silver's $18.8 million net income, alongside cash flows, liquidity, and non-GAAP reconciliations First Quarter 2022 Highlights Q1 2022 saw strong LGJV operational performance, with silver production up 60% YoY to 2.4 million ounces and revenues growing 89% to $87.6 million, leading to Gatos Silver's $18.8 million net income - Gatos Silver recorded net income of $18.8 million in Q1 2022, a significant improvement from a net loss of $1.6 million in Q1 2021, primarily due to a $21.9 million increase in equity income from the LGJV[78] - LGJV's silver production was 2.4 million ounces in Q1 2022, a 60% increase over the 1.5 million ounces produced in Q1 2021[78] - LGJV revenues increased 89% to $87.6 million in Q1 2022, with net income of $36.9 million compared to $6.9 million in Q1 2021[82] Results of Operations Gatos Silver's $18.8 million net income was driven by LGJV's strong performance, with revenue surging 89% to $87.6 million due to higher production and metal prices, while by-product cash cost per ounce of payable silver decreased 96% to $0.42 - Gatos Silver's general and administrative expenses increased by $1.9 million to $6.8 million in Q1 2022, primarily due to higher legal fees related to the mineral reserve errors[83] LGJV Operational & Financial Results (Q1 2022 vs Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Revenue | $87.6M | $46.3M | | Net Income | $36.9M | $6.9M | | Tonnes Milled per day | 2,611 | 2,261 | | Silver Production (M oz) | 2.4 | 1.5 | | By-product AISC per oz Ag | $8.46 | $19.76 | - LGJV's revenue increased by 89% in Q1 2022 compared to Q1 2021, driven by higher concentrate sales volumes (zinc up 59%, lead up 36%) and higher realized metal prices (zinc up 50%, lead up 17%)[90] Cash Flows, Liquidity and Capital Resources Gatos Silver's cash decreased by $1.3 million to $5.3 million, while LGJV's cash increased by $21.0 million to $41.2 million due to strong operating cash flow, with Gatos Silver having $13.0 million outstanding on its credit facility and sufficient liquidity for the next 12 months Gatos Silver Cash Flow Summary (Q1 2022 vs Q1 2021) | Activity ($ thousands) | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash used by Operating | (1,332) | (6,589) | | Net cash used by Investing | — | (113,823) | | Net cash provided by Financing | — | 1,297 | | Cash at end of period | 5,284 | 31,031 | LGJV Cash Flow Summary (Q1 2022 vs Q1 2021) | Activity ($ thousands) | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash provided by Operating | 42,054 | 23,335 | | Net cash used by Investing | (19,166) | (17,596) | | Cash at end of period | 41,231 | 5,441 | - As of March 31, 2022, the company had cash of $5.3 million and $13.0 million outstanding on its Credit Facility, and management believes it has sufficient cash and access to borrowings for at least the next 12 months[109][110][111] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Gatos Silver is exempt from providing disclosures under this item - As a smaller reporting company, Gatos Silver is not required to provide disclosure for this item[123] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2022, due to previously identified material weaknesses in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were not effective as of March 31, 2022[125] - The ineffectiveness was attributed to material weaknesses in internal control over financial reporting, as described in the 2021 10-K[125] - No changes occurred during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[126] Part II - OTHER INFORMATION Item 1. Legal Proceedings The company faces two putative class action lawsuits in the U.S. and Canada, alleging false and misleading statements regarding mineral resources and reserves at the Cerro Los Gatos mine - 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[131] - A second putative class action was commenced in the Ontario Superior Court of Justice on behalf of purchasers of Gatos securities between October 28, 2020, and January 25, 2022[132] - Both lawsuits allege false and misleading statements and omissions regarding the mineral resources and reserves of the company[131][132] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 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[134] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2022, the company did not issue any unregistered equity securities nor did it repurchase any common stock - The Company did not issue any shares of its common stock or other equity securities that were not registered during the quarter ended March 31, 2022[135] - There were no purchases of the Company's common stock made by or on behalf of the Company or any affiliated purchaser during the quarter[136] Other Items (3, 4, 5, 6) This section confirms no defaults on senior securities, no mine safety disclosures, no other material information, and lists exhibits filed with the report - Item 3: No defaults upon senior securities[137] - Item 4: Mine Safety Disclosures are not applicable[138] - Item 5: No other information to report[139] - Item 6: Lists the exhibits filed with the Form 10-Q[140][141][142]