Gatos Silver(GATO) - 2021 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The company presents its unaudited condensed consolidated financial statements, detailing significant changes in assets, equity, and profitability Condensed Consolidated Balance Sheets Balance Sheet Summary | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $408,385 | $265,410 | +$142,975 | | Cash and cash equivalents | $12,398 | $150,146 | -$137,748 | | Investment in affiliates | $393,608 | $109,597 | +$284,011 | | Total current assets | $14,736 | $155,752 | -$141,016 | | Total shareholders' equity | $391,759 | $261,386 | +$130,373 | | Credit Facility, net | $12,583 | — | +$12,583 | Condensed Consolidated Statements of Operations Operations Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Total expenses | $6,504 | $2,106 | $15,450 | $4,885 | | Equity income (loss) in affiliates | $1,600 | $3,447 | $22,592 | $(18,069) | | Term Loan closing fee | $(10,000) | — | $(10,000) | — | | Net income (loss) from continuing operations | $(14,999) | $433 | $(3,128) | $(26,207) | | Net loss | $(14,999) | $(1,185) | $(3,128) | $(31,150) | | Basic EPS (Continuing operations) | $(0.22) | $0.01 | $(0.05) | $(0.65) | Condensed Consolidated Statements of Shareholders' Equity (Deficit) Shareholders' Equity Summary | Metric (in thousands) | Dec 31, 2020 | Sep 30, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total shareholders' equity | $261,386 | $391,759 | +$130,373 | | Paid-in capital | $409,728 | $542,193 | +$132,465 | | Accumulated deficit | $(147,423) | $(150,551) | -$3,128 | | Common Stock shares outstanding | 59,183,076 | 69,134,494 | +9,951,418 | Condensed Consolidated Statements of Cash Flows Cash Flow Summary | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change | | :-------------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Net cash used by operating activities | $(15,494) | $(11,898) | $(3,596) | | Net cash used by investing activities | $(261,439) | $(8,405) | $(253,034) | | Net cash provided by financing activities | $139,185 | $14,845 | +$124,340 | | Net decrease in cash and cash equivalents | $(137,748) | $(5,458) | $(132,290) | | Cash and cash equivalents, end of period | $12,398 | $3,627 | +$8,771 | Notes to Condensed Consolidated Financial Statements 1. Description of Business - Gatos Silver's primary focus is the Los Gatos Joint Venture (LGJV) in Chihuahua, Mexico, where it operates a silver and zinc-rich mineral district[19] - As of September 30, 2021, Gatos Silver's ownership in the LGJV increased to 70.0%, with Dowa Metals and Mining Co, Ltd holding 30.0%[21] - The LGJV commenced commercial production of lead and zinc concentrates on September 1, 2019, which are sold to third-party customers[22] - The company is conducting infill and extension drilling at Cerro Los Gatos, and definition and exploratory drilling at the Esther deposit and its wholly-owned Santa Valeria project[23][24] 2. Summary of Significant Accounting Policies - Interim financial statements are unaudited and prepared under GAAP for interim information, including normal recurring adjustments[27] - The company adopted ASU No 2019-12, Income Taxes, with no material impact on financial statements[29] - No material changes to significant accounting policies previously disclosed in the 2020 10-K[28] 3. Property, Plant and Equipment, net - Mexican mineral concessions are valid for 50 years, extendable, and require semi-annual fees and annual work reports[30] - The Santa Valeria concession requires a 1% production royalty payment on net smelter returns[31] 4. Accounts Payable and Other Accrued Liabilities Liabilities Summary | Metric (in thousands) | Sep 30, 2021 | Dec 31, 2020 | Change | | :-------------------- | :----------- | :----------- | :----- | | Accounts payable | $263 | $560 | -$297 | | Accrued expenses | $955 | $1,240 | -$285 | | Accrued compensation | $2,565 | $1,964 | +$601 | | Total | $4,043 | $4,024 | +$19 | 5. Related-Party Transactions Related-Party Transactions Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | LGJV services earned | $1,250 | $900 | $3,750 | $3,000 | | LGJV receivables | $833 (Sep 30, 2021) | $1,200 (Dec 31, 2020) | | | | SSMRC services earned | nil | nil | $16 | nil | 6. Net Income (Loss) per Share Earnings Per Share Summary | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Basic EPS (Continuing operations) | $(0.22) | $0.01 | $(0.05) | $(0.65) | | Diluted EPS (Continuing operations) | $(0.22) | $0.01 | $(0.05) | $(0.65) | | Weighted average shares outstanding (Basic) | 67,325,644 | 40,506,144 | 62,210,848 | 40,505,790 | 7. Stockholders' Equity - Public offering in July 2021 issued 8,930,000 shares at $14.00/share, generating $118,894 thousand net proceeds[38] - An additional 286,962 shares were issued in August 2021 via over-allotment option exercise, yielding $3,837 thousand net proceeds[38] - Total unrecognized stock-based compensation expense was $8,346 thousand as of September 30, 2021, to be recognized over 1.9 years[41] - 144,958 Deferred Stock Units (DSUs) were outstanding at September 30, 2021, with 148,721 DSUs converted to common stock during the nine months ended September 30, 2021[44] Stock Option Activity (9 Months Ended Sep 30, 2021) | Stock Option Activity (9 Months Ended Sep 30, 2021) | Shares | Weighted-Average Exercise Price | | :-------------------------------------------------- | :----- | :------------------------------ | | Granted | 489,719 | $16.72 | | Exercised | 585,735 | $8.30 | | Outstanding at Sep 30, 2021 | 5,300,914 | $13.39 | 8. Fair Value Measurements - Financial instruments (cash, receivables, payables) approximate fair value due to short maturities[48] - Non-financial assets and liabilities, including investment in affiliates, are classified as Level 3 in the fair value hierarchy, using unobservable inputs and internal assumptions[49][50] 9. Commitments, Contingencies and Guarantees - The LGJV's $210,000 thousand Term Loan with Dowa was fully repaid on July 26, 2021, with Gatos Silver contributing its 70% share and paying a $10,000 thousand closing fee[53][54][104] - The $60,000 thousand Working Capital Facility (WCF) with Dowa was extinguished on March 11, 2021, with Gatos Silver contributing $42,000 thousand[57][105] - Gatos Silver repurchased an 18.5% interest in the LGJV from Dowa for $71,550 thousand on March 11, 2021, increasing its ownership to 70.0%[56] - The company guarantees LGJV equipment loan agreements, with $7,588 thousand outstanding as of September 30, 2021[58][100] 10. Debt - Company entered a $50,000 thousand Revolving Credit Facility (expandable to $100,000 thousand) on July 12, 2021, maturing July 31, 2024[59][106] - $13,000 thousand was outstanding under the Credit Facility as of September 30, 2021, with an interest rate of LIBOR plus 3%[60][108] - The company recognized $82 thousand in interest expense for both the three and nine months ended September 30, 2021[61] 11. Discontinued Operations - In October 2020, the company distributed its wholly-owned subsidiary, Silver Opportunity Partners LLC (SOP), which is now reported as discontinued operations[25][62] Discontinued Operations Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | | Net loss of discontinued operations | $1,618 | $4,943 | | Net cash used by operating activities of discontinued operations | N/A | $(3,181) | 12. Segment Information - The company operates in two reportable segments: Mexico (development and exploration, including LGJV) and Corporate[64] Segment Assets | Segment (in thousands) | Total Assets (Sep 30, 2021) | Total Assets (Sep 30, 2020) | Change | | :--------------------- | :-------------------------- | :-------------------------- | :----- | | Mexico | $61,373 | $37,359 | +$24,014 | | Corporate | $347,012 | $75,574 | +$271,438 | | Total | $408,385 | $112,933 | +$295,452 | 13. Investment in Affiliate - The equity income/loss includes amortization of the carrying value of the investment in excess of the underlying net assets of the LGJV Entities[65] Equity Income (Loss) in Affiliates | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Equity income (loss) in affiliates | $1,600 | $3,447 | $22,592 | $(18,069) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, operational updates, liquidity, and market risks, highlighting improved LGJV performance Forward-Looking Statements - Forward-looking statements cover future financial performance, growth strategies, production, exploration, mineral reserves, expenses, and capital requirements[71] - Key risks include negative operating cash flows, dependence on two principal projects, significant debt, estimation uncertainties for mineral reserves, speculative exploration, and commodity price volatility[72] - The company does not undertake to revise forward-looking statements unless required by law[74] Overview - Gatos Silver is a U.S-based precious metals company focused on becoming a premier silver producer, primarily through the CLG mine and LGD exploration via the LGJV[75] - The LGD is a new mining district with 14 mineralized zones, including CLG, Esther, and Amapola deposits, and 11 high-priority targets[76] CLG Mineral Reserves (100% Basis, as of July 1, 2020) | CLG Mineral Reserves (100% Basis, as of July 1, 2020) | Tonnes (millions) | Silver (g/t) | Gold (g/t) | Lead (%) | Zinc (%) | | :-------------------------------------------------- | :---------------- | :----------- | :--------- | :------- | :------- | | Proven and Probable (diluted) | 9.6 | 306 | 0.35 | 2.76 | 5.65 | | Proven (diluted) | 6.4 | | | | | | Probable (diluted) | 3.3 | | | | | Operational Update CLG Production (100% Basis) | CLG Production (100% Basis) | Q3 2021 | Q2 2021 | Q1 2021 | 2021 YTD | | :-------------------------- | :------ | :------ | :------ | :------- | | Tonnes milled (dmt) | 234,054 | 230,656 | 203,479 | 668,189 | | Tonnes milled per day (dmt) | 2,544 | 2,535 | 2,261 | 2,448 | | Average Silver grade (g/t) | 256 | 322 | 261 | 282 | | Contained Silver ounces (millions) | 1.7 | 2.1 | 1.5 | 5.3 | | Contained Lead pounds (millions) | 10.8 | 11.2 | 7.6 | 29.6 | | Contained Zinc pounds (millions) | 13.5 | 14.5 | 8.7 | 36.7 | | Silver Recoveries | 89% | 89% | 85% | 88% | COVID-19 Pandemic - COVID-19 temporarily affected 2020 operations due to a 45-day government-mandated suspension and protocol implementation costs[78] - New variants (e.g, Delta) pose risks of reimposed restrictions, additional costs, production delays, and operational restart costs[79] - Significant uncertainty remains regarding the duration and extent of the pandemic's impact on business, financial condition, and results of operations[79] Exploration Update - Three exploration drilling programs are underway, totaling 51,400 meters at an estimated cost of $7,700 thousand[80] - Cerro Los Gatos infill and extension drilling program expanded to 132 holes (27,000 meters) to convert inferred resources and support a potential production rate increase to 3,000 tpd; 78 holes drilled by Sep 30, 2021[82] - Los Gatos District resource expansion program at Esther deposit involves 59 holes (19,000 meters) to expand resources; 18 holes drilled by Sep 30, 2021[83] - The 5,400-meter exploration program at the wholly-owned Santa Valeria project was completed by September 30, 2021, and data analysis is ongoing[84] Components of Results of Operations - Exploration expenses are expected to increase with expanded activities at LGD and other properties[85] - General and administrative expenses have increased significantly due to public company operating costs (salaries, benefits, stock compensation, legal, compliance, insurance)[86] - Equity income (loss) in affiliates represents the proportional share of LGJV's net income/loss and amortization of basis difference[87] - LGJV arrangement fees for the Term Loan and WCF ceased after their extinguishment on July 26, 2021, and March 11, 2021, respectively[88] - The company has historically fully reserved for net deferred tax assets due to substantial losses, believing realization is unlikely before expiration[89] Results of Operations (Company) Company Operations Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change | | :-------------------------------- | :---------------------------- | :---------------------------- | :----- | :---------------------------- | :---------------------------- | :----- | | Net income (loss) from continuing operations | $(14,999) | $433 | $(15,432) | $(3,128) | $(26,207) | +$23,079 | | Term Loan closing fee | $(10,000) | — | $(10,000) | $(10,000) | — | $(10,000) | | Equity income (loss) in affiliates | $1,600 | $3,447 | $(1,847) | $22,592 | $(18,069) | +$40,661 | | General and administrative | $5,994 | $1,965 | +$4,029 | $14,008 | $4,345 | +$9,663 | Liquidity and Capital Resources (Company) - Key cash outflows included $71,550 thousand for LGJV interest repurchase, $42,000 thousand for WCF extinguishment, $144,809 thousand for Term Loan repayment, and $10,000 thousand Term Loan closing fee[97] - Cash inflows included $125,599 thousand net proceeds from a July 2021 public offering and $13,000 thousand from a new Revolving Credit Facility[98][99] - The company believes it has sufficient liquidity for the next 12 months but may need additional external financing for future exploration and development, with no assurance of availability on acceptable terms[101][102] Liquidity Summary | Metric (in thousands) | Sep 30, 2021 | Dec 31, 2020 | Change | | :-------------------- | :----------- | :----------- | :----- | | Cash and cash equivalents | $12,398 | $150,146 | $(137,748) | | Working capital | $10,693 | $151,728 | $(141,035) | Results of LGJV Operations - Nine-month net income improvement driven by 30% silver, 35% zinc, and 17% lead price increases, 67% higher lead concentrate production, 50% higher zinc concentrate production, and improved silver (27%) and zinc (9%) ore grades[117] LGJV Operations Summary | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change | | :-------------------- | :---------------------------- | :---------------------------- | :----- | :---------------------------- | :---------------------------- | :----- | | Sales | $56,991 | $44,021 | +$12,970 | $178,326 | $81,181 | +$97,145 | | Net income (loss) | $5,523 | $7,788 | $(2,265) | $41,720 | $(30,577) | +$72,297 | | Interest expense | $847 | $2,862 | $(2,015) | $5,320 | $9,805 | $(4,485) | | Loss on Term Loan extinguishment | $4,359 | — | +$4,359 | $4,359 | — | +$4,359 | LGJV Cash Flows | LGJV Cash Flows (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change | | :----------------------------- | :---------------------------- | :---------------------------- | :----- | | Operating activities | $84,964 | $31,411 | +$53,553 | | Investing activities | $(57,698) | $(44,208) | $(13,490) | | Financing activities | $(19,001) | $13,492 | $(32,493) | | Total change in cash | $8,265 | $695 | +$7,570 | Non-GAAP Financial Measures - Non-GAAP measures (Cash Costs, AISC) are used to evaluate business, providing additional information not standardized by GAAP[123][124] - AISC includes direct/indirect operating cash costs and sustaining capital expenditures, reflecting total sustainable production costs[125] Non-GAAP Metrics | Non-GAAP Metric (in thousands, except unit costs) | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------------ | :---------------------------- | :---------------------------- | | Cash costs | $34,565 | $99,620 | | All-in sustaining costs | $55,745 | $151,484 | | All-in sustaining costs, net of by-product credits | $26,965 | $78,082 | | By-product cash cost per ounce of payable silver | $3.58 | $5.48 | | By-product all-in sustaining cost per ounce of payable silver | $16.71 | $16.33 | Off-balance sheet arrangements - No significant off-balance sheet arrangements were reported that would materially affect financial condition, results, or liquidity[131] Critical Accounting Policies - Critical accounting policies and estimates are discussed in Note 2 of the consolidated financial statements in this report and the 2020 10-K[132] Jumpstart Our Business Startups Act of 2012 - Gatos Silver, an "emerging growth company," elected to "opt out" of the extended transition period for new accounting standards under the JOBS Act[133] - The company will comply with new/revised accounting standards on the same dates as other public companies, and this decision is irrevocable[133] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company details its exposure to commodity price fluctuations, foreign currency exchange rates, and investment concentration risks - Significant commodity price risk from silver, lead, zinc, and gold sales; a sustained price decrease could materially impact the business[134] - Foreign currency risk exists due to expenditures in Mexican pesos, impacting operational costs[135] - Concentration of risk from placing nearly all cash investments with a single, high-quality financial institution[136] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and procedures as of the reporting period end - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2021[137] - No material changes in internal control over financial reporting occurred during Q3 2021[138] - Management acknowledges inherent limitations in control systems, providing reasonable, not absolute, assurance against errors and fraud[139][140] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company reports no material legal proceedings impacting its financial condition or operations - The company is involved in normal business-related legal proceedings, none of which are considered material to its financial condition, cash flows, or results of operations[142] Item 1A. Risk Factors As of the report date, there have been no material changes to the risk factors previously disclosed in the 2020 10-K - No material changes to risk factors disclosed in the 2020 10-K as of the report date[143] - Existing and unknown risk factors could still significantly impact operations or financial condition[143] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has utilized approximately $131,972 thousand of its IPO net proceeds for LGJV-related activities and working capital - No unregistered equity securities were issued during the quarter ended September 30, 2021[144] - $131,972 thousand of IPO net proceeds used as of September 30, 2021[146] - Major uses of IPO proceeds include $71,550 thousand for LGJV interest repurchase and $42,000 thousand for LGJV WCF extinguishment[146] Item 3. Defaults Upon Senior Securities Gatos Silver reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[148] Item 4. Mine Safety Disclosures This section is not applicable to Gatos Silver, Inc - Mine Safety Disclosures are not applicable[149] Item 5. Other Information No other information was reported under this item - No other information was reported[150] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate and financial agreements and certifications - Exhibits include Amended and Restated Certificate of Incorporation and By-Laws, Confirmation Agreement, Revolving Credit Facility, Separation Agreement, and Section 302/1350 Certifications[151][152]