Gatos Silver(GATO) - 2021 Q2 - Quarterly Report

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