Gatos Silver(GATO) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for Q1 2024 include balance sheets, income, equity, and cash flow statements Condensed Consolidated Balance Sheets Total assets decreased to $382.4 million, driven by a reduction in investment in affiliates, while stockholders' equity increased | ASSETS (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $70,586 | $55,484 | | Other current assets | $2,486 | $22,642 | | Investment in affiliates | $308,202 | $321,914 | | Total Assets | $382,399 | $400,904 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable and other accrued liabilities | $10,376 | $33,357 | | Total stockholders' equity | $371,768 | $367,547 | | Total Liabilities and Stockholders' Equity | $382,399 | $400,904 | Condensed Consolidated Statements of Income and Comprehensive Income Net income increased to $2.5 million for Q1 2024, a significant rise from $0.8 million in the prior-year period | (in thousands, except share amounts) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Total expenses | $6,998 | $5,599 | | Equity income in affiliates | $7,288 | $5,011 | | Interest income | $767 | $161 | | Other income | $1,518 | $1,426 | | Income before taxes | $2,575 | $835 | | Net income and comprehensive income | $2,532 | $835 | | Net income per share (Basic and Diluted) | $0.04 | $0.01 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $371.8 million, primarily due to net income and stock-based compensation expenses | (in thousands) | Balance at Dec 31, 2023 | Stock-based compensation | DSU compensation | Net income | Balance at Mar 31, 2024 | | :------------------------- | :---------------------- | :----------------------- | :--------------- | :--------- | :---------------------- | | Common Stock (Amount) | 117 | — | — | — | 117 | | Paid-in Capital | 553,319 | 1,681 | 8 | — | 555,008 | | Accumulated deficit | (185,889) | — | — | 2,532 | (183,357) | | Total Stockholders' Equity | 367,547 | 1,681 | 8 | 2,532 | 371,768 | Condensed Consolidated Statements of Cash Flows Cash from operating activities improved to $15.1 million, largely due to a $21.0 million distribution from an affiliate | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $2,532 | $835 | | Equity income in affiliates | $(7,288) | $(5,011) | | Distribution received from affiliate | $21,000 | — | | Net cash provided (used) by operating activities | $15,136 | $(4,103) | | Net cash used by financing activities | $(34) | — | | Net increase (decrease) in cash and cash equivalents | $15,102 | $(4,103) | | Cash and cash equivalents, end of period | $70,586 | $12,901 | Notes to the Condensed Consolidated Financial Statements These notes detail accounting policies, financial statement components, related party transactions, and contingencies Note 1. Basis of Presentation The unaudited interim statements are prepared per GAAP and should be read with the 2023 Annual Report on Form 10-K - The interim condensed consolidated financial statements are unaudited and include all necessary recurring adjustments for fair presentation, prepared in accordance with GAAP for interim financial information[17] - These statements should be read in conjunction with the Company's audited consolidated financial statements in the 2023 10-K[17] Note 2. Summary of Significant Accounting Policies No material changes were made to significant accounting policies from those disclosed in the 2023 10-K - No material changes to significant accounting policies previously identified in the 2023 10-K[18] - The Company is assessing the impact of ASU No 2024-02 (Codification Improvements) and ASU No 2023-06 (Disclosure Improvements) but does not expect a material impact on financial statements[19][20][21] Note 3. Other Current Assets Other current assets decreased significantly due to a reduction in insurance proceeds receivable for class action settlements | (in thousands) | March 31, 2024 | December 31, 2023 | | :------------------------ | :------------- | :---------------- | | Value added tax receivable | $696 | $691 | | Prepaid expenses | $1,379 | $1,914 | | Insurance proceeds receivable | $403 | $20,000 | | Other assets | $8 | $37 | | Total other current assets | $2,486 | $22,642 | - The significant decrease in insurance proceeds receivable is due to a $19,597 thousand payment made by the Company's insurers in escrow for the U.S Class Action settlement on March 22, 2024[23] Note 4. Accounts Payable and Other Accrued Liabilities Current liabilities decreased substantially, mainly due to a $21.0 million reduction in legal settlement payable | (in thousands) | March 31, 2024 | December 31, 2023 | | :--------------------------------- | :------------- | :---------------- | | Accounts payable | $375 | $2,713 | | Accrued expenses | $4,700 | $3,031 | | Accrued compensation | $1,762 | $3,215 | | Legal settlement payable | $3,000 | $24,000 | | Current tax payable | $414 | $387 | | Other liabilities | $125 | $11 | | Total accounts payable and other current liabilities | $10,376 | $33,357 | - The legal settlement payable decreased significantly due to a $1,403 thousand payment made by the Company in escrow for the U.S Class Action settlement on March 22, 2024[25] Note 5. Related Party Transactions The Company earned increased management fees and employee secondment charges from the Los Gatos Joint Venture (LGJV) | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------- | :-------------------------------- | :-------------------------------- | | Management and administrative services income | $1,500 | $1,250 | | Employee secondment charges | $580 | $562 | Note 6. Stockholders' Equity Stock-based compensation expense increased in Q1 2024 due to new grants of stock options and restricted share units | Stock-Based Compensation (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Stock Options | $690 | $693 | | Performance share units | $51 | $50 | | Restricted share units | $940 | — | | Total stock-based compensation | $1,681 | $743 | | Stock Option Activity (Employee & Director) | Number of options | Weighted-Average Exercise Price | | :---------------------------------------- | :---------------- | :------------------------------ | | Outstanding at December 31, 2023 | 2,616,515 | $8.83 | | Granted | 592,753 | $6.41 | | Forfeited | (17,818) | $6.82 | | Expired | (9,946) | $11.62 | | Outstanding at March 31, 2024 | 3,181,504 | $8.38 | | RSU Activity (Employee) | Number of RSUs | Weighted-Average Price Per Share | | :------------------------------ | :------------- | :------------------------------- | | Outstanding at December 31, 2023 | 925,172 | $5.04 | | Granted | 296,375 | $6.41 | | Forfeited | (11,948) | $5.50 | | Outstanding at March 31, 2024 | 1,209,599 | $8.38 | - Total unrecognized stock-based compensation expense as of March 31, 2024, was $3,520 thousand for stock options (expected to be recognized over 2.1 years), $115 thousand for PSUs (0.7 years), and $4,511 thousand for RSUs (1.76 years)[31][33][36] Note 7. Net Income per Share Basic and diluted net income per share increased to $0.04 in Q1 2024 from $0.01 in the prior-year period | (in thousands, except share amounts) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net income and comprehensive income | $2,532 | $835 | | Weighted average shares: Basic | 69,181,047 | 69,162,223 | | Effect of dilutive stock options | 312,878 | — | | Effect of dilutive PSUs | 38,966 | — | | Effect of dilutive RSUs | 583,844 | — | | Effect of dilutive DSUs | 302,930 | 146,796 | | Diluted | 70,419,665 | 69,309,019 | | Net income per share: Basic and Diluted | $0.04 | $0.01 | Note 8. Fair Value Measurements The Company's investment in affiliates is classified as Level 3 due to reliance on internally developed assumptions - The Company's initial investment in affiliates is classified within Level 3 of the fair value hierarchy, as its valuation is based on internally developed assumptions with few observable inputs and no market activity[47] Note 9. Commitments, Contingencies and Guarantees The Company is subject to legal proceedings and regulatory investigations, with class actions reaching settlement agreements - The U.S Class Action lawsuit reached an agreement in principle to settle for $21.0 million, funded by the Company ($1.4 million) and its insurers ($19.6 million), with preliminary approval granted on February 29, 2024, and a final fairness hearing scheduled for May 29, 2024[51][52] - The Canadian Class Action lawsuit settled for $3.0 million, funded by the Company ($2.6 million) and its insurers ($0.4 million), with preliminary approval granted on April 16, 2024, and a final fairness hearing scheduled for June 28, 2024[54] - The Company is cooperating with U.S Department of Justice and SEC investigations related to its January 25, 2022 press release and issues concerning Cerro Los Gatos' mineral reserves and resources, with an unpredictable outcome[56] Note 10. Segment Information The Company operates through two segments, Mexico and Corporate, with the Mexico segment generating all equity income | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Mexico Segment | | | | Exploration expense | $31 | $26 | | General and administrative expense | $174 | $224 | | Equity income in affiliates | $(7,288) | $(5,011) | | Total assets | $61,016 | $121,623 | | Corporate Segment | | | | General and administrative expense | $6,789 | $5,312 | | Interest income | $(767) | $(161) | | Total assets | $321,383 | $261,207 | Note 11. Investment in Affiliates Equity income from the LGJV investment increased, and the Company received a $21.0 million capital distribution - Gatos Silver recognized $7,288 thousand in equity income from its investment in LGJV Entities for the three months ended March 31, 2024, compared to $5,011 thousand in the prior year[60] - The LGJV made a $30,000 thousand capital distribution on February 15, 2024, with Gatos Silver's share being $21,000 thousand[61] | LGJV Combined Statements of Operations (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $72,218 | $69,865 | | Total expenses | $57,013 | $51,624 | | Income before taxes | $14,947 | $18,658 | | Net income and comprehensive income | $10,172 | $12,701 | | LGJV Combined Balance Sheets (in thousands) | March 31, 2024 | December 31, 2023 | | :------------------------------------------ | :------------- | :---------------- | | Total current assets | $88,318 | $97,382 | | Total non-current assets | $406,883 | $416,513 | | Total Assets | $495,201 | $513,895 | | Total current liabilities | $40,134 | $39,264 | | Total non-current liabilities | $15,950 | $15,686 | | Total owners' capital | $439,117 | $458,945 | | Total Liabilities and Owners' Capital | $495,201 | $513,895 | Note 12. Subsequent Events The Company made a $2.6 million escrow payment in April 2024 to fund the Canadian Class Action settlement - On April 26, 2024, the Company made a payment in escrow of $2,597 thousand to fund the Canadian Class Action settlement[68] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operational performance for Q1 2024, including results, cash flows, and liquidity Forward-Looking Statements The report contains forward-looking statements about future performance that are subject to risks and uncertainties - Forward-looking statements cover estimates of future mineral production, costs, cash flows, capital expenditures, and other financial and operational aspects[71] - These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that could cause actual results to differ materially[72][73] First Quarter 2024 Highlights The company reported strong net cash flow and income, while the LGJV achieved record throughput despite lower net income Gatos Silver Financial Highlights | Gatos Silver (in millions) | Q1 2024 | Q1 2023 | | :------------------------- | :------ | :------ | | Net cash flow provided (used) by operating activities | $15.1 | $(4.1) | | Cash and cash equivalents (as of March 31) | $70.6 | $12.9 | | Net income | $2.5 | $0.8 | | EBITDA | $1.8 | $0.9 | LGJV (100% basis) Operational and Financial Highlights | LGJV (100% basis) | Q1 2024 | Q1 2023 | | :---------------- | :------ | :------ | | Silver production (million oz) | 2.37 | 2.43 | | Lead production (million lbs) | 10.1 | 9.5 | | Zinc production (million lbs) | 15.8 | 14.0 | | Processing plant throughput (tonnes) | 292,114 | 260,428 | | Revenue (million) | $72.2 | $69.9 | | Cost of sales (million) | $30.8 | $26.0 | | LGJV net income (million) | $10.2 | $12.7 | | EBITDA (million) | $35.1 | $39.6 | | Co-product AISC per ounce of payable silver equivalent | $14.36 | $12.79 | | By-product AISC per ounce of payable silver | $10.08 | $6.11 | - CLG achieved record process plant throughput rates, averaging 3,210 tonnes per day (tpd), an 11% increase from 2,894 tpd in Q1 2023[77] Results of Operations - Gatos Silver Net income increased to $2.5 million in Q1 2024, driven by higher equity and interest income Gatos Silver Select Financial Information (in thousands) | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Total expenses | $6,998 | $5,599 | | Equity income in affiliates | $7,288 | $5,011 | | Interest income | $767 | $161 | | Net other income | $9,573 | $6,434 | | Income before taxes | $2,575 | $835 | | Net income and comprehensive income | $2,532 | $835 | | Net income per share (basic and diluted) | $0.04 | $0.01 | - General and administrative expenses increased by $1.4 million, mainly due to a $0.9 million increase in non-cash stock-based compensation expense and a $0.6 million increase in non-recurring legal defense fees[80] - Equity income in affiliates increased by $2.3 million, primarily from a reduction in the priority distribution obligation, partly offset by lower LGJV equity income[81] - Interest income increased by $0.6 million due to higher cash balances and increased interest rates on deposits[82] Results of Operations - LGJV LGJV's net income decreased to $10.2 million due to higher costs, despite a 3% increase in revenue LGJV Financial Results (in thousands) | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $72,218 | $69,865 | | Cost of sales | $30,771 | $25,988 | | Royalties | $330 | $418 | | Exploration | $1,371 | $463 | | General and administrative | $4,285 | $3,936 | | Depreciation, depletion and amortization | $20,256 | $20,819 | | Other expense (income) | $258 | $(417) | | Income tax expense | $4,775 | $5,957 | | Net income and comprehensive income | $10,172 | $12,701 | LGJV Operating Results | Operating Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Tonnes milled (dmt) | 292,114 | 260,428 | | Tonnes milled per day (dmt) | 3,210 | 2,894 | | Silver grade (g/t) | 284 | 329 | | Zinc grade (%) | 3.99 | 3.93 | | Lead grade (%) | 1.77 | 1.86 | | Silver ounces (millions) | 2.37 | 2.43 | | Zinc pounds (millions) | 15.8 | 14.0 | | Lead pounds (millions) | 10.1 | 9.5 | | Average realized price per silver ounce | $22.91 | $26.61 | | Average realized price per zinc pound | $1.07 | $1.43 | | Average realized price per lead pound | $0.85 | $1.05 | - Revenue increased by 3% due to a 94% increase in provisional revenue adjustment and increased sales volumes, despite decreased average realized prices for silver (-14%), zinc (-25%), and lead (-19%)[92] - Cost of sales increased by 18% due to higher mill throughput, increased concentrate tonnage sold, new plant operating costs, and the strengthening Mexican peso[95] Sustaining Capital and Resource Development Drilling LGJV's Q1 2024 sustaining capital and resource development drilling expenditures totaled $8.9 million and $3.2 million, respectively - Sustaining capital expenditures for Q1 2024 were $8.9 million, including $5.8 million for mine development and $2.5 million for infrastructure and equipment[103] - Resource development drilling expenditures for Q1 2024 were $3.2 million, primarily related to resource expansion drilling of the South-East Deeps zone at CLG[104] Cash Flows - Gatos Silver Cash and equivalents increased to $70.6 million, with operating activities providing $15.1 million, driven by a distribution from LGJV Gatos Silver Cash Flows (in thousands) | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided (used) by Operating activities | $15,136 | $(4,103) | | Net cash used by Investing activities | — | — | | Net cash used by Financing activities | $(34) | — | | Total change in cash | $15,102 | $(4,103) | | Cash and cash equivalents, beginning of period | $55,484 | $17,004 | | Cash and cash equivalents, end of period | $70,586 | $12,901 | - The $15.1 million increase in cash and cash equivalents was primarily due to a $21.0 million capital distribution received from the LGJV on February 15, 2024[107][115] Cash Flows - LGJV LGJV's cash decreased to $29.8 million, primarily due to a $30.0 million capital distribution to its partners LGJV Cash Flows (in thousands) | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided (used) by Operating activities | $37,325 | $40,044 | | Net cash used by Investing activities | $(11,828) | $(11,366) | | Net cash used by Financing activities | $(30,016) | $(290) | | Total change in cash | $(4,519) | $28,388 | | Cash and cash equivalents, beginning of period | $34,303 | $34,936 | | Cash and cash equivalents, end of period | $29,784 | $63,324 | - The $2.7 million decrease in cash provided by operating activities was primarily due to increased cost of sales, exploration, and general and administrative expenses[112] - Cash used by investing activities was $11.8 million, including $10 million for mine development and $1.8 million for property, plant, and equipment[113] - Cash used by financing activities increased significantly to $30.0 million due to a capital distribution to LGJV partners in February 2024[114] Liquidity and Capital Resources The Company's cash position strengthened to $85.4 million by April 30, 2024, with sufficient liquidity for business plans - Cash and cash equivalents increased to $70.6 million at March 31, 2024, from $55.5 million at December 31, 2023, primarily due to a $21.0 million capital distribution from the LGJV[115] - As of April 30, 2024, cash and cash equivalents were $85.4 million, following an additional $17.5 million capital distribution from the LGJV[116] - The Company has $50.0 million available for withdrawal from its revolving credit facility, with an accordion feature for an additional $50.0 million[115] Contractual Obligations There have been no material changes to the Company's contractual obligations since the 2023 10-K filing - No material changes from the contractual obligations described in the 2023 10-K[119] Critical Accounting Policies and Estimates There have been no material changes to critical accounting policies and estimates as described in the 2023 10-K - No material changes to critical accounting policies and estimates described in the 2023 10-K[120] Jumpstart Our Business Startups Act of 2012 The Company has opted out of the extended transition period for new accounting standards as an emerging growth company - Gatos Silver, as an 'emerging growth company,' has elected to 'opt out' of the extended transition period for complying with new or revised accounting standards[121] - This decision is irrevocable, and the Company will comply with new or revised accounting standards on the relevant dates required for public companies that are not emerging growth companies[121] Non-GAAP Financial Measures This section defines and reconciles non-GAAP measures like AISC and EBITDA to provide insights beyond GAAP metrics - Non-GAAP measures such as Cash Costs, All-In Sustaining Costs (AISC), EBITDA, and Free Cash Flow are used to evaluate business aspects and provide additional information not captured by GAAP[122][123][132][133] Reconciliation of LGJV Expenses (GAAP) to Non-GAAP Measures (in thousands) | (in thousands, except where otherwise stated) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | | Total expenses | $57,013 | $51,624 | | Cash costs (A) | $39,343 | $34,497 | | Co-product AISC (B) | $48,287 | $42,139 | | AISC, net of by-product credits (C) | $22,613 | $13,552 | | Cash costs, net of by-product credits (D) | $13,669 | $5,910 | | Co-product cash cost per ounce of payable silver equivalent (A/E) | $11.70 | $10.47 | | Co-product AISC per ounce of payable silver equivalent (B/E) | $14.36 | $12.79 | | By-product cash cost per ounce of payable silver (D/F) | $6.09 | $2.66 | | By-product AISC per ounce of payable silver (C/F) | $10.08 | $6.11 | Reconciliation of Gatos Silver EBITDA (in thousands) | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net income and comprehensive income | $2,532 | $835 | | Interest expense | — | $164 | | Interest income | $(767) | $(161) | | Income tax expense | $43 | — | | Depreciation, depletion and amortization expense | $4 | $37 | | EBITDA | $1,812 | $875 | Reconciliation of Gatos Silver Free Cash Flow (in thousands) | (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided (used) by operating activities | $15,136 | $(4,103) | | Net cash used by investing activities | — | — | | Free cash flow | $15,136 | $(4,103) | Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Gatos Silver is exempt from providing disclosures about market risk - Gatos Silver is a 'smaller reporting company' and is not required to provide disclosures about market risk[138] Item 4. Controls and Procedures Management concluded disclosure controls were not effective as of March 31, 2024, due to previously identified material weaknesses - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of March 31, 2024, due to material weaknesses in internal control over financial reporting[140] - There have been no material changes in the Company's internal control over financial reporting during the quarter ended March 31, 2024[141] - Management acknowledges that all control systems have inherent limitations and cannot prevent all errors or fraud[142][145] PART II - OTHER INFORMATION Item 1. Legal Proceedings Information on legal proceedings is incorporated by reference from Note 9 in the financial statements section - For a description of Legal Proceedings, refer to Note 9. Commitments, Contingencies and Guarantees in Item 1 Financial Statements[148] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's 2023 10-K - No material changes to the risk factors disclosed in the 2023 10-K as of the date of this Report[149] Items 5. Other Information No directors or officers adopted or terminated any Rule 10b5-1 trading arrangements during the quarter - None of the Company's directors or officers adopted or terminated a 'Rule 10b5–1 trading arrangement' or a 'non-Rule 10b5–1 trading arrangement' during the three months ended March 31, 2024[151] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements and required certifications - Key exhibits include the Cerro Los Gatos Lead Concentrate Sales Agreement, Section 302 Certifications of the CEO and CFO, Section 1350 Certifications, and various Inline XBRL documents[153]