FORM 10-K
(Amendment No. 1)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-39649
GATOS SILVER, INC.
(Exact name of registrant as specified in its charter)
| ||||
Delaware | 27-2654848 | |||
(State or other jurisdiction | | (I.R.S. Employer Identification No.) |
925 W Georgia Street, Suite 600
Vancouver, British Columbia, CanadaV6C 3L2
(Address of principal executive offices) (Zip Code)
(604) 424-0984
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |||||
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, par value $0.001 per share | | GATO | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ ☐No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☑ | Smaller reporting company | ☑ | ||
| | Emerging growth company | ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
As of June 30, 2020,2022, the last business day of the registrant’s most recently completed second fiscal quarter, there was no public market for the registrant’s common stock. The registrant’s common stock began trading on the New York Stock Exchange and the Toronto Stock Exchange on October 28, 2020. The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $115,071,927 based on the closing price of the registrant’s common stock on the New York Stock Exchange on March 23, 2021, was $326,610,768.
As of March 23, 2021,June 26, 2023, the number of shares of Registrant’s common stock outstanding was 59,409,052.
DOCUMENTS INCORPORATED BY REFERENCE
None
EXPLANATORY NOTE
References throughout this Amendment No. 1 to the Annual Report on Form 10-K is incorporated by reference fromto “we,” “us,” “Gatos Silver,” “Company” or “our Company” are to Gatos Silver Inc., unless the registrant’s definitive proxy statementcontext otherwise indicates.
This Amendment No. 1 (“Amendment No. 1”) amends the Annual Report on Form 10-K of Gatos Silver, Inc. for the 2021 Annual Meeting of Stockholders which will be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
This Amendment No. 1 contains the restated financial statements for us and the Los Gatos Joint Venture (“LGJV”) for the Affected Period to correct (i) the timing and recognition of net deferred tax assets and current income taxes at the 70% - owned LGJV during the fourth quarter of 2021, (ii) the accounting for the priority distribution due to our LGJV partner to exclude the priority distribution payment from the net income of the LGJV in calculating the equity income in affiliate and the impairment amount of investment in affiliate during the fourth quarter of 2021, (iii) the calculation of the fair value and the impairment amount of investment in affiliate during the fourth quarter of 2021 and (iv) other immaterial changes during the fourth quarter of 2021.
This Amendment No. 1 contains the following sections:
Exhibits 23, 31, 32, 101 and 104 of Item 15. Exhibits and Financial Statement Schedules. |
Except as described above, this Amendment No. 1 does not amend, update or change any other items or disclosures contained in the Original Filing, and accordingly, this Amendment No. 1 does not reflect or purport to reflect any information or events occurring after the date of the Original Filing or modify or update those disclosures affected by subsequent events. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and the Company’s other filings with the SEC. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Original Filing.
i
TABLE OF CONTENTS
| Page | ||||||||
| Part I | | | ||||||
| | 8 | |||||||
| Part II | | | ||||||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 29 | ||||||
| | | | | |||||
| | 43 | |||||||
| | | | | |||||
| | 88 | |||||||
| Part IV | | | ||||||
| | ||||||||
91 |
ii
Notice Regarding Mineral Disclosure
Mineral Reserves and Resources
We are subject to the Reorganization was exchanged for (A) 0.394057448219062 shares of our common stock (subject to rounding to eliminate fractional shares) and (B) 0.105942551780938 shares of common stock of SOP Corporation (subject to rounding to eliminate fractional shares) and (iii) we changed our name from Sunshine Silver Mining & Refining Corporation to Gatos Silver, Inc. SOP held our interest in the Sunshine Complex, which is located in the Coeur d’Alene Mining District in Idaho and is comprisedreporting requirements of the Sunshine MineSecurities Exchange Act of 1934, as amended (the “Exchange Act”) and the Sunshine Big Creek Refinery. Through the Reorganization,applicable Canadian securities laws, and as a result, we distributed all ofhave separately reported our equity interest in SOP to our stockholders immediately priormineral reserves and mineral resources according to the Reorganization. As used in this Annual Report on Form 10-K (this “Report”), “SOP” refersstandards applicable to (i) SOP prior to the Reorganization and (ii) SOP Corporation from and after the Reorganization.
The estimation of July 1, 2020measured resources and exclude 655,746 tonnes of mineral reserves that have been mined through June 30, 2020. Subsequent to July 1, 2020, 363,857 tonnes of material have been mined through December 31, 2020, which we believe would not result in a material change to the information contained in the Los Gatos Technical Report.
Technical Report Summaries and Qualified Persons
The technical information concerning our mineral projects in this Form 10-K/A have been reviewed and approved by Tony Scott P. Geo, Senior Vice President of Corporate Development and Technical Services. Mr. Scott is a “qualified person” under S-K 1300 and has reviewed the contents of this Form 10-K/A. For a description of the key assumptions, parameters and methods used to estimate mineral reserves and mineral resources included in this Form 10-K/A, as well as data verification procedures and a general discussion of the extent to which the estimates may be affected by any known environmental, permitting, legal, title, taxation, sociopolitical, marketing or other relevant factors, likelyplease review the Los Gatos Technical Report which is included as an exhibit to influence the prospectsthis Report.
1
Certain terms and abbreviations used in this Report are defined below:
“Ag”
means the chemical symbol for the element silver.“AISC”
means all-in sustaining cost.“
Au” means the chemical symbol for the element gold.“By-Product”
is a secondary metal or mineral product recovered in the milling process.“Concentrate”
is the product of physical concentration“Dilution”
is an estimate of the amount of waste or low-grade mineralized rock which will be mined with the ore as part of normal mining practices in extracting an“Feasibility Study”
is a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production.“Grade”
means the concentration of each ore metal in a rock sample, usually given as weight percent. Where extremely low concentrations are involved, the concentration may be given in grams per tonne (g/t)“g/t”
means grams per tonne.“Hectare”
is a metric unit of area equal to 10,000 square meters (2.471 acres).“Indicated Mineral Resources”indicated mineral resources” or “Indicated Resources”
“Inferred Mineral Resources”inferred mineral resources” or “Inferred Resources”
“LOM” means life of mine.
“Los Gatos Technical Report”
means“masl”
is meters above sea level.2
“Mineral Reserves”
“mineral resources” or “resources” a concentration or occurrence of minerals, natural solid inorganic material or natural solid fossilized organic material including base and precious metals, coal, and industrial mineralsof economic interest in or on the earth’sEarth’s crust in such form, and quantity and of such a grade or quality, and quantity that it hasthere are reasonable prospects for economic extraction. TheA mineral resource is a reasonable estimate of mineralization, taking into account relevant factors such as cut-off grade, likely mining dimensions, location quantity, grade, geological characteristicsor continuity, that, with the assumed and continuityjustifiable technical and economic conditions, is likely to, in whole or in part, become economically extractable. It is not merely an inventory of a Mineral Resource are known, estimatedall mineralization drilled or interpreted from specific geological evidence and knowledge.
“Measured Mineral Resources”
“M&I”
means Measured Mineral Resources and Indicated Mineral Resources.“NI 43-101”
means National Instrument 43-101 — Standards of Disclosure for Mineral Projects adopted by the Canadian Securities Administrators.“NSR”
means Net Smelter Return: the proceeds returned from the smelter and/or refinery to the mine owner less certain costs.“Ore Reserve”
“Pb”
means the chemical symbol for the element lead.“Probable Mineral Reserve”
“Proven Mineral Reserve”
“SEC Mining Modernization Rules”
“Tailings”
“Ton”
“Zn”
means the chemical symbol for the element zinc.
3
Cautionary Information about Forward-Looking Statements
This Report contains statements that constitute “forward looking information” and “forward-looking statements” within the meaning of U.S. and Canadian securities laws, including the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by words such as “may,” “might,” “could,” “would,” “achieve,” “budget,” “scheduled,” “forecasts,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements may include, but are not limited to, the following:
● | estimates of future mineral production and sales; |
● | estimates of future production costs, other expenses and taxes for specific operations and on a consolidated basis; |
● | estimates of future cash flows and the sensitivity of cash flows to gold, copper, silver, lead, zinc and other metal prices; |
● | estimates of future capital expenditures, construction, production or closure activities and other cash needs, for specific operations and on a consolidated basis, and expectations as to the funding or timing thereof; |
● | estimates as to the projected development of certain ore deposits, including the timing of such development, the costs of such development and other capital costs, financing plans for these deposits and expected production commencement dates; |
● | estimates of mineral reserves and mineral resources statements regarding future exploration results and mineral reserve and mineral resource replacement and the sensitivity of mineral reserves to metal price changes; |
● | statements regarding the availability of, and terms and costs related to, future borrowing or financing and expectations regarding future debt repayments; |
● | statements regarding future dividends and returns to shareholders; |
● | estimates regarding future exploration expenditures, programs and discoveries; |
● | statements regarding fluctuations in financial and currency markets; |
● | estimates regarding potential cost savings, productivity, operating performance and ownership and cost structures; |
● | expectations regarding statements regarding future transactions, including, without limitation, statements related to future acquisitions and projected benefits, synergies and costs associated with acquisitions and related matters; |
● | expectations of future equity and enterprise value; |
● | expectations regarding the start-up time, design, mine life, production and costs applicable to sales and exploration potential of our projects; |
● | statements regarding future hedge and derivative positions or modifications thereto; |
● | statements regarding local, community, political, economic or governmental conditions and environments; |
● | statements and expectations regarding the impacts of COVID-19 and variants thereof and other health and safety conditions; |
4
● | statements regarding the impacts of changes in the legal and regulatory environment in which we operate, including, without limitation, relating to regional, national, domestic and foreign laws; |
● | statements regarding climate strategy and expectations regarding greenhouse gas emission targets and related operating costs and capital expenditures; |
● | statements regarding expected changes in the tax regimes in which we operate, including, without limitation, estimates of future tax rates and estimates of the impacts to income tax expense, valuation of deferred tax assets and liabilities, and other financial impacts; |
● | estimates of income taxes and expectations relating to tax contingencies or tax audits; |
● | estimates of future costs, accruals for reclamation costs and other liabilities for certain environmental matters, including without limitation, in connection with water treatment and tailings management; |
● | statements relating to potential impairments, revisions or write-offs, including without limitation, the result of fluctuation in metal prices, unexpected production or capital costs, or unrealized mineral reserve potential; |
● | estimates of pension and other post-retirement costs; |
● | statements regarding estimates of timing of adoption of recent accounting pronouncements and expectations regarding future impacts to the financial statements resulting from accounting pronouncements; |
● | estimates of future cost reductions, synergies, savings and efficiencies in connection with full potential programs and initiatives; and |
● | expectations regarding future exploration and the development, growth and potential of operations, projects and investments, including in respect of the Cerro Los Gatos Mine (“CLG”) and the Los Gatos District (“LGD”). |
Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by those relating to projections of our future financial performance, our anticipated growth strategies and anticipated trends in our industry, production from the CLG and further exploration of the Los Gatos District, estimated calculations of mineral reserves and resources at our properties, anticipated expenses, tax benefits, future strategic infrastructure development at the CLG and our requirements for additional capital.
All forward-looking statements speak only as of the date on which they are made. These statements are not a guarantee of future performance and involve certain risks, uncertainties and assumptions concerning future events that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. Important factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the risks set forth under “Risk Factors Summary” below, which are discussed in further detail in “Item 1A — 1A—Risk Factors.”. Such factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in this Report and those described from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”). These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material, may cause our actual future results to be materially different than those expressed in our forward-looking statements. Undue reliance should not be placed on these forward-looking statements. We do not undertake any obligation to make any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, except as required by law. Certain forward-looking statements are based on assumptions, qualifications and procedures which are set out only in the Los Gatos Technical Report. For a complete description of assumptions, qualifications and procedures associated with such information, reference should be made to the full text of the Los Gatos Technical Report.
5
We are subject to a variety of risks and uncertainties, including risks related to our business and industry; risks related to government regulations and international operations; risks related to the ownership of our common stock; and certain general risks, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. These risks include, but are not limited to, the following principal risks:
● | we are currently dependent on the CLG and the LGD for our future operations and may not be successful in identifying additional proven or probable mineral reserves; we may not be able to extend the current CLG life of mine by adding proven or probable mineral reserves; |
● | we may not sustain profitability; |
● | mineral reserve and mineral resource calculations at the CLG and other deposits in the CLG are only estimates and actual production results or future estimates may vary significantly from the current estimates; |
● | our and the Los Gatos Joint Venture’s (the “LGJV”) mineral exploration efforts are highly speculative in nature and may be unsuccessful; |
● | actual capital costs, operating costs, production and economic returns may differ significantly from those we have anticipated and there are no assurances that any future development activities will result in profitable mining operations; |
● | our operations involve significant risks and hazards inherent to the mining industry; |
● | the ability to mine and process ore at the CLG or other future operations may be adversely impacted in certain circumstances, some of which may be unexpected and not in our control; |
● | land reclamation and mine closure may be burdensome and costly and such costs may exceed our estimates; |
● | we may be materially and adversely affected by challenges relating to stability of underground openings; |
● | the title to some of the mineral properties may be uncertain or defective and we may be unable to obtain necessary surface and other rights to explore and exploit some mineral properties; |
● | we are subject to the risk of labor disputes, which could adversely affect our business, and which risk may be increased due to the unionization in the LGJV workforce; |
● | our success depends on developing and maintaining relationships with local communities and stakeholders; |
● | the prices of silver, zinc and lead are subject to change and a substantial or extended decline in the prices of silver, zinc or lead could materially and adversely affect our revenues of the LGJV and the value of our mineral properties; |
● | the Mexican federal and state governments, as well as local governments, extensively regulate mining operations, which impose significant actual and potential costs on us, and future regulation could increase those costs, delay receipt of regulatory refunds or limit our ability to produce silver and other metals; |
● | the Mexican federal government recently promulgated significant amendments to laws affecting the mining industry; while it is difficult to ascertain if and when the amendments will be fully implemented, and there is some lack of clarity in their drafting including their intended retroactive effect, the amendments could have a material adverse effect on the mining industry, and the LGJV’s and our Mexican businesses, particularly in respect of any new concessions, new mining permits, and new operations; |
6
● | our operations are subject to additional political, economic and other uncertainties not generally associated with U.S. operations; |
● | we are required to obtain, maintain and renew environmental, construction and mining permits, which is often a costly and time-consuming process and may ultimately not be possible; |
● | Electrum and its affiliates and MERS have a substantial degree of influence over us, which could delay or prevent a change of corporate control or result in the entrenchment of our management and/or Board of Directors; |
● | we are currently, and may in the future be, subject to claims and legal proceedings, including class action lawsuits, that could materially and adversely impact our financial position, financial performance and results of operations; and |
● | we have identified material weaknesses in our internal control over financial reporting. If we fail to remediate these deficiencies (or fail to identify and/or remediate other possible material weaknesses), we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, which may adversely affect investor confidence in us and, as a result, the value of our common stock. |
For a more complete discussion of the material risk factors applicable to us, see “Item 1A —- Risk Factors.”
7
PART I
| | | Measured Mineral Resources | | | Indicated Mineral Resources | | | Measured & Indicated Mineral Resources | | | Inferred Mineral Resources | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount (100% basis) | | | Amount (51.5% basis) | | | Grade / Qualities | | | Amount (100% basis) | | | Amount (51.5% basis) | | | Grade / Qualities | | | Amount (100% basis) | | | Amount (51.5% basis) | | | Grade / Qualities | | | Amount (100% basis) | | | Amount (51.5% basis) | | | Grade / Qualities | | ||||||||||||||||||||||||||||||||||||||
| (in millions of tonnes) | | | (g/t Ag or Au) (% Pb, Zn or Cu) | | | (in millions of tonnes) | | | (g/t Ag or Au) (% Pb, Zn or Cu) | | | (in millions of tonnes) | | | (g/t Ag or Au) (% Pb, Zn or Cu) | | | (in millions of tonnes) | | | (g/t Ag or Au) (% Pb, Zn or Cu) | | ||||||||||||||||||||||||||||||||||||||||||||||||||
Ag: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Los Gatos District | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cerro Los Gatos Mine(1) | | | | | 5.8 | | | | | | 3.0 | | | | | | 324 | | | | | | 4.6 | | | | | | 2.4 | | | | | | 202 | | | | | | 10.4 | | | | | | 5.4 | | | | | | 269 | | | | | | 3.7 | | | | | | 1.9 | | | | | | 107 | | |
Esther Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.46 | | | | | | 0.24 | | | | | | 133 | | | | | | 0.46 | | | | | | 0.24 | | | | | | 133 | | | | | | 2.29 | | | | | | 1.18 | | | | | | 98 | | |
Amapola Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.25 | | | | | | 0.13 | | | | | | 135 | | | | | | 0.25 | | | | | | 0.13 | | | | | | 135 | | | | | | 3.44 | | | | | | 1.77 | | | | | | 140 | | |
Total | | | | | 5.8 | | | | | | 3.0 | | | | | | 324 | | | | | | 5.3 | | | | | | 2.7 | | | | | | 193 | | | | | | 11.1 | | | | | | 5.8 | | | | | | 260 | | | | | | 9.4 | | | | | | 4.9 | | | | | | 117 | | |
Au: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Los Gatos District | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cerro Los Gatos Mine(1) | | | | | 5.8 | | | | | | 3.0 | | | | | | 0.39 | | | | | | 4.6 | | | | | | 2.4 | | | | | | 0.28 | | | | | | 10.4 | | | | | | 5.4 | | | | | | 0.34 | | | | | | 3.7 | | | | | | 1.9 | | | | | | 0.28 | | |
Esther Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.46 | | | | | | 0.24 | | | | | | 0.04 | | | | | | 0.46 | | | | | | 0.24 | | | | | | 0.04 | | | | | | 2.29 | | | | | | 1.18 | | | | | | 0.12 | | |
Amapola Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.25 | | | | | | 0.13 | | | | | | 0.10 | | | | | | 0.25 | | | | | | 0.13 | | | | | | 0.10 | | | | | | 3.44 | | | | | | 1.77 | | | | | | 0.10 | | |
Total | | | | | 5.8 | | | | | | 3.0 | | | | | | 0.39 | | | | | | 5.3 | | | | | | 2.7 | | | | | | 0.25 | | | | | | 11.1 | | | | | | 5.8 | | | | | | 0.32 | | | | | | 9.4 | | | | | | 4.9 | | | | | | 0.18 | | |
Pb: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Los Gatos District | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cerro Los Gatos Mine(1) | | | | | 5.8 | | | | | | 3.0 | | | | | | 2.90 | | | | | | 4.6 | | | | | | 2.4 | | | | | | 2.50 | | | | | | 10.4 | | | | | | 5.4 | | | | | | 2.70 | | | | | | 3.7 | | | | | | 1.9 | | | | | | 2.80 | | |
Esther Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.46 | | | | | | 0.24 | | | | | | 0.70 | | | | | | 0.46 | | | | | | 0.24 | | | | | | 0.70 | | | | | | 2.29 | | | | | | 1.18 | | | | | | 1.60 | | |
Amapola Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.25 | | | | | | 0.13 | | | | | | 0.10 | | | | | | 0.25 | | | | | | 0.13 | | | | | | 0.10 | | | | | | 3.44 | | | | | | 1.77 | | | | | | 0.20 | | |
Total | | | | | 5.8 | | | | | | 3.0 | | | | | | 2.90 | | | | | | 5.3 | | | | | | 2.7 | | | | | | 2.2 | | | | | | 11.1 | | | | | | 5.8 | | | | | | 2.6 | | | | | | 9.4 | | | | | | 4.9 | | | | | | 1.6 | | |
Zn: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Los Gatos District | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cerro Los Gatos Mine(1) | | | | | 5.8 | | | | | | 3.0 | | | | | | 5.80 | | | | | | 4.6 | | | | | | 2.4 | | | | | | 5.2 | | | | | | 10.4 | | | | | | 5.4 | | | | | | 5.5 | | | | | | 3.7 | | | | | | 1.9 | | | | | | 4.00 | | |
Esther Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.46 | | | | | | 0.24 | | | | | | 2.10 | | | | | | 0.46 | | | | | | 0.24 | | | | | | 2.10 | | | | | | 2.29 | | | | | | 1.18 | | | | | | 3.00 | | |
Amapola Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.25 | | | | | | 0.13 | | | | | | 0.30 | | | | | | 0.25 | | | | | | 0.13 | | | | | | 0.30 | | | | | | 3.44 | | | | | | 1.77 | | | | | | 0.30 | | |
Total | | | | | 5.8 | | | | | | 3.0 | | | | | | 5.8 | | | | | | 5.3 | | | | | | 2.7 | | | | | | 4.7 | | | | | | 11.1 | | | | | | 5.8 | | | | | | 5.2 | | | | | | 9.4 | | | | | | 4.9 | | | | | | 2.4 | | |
Cu: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Los Gatos District | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cerro Los Gatos Mine(1) | | | | | 5.8 | | | | | | 3.0 | | | | | | 0.11 | | | | | | 4.6 | | | | | | 2.4 | | | | | | 0.11 | | | | | | 10.4 | | | | | | 5.4 | | | | | | 0.11 | | | | | | 3.7 | | | | | | 1.9 | | | | | | 0.14 | | |
Esther Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.46 | | | | | | 0.24 | | | | | | 0.02 | | | | | | 0.46 | | | | | | 0.24 | | | | | | 0.02 | | | | | | 2.29 | | | | | | 1.18 | | | | | | 0.05 | | |
Amapola Deposit(2) | | | | | — | | | | | | — | | | | | | — | | | | | | 0.25 | | | | | | 0.13 | | | | | | 0.02 | | | | | | 0.25 | | | | | | 0.13 | | | | | | 0.02 | | | | | | 3.44 | | | | | | 1.77 | | | | | | 0.03 | | |
Total | | | | | 5.8 | | | | | | 3.0 | | | | | | 0.11 | | | | | | 5.3 | | | | | | 2.7 | | | | | | 0.10 | | | | | | 11.1 | | | | | | 5.8 | | | | | | 0.10 | | | | | | 9.4 | | | | | | 4.9 | | | | | | 0.08 | | |
| | | Proven Mineral Reserves | | | Probable Mineral Reserves | | | Total Mineral Reserves | | |||||||||||||||||||||||||||||||||||||||||||||
| | | Amount (100% basis) | | | Amount (51.5% basis) | | | Grades / Qualities | | | Amount (100% basis) | | | Amount (51.5% basis) | | | Grades / Qualities | | | Amount (100% basis) | | | Amount (51.5% basis) | | | Grades / Qualities | | |||||||||||||||||||||||||||
| | | (in millions of tonnes) | | | (g/t Ag or Au) (% Pb or Zn) | | | (in millions of tonnes) | | | (g/t Ag or Au) (% Pb or Zn) | | | (in millions of tonnes) | | | (g/t Ag or Au) (% Pb or Zn) | | ||||||||||||||||||||||||||||||||||||
Ag: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Los Gatos District | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cerro Los Gatos Mine | | | | | 6.4 | | | | | | 3.3 | | | | | | 332 | | | | | | 3.3 | | | | | | 1.7 | | | | | | 254 | | | | | | 9.6 | | | | | | 5.0 | | | | | | 306 | | |
Total | | | | | 6.4 | | | | | | 3.3 | | | | | | 332 | | | | | | 3.3 | | | | | | 1.7 | | | | | | 254 | | | | | | 9.6 | | | | | | 5.0 | | | | | | 306 | | |
Au: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Los Gatos District | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cerro Los Gatos Mine | | | | | 6.4 | | | | | | 3.3 | | | | | | 0.36 | | | | | | 3.3 | | | | | | 1.7 | | | | | | 0.34 | | | | | | 9.6 | | | | | | 5.0 | | | | | | 0.35 | | |
Total | | | | | 6.4 | | | | | | 3.3 | | | | | | 0.36 | | | | | | 3.3 | | | | | | 1.7 | | | | | | 0.34 | | | | | | 9.6 | | | | | | 5.0 | | | | | | 0.35 | | |
Pb: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Los Gatos District | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cerro Los Gatos Mine | | | | | 6.4 | | | | | | 3.3 | | | | | | 2.77 | | | | | | 3.3 | | | | | | 1.7 | | | | | | 2.74 | | | | | | 9.6 | | | | | | 5.0 | | | | | | 2.76 | | |
Total | | | | | 6.4 | | | | | | 3.3 | | | | | | 2.77 | | | | | | 3.3 | | | | | | 1.7 | | | | | | 2.74 | | | | | | 9.6 | | | | | | 5.0 | | | | | | 2.76 | | |
Zn: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Los Gatos District | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cerro Los Gatos Mine | | | | | 6.4 | | | | | | 3.3 | | | | | | 5.55 | | | | | | 3.3 | | | | | | 1.7 | | | | | | 5.86 | | | | | | 9.6 | | | | | | 5.0 | | | | | | 5.65 | | |
Total | | | | | 6.4 | | | | | | 3.3 | | | | | | 5.55 | | | | | | 3.3 | | | | | | 1.7 | | | | | | 5.86 | | | | | | 9.6 | | | | | | 5.0 | | | | | | 5.65 | | |
Item 1A. Risk Factors
The following risks could materially and adversely affect our business, financial condition, cash flows, and results of operations, and the trading price of our common stock could decline. These risk factors do not identify all risks that we face; our operationswe could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.immaterial. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. Refer also to the other information set forth in this this Report, including our consolidated financial statements and the related notes and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related to Our Financial Condition
We have a history of negative operating cash flows and net losses and we may never achieve or sustain profitability.
The Los Gatos DistrictLGD (other than the CLG) does not have identified proven and probable mineral reserves. Mineral exploration and development involve a high degree of risk that even a combination of careful evaluation, experience and knowledge cannot eliminate, and few properties that are explored are ultimately developed into producing mines. There is no assurance that our mineral exploration programs at the Los Gatos DistrictLGD will establish the presence of any additional proven or probable mineral reserves. The failure to establish additional proven or probable mineral reserves would severely restrict our ability to implement our strategies for long-term growth.
We may not sustain profitability.
We have a history of negative operating cash flows and cumulative net losses. For the years ended December 31, 2021 and 2020, we reported a net loss of $65.9 million (restated) and $40.4 million, respectively, and negative operating cash flow of $21.5 million and $18.4 million, respectively.
We may not sustain profitability. To remain profitable, we must succeed in generating significant revenues at the LGJV, which will require us to be successful in a range of challenging activities and is subject to numerous risks, including the risk factors set forth in this “Risk Factors” section. In addition, we may encounter unforeseen expenses, difficulties, complications, delays, inflation and other unknown factors that may adversely affect our revenues, expenses and profitability. Our failure to achieve or sustain profitability would depress our market value, could impair our ability to execute our business plan, raise capital or continue our operations and could cause our shareholders to lose all or part of their investment.
Deliveries under concentrate sales agreements may be suspended or cancelled by our customers in certain cases.
Under concentrate sales agreements, our customers may suspend or cancel delivery of our products in some cases, such as force majeure. Events of force majeure under these agreements generally include, among others, acts of God, strikes, fires, floods, wars, government actions or other events that are beyond the control of the parties involved. Any suspension or cancellation by our customers of deliveries under our sales contracts that are not replaced by deliveries under new contracts would reduce our cash flow and could materially and adversely affect our financial condition and results of operations.
We do not currently intend to enter into hedging arrangements with respect to silver and other minerals and our hedging activities,metal prices or our decision not to hedge, with respect to our expensescurrencies, which could expose us to losses. We are also subject to risks relating to fluctuations in the exchange rate of the Mexican peso to the U.S. dollar.
We do not currently intend to enter into hedging arrangements with respect to silver and other minerals.metal prices or currencies. As such,a result, we will not be protected from a decline in the price of silver and other minerals.minerals or fluctuations in exchange rates. This strategy may have a material adverse effect upon our financial performance, financial position and results of operations.
We report our financial statements in U.S. dollars. A portion of our costs and expenses are incurred in Mexican pesos.pesos and, to a lesser extent, Canadian dollars. As a result, any significant and sustained appreciation of the Mexican pesothese currencies against the U.S. dollar may materially increase our costs and expenses. Additionally, we are, and will be, exposed to the potentially adverse effects of fluctuations in input costs, such as diesel fuel, and if we borrow funds at floating interest rates. We may seek to enter into hedging arrangements to hedge some of our input costs, such as diesel fuel, and our currency exposure with respect to the portion of our costs and expenses incurred in Mexican pesos. In the future we may also seek to enter into interest rate hedge agreements in connection with future indebtedness we may incur that bears interest at a floating rate. We currently, however, have not entered into any such hedging arrangements, or made a decision to do so, and there can be no assurance that we will be able to do so on acceptable terms, or at all. Even if we seek and are able to enter into hedging contracts, there is no assurance that such
8
hedging program will be effective, and any hedging program would also prevent us from benefitting fully from applicable input cost or rate decreases. In addition, we may in the future experience losses if a counterparty fails to perform under a hedge arrangement.
We and/or the LGJV hashave historically had significant debt and may incur further debt in the future, which could adversely affect our and the LGJV’s and our financial health and limit our ability to obtain financing in the future and pursue certain business opportunities.
We have a Credit Facility providing for a revolving line of credit in the principal amount of $50 million that has debt service obligations pursuantan accordion feature, which allows for an increase in the total line of credit up to the agreements governing its outstanding debt.$75 million, subject to certain conditions. As of December 31, 2020, the LGJV2021, we had $222.8$13 million of debt outstanding indebtedness under a term loan agreement with Dowa, dated July 11, 2017, as amended from time to time (the “Term Loan”) and $60.0 millionthe Credit Facility. As of debtthe date of the Original Filing, the balance outstanding under the WCF(togetherCredit Facility was $9 million following a $4 million principal repayment in December 2022. The Credit Facility contains affirmative and negative covenants. If we are unable to comply with the Term Loan,requirements of the “DowaCredit Facility, the facility may be terminated or the credit available thereunder may be materially reduced, and we may not be able to obtain additional or alternate funding on satisfactory terms, if at all. In 2022, for example, we were required to revise our Credit Facility following our announcement on January 25, 2022, that there were reserve calculation errors and indications of an overestimation in the existing resource model for the CLG. See Note 12 — Debt Agreements”). On March 11, 2021,in our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for additional information regarding our Credit Facility. Our borrowings under the WCF was extinguished.Credit Facility accrues interest based on SOFR; therefore, any increases in interest rates could adversely affect our financial conditions and ability to service our indebtedness.
While the LGJV currently has no significant debt service obligations, the LGJV may in the future incur debt obligations and the above factors would apply to such debt. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Operations—Liquidity and Capital Resources — Resources—Dowa Debt Agreements.”
The Term Loan contains certain restrictive covenants,Company’s effective tax rate could be volatile and materially change as a result of changes in tax laws, mix of earnings and other factors.
We are subject to tax laws in the United States and foreign jurisdictions including restrictionsMexico and Canada.
Changes in tax laws or policy could have a negative impact on the LGJV’s ability to incur additional indebtedness and create liens on its properties, to dispose of property other thanCompany’s effective tax rate The Company operates in the ordinary course of business, to liquidate or dissolve itself or to enter into acquisitions or mergers, to make investments or other capital expenditures and to make distributions or dividends. In addition, the LGJV is required to retain sufficient funds at all times to pay one semi-annual payment of principal under the Term Loan and to fund the LGJV’s operations for at least three months. These covenants and restrictions reduce funds available for operations and capital expenditures, future business opportunities, future dividends to us and other purposes; make the LGJV more vulnerable to economic and industry downturns and reduce flexibility in responding to changing business and economic conditions; limit flexibility in planning for, or reacting to,countries which have different statutory rates. Consequently, changes in the businessmix and source of earnings between countries could have a material impact on the industry in which we operate; place us at a competitive disadvantage comparedCompany’s overall effective tax rate.
The LGJV is subject to our competitors that have less debt; limit our ability to borrow more money for operationsMexican income and sustaining capital or to finance acquisitions in the future; or require us to make future capital contributions to the LGJV, if needed, in order to make required payments of interestother taxes, and principal. If we, as a 70.0% guarantor of the Term Loan, ordistributions from the LGJV are unablesubject to meet debt service obligationsMexican withholding taxes. Any change in such taxes could materially adversely affect our effective tax rate and the future, our financial position, financial performance and resultsquantum of operations maycash available to be materially and adversely affected.
Risks Related to Our Operations
Mineral reserve and mineral resource calculations at the CLG and at other deposits in the Los Gatos DistrictLGD are only estimates and actual production results and future estimates may vary significantly from the current estimates.
Calculations of mineral reserves and mineral resources at the CLG and of the mineral resources at other deposits in the Los Gatos DistrictLGD are only estimates and depend on geological interpretation and statistical inferences or assumptions drawn from drilling and sampling analysis, which might prove to be materially inaccurate. There is a degree of uncertainty attributable to the calculation of mineral reserves and mineral resources. Until mineral reserves and mineral resources are actually mined and processed, the quantity of metal and grades must be considered as estimates only and no assurance can be given that the indicated levels of metals will be produced. In making determinations about whether to advance any of our projects to development, we must rely upon estimated calculations for the mineral reserves and mineral resources and grades of mineralization on our properties.
The estimation of mineral reserves and mineral resources is a subjective process that is partially dependent upon the judgment of the persons preparing the estimates. The process relies on the quantity and quality of available data and is based on knowledge, mining experience, statistical analysis of drilling results and industry practices. Valid estimates made at a given time may significantly change when new information becomes available.
9
Estimated mineral reserves and mineral resources may have to be recalculated based on changes in metal prices, further exploration or development activity or actual production experience. This could materially and adversely affect estimates of the volume or grade of mineralization, estimated recovery rates or other important factors that influence mineral reserves and mineral resources estimates. The extent to which mineral resources may ultimately be reclassified as mineral reserves is dependent upon the demonstration of their profitable recovery. Any material changes in volume and grades of mineralization will affect the economic viability of placing a property into production and a property’s return on capital. We cannot provide assurance that mineralization can be mined or processed profitably.
Mineral reserve and mineral resource estimates have been determined and valued based on assumed future metal prices, cut-offcutoff grades and operating costs that may prove to be inaccurate. The mineral reserve and mineral resource estimates may be adversely affected by:
● | declines in the market price of silver, lead or zinc; |
● | increased production or capital costs; |
● | decreased throughput; |
● | reduction in grade; |
● | increase in the dilution of ore; |
● | inflation rates, future foreign exchange rates and applicable tax rates; |
● | changes in environmental, permitting and regulatory requirements; and |
● | reduced metal recovery. |
Extended declines in the market price for silver, lead and zinc may render portions of our mineralization uneconomic and result in reduced reported volume and grades, which in turn could have a material adverse effect on our financial performance, financial position and results of operations.
In addition, inferred mineral resources have a great amount of uncertainty as to their existence and their economic and legal feasibility. There should be no assumption that any part of an inferred mineral resource will be upgraded to a higher category or that any of the mineral resources not already classified as mineral reserves will be reclassified as mineral reserves.
Our and the LGJV’s mineral exploration efforts are highly speculative in nature and may be unsuccessful.
Mineral exploration is highly speculative in nature, involves many uncertainties and risks and is frequently unsuccessful. It is performed to demonstrate the dimensions, position and mineral characteristics of mineral deposits, estimate mineral resources, assess amenability of the deposit to mining and processing scenarios and estimate potential deposit value. Once mineralization is discovered, it may take a number of years from the initial exploration phases before production is possible, during which time the potential feasibility of the project may change adversely. Substantial expenditures are required to establish additional proven and probable mineral reserves, to determine processes to extract the metals and, if required, to permit and construct mining and processing facilities and obtain the rights to the land and resources required to develop the mining activities.
Development projects and newly constructed mines have no or little operating history upon which to base estimates of proven and probable mineral reserves and estimates of future operating costs. Estimates are, to a large extent, based upon the interpretation of geological data and modeling obtained from drill holes and other sampling techniques, feasibility studies that derive estimates of operating costs based upon anticipated tonnage and grades of material to be mined and processed, the configuration of the deposit, expected recovery rates of metal from the mill feed material, facility and equipment capital and operating costs, anticipated climatic conditions and other factors. As a result, actual operating costs and economic returns based upon development of proven and probable mineral reserves may differ significantly from those originally estimated. Moreover, significant decreases in actual or expected commodity prices may mean mineralization, once found, will be uneconomical to mine.
10
The ability to mine and process materials at the CLG or other future operations may be adversely impacted byin certain circumstances.
A number of factors could affect our ability to mine materials, and process the quantities of metalsmined materials that we recover and ourrecover. Our ability to efficiently mine materials and to handle certain quantities of processed materials, including, but not limited to, the presence of oversized material at the crushing stage; material showing breakage characteristics different than those planned; material with grades outside of planned grade range; the presence of deleterious materials in ratios different than expected; material drier or wetter than expected, due to natural or environmental effects; and materials having viscosity or density different than expected.
The occurrence of one or more of the circumstances described above could affect our ability to process the number of tonnes planned, recover valuable materials, remove deleterious materials, and produce planned quantities of concentrates. In turn, this may result in lower throughput, lower recoveries, increased downtime or some combination of all of the foregoing. While issues of this nature are part of normal operations, there is no assurance that unexpected conditions may not materially and adversely affect our business, results of operations or financial condition.
Our ability to efficiently mine materials at the CLG is also affected by the hydrogeology of areas within the mine, which requires the installation of dewatering infrastructure to manage underground water. As the mine expands, additional infrastructure will be required. Existing dewatering infrastructure may be ineffective at managing underground water, and although additional capital for dewatering infrastructure is contemplated in the LOM plan included in the Los Gatos Technical Report, further dewatering infrastructure may be more costly than planned or may otherwise be ineffective.
Actual capital costs, operating costs, production and economic returns may differ significantly from those we have anticipated and there are no assurances that any future development activities will result in profitable mining operations.
The actual capital and operating costs at the CLG will depend upon changes in the availability and prices of labor, equipment and infrastructure, variances in ore recovery and mining rates from those assumed in the mining plan, operational risks, changes in governmental regulation, including taxation, environmental, permitting and other regulations and other factors, many of which are beyond our control. Due to any of these or other factors, the capital and operating costs at the CLG may be significantly higher than those set forth in the Los Gatos Technical Report. As a result of higher capital and operating costs, production and economic returns may differ significantly from those set forth in the Los Gatos Technical Report and there are no assurances that any future development activities will result in profitable mining operations.
Land reclamation and mine closure may be burdensome and costly.
Land reclamation and mine closure requirements are generally imposed on mining and exploration companies, such as ours, which require us, among other things, to minimize the effects of land disturbance. Such requirements may include controlling the discharge of potentially dangerous effluents from a site and restoring a site’s landscape to its pre-exploration form. The actual costs of reclamation and mine closure are uncertain and planned expenditures may differ from the actual expenditures required. Therefore, the amount that we are required to spend could be materially higher than current estimates. Any additional amounts required to be spent on reclamation and mine closure may have a material adverse effect on our financial performance, financial position and results of operations and may cause us to alter our operations. In addition, we are required to maintain financial assurances, such as letters of credit, to secure reclamation obligations under certain laws and regulations. The failure to acquire, maintain or renew such financial assurances could subject us to fines and penalties or suspension of our operations. Letters of credit or other forms of financial assurance represent only a portion of the total amount of money that will be spent on reclamation over the life of a mine’s operation. Although we include liabilities for estimated reclamation and mine closure costs in our financial statements, it may be necessary to spend more than what is projected to fund required reclamation and mine closure activities.
The development of one or more of our mineral projects that have been, or may in the future be, found to be economically feasible will be subject to all of the risks associated with establishing new mining operations.
The Los Gatos Technical Report indicates that the CLG is a profitable silver-zinc-lead project with an estimated 11-year5-year mine life currently, at modeled metals prices. If the development of one of our other mineral projectsproperties is found to be economically feasible, the development of such projects will require obtaining permits and financing, and the construction and operation of mines, processing
11
plants and related infrastructure. As a result, we will be subject to certain risks associated with establishing new mining operations, including:
● | the timing and cost, which can be considerable, of the construction of mining and processing facilities and related infrastructure; |
● | the availability and cost of skilled labor, mining equipment and principal supplies needed for operations, including explosives, fuels, chemical reagents, water, power, equipment parts and lubricants; |
● | the availability and cost of appropriate smelting and refining arrangements; |
● | the need to obtain necessary environmental and other governmental approvals and permits and the timing of the receipt of those approvals and permits; |
● | the availability of funds to finance construction and development activities; |
● | industrial accidents; |
● | mine failures, shaft failures or equipment failures; |
● | natural phenomena such as inclement weather conditions, floods, droughts, rock slides and seismic activity; |
● | unusual or unexpected geological and metallurgical conditions, including excess water in underground mining; |
● | exchange rate and commodity price fluctuations; |
● | high rates of inflation; |
● | health pandemics; |
● | potential opposition from nongovernmental organizations, environmental groups or local groups, which may delay or prevent development activities; and |
● | restrictions or regulations imposed by governmental or regulatory authorities, including with respect to environmental matters. |
The costs, timing and complexities of developing these projects, as well as for the projectsCLG, may be greater than anticipated. Cost estimates may increase significantly as more detailed engineering work is completed on a project. It is common in mining operations to experience unexpected costs, problems and delays during construction, development and mine startup. In addition, the cost of producing silver bearing concentrates that are of acceptable quality to smelters may be significantly higher than expected. We may encounter higher than acceptable contaminants in our concentrates such as arsenic, antimony, mercury, copper, iron, selenium, fluorine or other contaminants that, when present in high concentrations, can result in penalties or outright rejection of the metals concentrates by the smelters or offtakers.traders. For example, due to the high fluorine content at the CLG, it was necessary to provide additional cleaning stageswe are finalizing the construction of a leaching plant designed to reduce thefluorine levels in zinc concentrates produced. Additional investments to further reduce fluorine content of the concentrateconcentrates produced at the CLG.may be required. Accordingly, we cannot provide assurance that our activities will result in profitable mining operations at the mineral properties.
Our operations involve significant risks and hazards inherent to the mining industry.
Our operations involve the operation of large machines, heavy mobile equipment and drilling equipment. Hazards such as adverse environmental conditions, industrial accidents, labor disputes, unusual or unexpected geological conditions, ground control problems, cave-ins, changes in the regulatory environment, metallurgical and other processing problems, mechanical equipment failure, facility performance problems, fire and natural phenomena such as inclement weather conditions, floods and earthquakes are inherent risks in our operations. Certain of these hazards may be more severe or frequent as a result of climate change. Hazards inherent to the mining industry canhave in the past caused and may in the future cause injuries or death to employees, contractors or other persons at our mineral properties, severe damage to and destruction of our property, plant and equipment, and contamination of, or
12
damage to, the environment, and can result in the suspension of our exploration activities and future development and production activities. While we aim to maintain best safety practices as part of itsour culture, safety measures implemented by us may not be successful in preventing or mitigating future accidents.
In addition, from time to time we may be subject to governmental investigations and claims and litigation filed on behalf of persons who are harmed while at our properties or otherwise in connection with our operations. To the extent that we are subject to personal injury or other claims or lawsuits in the future, it may not be possible to predict the ultimate outcome of these claims and lawsuits due to the nature of personal injury litigation. Similarly, if we are subject to governmental investigations or proceedings, we may incur significant penalties and fines, and enforcement actions against us could result in the closing of certain of our mining operations. If claims and lawsuits or governmental investigations or proceedings are ultimately resolved against us, it could have a material adverse effect on our financial performance, financial position and results of operations. Also, if we mine on property without the appropriate licenses and approvals, we could incur liability, or our operations could be suspended.
We may be materially and adversely affected by challenges relating to slope and stability of underground openings.
Our underground mines get deeper and our waste and tailings deposits increase in size as we continue with and expand our mining activities, presenting certain geotechnical challenges, including the possibility
The title to some of the mineral properties may be uncertain or defective, and we may be unable to obtain necessary surface and other rights to explore and develop some mineral properties, thus risking our investment in such properties.
Under the laws of Mexico, mineral resources belong to the state, and government concessions are required to explore for or exploit mineral reserves. Mineral rights derive from concessions granted, on a discretionary basis, by the Ministry of Economy, pursuant to the Mexican mining law and the regulations thereunder. While we and the LGJV hold title to the mineral properties in Mexico described in this Report, including the CLG, through these government concessions, there is no assurance that title to the concessions comprising the CLG or our or the LGJV’s other properties will not be challenged or impaired. TheOne of our concessions, comprising over 19,000 hectares, the Los Gatos concession, is held by us subject to the terms of an agreement with the original holder of that concession. The CLG and our or the LGJV’s other properties may be subject to prior unregistered agreements, interests or native land claims, and title may be affected by such undetected defects. A title defect on any of our mineral properties (or any portion thereof) could adversely affect our ability to mine the property and/or process the minerals that we mine.
The mineral properties’ mining concessions in Mexico may be terminated if the obligations to maintain the concessions in good standing are not satisfied or are not considered to be satisfied, including obligations to explore or exploit the relevant concession, to pay any relevant fees, to comply with all environmental and safety standards, to provide information to the Mexican Ministry of Economy and to allow inspections by the Mexican Ministry of Economy. In addition to termination, failure to make timely concession maintenance payments and otherwise comply, or be considered to comply with applicable laws, regulations and local practices relating to mineral right applications and tenure could result in reduction or expropriation of entitlements.
Title insurance is generally not available for mineral properties and our ability to ensure that we have obtained secure claim to individual mineral properties or mining concessions may be severely constrained. We rely on title information and/or representations and warranties provided by our grantors. Any challenge to our title could result in litigation, insurance claims and potential losses, delay the exploration and development of a property and ultimately result in the loss of some or all of our interest in the property. In addition, if we mine on property without the appropriate title, we could incur liability for such activities. While we have received a title opinion in relation to the Los Gatos DistrictLGD dated as of November 5, 2019, which opinion was updated as of August 18, 2021, such opinion is not a guarantee of title and such title may be challenged.
In addition, surface rights are required to explore and to potentially develop the mineral properties. Currently, of the 103,087 hectares of mineral rights owned in the LGD, MPR owns surface rights covering the known extents of the CLG, and Esther Resource areas, totaling 5,479 hectares. We negotiate surface access rights for exploration in other areas.
13
Suitable infrastructure may not be available or damage to existing infrastructure may occur.
Mining, processing, development and exploration activities depend on adequate infrastructure. Reliable roads, bridges, port and/or rail transportation, power sources, water supply and access to key consumables are important determinants for capital and operating costs. The lack of availability on acceptable terms or the delay in the availability of any one or more of these items could prevent or delay exploration, development or exploitation of our projects. If adequate infrastructure is not available in a timely manner, there can be no assurance that the exploitation or development of our projects will be commenced or completed on a timely basis, or at all, or that the resulting operations will achieve the anticipated production volume, or that the construction costs and operating costs associated with the exploitation and/or development of our projects will not be higher than anticipated. In addition, extreme weather phenomena, sabotage, vandalism, government, non-governmental organization and community or other interference in the maintenance or provision of such infrastructure could adversely affect our operations and profitability.
Risks Related to Our Business and Industry
The prices of silver, zinc and lead are subject to change and a substantial or extended decline in the prices of silver, zinc or lead could materially and adversely affect revenues of the LGJV and the value of our mineral properties.
Our business and financial performance will be significantly affected by fluctuations in the prices of silver, zinc and lead. The prices of silver, zinc and lead are volatile, can fluctuate substantially and are affected by numerous factors that are beyond our control. For the year ended December 31, 2021, the London Bullion Market Association (“LBMA”) silver price ranged from a low of $21.53 per ounce on September 30, 2021 to a high of $29.59 per ounce on February 1, 2021; the London Metals Exchange (“LME”) Official Settlement zinc price ranged from a low of $2,539 per tonne ($1.15 per pound) on February 2, 2021 to a high of $3,815 per tonne ($1.73 per pound) on October 18, 2021; the LME Official Settlement lead price ranged from a low of $1,896 per tonne ($0.86 per pound) on March 18, 2021 to a high of $2,504 per tonne ($1.14 per pound) on August 18, 2021. For the year ended December 31, 2022, the LBMA silver price ranged from a low of $17.77 per ounce on September 1, 2022 to a high of $26.18 per ounce on March 9, 2022; the LME Official Settlement zinc price ranged from a low of $2,682 per tonne ($1.22 per pound) on November 3, 2022 to a high of $4,530 per tonne ($2.05 per pound) on April 19, 2022; the LME Official Settlement lead price ranged from a low of $1,754 per tonne ($0.80 per pound) on September 27, 2022 to a high of $2,513 per tonne ($1.14 per pound) on March 7, 2022. Prices are affected by numerous factors beyond our control, including:
● | prevailing interest rates and returns on other asset classes; |
● | expectations regarding inflation, monetary policy and currency values; |
● | speculation; |
● | governmental and exchange decisions regarding the disposal of precious metals stockpiles, including the decision by the CME Group, the owner and operator of the futures exchange, to raise silver’s initial margin requirements on futures contracts; |
● | political and economic conditions; |
● | available supplies of silver, zinc and lead from mine production, inventories and recycled metal; |
● | sales by holders and producers of silver, zinc and lead; and |
● | demand for products containing silver, zinc and lead. |
Because the LGJV expects to derive the substantial majority of our revenues from sales of silver, zinc and lead, its results of operations and cash flows will fluctuate as the prices for these metals increase or decrease. A sustained period of declining prices would materially and adversely affect our financial performance, financial position and results of operations.
14
Changes in the future demand for the silver, zinc and lead we produce could adversely affect future sales volume and revenues of the LGJV and our earnings.
The LGJV’s future revenues and our earnings will depend, in substantial part, on the volume of silver, zinc and lead we sell and the prices at which we sell, which in turn will depend on the level of industrial and consumer demand. Based on 2021 data from the Silver Institute, demand for silver is driven by industrial demand (including photovoltaic, electrical and electronics) (c. 48%), bar and coin demand (c. 27%) jewelry and silverware (c. 21%) and other demand, especially photography (c. 4%). An increase in the production of silver worldwide or changes in technology, industrial processes or consumer habits, including increased demand for substitute materials, may decrease the demand for silver. Increased demand for substitute materials may be either technologically induced, when technological improvements render alternative products more attractive for first use or end use than silver or allow for reduced application of silver, or price induced, when a sustained increase in the price of silver leads to partial substitution for silver by a less expensive product or reduced application of silver. Demand for zinc is primarily driven by the demand for galvanized steel, used in construction, automobile and other industrial applications. Demand for lead is primarily driven by the demand for batteries, used in vehicles, emergency systems and other industrial battery applications. Any substitution of these materials may decrease the demand for the silver, zinc and lead we produce. A fall in demand, resulting from economic slowdowns or recessions or other factors, could also decrease the price and volume of silver, zinc and lead we sell and therefore materially and adversely impact our results of operations and financial condition. Increases in the supply of silver, zinc and lead, including from new mining sources or increased recycling (driven by technological changes, pricing incentives or otherwise) may act to suppress the market prices for these commodities.
We are subject to the risk of labor disputes, which could adversely affect our business, and which risk may be increased due to the unionization in the LGJV workforce.
Although we have not experienced any significant labor disputes in recent years, there can be no assurances that we will not experience labor disputes in the future, including protests, blockades and strikes, which could disrupt our business operations and have an adverse effect on our business and results of operation. Although we consider our relations with our employees to be good, there can be no assurance that we will be able to maintain a satisfactory working relationship with our employees in the future. The LGJV’s hourly work force is unionized, which may increase the risk of such disruptions. In addition, the unionized workforce, or further unionization of the workforce, may, among other things, require more extensive human resources staff, increase legal costs, increase involvement with regulatory agencies, result in lost workforce flexibility, and increase labor costs due to rules, grievances and arbitration proceedings.
Our success depends on developing and maintaining relationships with local communities and stakeholders.
Our ongoing and future success depends on developing and maintaining productive relationships with the communities surrounding our operations, including local indigenous people who may have rights or may assert rights to certain of our properties, and other stakeholders in our operating locations. We believe our operations can provide valuable benefits to surrounding communities in terms of direct employment, training and skills development and other benefits associated with ongoing payment of taxes. In addition, we seek to maintain partnerships and relationships with local communities. Notwithstanding our ongoing efforts, local communities and stakeholders can become dissatisfied with our activities or the level of benefits provided, which may result in legal or administrative proceedings, civil unrest, protests, direct action or campaigns against us. Any such occurrence could materially and adversely affect our business, financial condition or results of operations.
We are subject to class action lawsuits.
We are currently subject to class actions lawsuits. See Note 10—Commitments, Contingencies and Guarantees in our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for additional information regarding our assessment of contingencies related to legal matters. See also “Item 3. Legal Proceedings.” Such actions subject us to significant costs, which may not be adequately covered by insurance, divert management’s time and attention from our operations and reduce our ability to attract and retain qualified personnel. Our inability to successfully defend against such actions could have a material adverse effect on our business and financial condition.
15
The COVID-19 pandemic has adversely affected our business and operations. The widespread outbreak of any other health pandemics, epidemics, communicable diseases or public health crises could also adversely affect us, particularly in regions where we conduct our business operations.
Our business could be adversely affected by the widespread outbreak of a health epidemic, communicable disease or any other public health crisis.
For example, the outbreak of COVID-19 in the United States, Mexico and elsewhere has created significant business disruption and adversely affected our business and operations. The outbreak has resulted in governments implementing numerous measures to contain COVID-19, such as travel bans and restrictions, particularly quarantines, shelter-in-place or total lockdown orders and business limitations and shutdowns. These containment measures are subject to change and the respective government authorities may tighten the restrictions at any time.
Any prolonged disruption of our or the LGJV’s operations and closures of facilities resulting from health pandemic, epidemics communicable diseases or public health crises would delay our current exploration and production timelines and negatively impact our business, financial condition and results of operations. Although vaccines for COVID-19 have been approved for use, the distribution of the vaccines did not begin until late 2020,operations and a majority of the public will likely not be vaccinated until sometime in 2021 or later. Additionally, new strains of COVID-19 are surfacing, and the effectiveness of the approved vaccines against these new strains is unknown.
The mining industry is very competitive.
The mining industry is very competitive. Much of our competition is from larger, established mining companies with greater liquidity, greater access to credit and other financial resources, newer or more efficient equipment, lower cost structures, more effective risk management policies and procedures and/or a greater ability than us to withstand losses. Our competitors may be able to respond more quickly to new laws or regulations or emerging technologies or devote greater resources to the expansion or efficiency of their operations than we can. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and gain significant market share to our detriment. We may not be able to compete successfully against current and future competitors, and any failure to do so could have a material adverse effect on our business, financial condition or results of operations.
Our insurance may not provide adequate coverage.
Our business and operations are subject to a number of risks and hazards, including, but not limited to, adverse environmental conditions, industrial accidents, labor disputes, unusual or unexpected geological conditions, ground control problems, cave-ins, changes in the regulatory environment, metallurgical and other processing problems, mechanical equipment failure, facility performance problems, fires and natural phenomena such as inclement weather conditions, floods and earthquakes. These risks could result in damage to, or destruction of, our mineral properties or production facilities, personal injury or death, environmental damage, delays in exploration, mining or processing, increased production costs, asset write downs, monetary losses and legal liability.
Our property and liability insurance may not provide sufficient coverage for losses related to these or other hazards. Insurance against certain risks, including those related to environmental matters or other hazards resulting from exploration and production, is generally not available to us or to other companies within the mining industry. Our current insurance coverage may not continue to be available at economically feasible premiums, or at all. In addition, our business interruption insurance relating to our properties has long waiting periods before coverage begins. Accordingly, delays in returning to any future production could produce near-term severe impact to our business. Our director and officer liability insurance may be insufficient to cover losses from claims relating to matters for which directors and officers are indemnified by us or for which we are determined to be directly responsible, and regardless are and may continue to be subject to significant retentions or deductibles, including current class action lawsuits. See “Item 3. Legal Proceedings.” Any losses from these events may cause us to incur significant costs that could have a material adverse effect on our financial performance, financial position and results of operations.
Our business is sensitive to nature and climate conditions.
A number of governments have introduced or are moving to introduce climate change legislation and treaties at the international, national, state/provincial and local levels. Regulations relating to emission levels (such as carbon taxes) and energy efficiency are becoming more stringent. If the current regulatory trend continues, this may result in increased costs at some or all of our business locations. In addition, the physical risks of climate change may also have an adverse effect on our operations. Extreme weather events, which may become more common and severe due to climate change, have the potential to disrupt our power supply,
16
surface operations and exploration at our mines and may require us to make additional expenditures to mitigate the impact of such events.
If we are unable to retain key members of management, our business might be harmed.
Our exploration activities and any future development and construction or mining and processing activities depend to a significant extent on the continued service and performance of our senior management team, including our Chief Executive Officer. We depend on a relatively small number of key officers, and we currently do not, and do not intend to, have key-personkeyperson insurance for these individuals. Departures by members of our senior management could have a negative impact on our business, as we may not be able to find suitable personnel to replace departing management on a timely basis, or at all. The loss of any member of our senior management team could impair our ability to execute our business plan and could, therefore, have a material adverse effect on our business, results of operations and financial condition. In addition, the international mining industry is very active and we are facing increased competition for personnel in all disciplines and areas of operation. There is no assurance that we will be able to attract and retain personnel to sufficiently staff our development and operating teams.
We may fail to identify attractive acquisition candidates or joint ventures with strategic partners or may fail to successfully integrate acquired mineral properties or successfully manage joint ventures.
As part of our developmentgrowth strategy, we may acquire additional mineral properties or enter into joint ventures with strategic partners. However, there can be no assurance that we will be able to identify attractive acquisition or joint venture candidates in the future or that we will succeed at effectively managing their integration or operation. In particular, significant and increasing competition exists for mineral acquisition opportunities throughout the world. We face strong competition from other mining companies in connection with the acquisition of properties producing, or capable of producing, metals as well as in entering into joint ventures with other parties. If the expected synergies from such transactions do not materialize or if we fail to integrate them successfully into our existing business or operate them successfully with our joint venture partners, or if there are unexpected liabilities, our results of operations could be adversely affected.
Pursuant to the Unanimous Omnibus Partner Agreement, which governs our and Dowa’s respective rights over the LGJV, we and Dowa must jointly approve certain major decisions involving the LGJV, including decisions relating to the merger, amalgamation or restructuring of the LGJV and key strategic decisions, including with respect to expansion, among others. If we are unable to obtain the consent of Dowa, we may be unable to make decisions relating to the LGJV that we believe are beneficial for its operations, which may materially and adversely impact our results of operations and financial condition.
In connection with any future acquisitions or joint ventures, we may incur indebtedness or issue equity securities, resulting in increased interest expense or dilution of the percentage ownership of existing shareholders. Unprofitable acquisitions or joint ventures, or additional indebtedness or issuances of securities in connection with such acquisitions or joint ventures, may adversely affect the price of our common stock and negatively affect our results of operations.
Our information technology systems may be vulnerable to disruption, which could place our systems at risk from data loss, operational failure or compromise of confidential information.
We rely on various information technology systems. These systems remain vulnerable to disruption, damage or failure from a variety of sources, including, but not limited to, errors by employees or contractors, computer viruses, cyberattacks, including phishing, ransomware, and similar malware, misappropriation of data by outside parties, and various other threats. Techniques used to obtain unauthorized access to or sabotage our systems are under continuous and rapid evolution, and we may be unable to detect efforts to disrupt our data and systems in advance. Breaches and unauthorized access carry the potential to cause losses of assets or production, operational delays, equipment failure that could cause other risks to be realized, inaccurate recordkeeping, or disclosure of confidential information, any of which could result in financial
17
Our directors may have conflicts of interest as a result of their relationships with other mining companies.
Our directors are also directors, officers and shareholders of other companies that are similarly engaged in the business of developing and exploiting natural resource properties. Consequently, there is a possibility that our directors may be in a position of conflict in the future.
We are required to establish and maintain proper and effective internal controls over financial reporting. We have identified material weaknesses in our internal control over financial reporting. If we fail to remediate these deficiencies (or fail to identify and/or remediate other possible material weaknesses), we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. Under standards established by the United States Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
We are required, pursuant to Section 404 of the Sarbanes Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting for fiscal year 2021. This assessment includes disclosure of any material weaknesses identified by our management in our internal controls over financial reporting. Additionally, we are required to disclose changes made in our internal controls and procedures on a quarterly basis.
However, for as long as we are an emerging growth company, or a smaller reporting company that is a non-accelerated filer, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b). At such time, this attestation will be required, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our relationship with SOPremediation efforts may strainnot enable us to avoid a material weakness in the future. We may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff.
We have identified material weaknesses in our senior management resources and could potentially result in conflicts of interest.
● | We did not demonstrate the appropriate tone at the top including failing to design or maintain an effective control environment commensurate with the financial reporting requirements of a public company in the United States and Canada. In particular, we did not design control activities to adequately address identified risks or operate at a sufficient level of precision that would identify material misstatements to our financial statements and did not design and maintain sufficient formal documentation of accounting policies and procedures to support the operation of key control procedures. |
● | We failed to design and maintain effective controls relating to our risk assessment process as it pertained to the assessment of key assumptions, inputs and outputs contained in our July 2020 technical report. |
In connection with SOP, pursuantour review of the internal control structure related to the preparation of the restated financial statements for the fiscal year ended December 31, 2021, we have identified the following additional material weaknesses in our internal controls over financial reporting:
● | We failed to design and maintain effective controls over accounting for current and deferred income taxes. This material weakness resulted in a material misstatement of our previously issued financial statements for the year ended December 31, 2021 which resulted in an overstatement of the current income tax expense. Specifically, the financial statements of the LGJV at December 31, 2021 did not accurately reflect the current and deferred tax assets and liabilities at December 31, 2021. Consequently, the impairment of investment in affiliates and the investment in affiliates and the equity income in affiliates were also not accurately presented in the Company’s financial statements at December 31, 2021. |
18
● | We did not have adequate technical accounting expertise to ensure that complex accounting matters such as the impact of the priority distribution payment due to our joint venture partner and the impairment charge was recognized in accordance with GAAP. These material weaknesses resulted in a material misstatement of our previously issued financial statements for the year ended December 31, 2021. The financial statements did not accurately reflect the investment in affiliates and the equity income in affiliates. Additionally, this caused the impairment of investment in affiliates to be misstated. |
This Amendment No. 1 contains restated financial statements for the fiscal year ended December 31, 2021.
We are in the process of implementing measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses described above. To date, we have:
● | engaged a third-party expert to assist management in documenting key processes related to our internal control environment, designing and implementing an effective risk assessment and monitoring program to identify risks of material misstatements and ensuring that the internal controls have been appropriately designed to address and effectively monitor identified risk; |
● | hired a new executive leadership team, including a new CEO, CFO and senior executive responsible for technical services, each of which has appropriate experience and has demonstrated a commitment to improving the Company’s control environment; |
● | hired additional personnel with accounting and technical expertise, including hiring new accounting staff in connection with the relocation of the Company’s headquarters to Vancouver; |
● | enhanced the procedures and functioning of our disclosure committee relating to the appropriate reporting of information and review and approval of the Company’s public disclosures; |
● | engaged a new independent third-party subject matter specialist to perform a technical review of the 2022 mineral resource and mineral reserve estimates; |
● | enhanced our procedures, including implementing appropriate controls, relating to management verification of the key assumptions, inputs and outputs for our Technical Reports; |
● | engaged a new independent third-party tax specialist to perform a review of the tax provision calculation at the LGJV and the recognition of deferred tax assets and liabilities; and |
● | implemented process to identify complex technical accounting matters that would require technical accounting analysis by a technical accounting expert in a timely manner. |
We have incurred significant costs in connection with our efforts to remediate these material weaknesses, and we expect to incur additional costs in the future. Neither we nor our independent registered public accounting firm have tested the effectiveness of our internal control over financial reporting and we cannot provide assurance that we will be able to successfully remediate the material weaknesses described above. Even if we successfully remediate such material weaknesses, we cannot provide certain executiveany assurance that we will not suffer from these or other material weaknesses in the future.
Our remediation efforts may not enable us to avoid a material weakness in the future. We may need to undertake various actions, such as implementing new internal controls and managerial advisory servicesprocedures and hiring additional accounting or internal audit staff. If we continue to SOP. SOP reimburses us for costs representingbe unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion on the proportioneffectiveness of our advisory services allocatedinternal controls to it under the Management Services Agreement. However, providing such advisory services to SOP may strain our resourcesextent required, we could lose investor confidence in the accuracy and divert management’s attention from our principal projects and other business concerns, which would adversely affect our business and operating results. Certaincompleteness of our directors are also directors of SOP,financial reports, which could create,cause the price of our common stock to decline, and we may be subject to investigation or appear to create, conflictssanctions by the SEC.
19
Risks Related to Government Regulations
The Mexican government, as well as local governments, extensively regulate mining operations, which impose significant actual and potential costs on us, and future regulation could increase those costs, delay receipt of regulatory refunds or limit our ability to produce silver and other metals.
The mining industry is subject to increasingly strict regulation by federal, state and local authorities in Mexico, and other jurisdictions in which we may operate, including in relation to:
● | limitations on land use; |
● | mine permitting and licensing requirements; |
● | reclamation and restoration of properties after mining is completed; |
● | management of materials generated by mining operations; and |
● | storage, treatment and disposal of wastes and hazardous materials. |
The liabilities and requirements associated with the laws and regulations related to these and other matters, including with respect to air emissions, water discharges and other environmental matters, may be costly and time-consumingtime consuming and may restrict, delay or prevent commencement or continuation of exploration or production operations. There can be no assurance that we have been or will be at all times in compliance with all applicable laws and regulations. Failure to comply with, or the assertion that we have failed to comply with, applicable laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of cleanup and site restoration costs and liens, the issuance of injunctions to limit or cease operations, the suspension or revocation of permits or authorizations and other enforcement measures that could have the effect of limiting or preventing production from our operations. We may incur material costs and liabilities resulting from claims for damages to property or injury to persons arising from our operations. If we are pursued for sanctions, costs and liabilities in respect of these matters, our mining operations and, as a result, our financial performance, financial position and results of operations, could be materially and adversely affected.
Our Mexican properties are subject to regulation by the Political Constitution of the United Mexican States, and are subject to various legislation in Mexico, including the Mining Law, the Federal Law of Waters, the Federal Labor Law, the Federal Law of Firearms and Explosives, the General Law on Ecological Balance and Environmental Protection and the Federal Law on Metrology Standards. Our operations at our Mexican properties also require us to obtain local authorizations and, under the Agrarian Law, to comply with the uses and customs of communities located within the properties. Mining, environmental and labor authorities may inspect our Mexican operations on a regular basis and issue various citations and orders when they believe a violation has occurred under the relevant statute.
If inspections in Mexico result in an actual or alleged violation, we may be subject to fines, penalties or sanctions, our mining operations could be subject to temporary or extended closures, and we may be required to incur capital expenditures to re-commencerecommence our operations. Any of these actions could have a material adverse effect on our financial performance, financial position and results of operations.
20
The Mexican federal government recently promulgated significant amendments to laws affecting the COVID-19 pandemic,mining industry; while it is difficult to ascertain if and when the Mexican government ordered a temporary suspension of all “non-essential” operations nationwide in Mexico, including mining operations. In late May 2020, the Mexican government designated mining an essential serviceamendments will be fully implemented, and allowed mines to resume production, subject to deploying COVID-19 prevention protocols. However, there is no certainty thatsome lack of clarity in their drafting including their intended retroactive effect, the Mexican regulators will not require further limitations on, or even a full shut down of, the operations at the CLG in connection with COVID-19. The potential costs of complying with these COVID-19 requirements is unknown andamendments could have a material adverse effect on us.
On May 8, 2023, legislative amendments were promulgated by the Mexican federal government (the “Amendments”). If fully implemented, the Amendments would include the following attributes: new concessions would only be granted through public bidding and letters of credit would be required; new mining concessions would be granted in respect of specified minerals; the potential to expropriate private land would be discontinued; the term and extension period of new mining concessions would be reduced to 30 and 25 years, respectively; the approval of transferees of mining concessions would be required; minimum payments of 5% of profits to local communities would be imposed; social impact studies and community consultation would be required; restoration, closure and post closure programs would be required; water availability would be a condition for granting new mining concessions; the concept of presumptive approval (afirmativa ficta) for approval matters properly and timely submitted to regulatory agencies would be removed; parastatal entities could be created and would enjoy preferential rights to exploration; environmental obligations and prohibitions would be increased; and water concessions could be significantly modified by governmental authorities in certain circumstances. The foregoing is a non-exhaustive summary of the Amendments.
The Amendments are stated to be immediately effective, but regulations are required for the Amendments to be fully implemented. Although it is not clear in all instances, the Amendments are generally stated to not have retroactive effect, and as such their most significant impact would be expected to be on new mining concessions rather than existing concessions and operations, including those of the LGJV and ours. Certain of the Amendments may also apply to existing operations, such as the requirement for approval of any concession transferee, establishing a closure and post-closure program and additional environmental obligations. We understand that the Amendments could be challenged on the basis of the legislative process followed or by parties directly affected by the Amendments on constitutional or other grounds. The impact of the Amendments on the LGJV and us will depend on the extent and timing of their implementation and the extent of their retroactive effect. We will be continuing to monitor and assess the potential impact of the Amendments on the LGJV, us, and any future opportunities in Mexico.
Our operations are subject to additional political, economic and other uncertainties not generally associated with U.S. operations.
We currently have two properties in Mexico: the Los Gatos District,LGD, which the LGJV controls, and the Santa Valeria property, which is owned 100% by us. Our operations are subject to significant risks inherent in exploration and resource extraction by foreign companies in Mexico. Exploration, development, production and closure activities in Mexico are potentially subject to heightened political, economic, regulatory and social risks that are beyond our control. These risks include:
● | the possible unilateral cancellation or forced renegotiation of contracts and licenses; |
● | unfavorable changes in laws and regulations; |
● | royalty and tax increases; |
● | claims by governmental entities or indigenous communities; |
● | expropriation or nationalization of property; |
● | political instability; |
● | fluctuations in currency exchange rates; |
● | social and labor unrest, organized crime, hostage taking, terrorism and violent crime; |
● | uncertainty regarding the availability of reasonable electric power costs; |
● | uncertainty regarding the enforceability of contractual rights and judgments; and |
● | other risks arising out of foreign governmental sovereignty over areas in which our mineral properties are located. |
21
Local economic conditions also can increase costs and adversely affect the security of our operations and the availability of skilled workers and supplies. Higher incidences of criminal activity and violence in the area of some of our properties could adversely affect the LGJV’s ability to operate in an optimal fashion or at all, and may impose greater risks of theft and higher costs, which would adversely affect results of operations and cash flows.
Acts of civil disobedience are common in Mexico. In recent years, many mining companies have been targets of actions to restrict their legally entitled access to mining concessions or property. Such acts of civil disobedience often occur with no warning and can result in significant direct and indirect costs. We cannot provide assurance that there will be no disruptions to site access in the future, which could adversely affect our business.
Local and regional meteorological conditions can increase our operating costs and adversely affect our ability to mine and process ore. Such inclement conditions, including severe precipitation events, extremely high winds or wildfires could directly impact our surface operations. Northern Mexico is highly dependent upon natural gas from Texas to generate power. Regional inclement weather conditions in the state of Chihuahua, Mexico, or Texas, such as the recent severe winter storms in Texas, could adversely impact our ability to maintain sufficient power from the national Mexico power grid. The CLG project was designed to allow the mine and processing plant to operate independently. The project has diesel-powered generators with sufficient capacity to maintain power to the residential camp, surface administrative facilities and the underground mine but not the processing plant. During such events, our ability to mine and process at design capacities could become constrained.
The right to export silver-bearing concentrateconcentrates and other metals may depend on obtaining certain licenses, which could be delayed or denied at the discretion of the relevant regulatory authorities, or meeting certain quotas. The United States and Mexico began implementation of the United States-Mexico-Canada Agreement (USMCA) in 2020. The United States and Mexico, and any other country in which we may operate in the future, could alter their trade agreements, including terminating trade agreements, instituting economic sanctions on individuals, corporations or countries, and introducing other government regulations affecting trade between the United States and other countries. It may be time consumingtime-consuming and expensive for us to alter our operations in order to adapt to or comply with any such changes. If the United States were to withdraw from or materially modify international trade agreements to which it is a party, or if other countries imposed or increased tariffs on the minerals we may extract in the future, the costs of such products could increase significantly. Any of these conditions could lead to lower productivity and higher costs, which would adversely affect our financial performance, financial position and results of operations. Generally, our operations may be affected in varying degrees by changing government regulations in the United States and/or Mexico with respect to, but not limited to, restrictions on production, price controls, export controls, currency remittance, importation of products and supplies, income and other taxes, royalties, the repatriation of profits, expropriation of mineral property, foreign investment, maintenance of concessions, licenses, approvals and permit, environmental matters, land use, land claims of local indigenous people and workplace safety.
Such developments could require us to curtail or terminate operations at our mineral properties in Mexico, incur significant costs to meet newly imposed environmental or other standards, pay greater royalties or higher prices for labor or services and recognize higher taxes, which could materially and adversely affect our results of operations, cash flows and financial condition. Furthermore, failure to comply strictly with applicable laws, regulations and local practices could result in loss, reduction or expropriation of licenses, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests.
We continue to monitor developments and policies in Mexico and assess the impact thereof on our operations; however, such developments cannot be accurately predicted and could have an adverse effect on our business, financial condition and results of operations.
We are required to obtain, maintain and renew environmental, construction and mining permits, which is often a costly and time-consuming process and may ultimately not be possible.
Mining companies, including ours, need many environmental, construction and mining permits, each of which can be time consuming and costly to obtain, maintain and renew. In connection with our current and future operations, we must obtain and maintain a number of permits that impose strict conditions, requirements and obligations, including those relating to various environmental and health and safety matters. To obtain, maintain and renew certain permits, we have been and may in the future be required to conduct environmental studies, and make associated presentations to governmental authorities, pertaining to the potential impact of our current and future operations upon the environment and to take steps to avoid or mitigate those impacts. Permit terms and conditions can impose restrictions on how we conduct our operations and limit our flexibility in developing our mineral
22
properties. Many of our permits are subject to renewal from time to time, and applications for renewal may be denied or the renewed permits may contain more restrictive conditions than our existing permits, including those governing impacts on the environment. We may be required to obtain new permits to expand our operations, and the grant of such permits may be subject to an expansive governmental review of our operations. We may not be successful in obtaining such permits, which could prevent us from commencing, continuing or expanding operations or otherwise adversely affect our business. Renewal of existing permits or obtaining new permits may be more difficult if we are not able to comply with our existing permits. Applications for permits, permit area expansions and permit renewals can also be subject to challenge by interested parties, which can delay or prevent receipt of needed permits. The permitting process can vary by jurisdiction in terms of its complexity and likely outcomes. The applicable laws and regulations, and the related judicial interpretations and enforcement policies, change frequently, which can make it difficult for us to obtain and renew permits and to comply with applicable requirements. Accordingly, permits required for our operations may not be issued, maintained or renewed in a timely fashion or at all, may be issued or renewed upon conditions that restrict our ability to conduct our operations economically, or may be subsequently revoked. Any such failure to obtain, maintain or renew permits, or other permitting delays or conditions, including in connection with any environmental impact analyses, could have a material adverse effect on our business, results of operations and financial condition.
In regard to the CLG, the Los Gatos DistrictLGD and other Mexican projects, Mexico has adopted laws and guidelines for environmental permitting that are similar to those in effect in the United States and South American countries. We are currently operating under permits regulating mining, processing, use of explosives, water use and discharge and surface disturbance in relation to the Los Gatos DistrictLGD and the Santa Valeria property. We will be required to apply for corresponding authorizations prior to any production at our other Mexican properties and there can be no certainty as to whether, or the terms under which, such authorizations will be granted or renewed. Any failure to obtain authorizations and permits, or other authorization or permitting delays or conditions, could have a material adverse effect on our business, results of operations and financial condition.
We are subject to environmental and health and safety laws, regulations and permits that may subject us to material costs, liabilities and obligations.
We are subject to environmental laws, regulations and permits in the various jurisdictions in which we operate, including those relating to, among other things, the removal and extraction of natural resources,
We could be liable for any environmental contamination at, under or released from our or our predecessors’ currently or formerly owned or operated properties or third-party waste disposal sites. Certain environmental laws impose joint and several strict liability for releases of hazardous substances at such properties or sites, without regard to fault or the legality of the original conduct. A generator of waste can be held responsible for contamination resulting from the treatment or disposal of such waste at any offsite location (such as a landfill), regardless of whether the generator arranged for the treatment or disposal of the waste in compliance with applicable laws. Costs associated with liability for removal or remediation of contamination or damage to natural resources could be substantial and liability under these laws may attach without regard to whether the responsible party knew of, or was responsible for, the presence of the contaminants. Accordingly, we may be held responsible for more than our share of the contamination or other damages, up to and including the entire amount of such damages. In addition to potentially significant investigation and remediation costs, such matters can give rise to claims from governmental authorities and other third parties, including for orders, inspections, fines or penalties, natural resource damages, personal injury, property damage, toxic torts and other damages.
23
Our costs, liabilities and obligations relating to environmental matters could have a material adverse effect on our financial performance, financial position and results of operations.
We may be responsible for anti-corruptionanticorruption and anti-briberyantibribery law violations.
Our operations are governed by, and involve interactions with, various levels of government in foreign countries. We are required to comply with anti-corruptionanticorruption and anti-briberyantibribery laws, including the Corruption of Foreign Public Officials Act (Canada) and the U.S. Foreign Corrupt Practices Act (the “FCPA”)(together, the “Corruption Legislation “) and similar laws in Mexico. These laws generally prohibit companies and company employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. The FCPACorruption Legislation also requires companies to maintain accurate books and records and internal controls. Because our interests are located in Mexico, there is a risk of potential FCPACorruption Legislation violations.
In recent years, there has been a general increase in both the frequency of enforcement and the severity of penalties under such laws, resulting in greater scrutiny and punishment to companies convicted of violating anti-corruption and anti-bribery laws. A company may be found liable for violations by not only its employees, but also by its contractors and third-party agents. Our internal procedures and programs may not always be effective in ensuring that we, our employees, contractors or third-party agents will comply strictly with all such applicable laws. If we become subject to an enforcement action or we are found to be in violation of such laws, this may have a material adverse effect on our reputation and may possibly result in significant penalties or sanctions, and may have a material adverse effect on our cash flows, financial condition or results of operations.
We may be required by human rights laws to take actions that delay our operations or the advancement of our projects.
Various international and national laws, codes, resolutions, conventions, guidelines and other materials relate to human rights (including rights with respect to health and safety and the environment surrounding our operations). Many of these materials impose obligations on government and companies to respect human rights. Some mandate that governments consult with communities surrounding our projects regarding government actions that may affect local stakeholders, including actions to approve or grant mining rights or permits. The obligations of government and private parties under the various international and national materials pertaining to human rights continue to evolve and be defined. One or more groups of people may oppose our current and future operations or further development or new development of our projects or operations. Such opposition may be directed through legal or administrative proceedings or expressed in manifestations such as protests, roadblocks or other forms of public expression against our activities, and may have a negative impact on our reputation. Opposition by such groups to our operations may require modification of, or preclude the operation or development of, our projects or may require us to enter into agreements with such groups or local governments with respect to our projects, in some cases causing considerable delays to the advancement of our projects.
Risks Related to Ownership of Our Common Stock
The market price of our common stock has been, and may continue to be volatile.
The trading price of our common stock couldhas been, and may continue to be, volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:
● | failure to identify mineral reserves at our properties; |
● | failure to achieve or continue production at our mineral properties; |
● | actual or anticipated changes in the price of silver and base metal byproducts; |
● | fluctuations in our quarterly and annual financial results or the quarterly and annual financial results of companies perceived to be similar to us; |
● | changes in market valuations of similar companies; |
● | success or failure of competitor mining companies; |
● | changes in our capital structure, such as future issuances of securities or the incurrence of debt; |
24
● | sales of large blocks of our common stock; |
● | announcements by us or our competitors of significant developments, contracts, acquisitions or strategic alliances; |
● | changes in regulatory requirements and the political climate in the United States, Mexico, Canada or all; |
● | litigation and/or investigations involving our Company, our general industry or both; |
● | additions or departures of key personnel; |
● | investors’ general perception of us, including any perception of misuse of sensitive information; |
● | changes in general economic, industry and market conditions; |
● | accidents at mining properties, whether owned by us or otherwise; |
● | natural disasters, terrorist attacks and acts of war; and |
● | our ability to control our costs. |
If the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling
If any of the foregoing occurs it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be both costly to defend against and a distraction to management.
Our anti-takeover defense provisions may cause our common stock to trade at market prices lower than it might absent such provisions.
Our Board of Directors has the authority to issue blank check preferred stock. Additionally, our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain several provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of our Board of Directors. These include provisions setting forth advance notice procedures for shareholders’ nominations of directors and proposals of topics for consideration at meetings of shareholders, provisions restricting shareholders from calling a special meeting of shareholders or requiring one to be called, provisions limiting the ability of shareholders to act by written consent and provisions requiring a 66.67% shareholder vote to amend our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws. These provisions may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our shareholders receiving a premium over the market price for their common stock. In addition, these provisions may cause our common stock to trade at a market price lower than it might absent such provisions.
Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the holders of a large number of shares intend to sell shares, could cause the market price of our common stock to drop significantly.
Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of March 23, 2021, we had 59,409,052 shares of common stock outstanding. In connection with our initial public offering, all of our directors and executive officers and the holders of substantially all of our common stock entered into lockup agreements in which they agreed, subject to certain exceptions, not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock. The shares of our common stock covered by these lockup agreements will become eligible to be sold beginning on April 26, 2021. The representatives of the underwriters in our initial public offering may, in their sole discretion and without notice, release all or any portion of the common stock subject to lockup agreements. As restrictions on resale end, the market price of our common stock could drop significantly if the holders of these shares sell them. or are perceived by the market as intending to sell them.
Certain stockholders will have rights, subject to specified conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We have also registered all shares of common stock that we may issue under our equity compensation plans, which can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliatesaffiliates. Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that holder of a large number of shares intends to sell shares, could cause the market
25
price of our common stock to drop significantly and the lock-up agreements described above. These factors could also make it more difficult for us to raise additional funds through future offerings of our common stock or other securities.
We do not currently intend to pay dividends on our common stock and, consequently, shareholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividend on our capital stock. We do not intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain all future
Electrum and its affiliates and MERS have a substantial degree of influence over us, which could delay or prevent a change of corporate control or result in the entrenchment of our management and/or Board of Directors.
As of March 23, 2021,27, 2023, the Electrum Group, LLC and its affiliates (collectively, “Electrum”) and the Municipal Employees’ Retirement System of Michigan (“MERS”) beneficially own approximately 42%32% and 10%9% of our outstanding common stock, respectively. We have entered into a shareholdersshareholder’s agreement with Electrum and MERS pursuant to which Electrum and MERS have certain director nomination rights. The shareholders agreement also provides that Electrum approval must be obtained prior to us engaging in certain corporate actions. As a result, Electrum has significant influence over our management and affairs and, so long asif Electrum owns at least 35% of our outstanding common stock, will have approval rights over certain corporate actions, including, among others, any merger, consolidation or sale of all or substantially all of our assets, the incurrence of more than $100 million of indebtedness and the issuance of more than $100 million of equity securities.
The concentration of ownership and our shareholders agreement may harm the market price of our common stock by, among other things:
● | delaying, deferring or preventing a change of control, even at a per share price that is in excess of the then current price of our common stock; |
● | impeding a merger, consolidation, takeover or other business combination involving us, even at a per share price that is in excess of the then current price of our common stock; or |
● | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, even at a per share price that is in excess of the then-current price of our common stock. |
We are an “emerging growth company” and a smaller reporting company, and we cannot be certain if the reduced disclosure requirements applicable to us will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We would also be exempt from the requirement to obtain an external audit on the effectiveness of internal control over financial reporting provided in Section 404(b) of the Sarbanes-OxleySarbanes Oxley Act. These exemptions and reduced disclosures in our SEC filings due to our status as a smaller reporting company mean our auditors do not review our internal control over financial reporting and may make it harder for investors to analyze our results of operations and financial prospects. We cannot predict if investors will find our common stock less attractive because we
26
may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock prices may be more volatile.
Our Amended and Restated Certificate of Incorporation and shareholders agreement contain a provision renouncing our interest and expectancy in certain corporate opportunities.
Our Amended and Restated Certificate of Incorporation and shareholders agreement provide for the allocation of certain corporate opportunities between us and Electrum and MERS. Under these provisions, neither Electrum nor MERS, their affiliates and subsidiaries, nor any of their officers, directors, agents, stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. For instance, a director of our Company who is not also our employee and also serves as a director, officer or employee of Electrum or MERS or any of their subsidiaries or affiliates may pursue certain acquisition or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our financial performance, financial position and results of operations if attractive corporate opportunities are allocated by Electrum or MERS to themselves or their subsidiaries or affiliates instead of to us.
Our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States are the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
● | any derivative action or proceeding brought on our behalf; |
● | any action asserting a breach of fiduciary duty; |
● | any action asserting a claim against us arising under the Delaware General Corporation Law; and |
● | any action asserting a claim against us that is governed by the internal affairs doctrine. |
The foregoing provision does not apply to claims under the Securities Act, the Exchange Act or any claim for which the U.S. federal courts have exclusive jurisdiction. Our Amended and Restated Certificate of Incorporation further provides that the federal district courts of the United States will, to the fullest extent permitted by law, be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.
Our Amended and Restated Certificate of Incorporation also provides that any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice of and to have consented to these choice of forum provisions. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers, and other employees, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder.
While Delaware courts have determined that choice of forum provisions are facially valid, it is possible that a court of law in another jurisdiction could rule that the choice of forum provisions contained in our Amended and Restated Certificate of Incorporation are inapplicable or unenforceable if they are challenged in a proceeding or otherwise. If a court were to find the choice of forum provision in our Amended and Restated Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.
27
General Risk Factors
We will continue to incur significantly increased costs and devote substantial management time as a result of operating as a public company.
As a public company, we will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. For example, weWe are subject to the reporting requirements of the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations of the SEC, NYSE and TSX, including the establishment and maintenance of effective disclosure and financial controls, changes in corporate governance practices and required filing of annual, quarterly and current reports with respect to our business and results of operations. We expect that complianceCompliance with these requirements has increased and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company. We have hired additional accounting personnel and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and willmay need to establish an internal audit function within one year of our initial public offering.
If securities or industry analysts do not continue to publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that securities or industry analysts publish about us or our business. If analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business model or our stock performance, or if our results of operations fail to meet the expectations of analysts, the price of our common stock would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn might cause the price of our common stock and trading volume to decline.
28
Concession Name | | | Title Number | | | Date Granted mm/dd/yy | | | Hectares | | | Current Concessionaire | | |||||||||
Los Gatos | | | | | 231498 | | | | | | 3/4/08 | | | | | | 19,712 | | | | Minera Plata Real | |
Los Gatos 2 | | | | | 228950 | | | | | | 2/22/07 | | | | | | 10,720 | | | | Minera Plata Real | |
Los Gatos 3 | | | | | 231076 | | | | | | 1/16/08 | | | | | | 27 | | | | Minera Plata Real | |
Mezcalera | | | | | 228249 | | | | | | 10/17/06 | | | | | | 4,992 | | | | Minera Plata Real | |
Mezcalera 2 Fracción I | | | | | 228929 | | | | | | 2/21/07 | | | | | | 39 | | | | Minera Plata Real | |
Mezcalera 2 Fracción II | | | | | 228930 | | | | | | 2/21/07 | | | | | | 26 | | | | Minera Plata Real | |
Mezcalera 2 Fracción III | | | | | 228931 | | | | | | 2/21/07 | | | | | | 29 | | | | Minera Plata Real | |
Paula Adorada | | | | | 223392 | | | | | | 12/9/04 | | | | | | 40 | | | | Minera Plata Real | |
La Gavilana | | | | | 237137 | | | | | | 11/19/10 | | | | | | 10 | | | | Minera Plata Real | |
San Luis | | | | | 236908 | | | | | | 10/5/10 | | | | | | 16 | | | | Minera Plata Real | |
La Gavilana Fracción I | | | | | 237461 | | | | | | 12/21/10 | | | | | | 44 | | | | Minera Plata Real | |
Los Estados Fracción I | | | | | 237694 | | | | | | 4/25/11 | | | | | | 9 | | | | Minera Plata Real | |
Los Estados Fracción II | | | | | 237695 | | | | | | 4/25/11 | | | | | | 44 | | | | Minera Plata Real | |
Los Gatos 4 | | | | | 238511 | | | | | | 9/23/11 | | | | | | 52,597 | | | | Minera Plata Real | |
San Luis 2 | | | | | 238694 | | | | | | 10/18/11 | | | | | | 42 | | | | Minera Plata Real | |
Los Veranos | | | | | 238573 | | | | | | 9/23/11 | | | | | | 14,740 | | | | Minera Plata Real | |
San Luis 3 | | | | | 240452 | | | | | | 5/23/12 | | | | | | 0.01 | | | | Minera Plata Real | |
Total | | | | | | | | | | | | | | | | | 103,087 | | | | | |
| | | Category | | | Tonnes (million; 100% basis) | | | Tonnes (million; 51.5% basis) | | | Ag (g/t) | | | Au (g/t) | | | Pb (%) | | | Zn (%) | | | Cu (%) | | |||||||||||||||||||||
Cerro Los Gatos Mine(1) | | | Measured | | | | | 5.8 | | | | | | 3.0 | | | | | | 324 | | | | | | 0.39 | | | | | | 2.9 | | | | | | 5.8 | | | | | | 0.11 | | |
| | | Indicated | | | | | 4.6 | | | | | | 2.4 | | | | | | 202 | | | | | | 0.28 | | | | | | 2.5 | | | | | | 5.2 | | | | | | 0.11 | | |
| | | M&I | | | | | 10.4 | | | | | | 5.4 | | | | | | 269 | | | | | | 0.34 | | | | | | 2.7 | | | | | | 5.5 | | | | | | 0.11 | | |
| | | Inferred | | | | | 3.7 | | | | | | 1.9 | | | | | | 107 | | | | | | 0.28 | | | | | | 2.8 | | | | | | 4.0 | | | | | | 0.14 | | |
Esther Deposit(2) | | | Indicated | | | | | 0.46 | | | | | | 0.24 | | | | | | 133 | | | | | | 0.04 | | | | | | 0.70 | | | | | | 2.10 | | | | | | 0.02 | | |
| | | Inferred | | | | | 2.29 | | | | | | 1.18 | | | | | | 98 | | | | | | 0.12 | | | | | | 1.60 | | | | | | 3.00 | | | | | | 0.05 | | |
Amapola Deposit(2) | | | Indicated | | | | | 0.25 | | | | | | 0.13 | | | | | | 135 | | | | | | 0.10 | | | | | | 0.10 | | | | | | 0.30 | | | | | | 0.02 | | |
| | | Inferred | | | | | 3.44 | | | | | | 1.77 | | | | | | 140 | | | | | | 0.10 | | | | | | 0.20 | | | | | | 0.30 | | | | | | 0.03 | | |
| | | Category | | | Tonnes (million; 100% basis) | | | Tonnes (million; 51.5% basis) | | | AgEq (g/t) | | | Ag (g/t) | | | Au (g/t) | | | Pb (%) | | | Zn (%) | | | AgEq toz (millions) | | | Ag toz (millions) | | | Au toz (thousands) | | | Pb lbs (millions) | | | Zn lbs (millions) | | ||||||||||||||||||||||||||||||||||||
Cerro Los Gatos Mine | | | Measured | | | | | 1.3 | | | | | | 0.7 | | | | | | 442 | | | | | | 181 | | | | | | 0.39 | | | | | | 2.4 | | | | | | 4.5 | | | | | | 19 | | | | | | 8 | | | | | | 16 | | | | | | 71 | | | | | | 131 | | |
| | | Indicated | | | | | 2.2 | | | | | | 1.1 | | | | | | 368 | | | | | | 139 | | | | | | 0.23 | | | | | | 2.1 | | | | | | 4.2 | | | | | | 26 | | | | | | 10 | | | | | | 17 | | | | | | 101 | | | | | | 205 | | |
| | | M&I | | | | | 3.5 | | | | | | 1.8 | | | | | | 395 | | | | | | 154 | | | | | | 0.29 | | | | | | 2.2 | | | | | | 4.3 | | | | | | 45 | | | | | | 17 | | | | | | 33 | | | | | | 172 | | | | | | 337 | | |
| | | Inferred | | | | | 3.7 | | | | | | 1.9 | | | | | | 361 | | | | | | 107 | | | | | | 0.28 | | | | | | 2.8 | | | | | | 4.0 | | | | | | 43 | | | | | | 13 | | | | | | 34 | | | | | | 231 | | | | | | 330 | | |
| | | Tonnes | | | Au (g/t) | | | Ag (g/t) | | | Pb (%) | | | Zn (%) | | |||||||||||||||
Production Statistics | | | | | 1,019,603 | | | | | | 0.42 | | | | | | 240.27 | | | | | | 2.71 | | | | | | 3.63 | | |
Modelled Reserve Depletion | | | | | 1,065,883 | | | | | | 0.47 | | | | | | 244.59 | | | | | | 1.85 | | | | | | 3.27 | | |
Zone | | | Category | | | Tonnes (millions; 100% basis) | | | Tonnes (millions; 51.5% basis) | | | Ag (g/t) | | | Au (g/t) | | | Pb (%) | | | Zn (%) | | ||||||||||||||||||
Northwest Zone | | | Proven | | | | | 2.6 | | | | | | 1.3 | | | | | | 359 | | | | | | 0.43 | | | | | | 3.09 | | | | | | 5.88 | | |
| | | Probable | | | | | 0.5 | | | | | | 0.3 | | | | | | 333 | | | | | | 0.34 | | | | | | 2.86 | | | | | | 5.88 | | |
Central Zone | | | Proven | | | | | 3.8 | | | | | | 1.9 | | | | | | 314 | | | | | | 0.31 | | | | | | 2.55 | | | | | | 5.32 | | |
| | | Probable | | | | | 1.8 | | | | | | 0.9 | | | | | | 299 | | | | | | 0.44 | | | | | | 2.32 | | | | | | 5.82 | | |
Southeast Zone | | | Proven | | | | | 0.0 | | | | | | 0.0 | | | | | | 148 | | | | | | 0.16 | | | | | | 3.69 | | | | | | 7.23 | | |
| | | Probable | | | | | 0.6 | | | | | | 0.3 | | | | | | 148 | | | | | | 0.16 | | | | | | 3.69 | | | | | | 7.23 | | |
Southeast Zone Block 2 | | | Probable | | | | | 0.4 | | | | | | 0.2 | | | | | | 118 | | | | | | 0.17 | | | | | | 3.11 | | | | | | 4.16 | | |
Total (Proven) | | | | | | | | 6.4 | | | | | | 3.3 | | | | | | 332 | | | | | | 0.36 | | | | | | 2.77 | | | | | | 5.55 | | |
Total (Probable) | | | | | | | | 3.3 | | | | | | 1.7 | | | | | | 254 | | | | | | 0.34 | | | | | | 2.74 | | | | | | 5.86 | | |
Total (Proven & Probable) | | | | | | | | 9.6 | | | | | | 5.0 | | | | | | 306 | | | | | | 0.35 | | | | | | 2.76 | | | | | | 5.65 | | |
Description | | | Unit Cost ($/meter) | | | Unit Cost ($/t-milled) | | ||||||
Mine, Surface and G&A | | | | | 26.47 | | | | | | 83.58 | | |
LOM Operating | | | | | — | | | | | | 83.58 | | |
| | | Average Grade Processed | | | | | | | | | Life-of-Mine Payable Production | | | Avg. Annual PayableProduction (51.5% basis) | | |||
| | | (100% basis) | | | (51.5% basis) | | | (100% basis) | | |||||||||
Production Statistics | | | | | | | | | | | | | | | | | | | |
Silver | | | 305 g/t | | | 72.0 Moz | | | 37.1 Moz | | | 6.5 Moz | | | 3.4 Moz | | |||
Zinc | | | 5.7% | | | 679 Mlb | | | 350 Mlb | | | 62 Mlb | | | 32 Mlb | | |||
Lead | | | 2.8% | | | 442 Mlb | | | 228 Mlb | | | 40 Mlb | | | 21 Mlb | | |||
Gold | | | 0.35 g/t | | | 45.5 Koz | | | 23.4 Koz | | | 4.1 Koz | | | 2.1 Koz | | |||
Silver Equivalent | | | 642 g/t | | | 134.7 Moz | | | 69.4 Moz | | | 12.2 Moz | | | 6.3 Moz | | |||
Life-of-Mine Cost Metrics | | | | | | | | | | | | | | | | | | | |
Total Sustaining Capital Costs | | | $ millions | | | | $ | 267 | | | | | | | | | | | |
Operating Costs | | | $/t-milled | | | | $ | 83.58 | | | | | | | | | | | |
TC / RC, Penalties and Freight Costs | | | $/mt | | | | $ | 51.90 | | | | | | | | | | | |
Royalties | | | $/mt | | | | $ | 1.50 | | | | | | | | | | | |
Life-of-Mine By-Product Costs | | | | | | | | | | | | | | | | | | | |
AISC | | | $/oz Ag | | | | $ | 5.47 | | | | | | | | | | | |
Life-of-Mine Co-Product Costs | | | | | | | | | | | | | | | | | | | |
AISC | | | $/oz AgEq | | | | $ | 11.77 | | | | | | | | | | | |
Project Economics | | | | | | | | | | | | | | | | | | | |
NPV (post-tax; 5.0%) | | | $ millions | | | | $ | 653 | | | | | | | | | | | |
Mineralized Zones | | | Length (m) | | | Ag (g/t) | | | Pb (%) | | | Zn (%) | | ||||||||||||
Boca de Leon | | | | | 2.2 | | | | | | 90.6 | | | | | | 5.0 | | | | | | 0.8 | | |
Cieneguita | | | | | 1.3 | | | | | | 62.4 | | | | | | 5.4 | | | | | | 0.9 | | |
El Lince | | | | | 4.0 | | | | | | 62.2 | | | | | | 0.0 | | | | | | 0.1 | | |
El Rodeo | | | | | 0.8 | | | | | | 61.5 | | | | | | 3.4 | | | | | | 4.0 | | |
La Paula | | | | | 4.0 | | | | | | 180.0 | | | | | | 0.1 | | | | | | 0.1 | | |
Los Torunos | | | | | 1.8 | | | | | | 34.2 | | | | | | 2.6 | | | | | | 0.9 | | |
Mezcalera | | | | | 2.0 | | | | | | 59.4 | | | | | | 0.1 | | | | | | 0.1 | | |
San Agustin | | | | | 1.3 | | | | | | 148.0 | | | | | | 1.2 | | | | | | 2.3 | | |
San Luis | | | | | 2.0 | | | | | | 271.0 | | | | | | 0.3 | | | | | | 0.1 | | |
PART II
| | | (a) | | | (b) | | | (c) | | |||||||||
Plan Category | | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | |||||||||
Equity compensation plans not approved by security holders: | | | | | — | | | | | | — | | | | | | — | | |
Equity compensation plans approved by security holders: | | | | | | | | | | | | | | | | | | | |
Equity Incentive Compensation Plan(1) | | | | | | | | | | | | | | | | | | | |
Deferred stock units(2) | | | | | 182,714 | | | | | | N/A | | | | | | | | |
Stock options(3) | | | | | 5,455,606 | | | | | $ | 12.48 | | | | | | | | |
Total for Equity Incentive Compensation Plan | | | | | 5,638,320 | | | | | $ | — | | | | | | 9,361,680 | | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data” and the other information included elsewhere in this Report.
Restatement of previously issued Consolidated Financial Statements for the correction of an understatement of Investment in affiliate and an understatement of deferred taxes assets in the combined financial statements of the LGJV
Investment in affiliates – Income Taxes
During the preparation of the 2022 annual financial statements the Company identified that the investment in affiliates and equity income in affiliates were not correct in prior periods. The Company identified that its investment in affiliate, the LGJV, did not recognize certain current and deferred tax assets and deferred tax liabilities in accordance with ASC 740, Income Taxes. As a result, the Company identified that there were errors in the calculation of the deferred tax assets related to property plant and equipment, mine development and historical net operating losses. In certain cases, the tax basis was not calculated in accordance with the Mexican tax regulations. The LGJV understated the value of the deferred tax assets at December 31, 2021, and, as a result, the investment in affiliates was understated before accounting for the impairment. In accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”), these items are treated as errors and are material to the 2021 consolidated financial statements and the three quarters ended March 31, 2022, June 30, 2022, and September 30, 2022, and, therefore, require that these consolidated financial statements be restated.
The impact of the error on the financial statements of the LGJV was (i) an increase in deferred tax assets of $8.2 million, and (ii) a decrease in the current income tax liability of $6.3 million as of December 31, 2021, (iii) a decrease in foreign exchange loss of $1.4 million, (iv) and an increase in income tax recovery of $13.1 million.
The impact of the LGJV tax errors on the Company’s financial statements for the year ended December 31, 2021, was an increase in the investment in affiliates and equity income in affiliates of $10.1 million.
Investment in affiliates – Priority distribution payment
The Company also identified that the accounting for the priority distribution payment to our partner in the LGJV was not recorded in accordance with ASC 970 –323-35, Equity Method and Joint Ventures. The priority distribution payment was required to be excluded from the initial equity income in affiliates and equity income should have been recognized after the priority distribution payment was accounted for. This is considered an error in accordance with ASC 250 and is material to the consolidated financial statements for 2021 and the three quarters ended March 31, 2022, June 30, 2022, and September 30, 2022, and, therefore, require that the consolidated financial statements be restated.
The impacts of the error described on the Company’s financial statements for the year ended December 31, 2021, was a decrease in the investment in affiliates and equity income in affiliates of $2.6 million.
Investment in affiliates – impairment
During the process of correcting the deferred tax assets and liabilities discussed above the Company identified that the fair value financial model used to calculate the impairment of the investment in affiliate overstated the amount of VAT receivable that was available to offset against future income taxes payable in Mexico. In addition, the net operating losses and future tax depreciation amounts were incorrectly calculated and the Company incorrectly included the value of future management fees receivable in the fair value calculation. These errors resulted in a decrease of $21.9 million in the fair value of the cash flows used to determine the amount of the impairment of the investment in affiliate. As a result of the changes to the timing and recognition of deferred tax assets and liabilities, the priority distribution payment accounting explained above, and the resulting impact of the basis amortization of the investment in affiliates, the book value of the investment in affiliates increased by $6.9 million. The net result was an increase in the impairment of the investment in affiliates of $28.8 million.
29
The aggregate impact of the above-noted changes, along with the increase of $0.6 million in the basis amortization of the investment in affiliates resulting from the above-noted changes on basis amortization of the investment in affiliates and other previously uncorrected immaterial misstatement to general and administrative and paid in capital ($0.6 million respectively) was (i) an increase in equity income in affiliates of $6.9 million, (ii) an increase in impairment of investment in affiliates by $28.8 million, (iii) an increase in net loss of $22.4 million, and (vi) a decrease in shareholders’ equity of $21.9 million for the year ended December 31, 2021. These adjustments related to non-cash items, accordingly there were not changes to cash flows from operations, cash flows from investing activities or cash flows from financing activities or to the cash balance for the year ended December 31, 2021.
These are considered errors in accordance with ASC 250 and are material to the consolidated financial statements for 2021 and require that the consolidated financial statements be restated. The restatement adjustments in 2021 only impacted the fourth quarter of 2021 with no impact to the first, second and third quarters of 2021 filed financial statements.
Due to these accounting errors, the Company’s management has concluded that material weaknesses in its internal controls over financial reporting existed at December 31, 2021, and through the current date. See Item 9A Controls and Procedures below for a further description on the material weaknesses.
Overview
We are a U.S.-basedCanadian headquartered, Delaware incorporated precious metals production,exploration, development and explorationproduction company with the objective of becoming a premierleading silver producer. Our primary efforts are focused on the operation of the LGJV in Chihuahua, Mexico. The LGJV was formed on January 1, 2015, when we entered into the Unanimous Omnibus Partner Agreement with Dowa to further explore, and potentially develop and operate mining properties within the LGD. The LGJV Entities own certain surface and mineral rights associated with the LGD. The LGJV ownership is currently 70% Gatos Silver and 30% Dowa. On September 1, 2019, the LGJV commenced commercial production at CLG, which produces a silver containing lead concentrate and zinc concentrate. We are currently focused on the production and continued development of the CLG and the further exploration and development of the Los Gatos District:LGD.
2021 Key Highlights (LGJV at 100% Basis)
● | LGJV revenues totaled $249.2 million for 2021, a 105% increase over 2020 as a result of higher throughput, higher average realized metal prices, higher silver grades and metal recovery; |
● | Achieved strong metal recoveries at CLG with silver recovery averaging 88.3%, zinc recovery averaging 62.9% and lead recovery averaging 87.6%; |
● | Achieved processing throughput of 909,586 tonnes, averaging 2,492 tpd and exceeding the 2,500 tpd design capacity at the CLG for the last three quarters of 2021; |
● | Silver ounces produced increased by 81% to 7.6 million ounces; however, cost sales only increased 50% as a result of the increase in production during 2021. By-product cash operating cost per ounce of payable silver was $4.98 in 2021 compared to $14.48 in 2020. CLG co-product AISC per ounce of payable silver equivalent reduced 25% to $19.05 and by-product AISC per ounce of payable silver reduced 47% to $15.72. The changes were primarily due to increased metal production as a result of higher-grade ore mined and higher mill throughput. See “Non GAAP Financial Measures” below; |
● | Repurchased an additional 18.5% interest in the LGJV, increasing the Company’s LGJV interest to 70%; |
● | Extinguished the $60 million LGJV WCF of which Gatos Silver’s pro-rata portion was $42 million; |
● | Retired the LGJV’s Term Loan of which Gatos Silver’s 70% portion and related costs was $155.9 million; |
● | Raised net proceeds of $118.9 million in a follow-on public offering and secured a $50 million Credit Facility; |
● | Managed COVID-19 prevention effectively at CLG; |
30
● | Implemented physical and mental health initiatives in the community and continued community infrastructure support to secure our current strong foundation for solid operating performance and community engagement; |
● | Advanced definition drilling at CLG with six drills in operation as of December 31, 2021; and |
● | Recorded an other-than-temporary impairment totaling $80.3 million (restated) of its investment in affiliates. |
Components of Results of Operations
Operating Expenses
Exploration Expenses
We conduct exploration activities under mining concessions in Mexico. We expect exploration expenses to increase significantly as we continue to expand our exploration activities at the Los Gatos DistrictLGD and our other exploration properties. Exploration expenses primarily consist of drilling costs, lease concession payments, assay costs and other geological and support costs at our exploration properties.
General and Administrative Expenses
Our general and administrative expenses consist of salaries and benefits, stock compensation, professional and consultant fees, insurance and other general administration costs. Our general and administrative expenses are expected to increase significantly as we operate as a public company. We expect higher costs related to salaries, benefits, stock compensation, legal fees, compliance and corporate governance, accounting and audit expenses, stock exchange listing fees, transfer agent and other stockholder-related fees, directors’ and officers’ and other insurance costs, and other administrative costs. We arewere party to a Management Services Agreement with SOP,Silver Opportunity Partners Corporation (“SOP”) which was renamed to Sunshine Silver Mining & Refining Corporation (“SSMRC”), pursuant to which we provideprovided certain executive and managerial advisory services to SOP. SOP reimbursesSSMRC. SSMRC reimbursed us for costs of providing such services.
Equity LossIncome (Loss) in Affiliates
Our equity lossincome (loss) in affiliates relates to our proportional share of net lossincome (loss) incurred from the LGJV and the amortization of the basis difference between our investment in the LGJV and the net assets of the LGJV.
Impairment of Investment in Affiliates
A loss in value of an investment that is other than a temporary decline shall be recognized. On November 10, 2022, the Company issued an updated technical report for the LGJV, the Los Gatos Technical Report. The Los Gatos Technical Report indicated a significant decrease in the mineral reserves and mineral resources from the previously issued technical report in 2020. The Company considered this reduction in the mineral reserve and mineral resources as an indicator of a possible other-than-temporary decline in value and as a result compared the carrying value of the LGJV on December 31, 2021, to the fair value of the LGJV. The fair value of the LGJV was estimated based on the net present value of the expected cash flows attributable to the Company from the LGJV. The discount rate used was 5.00%.
LGJV Arrangement Fee
Our LGJV arrangement fee consistsconsisted of arrangement fees related to the WCF and the Term Loan with Dowa prior to their extinguishment on March 11, 2021, and the WCF.July 26, 2021, respectively. The arrangement fees arewere based on a fixed 2%1% and 15% ratesrate for the Term Loan and the WCF, respectively, and 70% of the outstanding principal of the respective facility. These arrangement fees arewere solely our responsibility. On March 11, 2021, the WCF was extinguished and thus we doWe did not expect to incur LGJV arrangement fees in future periods with respect tobeyond July 26, 2021, on the WCF but will continue to incur LGJV arrangement fees with respect to theor Term Loan as long as such loan remains outstanding.
Income Taxes
As we have incurred substantial losses from our exploration and pre-development activities, we may receive furtherfuture benefits in the form of deferred tax assets that can reduce our future income tax liabilities, if
31
statements and have fully reserved for such net deferred tax assets, as we believe it is more likely than not that the full benefit of these net deferred tax assets will not be realized before expiration.
Royalties
Exploration activities are conducted on the Los Gatos District mining concessions in Mexico. Mineral and concession lease payments are required to be paid to various entities to secure the appropriate claims or surface rights. Certain of these agreements also have royalty payments that were triggered when we began producing and selling metal-bearing concentrate.
Results of Operations
Results of operations Gatos Silver
The following table presents certain information relating to our operating results and discontinued SOP operations for the years ended December 31, 20202021 and 2019.2020. In accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), these financial results represent the restated consolidated results of operations of our Company and its subsidiaries (in thousands). See Note 12 — Discontinued Operations in our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for additional information.
| | | Year Ended December 31, | | |||||||||
| | | 2020 | | | 2019 | | ||||||
Expenses | | | | | | | | | | | | | |
Exploration | | | | $ | 785 | | | | | $ | 923 | | |
General and administrative | | | | | 7,765 | | | | | | 2,903 | | |
Amortization | | | | | 30 | | | | | | 34 | | |
Total expenses | | | | | 8,580 | | | | | | 3,860 | | |
Other expense (income) | | | | | | | | | | | | | |
Dilution loss in affiliates | | | | | — | | | | | | 11,231 | | |
Equity loss in affiliates | | | | | 17,585 | | | | | | 12,865 | | |
Arrangement fees | | | | | 4,843 | | | | | | 2,988 | | |
Interest expense | | | | | 4,047 | | | | | | — | | |
Other income | | | | | (28) | | | | | | (36) | | |
Net other expense | | | | | 26,447 | | | | | | 27,048 | | |
Net loss from continuing operations | | | | $ | 35,027 | | | | | $ | 30,908 | | |
Loss from discontinued operations | | | | | 5,414 | | | | | | 6,910 | | |
Net loss | | | | $ | 40,441 | | | | | $ | 37,818 | | |
| | | | | | |
| | Years Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (restated) | | | | |
Expenses | | |
| | |
|
Exploration | | $ | 1,657 | | $ | 785 |
General and administrative | |
| 21,447 | |
| 7,765 |
Amortization | |
| 89 | |
| 30 |
Total expenses | |
| 23,193 | |
| 8,580 |
Other income (expense) | |
|
| |
|
|
Equity income (loss) in affiliates | |
| 42,804 | |
| (17,585) |
Impairment of investment in affiliates | | | (80,348) | | | — |
Arrangement fees | |
| (195) | |
| (4,843) |
Interest expense | |
| (185) | |
| (4,047) |
Other (expense) income | |
| (4,738) | |
| 28 |
Total other expense | |
| (42,662) | |
| (26,447) |
Net loss from continuing operations | | $ | (65,855) | | $ | (35,027) |
Net loss from discontinued operations | |
| — | |
| (5,414) |
Net loss | | $ | (65,855) | | $ | (40,441) |
Gatos Silver
Year Ended December 31, 20202021, Compared to Year Ended December 31, 2019
Exploration
Exploration costs incurred during 2021 increased approximately $0.9 million from Continuing Operations
General and administrative expenses
During 2021, we incurred general and administration expense of $21.4 million (restated) compared to $7.8 million in 2020. The $13.6 million increase is due to higher corporate expenditures related to public company governance and reporting requirements and increased stock-based compensation expense incurred during the year ended December 31, 2020, we experienced2021. The Company also incurs expenses related to providing management and administration services to the LGJV, for which it receives a management fee, included in Other Income ($5.0 million for the year ended December 31, 2021).
Equity income (loss) in affiliates
32
The improvement in equity income (loss), for the year ended December 31, 2021, resulted primarily from the increase in our ownership in the LGJV from 51.5% to 70.0% on March 11, 2021, resulting in a larger component of the net loss from continuing operationsincome of $35,027 thousandthe investment in affiliates being recognized by the Company. In addition, during 2021 the LGJV recorded net income of $78.6 million (restated) compared to a net loss of $30,908 thousand$27.7 million in 2020, as a result the equity income in affiliates recorded during 2021 increased. The increase in net income at the LGJV was primarily due to the increase in concentrate sold and higher realized metals prices for the year ended December 31, 2019. The $4,119 thousand increase2021, compared to the year ended December 31, 2020. Concentrate production increased in net loss from continuing operations was primarily attributable2021 due to an increase inmining and processing activities operating expenses. General and administrative expense increased to $7,765 thousandnear design throughput for the year ended December 31, 2020,2021, compared to $2,903 thousand forthe ramp-up to design throughput during the year ended December 31, 2019, primarily due to higher costs associated with becoming a publicly traded company with higher legal and consulting costs, additional personnel, higher directors fees, increased directors and officers insurance premiums and increased stock-based compensation expense related to the offering.
Impairment of investment in affiliate
On November 10, 2022, we provided an updated technical report for the LGJV, the Los Gatos Technical Report. The Los Gatos Technical Report indicated a significant decrease in the mineral reserve and mineral resource from Discontinued Operations
The fair value of the LGJV was estimated based on the net present value of the expected cash flows attributable to the Company from discontinued operations decreasedthe LGJV. The discount rate used was 5.00%. The fair value of the investment in the LGJV was estimated to $5,414 thousandbe $333.5 million (restated) and the carrying value at December 31, 2021 was $413.8 million. Since the carrying value exceeded the fair value a non-cash impairment charge of $80.3 million was recorded during the fourth quarter of 2021. There was no impairment recorded for the year ended December 31, 20202020.
Other (expense) income
Other loss of $4.7 million in 2021 primarily consists of the $10.0 million fee paid to Dowa, offset by a $5.0 million management fee received from $6,910 thousandthe LGJV.
Net loss
For the year ended December 31, 2021, we recorded a net loss from continuing operations of $65.9 million (restated) compared to a net loss from continuing operations of $35.0 million for the year ended December 31, 2019. Our fiscal2020. In addition to the items listed above the net loss for 2021 was also impacted by a $10.0 million fee paid to Dowa, the $4.6 million decrease in LGJV arrangement fees due to lower outstanding balances on the WCF and Term Loan extinguished in 2021, and the $4.0 million non-recurring interest expense in 2020 results includeassociated with the SOP operations through October 30, 2020, the effective dateconvertible note that was converted to capital stock as part of the Reorganization. AsIPO.
33
Results of operations LGJV
The following table presents operational information and select restated financial information of the LGJV for years ended December 31, 2021 and 2020. The financial information is extracted from the Combined Statements of Income (Loss) for the years ended December 31, 2021 and 2020. The financial and operational information of the LGJV and CLG is shown on a result, the 2020 results reflect only 10 months (83%) of discontinued SOP operations.
| | | | | | | |
| | | Year Ended |
| |||
Financial | | | December 31, |
| |||
Amounts in thousands |
|
| 2021 |
|
| 2020 | |
Revenue |
| $ | 249,194 |
| $ | 121,470 | |
Cost of sales | | | 97,710 | | | 65,005 | |
Royalties | | | 4,781 | | | 2,148 | |
Exploration | | | 5,383 | | | 841 | |
General and administrative | | | 13,345 | | | 9,718 | |
Depreciation, depletion and amortization | | | 52,402 | | | 44,904 | |
Other | | | — | | | 3,416 | |
Total other expense | | | (12,086) | | | (23,154) | |
Income tax recovery (restated) | | | 15,097 | | | — | |
Net income (loss) (restated) |
| $ | 78,584 |
| $ | (27,716) | |
Operating Results | | | | | | | |
Tonnes milled (dmt) | | | 909,586 | | | 667,422 | |
Tonnes milled per day (dmt) | | | 2,492 | | | 1,829 | |
Average Grades | | | | | | | |
Silver grade (g/t) | | | 295 | | | 229 | |
Gold grade (g/t) | | | 0.32 | | | 0.42 | |
Lead grade (%) | | | 2.27 | | | 2.27 | |
Zinc grade (%) | | | 3.94 | | | 3.64 | |
Contained Metal | | | | | | | |
Silver ounces (millions) | | | 7.6 | | | 4.2 | |
Zinc pounds - in zinc conc. (millions) | | | 49.6 | | | 34.2 | |
Lead pounds - in lead conc. (millions) | | | 39.8 | | | 27.4 | |
Gold ounces - in lead conc. (thousands) | | | 5.2 | | | 4.9 | |
Recoveries 1 | | | | | | | |
Silver - in both lead and zinc concentrates | | | 88.3 | % | | 84.1 | % |
Zinc - in zinc concentrate | | | 62.9 | % | | 63.0 | % |
Lead - in lead concentrate | | | 87.6 | % | | 82.3 | % |
Gold - in lead concentrate | | | 56.3 | % | | 55.4 | % |
Average realized price per silver ounce |
| $ | 24.38 |
| $ | 19.97 | |
Average realized price per gold ounce |
| $ | 1,761 |
| $ | 1,709 | |
Average realized price per lead pound |
| $ | 1.01 |
| $ | 0.83 | |
Average realized price per zinc pound |
| $ | 1.38 |
| $ | 1.03 | |
Co-product AISC per ounce of payable silver equivalent2 |
| $ | 19.05 |
| $ | 25.34 | |
By-product AISC per ounce of payable silver2 |
| $ | 15.72 |
| $ | 29.82 | |
(1) | Recoveries are reported for payable metals in the identified concentrate. Recoveries reported previously were based on total metal in both concentrates. |
(2) | See “Non-GAAP Financial Measures” below. |
34
LGJV
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Revenue
Revenue increased by 105% in 2021 compared to 2020, as a result of the continued ramp-up in production during 2021 and an increase in realized metal prices. Lead and zinc concentrate production increased 45% and 45% respectively, and realized silver, zinc and lead prices increased 22%, 34% and 22%, respectively. Silver and zinc ore grades increased 29% and 8%, respectively.
Cost of sales
Cost of sales increased by 50% primarily as a result of the increase in production and higher input costs due to cost inflation. Production during 2020 was impacted by the COVID-19 pandemic whereas the LGJV incurred certain fixed costs during the April through May 2020 temporary suspension and the related ramp-up periods. Co- product AISC per ounce of payable silver equivalent and by-product AISC per ounce of decreased by 25% and 47% respectively, to $19.05 and 15.72, respectively, for the year ended 2021.
Royalties
Royalty expense increased by $2.6 million in 2021 due to the increase in metal prices and increase in metal production during the year ended December 31, 2021.
Exploration
Exploration expense of $5.4 million in 2021 related to work performed to expand resources throughout the LGD.
General and Administrative
General and administrative expense for 2021 were 37% higher than in 2020, During 2020 the LGJV reduced the headcount of general and administrative personnel to limit the spread of COVID-19 resulting in lower general and administrative expenditures. During 2021 headcount was increased to normal levels. In addition, general and administrative costs were higher in 2021 due to higher insurance costs, and increased COVID-19 preventative costs.
Depreciation, depletion and amortization
Depreciation, depletion, and amortization expense increased by approximately 17% year over year primarily as a result of an increase in tonnes mined and also due to the decrease in the mineral reserve and the shorter mine life based on the Los Gatos Technical Report. The lower mineral reserve tonnes and shorter LOM reduced the basis for the depreciation and as a result increased the depreciation, depletion, and amortization expense incurred in 2021.
Other expense
Other expense decreased primarily due to a 48% decrease in interest expense due to lower interest rates, lower borrowings and lower arrangement fees incurred during 2021 compared to 2020 as a result of the retirement of the WCF and the Term Loan.
Income tax recovery
In 2021, the LGJV recognized an income tax recovery due to the release of the full valuation allowance on its deferred tax assets.
35
Net Income (loss)
For the year ended December 31, 2021, the LGJV had net income of $78.6 million (restated) compared to a net loss of $27.7 million for the year ended December 31, 2020. The change in net income (loss) was primarily due to the significant increase in revenue driven by the strong improvement in production during 2021, partially offset by an increase in cost of sales, royalties, depreciation depletion and amortization, royalty expense, and general and administrative expense. In addition, interest expense decreased 56% due to lower interest rates, lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan and the LGJV recognized an income tax benefit due to the release of the full valuation allowance and an increase in income tax benefit in the current year.
Cash Flows
Gatos Silver
The following table presents our cash flows for the years ended December 31, 2021 and 2020.
| | | | | | |
| | Years Ended December 31, | ||||
| | 2021 | | 2020 | ||
Net cash provided by (used by) |
| |
|
| |
|
Operating activities | | $ | (21,485) | | $ | (18,388) |
Investing activities | |
| (261,439) | |
| (12,129) |
Financing activities | |
| 139,394 | |
| 172,464 |
Total change in cash | | $ | (143,530) | | $ | 141,947 |
Cash used by operating activities was $21.5 million and $18.4 million for the years ended December 31, 2021 and 2020, respectively. The $3.1 million increase in cash usage was primarily due to a $10.0 million fee paid to Dowa and higher general and administrative costs, partially offset by favorable working capital changes from operations and discontinued operations spun off in October 2020.
Cash used by investing activities was $261.4 million and $12.1 million for the years ended December 31, 2021 and 2020, respectively. The $249.3 million increase was primarily due to the $144.8 million capital contribution to the LGJV used to extinguish our 70% share of the Term Loan repayment in July 2021, the $71.6 million acquisition of the 18.5% interest in the LGJV from Dowa in March 2021 and the $42 million pro-rata capital contribution to the LGJV for the extinguishment of the WCF in March 2021.
Cash provided by financing activities was $139.4 million and $172.5 million for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021, cash provided by financing activities primarily reflected the $121.0 million in net proceeds from the issuance of common stock in a follow-on public offering and the $13.0 million in borrowings under the Credit Facility. For the year ended December 31, 2020, cash provided by financing activities primarily reflected the $160.4 million in net proceeds from the issuance of common stock in the IPO and the $15.0 million in proceeds from related party borrowings.
LGJV
The following table presents summarized information relating to the LGJV’s cash flows for years ended December 31, 2021 and 2020.
| | | | | | |
|
| Years Ended December 31, | ||||
| | 2021 | | 2020 | ||
Net cash provided by (used by) | |
| | |
| |
Operating activities | | $ | 119,787 | | $ | 47,872 |
Investing activities | |
| (79,045) | |
| (64,436) |
Financing activities | | | (22,138) | | | 16,938 |
Total change in cash | | $ | 18,604 | | $ | 374 |
Cash provided by operating activities was $119.8 million and $47.9 million for the years ended December 31, 2021 and 2020, respectively. The $71.9 million increase in cash provided by operating activities was primarily due to the increase in revenue
36
due to higher metals prices, higher processed ore tonnes and higher ore grades for the year ended December 31, 2021, compared to the prior year period, partially offset by increased receivables from customers.
Cash used by investing activities was $79.0 million and $64.4 million for the years ended December 31, 2021 and 2020, respectively. The $14.6 million increase in cash used was primarily due to higher expenditures for property, plant and equipment and mine development.
Cash used by financing activities was $22.1 million for the year ended December 31, 2021 and cash provided by financing activities was $16.9 million for the year ended December 31, 2020. The $39.1 million change in financing cash flows was primarily due to the $144.8 million retirement of the Term Loan in July 2021, the $60 million extinguishment of the WCF in March 2021, and the $15.9 million Term Loan payment in June 2021, partially offset by the $207.2 million of capital contributions in 2021 and the proceeds from the $18.9 million related party loans to the LGJV during the year ended December 31, 2020.
Liquidity and Capital Resources
As of December 31, 2021, and December 31, 2019,2020, we had cash and cash equivalents of $150,146 thousand$6.6 million and $8,581 thousand,$150.1 million, respectively. The increasedecrease in cash and cash equivalents was primarily due to net proceeds from the IPO and from the issuanceour $71.6 million repurchase of the convertible notes, described below,18.5% interest in the LGJV from Dowa, the $42.0 million capital contribution to the LGJV used to extinguish our 70% share of the WCF, the $144.8 million capital contribution to the LGJV used to extinguish our 70% share of the Term Loan repayment, and a $10.0 million fee paid to Dowa; partially offset by increased financing costsnet proceeds of $118.9 million from the July 2021 follow-on public offering and higher administrative costs from being$13.0 million borrowing under the Credit Facility. As a publicly listed company. Asresult of December 31, 2020, and December 31, 2019, we had working capital of $151,728 thousand and $14,990 thousand, respectively. The increase in working capital was primarily due to the higher cash and cash equivalents and an increase in prepaid expenses, partially offset by converting related-party receivables to capital contributions18.5% repurchase, our ownership in the LGJV increased to 70% and a decrease in deferred financing costs.
Sources and Uses of Capital Resources
On April 20, 2020, we entered into a convertible note purchase agreement with Electrum Silver US LLC, which was subsequently amended. The outstanding principal amount of the convertible notes and any accrued but unpaid interest was due and payable on April 19, 2023 unless converted into shares ofMarch 11, 2021, using proceeds from our common stock in a qualified financing. However, any conversion of the convertible notes into equity securities as described above was deemed a repayment of the convertible notes so converted. The convertible notes bore interest at a rate of 5.00% per annum, compounding annually. From April 20, 2020 to September 21, 2020, we issued $15,000 thousand aggregate principal amount of convertible notes. In connection with the closing of the IPOinitial public offering on October 30, 2020, we converted all of the outstanding principal amount of the convertible notes plus $187 thousand in accrued and unpaid interest into an aggregate of 2,712,003 shares of common stock.
On July 19, 2021, we completed a public offering of 8,930,000 shares of common stock at a price of $14.00 per share, resulting in net proceeds of $118.9 million, after deducting underwriting discounts and commissions. On August 18, 2021, the Company issued an additional 286,962 shares of common stock at a price of $14.00 per share, through the exercise of the $60,000 thousand WCFover-allotment option, with net proceeds from the additional issuance of $3.8 million, after deducting underwriting discounts and commissions. Additionally, the Company incurred $1.7 million in other costs related to the offering.
On July 12, 2021, the Company entered into the Credit Facility that provides for $42,000 thousand.
On July 26, 2021, the LGJV repaid all amounts owed to Dowa under the Term Loan. To fund its 70% portion of the Term Loan repayment, the Company loaned $144.8 million to the LGJV. This loan was converted into a capital contribution to the LGJV on July 26, 2021.
On May 31, 2023, our cash and cash equivalents are $10.5 million and we have $41 million available to be drawn under the Credit Facility; and the LGJV has cash and cash equivalents of $78.9 million. We believe we have sufficient cash and access to borrowings and other resources to carry out our business plans for at least the next 12 months. We are focused on our forward-looking liquidity needs. We are evaluating our ongoing fixed cost structure as well as decisions related to project retention, advancement and development. We will likely be required to raise capital or take other measures to fund future exploration and development. Significant development activities, if warranted, will require that we arrange for financing in advance of planned expenditures. In addition, we expect to continuemay decide to increase our current financial resources with external financings as long asif our long-term business needs require us to do so.so however there can be no assurance that the financing will be available to us on acceptable terms, or at all. We manage liquidity risk through our credit facility and the management of our capital structure.
We may be required to provide funds to the LGJV to support operations at the CLG which, depending upon the circumstances, may be in the form of equity, various forms of debt, joint venture funding or some combination thereof. There can be no assurance that additional funds will be available to us on acceptable terms, or at all. If we raise additional funds by issuing equity or
37
convertible debt securities, substantial dilution to existing stockholders may result. Additionally, if we raise additional funds by incurring new debt obligations, the terms of the debt may require significant cash payment obligations, as well as covenants and specific financial ratios that may restrict our ability to operate our business.
Indebtedness and Lines of Credit
We guaranteed 70.0% of the Term Loan and the WCF (prior to the repayment on July 26, 2021, and March 11, 2021, respectively, as discussed further below). We guarantee the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of December 31, 2020.2021, the LGJV had $6.0 million outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $14 thousand, with varying maturity dates through August 2023. We had certain arrangement fee obligations related to the CLG as detailed in the “LGJV Arrangement Fee” above.
On July 12, 2021, the Company entered into the Credit Facility that provides for a $50.0 million revolving line of credit with an accordion feature, which allowed at the time, for an increase in the total line of credit up to $100.0 million, subject to certain conditions. The Credit Facility maturity date was on July 31, 2024. The Credit Facility contains affirmative and negative covenants that are customary for credit agreements of this nature. The affirmative covenants consist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, among other things, limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. Obligations under the Credit Facility may be accelerated upon the occurrence of certain customary events of default. Loans under the Credit Facility bear interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% or the U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined in accordance with a pricing grid based upon the Company’s consolidated net leverage ratio as of the end of the applicable period.
On July 19, 2021, we borrowed $13.0 million under the Credit Facility at a rate of LIBOR plus 3%. As of December 31, 2020,2021, $13.0 million remained outstanding under the approximate ownershipCredit Facility. On December 19, 2022, we made a $4.0 million repayment. The current balance outstanding on the Credit Facility is $9.0 million, as of March 20, 2023.
On March 7, 2022, we amended the Credit Facility with the lender, BMO, to address potential loan covenant deficiencies. The amendment included the following revisions:
● | the credit limit was reduced to $30.0 million, until we deliver a new LOM CLG financial model with updated mineral reserves; |
● | upon assessment of the new CLG financial model, BMO, in its sole discretion, may increase the credit limit up to the original $50.0 million; |
● | requirement to provide updated financial projections for the CLG by September 30, 2022. The financial projections were provided by the required date, and it was used as the basis for the amendment entered into on December 19, 2022 discussed below; and |
● | waivers of certain defaults, events of default, representations and warranties and covenants arising out of the facts that led to the potential reduction in metal content of the previously stated mineral reserve figures. |
On December 19, 2022, we entered an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of $50.0 million, with an accordion feature providing up to an additional $25.0 million. Key terms of the LGJV entities was 51.5% in favoramended Credit Facility include:
● | $50.0 million revolving line of credit with an accordion feature, which allows for an increase in the total line of credit up to $75.0 million, subject to certain conditions; |
● | The maturity date was extended from July 31, 2024 to December 31, 2025; |
● | A change in the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”); and |
● | Loans under the Revolver bear interest at a rate equal to either a term SOFR rate plus a margin ranging from 3.00% to 4.00% or a U.S. base rate plus a margin ranging from 2.00% to 3.00%, at our option. |
38
The Credit Facility contains affirmative and negative covenants that are customary for agreements of this nature. The affirmative covenants require the Company to comply, at all times, with, among other things, a Leverage Ratio not greater than 3.00 to 1.00, with EBITDA calculated upon a trailing four fiscal quarter period, a liquidity covenant not less than $20.0 million and 48.5% in favor of Dowa.
Dowa Debt Agreements
Dowa Term Loan
On July 11, 2017, we entered into the Term Loan with the LGJV and Dowa, whereby the LGJV could borrow up to $210,000 thousand$210.0 million to finance the development of the Los Gatos project, with a maturity date of December 29, 2027. Interest accruesaccrued daily at LIBOR plus 2.35% per annum, and the interest was added to the amount borrowed until production commenced at the Los Gatos project. The LGJV iswas obligated to pay 14 consecutive semi-annual payments totaling the aggregate principal amount and capitalized interest beginning June 30, 2021, with payments made two business days prior to the end of each June and December. We guaranteeguaranteed 70.0% of the Term Loan and arewere required to pay an arrangement fee on the borrowing, calculated as 2% per annum on 70% of the outstanding principal balance, payable in semi-annual installments. The
On July 26, 2021, the LGJV repaid all amounts owed to Dowa under the Term Loan. To fund its 70% portion of the Term Loan contains affirmative and negative covenants reasonably customary for similar facilities, with whichrepayment, the Company loaned $144.8 million to the LGJV. This loan was converted into a capital contribution to the LGJV is in compliance in all material respects ason July 26, 2021. Dowa’s 30% portion of December 31, 2020.
Los Gatos Working Capital Facility
On May 30, 2019, we entered into the WCF with the LGJV and Dowa, under which Dowa agreed to provide a maximum of $60,000 thousand$60.0 million for the benefit of the LGJV, with a maturity date of June 28, 2021. The interest under the WCF was LIBOR plus 3% per annum and was payable by the LGJV. We guaranteed 70% of this facility and were required to pay an arrangement fee on the borrowing, calculated as 15.0% per annum on 70.0% of the average daily principal amount outstanding during the relevant fiscal quarter. The WCF contained affirmative and negative covenants reasonably customary for similar facilities, with which the LGJV was in compliance in all material respects as of December 31, 2020. The full principal amount of the WCF was drawn down by the LGJV as of September 2019. On March 11, 2021, the WCF was extinguished.
| | | Year Ended December 31, | | |||||||||
| | | 2020 | | | 2019 | | ||||||
| | | (in thousands) | | |||||||||
Net cash provided by (used by) | | | | | | | | | | | | | |
Operating activities from continuing operations | | | | $ | (18,388) | | | | | $ | (12,295) | | |
Investing activities from continuing operations | | | | | (12,129) | | | | | | (21,905) | | |
Financing activities from continuing operations | | | | | 172,464 | | | | | | 39,828 | | |
Total change in cash | | | | $ | 141,947 | | | | | $ | 5,628 | | |
Contractual Obligations
We and the $15,000 thousand in proceeds from the sale of convertible notes in 2020, partially offset by an increase in deferred financing costs in 2020.
| | | December 31, 2020 | | | December 31, 2019 | | ||||||
ASSETS | | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | | |
Cash and cash equivalents | | | | $ | 1,676 | | | | | $ | 1,302 | | |
Receivables | | | | | 3,988 | | | | | | 5,655 | | |
Inventories | | | | | 10,315 | | | | | | 11,374 | | |
VAT receivable | | | | | 50,732 | | | | | | 50,184 | | |
Other current assets | | | | | 2,891 | | | | | | 1,672 | | |
Total current assets | | | | | 69,602 | | | | | | 70,187 | | |
Non-Current Assets | | | | | | | | | | | | | |
Mine development, net | | | | | 202,874 | | | | | | 182,602 | | |
Property, plant and equipment, net | | | | | 196,942 | | | | | | 216,131 | | |
Total non-current assets | | | | | 399,816 | | | | | | 398,733 | | |
Total Assets | | | | $ | 469,418 | | | | | $ | 468,920 | | |
LIABILITIES AND OWNERS’ CAPITAL | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | | $ | 35,767 | | | | | $ | 43,287 | | |
Related party payable | | | | | 1,703 | | | | | | 6,875 | | |
Accrued interest | | | | | 101 | | | | | | 885 | | |
Unearned revenue | | | | | 3,276 | | | | | | — | | |
Equipment loans | | | | | 7,084 | | | | | | 6,948 | | |
Dowa Term Loan | | | | | 31,826 | | | | | | — | | |
Working Capital Facility | | | | | 60,000 | | | | | | — | | |
Total current liabilities | | | | | 139,757 | | | | | | 57,995 | | |
Non-Current Liabilities | | | | | | | | | | | | | |
Dowa Term Loan | | | | | 187,767 | | | | | | 217,796 | | |
Working Capital Facility | | | | | — | | | | | | 60,000 | | |
Equipment loans | | | | | 6,120 | | | | | | 12,916 | | |
Reclamation obligations | | | | | 12,162 | | | | | | 11,314 | | |
Total non-current liabilities | | | | | 206,049 | | | | | | 302,026 | | |
Owners’ Capital | | | | | | | | | | | | | |
Capital contributions | | | | | 271,368 | | | | | | 237,905 | | |
Paid-in capital | | | | | 16,366 | | | | | | 7,400 | | |
Accumulated deficit | | | | | (164,122) | | | | | | (136,406) | | |
Total owners’ capital | | | | | 123,612 | | | | | | 108,899 | | |
Total Liabilities and Owners’ Capital | | | | $ | 469,418 | | | | | $ | 468,920 | | |
| | | Twelve Months Ended December 31, | | |||||||||
| | | 2020 | | | 2019 | | ||||||
Sales | | | | $ | 121,470 | | | | | $ | 36,508 | | |
Expenses | | | | | | | | | | | | | |
Cost of sales | | | | | 65,005 | | | | | | 30,339 | | |
Royalties | | | | | 2,148 | | | | | | 184 | | |
Exploration | | | | | 841 | | | | | | 208 | | |
General and administrative | | | | | 9,718 | | | | | | 2,587 | | |
Depreciation, depletion and amortization | | | | | 44,904 | | | | | | 15,460 | | |
Other | | | | | 3,416 | | | | | | — | | |
| | | | | 126,032 | | | | | | 48,778 | | |
Other (income) expense | | | | | | | | | | | | | |
Interest expense | | | | | 12,484 | | | | | | 5,107 | | |
Arrangement fee | | | | | 8,888 | | | | | | 3,524 | | |
Accretion expense | | | | | 849 | | | | | | 789 | | |
Other (income) expense | | | | | (109) | | | | | | 239 | | |
Foreign exchange loss | | | | | 1,042 | | | | | | 174 | | |
| | | | | 23,154 | | | | | | 9,833 | | |
Net Loss | | | | $ | (27,716) | | | | | $ | (22,103) | | |
| | | Twelve Months Ended December 31, | | |||||||||
| | | 2020 | | | 2019 | | ||||||
Net cash provided by (used by) | | | | | | | | | | | | | |
Operating activities | | | | $ | 47,872 | | | | | $ | (16,008) | | |
Investing activities | | | | | (64,436) | | | | | | (123,078) | | |
Financing activities | | | | | 16,938 | | | | | | 129,157 | | |
Total change in cash | | | | $ | 374 | | | | | $ | (9,929) | | |
Critical Accounting Policies
Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability or expense that is being reported. For a discussion of recent accounting pronouncements, see Note 2 —- Summary of Significant Accounting Policies in the notes to the consolidated financial statements.
39
Equity Method Investment
We account for our investment in affiliates using the equity method of accounting whereby, after valuing the initial investment, we recognize our proportional share of results of operations of the affiliate in itsour consolidated financial statements. EquityThe value of equity method investments are reviewed periodically foradjusted if it is determined that there is an other-than-temporary decline in value. The Company reviews equity method investments for an other-than-temporary decline in value when events or circumstances indicate that a decline in the fair value of the investment below its carrying value is other-than-temporary. Our investment in the LGJV is presented as investment in affiliates in the consolidated balance sheet. The difference between the carrying amount of the investment in affiliates and our equity in the LGJV’s net assets is due to value of mineral resources at MPR. We incurhave historically incurred certain costs on behalf of the LGJV, primarily related to a project development loan arrangement fee.fee, and may incur such fees from time to time in the future. Our proportional
Mineral Properties and Carrying Value of Long-Lived Assets
Mineral property acquisition costs are recorded at cost and are deferred until the viability of the property is determined. Exploration, mineral property evaluation, option payments, related acquisition costs for mineral properties acquired under option agreements, general overhead, administrative and holding costs to maintain a property on a care and maintenance basis are expensed in the period they are incurred. When proven and probable mineral reserves are determined for a property, subsequent development costs on the property are capitalized. If a project were to be put into production, capitalized development costs would be depleted on the units of production basis determined by the proven and probable mineral reserves for that project.
Existing proven and probable mineral reserves and value beyond proven and probable mineral reserves, including mineralization other than proven and probable mineral reserves and other material that is not part of the measured, indicated or inferred resource base, are included when determining the fair value of mine site reporting units at acquisition and, subsequently, in determining whether the assets are impaired. The term “recoverable minerals” refers to the estimated amount of silver and other commodities that will be obtained after taking into account losses during mining, mineral resources processing and treatment and ultimate sale. Estimates of recoverable minerals from such exploration-stage mineral interests are risk-adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. We review and evaluate our long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on estimated quantities of recoverable minerals, expected silver and other commodity prices (considering current and historical prices, trends and related factors), production levels, operating costs, capital requirements and reclamation costs, all based on LOM plans. No impairment tests have been required during the periods presented.
Various factors could impact our ability to achieve our forecasted production schedules from proven and probable mineral reserves. Additionally, production, capital and reclamation costs could differ from the assumptions used in the cash flow models used to assess impairment. The ability to achieve the estimated quantities of recoverable minerals from exploration-stage mineral interests involves further risks in addition to those factors applicable to mineral interests where proven and probable mineral reserves have been identified, due to the lower level of confidence that the identified mineral resources could ultimately be mined economically. Assets classified as exploration potential have the highest level of risk that the carrying value of the asset can be ultimately realized, due to the still lower level of geological confidence and economic modeling.
Income and Mining Taxes
We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows and the application of existing tax laws in the United States and Mexico. Refer to “— Critical”Critical Accounting Policies —- Mineral Properties and Carrying Value of Long-Lived Assets” above for a discussion of the factors that could cause future cash flows to differ from estimates. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize deferred tax assets recorded at the balance sheet date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which we operate could limit our ability to obtain the future tax benefits represented by our deferred tax assets recorded at the reporting date.
40
Our properties involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal,
Common Stock Valuation
Prior to October 2020 we estimated the fair value of our common stock in 2019, and prior to October 2020, based on resource multiples, discounted cash flows, comparable property values, comparable public company equity values, changes in comparable public company equity values, and a discount for a lack of marketability. Prior to the IPO, based on this market data, the corresponding fair value of our common stock was used in valuing the options and DSUs granted in 2019 and 2020. At and subsequent to the IPO, the fair value of our common stock was based on the market price of our common stock on the grant date.
Recently Issued and Adopted Accounting Pronouncements
Refer to Note 2 of our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Report.
Jumpstart Our Business Startups Act of 2012
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to, among other things, take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.
Non-GAAP Financial Measures
We use certain measures that are not defined by GAAP to evaluate various aspects of our business. These non-GAAP financial measures are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.
Cash Costs and All-In Sustaining Costs
Cash costs and all-in sustaining costs (“AISC”) are non-GAAP measures. AISC was calculated based on guidance provided by the World Gold Council (“WGC”). WGC is not a regulatory industry organization and does not have the authority to develop accounting standards for disclosure requirements. Other mining companies may calculate AISC differently as a result of differences in underlying accounting principles and policies applied, as well as definitional differences of sustaining versus expansionary (i.e. non-sustaining) capital expenditures based upon each company’s internal policies. Current GAAP measures used in the mining industry, such as cost of sales, do not capture all of the expenditures incurred to discover, develop and sustain production. Therefore, we believe that cash costs and AISC are non-GAAP measures that provide additional information to management, investors and analysts that aid in the understanding of the economics of the Company’s operations and performance and provides investors visibility by better defining the total costs associated with production.
Cash costs include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, treatment and refining costs, general and administrative costs, royalties and mining production taxes. AISC includes total production cash costs incurred at the LGJV’s mining operations plus sustaining capital expenditures. The Company believes this measure represents the total sustainable costs of producing silver from current operations and provides additional information of the LGJV’s operational performance and ability to generate cash flows. As the measure seeks to reflect the full cost of silver production from current operations, new project and expansionary capital at current operations are not included. Certain cash expenditures such as new project spending, tax payments, dividends, and financing costs are not included.
41
Reconciliation of expenses (GAAP) to non-GAAP measures
The table below presents a reconciliation between the most comparable GAAP measure of the LGJV’s expenses to the non-GAAP measures of (i) cash costs, (ii) cash costs, net of by-product credits, (iii) co-product all-in sustaining costs and Qualitative Disclosures about Market Risk(iv) by-product all-in sustaining costs for our operations.
The calculations for determining co-product and by-product cash cost and co-product and by-product AISC per ounce for year ended December 31, 2021, were updated to include period end accruals for sales (both volume and value for payable metals). In addition, the calculation for determining silver equivalent ounces used for co-product cash cost per ounce and co-product AISC per ounce was updated to include final settlements in the calculation of the realized metal prices.
| | | | | | |
| | Years Ended December 31, | ||||
(in thousands, except unit costs) |
| 2021 |
| 2020 | ||
Cost of sales | | $ | 97,710 | | $ | 65,005 |
Royalties | | | 4,781 | | | 2,148 |
Exploration | | | 5,383 | | | 841 |
General and administrative | | | 13,345 | | | 9,718 |
Depreciation, depletion and amortization | | | 52,402 | | | 44,904 |
Other | | | — | | | 3,416 |
Total expenses | | $ | 173,621 | | $ | 126,032 |
Depreciation, depletion and amortization | |
| (52,402) | |
| (44,904) |
Exploration1 | |
| (5,383) | |
| (841) |
Treatment and refining costs2 | |
| 21,601 | |
| 23,305 |
Cash costs (A) | | $ | 137,437 | | $ | 103,592 |
Sustaining capital | |
| 72,979 | |
| 51,093 |
All-in sustaining costs (B) | | $ | 210,416 | | $ | 154,685 |
By-product credits3 | |
| (103,571) | |
| (55,370) |
All-in sustaining costs, net of by-product credits (C) | | $ | 106,845 | | $ | 99,315 |
Cash costs, net of by-product credits (D) | | $ | 33,866 | | $ | 48,222 |
| | | | | | |
Payable ounces of silver equivalent4 (E) | |
| 11,045 | |
| 6,104 |
Co-product cash cost per ounce of payable silver equivalent (A/E) | | $ | 12.44 | | $ | 16.97 |
Co-product all-in sustaining cost per ounce of payable silver equivalent (B/E) | | $ | 19.05 | | $ | 25.34 |
| | | | | | |
Payable ounces of silver (F) | |
| 6,797 | |
| 3,331 |
By-product cash cost per ounce of payable silver (D/F) | | $ | 4.98 | | $ | 14.48 |
By-product all-in sustaining cost per ounce of payable silver (C/F) | | $ | 15.72 | | $ | 29.82 |
1 2019, Exploration costs are not related to current mining operations.
2 Represent reductions on customer invoices and included in Revenue of the LGJV commenced productioncombined statement of silver and concentrates containing silver,income (loss).
3 By-product credits reflect realized metal prices of zinc, lead zinc, antimony and gold atfor the CLG. Accordingly, we expectapplicable period.
4 Silver equivalents utilize the principal sourceaverage realized prices during the year ended December 31, 2021 of future revenue to be the sale of$24.38/oz silver, and to a lesser extent,$1.38/lb zinc, $1.01/lb lead and zinc. A significant$1,761/oz gold and sustained decrease in the priceaverage realized prices during the year ended December 31, 2020 of these metals from current levels could have a material$19.97/oz silver, $1.03/lb zinc, $0.83/lb lead and negative impact$1,709/oz gold. The average realized prices are determined based on our business, financial condition and resultsrevenue inclusive of operations.final settlements.
42
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Gatos Silver, Inc. Consolidated Financial Statements | ||||||||
(PCAOB ID 1263) | | 44 | ||||||
Report of Independent Registered Public Accounting Firm - (KPMG LLP, Denver, CO, Auditor Firm ID: 185) | | 45 | ||||||
Consolidated Balance Sheets as of December 31, | | 46 | ||||||
| 47 | |||||||
| 48 | |||||||
| 49 | |||||||
| 50 | |||||||
| | | ||||||
Los Gatos Joint Venture Combined Financial Statements | | | ||||||
| 70 | |||||||
| 72 | |||||||
| 73 | |||||||
| 74 | |||||||
| 75 | |||||||
| 76 |
43
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Gatos Silver, Inc. and subsidiaries (the Company)“Company”) as of December 31, 20202021, and 2019, the related consolidated statements of operations, and comprehensive loss,changes in shareholders’ equity (deficit), and cash flows for the years thenyear ended ,December 31, 2021, and the related notes (collectively the consolidatedreferred to as “consolidated financial statements)statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019,2021, and the results of its operations and its cash flows for the years thenyear ended December 31, 2021 in conformityaccordance with U.S. generally accepted accounting principles.
Restatement of 2021 consolidated financial statements
As discussed in Note 3 to the consolidated financial statements, the 2021 consolidated financial statements have been restated to correct certain misstatements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ KPMGErnst and Young LLP
Chartered Professional Accountants
Licensed Public Accountants
We have served as the Company’s auditor since 2011.2022.
Toronto, Canada
June 26, 2023
44
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Gatos Silver, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Gatos Silver, Inc. and subsidiaries (the Company) as of December31, 2020, the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for the year ended December31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December31, 2020, and the results of its operations and its cash flows for the year ended December31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2011 to 2022.
Denver, Colorado
March 29, 2021
45
GATOS SILVER, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(In thousands of United States dollars, except for share and per share amounts)
| | | 2020 | | | 2019 | | ||||||
ASSETS | | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | | |
Cash and cash equivalents | | | | $ | 150,146 | | | | | $ | 8,581 | | |
Deferred financing costs | | | | | — | | | | | | 1,777 | | |
Related party receivables | | | | | 1,727 | | | | | | 6,422 | | |
Other current assets | | | | | 3,879 | | | | | | 552 | | |
Current assets of discontinued operations | | | | | — | | | | | | 1,123 | | |
Total current assets | | | | | 155,752 | | | | | | 18,455 | | |
Non-Current Assets | | | | | | | | | | | | | |
Investment in affiliates | | | | | 109,597 | | | | | | 105,396 | | |
Property, plant and equipment, net of accumulated depreciation of $948 and $917, respectively | | | | | 61 | | | | | | 92 | | |
Non-current assets of discontinued operations | | | | | — | | | | | | 30,352 | | |
Total Assets | | | | $ | 265,410 | | | | | $ | 154,295 | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | |
Accounts payable and other accrued liabilities | | | | $ | 4,024 | | | | | $ | 2,817 | | |
Current liabilities of discontinued operations | | | | | — | | | | | | 648 | | |
Total current liabilities | | | | $ | 4,024 | | | | | $ | 3,465 | | |
Non-Current Liabilities | | | | | | | | | | | | | |
Non-current liabilities of discontinued operations | | | | | — | | | | | | 1,439 | | |
Shareholders’ Equity | | | | | | | | | | | | | |
Common Stock, $0.001 par value; 700,000,000 shares authorized; 59,183,076 and 40,323,430 shares outstanding as of December 31, 2020 and December 31, 2019(1) | | | | | 108 | | | | | | 80 | | |
Paid-in capital | | | | | 409,728 | | | | | | 375,921 | | |
Accumulated deficit | | | | | (147,423) | | | | | | (225,583) | | |
Treasury stock, at cost, 144,589 shares as of December 31, 2020 and December 31, 2019(1) | | | | | (1,027) | | | | | | (1,027) | | |
Total shareholders’ equity | | | | | 261,386 | | | | | | 149,391 | | |
Total Liabilities and Shareholders’ Equity | | | | $ | 265,410 | | | | | $ | 154,295 | | |
| | | | | | | | |
| | Notes | | 2021 | | 2020 | ||
| | | | (restated) | | | ||
ASSETS | | |
| |
|
| |
|
Current Assets | | |
| |
|
| |
|
Cash and cash equivalents | | | | $ | 6,616 | | $ | 150,146 |
Related party receivables | | | |
| 1,592 | |
| 1,727 |
Other current assets | | 4 | |
| 3,558 | |
| 3,879 |
Total current assets | | | |
| 11,766 | |
| 155,752 |
Non-Current Assets | | | |
| | |
| |
Investment in affiliates | | 16 | |
| 333,447 | |
| 109,597 |
Other non-current assets | | | | | 35 | | | 61 |
Total Assets | | | | $ | 345,248 | | $ | 265,410 |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
|
| |
|
|
Current Liabilities | | | |
|
| |
|
|
Accounts payable and other accrued liabilities | | 6 | | $ | 1,406 | | $ | 4,024 |
Non-Current Liabilities | | | |
|
| |
|
|
Credit Facility, net of debt issuance costs | | 12 | |
| 12,620 | |
| — |
Shareholders’ Equity | | | |
|
| |
|
|
Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,162,223 and 59,183,076 shares outstanding as of December 31, 2021 and December 31, 2020, respectively | | | |
| 117 | |
| 108 |
Paid‑in capital | | | |
| 544,383 | |
| 409,728 |
Accumulated deficit | | | |
| (213,278) | |
| (147,423) |
Treasury stock, at cost, nil and 144,589 shares as of December 31, 2021 and December 31, 2020, respectively | | | |
| — | |
| (1,027) |
Total shareholders’ equity | | | |
| 331,222 | |
| 261,386 |
Total Liabilities and Shareholders’ Equity | | | | $ | 345,248 | | $ | 265,410 |
See accompanying notes to the consolidated financial statements.
46
GATOS SILVER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands of United States dollars, except for share and per share amounts)
| | | 2020 | | | 2019 | | ||||||
Expenses | | | | | | | | | | | | | |
Exploration | | | | $ | 785 | | | | | $ | 923 | | |
General and administrative | | | | | 7,765 | | | | | | 2,903 | | |
Amortization | | | | | 30 | | | | | | 34 | | |
Total expenses | | | | | 8,580 | | | | | | 3,860 | | |
Other expense (income) | | | | | | | | | | | | | |
Dilution loss in affiliates | | | | | — | | | | | | 11,231 | | |
Equity loss in affiliates | | | | | 17,585 | | | | | | 12,865 | | |
Arrangement fees | | | | | 4,843 | | | | | | 2,988 | | |
Interest expense | | | | | 4,047 | | | | | | — | | |
Other income | | | | | (28) | | | | | | (36) | | |
Net other expense | | | | | 26,447 | | | | | | 27,048 | | |
Net loss from continuing operations | | | | $ | 35,027 | | | | | $ | 30,908 | | |
Loss from discontinued operations | | | | | 5,414 | | | | | | 6,910 | | |
Net loss | | | | $ | 40,441 | | | | | $ | 37,818 | | |
Other comprehensive (gain) loss | | | | | | | | | | | | | |
Unrealized gain on securities, net of tax, from discontinued operations | | | | | — | | | | | | (32) | | |
Comprehensive loss from continuing operations | | | | | 35,027 | | | | | | 30,908 | | |
Comprehensive loss from discontinued operations | | | | | 5,414 | | | | | | 6,878 | | |
Comprehensive loss | | | | $ | 40,441 | | | | | $ | 37,786 | | |
Net loss per share: | | | | | | | | | | | | | |
From continuing operations, basic and diluted(1) | | | | $ | 0.80 | | | | | $ | 0.79 | | |
From discontinued operations, basic and diluted(1) | | | | $ | 0.13 | | | | | $ | 0.18 | | |
Basic and diluted(1) | | | | $ | 0.93 | | | | | $ | 0.97 | | |
Weighted average shares outstanding: | | | | | | | | | | | | | |
Basic and diluted(1) | | | | | 43,655,601 | | | | | | 38,967,038 | | |
| | | | | | | | |
| | Notes |
| 2021 |
| 2020 | ||
| | | | (restated) | | | ||
Expenses | | | | | | | | |
Exploration | | | | $ | 1,657 | | $ | 785 |
General and administrative | | | |
| 21,447 | |
| 7,765 |
Amortization | | | |
| 89 | |
| 30 |
Total expenses | | | |
| 23,193 | |
| 8,580 |
Other income (expense) | | | |
|
| |
|
|
Equity income (loss) in affiliates | | 3, 16 | |
| 42,804 | |
| (17,585) |
Impairment of investment in affiliates | | 3, 16 | | | (80,348) | | | — |
Arrangement fees | | | |
| (195) | |
| (4,843) |
Interest expense | | | |
| (185) | |
| (4,047) |
Other (expense) income | | 8, 11 | |
| (4,738) | |
| 28 |
Total other expense | | | |
| (42,662) | |
| (26,447) |
Net loss from continuing operations | | | | $ | (65,855) | | $ | (35,027) |
Net loss from discontinued operations | | 14 | | | — | | | (5,414) |
Net loss | | | | $ | (65,855) | | $ | (40,441) |
Net loss per share: | | | |
|
| |
|
|
Basic and diluted(1) | | | | | | | | |
Continuing operations | | | | $ | (1.03) | | $ | (0.80) |
Discontinued operations | | | | $ | — | | $ | (0.13) |
| | | | $ | (1.03) | | $ | (0.93) |
Weighted average shares outstanding: | | | | | | | | |
Basic and diluted(1) | | | | | 63,994,693 | | | 43,655,601 |
(1) | Prior period results have been adjusted to reflect the two-for-one reverse split in October 2020. See Note 1, Description of Business for details. |
47
GATOS SILVER, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands of United States dollars, except for share and per share amounts)
| | | | | | | | | | | | | | | | | | | |
| | Number (1) | | Amount |
| | |
| | |
| | |||||||
| | Common | | Treasury | | Common | | Treasury | | Paid-in | | Accumulated | | | |||||
|
| Stock |
| Stock |
| Stock |
| Stock |
| Capital |
| Deficit |
| Total | |||||
Balance at December 31, 2019 |
| 40,323,430 |
| 144,589 | | $ | 80 | | $ | (1,027) | | $ | 375,921 | | $ | (225,583) |
| $ | 149,391 |
Stock-based compensation |
| — |
| — | |
| — | |
| — | |
| 4,563 | |
| — |
| | 4,563 |
Issuance of common stock, net |
| 24,644,500 |
| — | |
| 25 | |
| — | |
| 155,612 | |
| — |
| | 155,637 |
Convertible note conversion | | 2,712,003 | | — | | | 3 | | | — | | | 18,981 | | | — | | | 18,984 |
Deferred salary conversion |
| 47,061 |
| — | |
| — | |
| — | |
| 329 | |
| — |
| | 329 |
DSU compensation | | — | | — | | | — | | | — | | | 61 | | | — | | | 61 |
Distribution from Reorganization | | (8,543,918) | | — | | | — | | | — | | | (145,780) | | | 118,601 | | | (27,179) |
Other |
| — |
| — | |
| — | |
| — | |
| 41 | |
| — |
| | 41 |
Net loss |
| — |
| — | |
| — | |
| — | |
| — | |
| (40,441) |
| | (40,441) |
Balance at December 31, 2020 |
| 59,183,076 |
| 144,589 | | $ | 108 | | $ | (1,027) | | $ | 409,728 | | $ | (147,423) |
| $ | 261,386 |
Stock-based compensation(2) |
| — |
| — | |
| — | |
| — | |
| 7,694 | |
| — |
| | 7,694 |
Issuance of common stock, net |
| 9,830,426 |
| (144,589) | |
| 9 | |
| 1,027 | |
| 126,071 | |
| — |
| | 127,107 |
DSU compensation | | — | | — | | | — | | | — | | | 1,163 | | | — | | | 1,163 |
DSUs converted to common stock | | 148,721 | | — | | | — | | | — | | | — | | | — | | | — |
Other |
| — |
| — | |
| — | |
| — | |
| (273) | |
| — |
| | (273) |
Net loss(2) |
| — |
| — | |
| — | |
| — | |
| — | |
| (65,855) |
| | (65,855) |
Balance at December 31, 2021(2) |
| 69,162,223 |
| — | | $ | 117 | | $ | — | | $ | 544,383 | | $ | (213,278) |
| | 331,222 |
(1) | Prior period results have been adjusted to reflect the two-for-one reverse split in October 2020. See Note 1, Description of Business for details. |
(2) | Information for the year ended December 31, 2021, has been restated. |
48
GATOS SILVER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands of United States dollars, except for share and per share amounts)
| | | | | | | | |
| | | | | ||||
| | Notes |
| 2021 |
| 2020 | ||
|
| | | (restated) | | | ||
OPERATING ACTIVITIES | | |
| |
|
| |
|
Net loss | | | | $ | (65,855) | | $ | (40,441) |
Plus net loss from discontinued operations | | | | | — | | | 5,414 |
Adjustments to reconcile net loss to net cash used by operating activities: | | | |
| | |
|
|
Amortization | | | |
| 89 | |
| 30 |
Stock-based compensation expense | | 9 | |
| 7,738 | |
| 4,368 |
Equity (income) loss in affiliates | | 16 | |
| (42,804) | |
| 17,585 |
Interest expense on convertible notes beneficial conversion terms | | 7 | | | — | | | 3,984 |
Impairment of investment in affiliates | | 16 | | | 80,348 | | | — |
Other | | | |
| (260) | |
| 329 |
Changes in operating assets and liabilities: | | | |
| | |
|
|
Receivables from related‑parties | | | |
| 134 | |
| (4,752) |
Accounts payable and other accrued liabilities | | | |
| (1,196) | |
| 2,027 |
Other current assets | | | | | 321 | | | (3,479) |
Operating cash flows from discontinued operations | | | |
| — | |
| (3,453) |
Net cash used by operating activities | | | |
| (21,485) | |
| (18,388) |
INVESTING ACTIVITIES | | | |
|
| |
|
|
Transfers of restricted cash to cash | | | |
| — | |
| 151 |
Investment in affiliates | | 16 | |
| (261,439) | |
| (12,298) |
Investing cash flows from discontinued operations | | | | | — | | | 18 |
Net cash used by investing activities | | | |
| (261,439) | |
| (12,129) |
FINANCING ACTIVITIES | | | |
|
| |
|
|
Related‑party convertible debt | | | | | — | | | 15,000 |
Credit Facility | | 12 | | | 13,000 | | | — |
Financing costs | | | | | (7,277) | | | (4,039) |
Issuance of common stock | | 9 | |
| 133,085 | |
| 160,436 |
Issuance of treasury stock | | | |
| 1,027 | |
| — |
Other | | | |
| (441) | |
| 260 |
Financing cash flows from discontinued operations | | | | | — | | | 807 |
Net cash provided by financing activities | | | |
| 139,394 | |
| 172,464 |
Net (decrease) increase in cash and cash equivalents | | | |
| (143,530) | |
| 141,947 |
Cash and cash equivalents, beginning of period | | | |
| 150,146 | |
| 9,085 |
Less cash of discontinued operations | | | | | — | | | 886 |
Cash and cash equivalents form continuing operations, end of period | | | | $ | 6,616 | | $ | 150,146 |
Interest paid | | | | $ | 168 | | $ | — |
Supplemental disclosure of noncash transactions: | | | |
|
| |
|
|
Deferred financing costs included in accounts payable and accrued liabilities | | | | $ | — | | $ | 1,118 |
Director fees in accrued liabilities converted to deferred share units | | | | $ | 306 | | $ | 61 |
Conversion of related party accounts receivable into LGJV capital contributions | | | | $ | — | | $ | 9,448 |
Conversion of convertible notes to equity | | | | $ | — | | $ | 15,000 |
Underwriting fees recorded to deferred financing costs | | | | $ | — | | $ | (12,076) |
Deferred financing costs charged to equity | | | | $ | — | | $ | 16,874 |
See accompanying notes to the consolidated financial statements.
49
| | | Number(1) | | | Amount | | | Paid-in Capital | | | Accumulated Deficit | | | Other Comprehensive Income (Loss) | | | Total Shareholders’ Equity | | ||||||||||||||||||||||||||||||
| Common Stock | | | Treasury Stock | | | Common Stock | | | Treasury Stock | | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | | | | | 36,951,274 | | | | | | 144,589 | | | | | $ | 74 | | | | | $ | (1,027) | | | | | $ | 331,802 | | | | | $ | (187,765) | | | | | $ | (32) | | | | | $ | 143,052 | | |
Stock-based compensation | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 3,219 | | | | | | — | | | | | | — | | | | | | 3,219 | | |
Issuance of common stock | | | | | 3,372,156 | | | | | | — | | | | | | 6 | | | | | | — | | | | | | 40,459 | | | | | | — | | | | | | — | | | | | | 40,465 | | |
Unrealized gain on investments, net of tax | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 32 | | | | | | 32 | | |
Deferred share unit compensation | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 491 | | | | | | — | | | | | | — | | | | | | 491 | | |
Other | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (50) | | | | | | — | | | | | | — | | | | | | (50) | | |
Net loss | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (37,818) | | | | | | — | | | | | | (37,818) | | |
Balance at December 31, 2019 | | | | | 40,323,430 | | | | | | 144,589 | | | | | $ | 80 | | | | | $ | (1,027) | | | | | $ | 375,921 | | | | | $ | (225,583) | | | | | $ | — | | | | | $ | 149,391 | | |
Stock-based compensation | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 4,563 | | | | | | — | | | | | | — | | | | | | 4,563 | | |
Issuance of common stock, net | | | | | 24,644,500 | | | | | | — | | | | | | 25 | | | | | | — | | | | | | 155,612 | | | | | | — | | | | | | — | | | | | | 155,637 | | |
Convertible note conversion | | | | | 2,712,003 | | | | | | — | | | | | | 3 | | | | | | — | | | | | | 18,981 | | | | | | — | | | | | | — | | | | | | 18,984 | | |
Deferred salary conversion | | | | | 47,061 | | | | | | — | | | | | | — | | | | | | — | | | | | | 329 | | | | | | — | | | | | | — | | | | | | 329 | | |
Deferred share unit compensation | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 61 | | | | | | — | | | | | | — | | | | | | 61 | | |
Distribution from Reorganization | | | | | (8,543,918) | | | | | | — | | | | | | — | | | | | | — | | | | | | (145,780) | | | | | | 118,601 | | | | | | — | | | | | | (27,179) | | |
Other | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 41 | | | | | | — | | | | | | — | | | | | | 41 | | |
Net loss | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (40,441) | | | | | | — | | | | | | (40,441) | | |
Balance at December 31, 2020 | | | | | 59,183,076 | | | | | | 144,589 | | | | | $ | 108 | | | | | $ | (1,027) | | | | | $ | 409,728 | | | | | $ | (147,423) | | | | | $ | — | | | | | $ | 261,386 | | |
| | | 2020 | | | 2019 | | ||||||
OPERATING ACTIVITIES | | | | | | | | | | | | | |
Net loss | | | | $ | (40,441) | | | | | $ | (37,818) | | |
Plus net loss from discontinued operations | | | | $ | 5,414 | | | | | $ | 6,910 | | |
Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | | | | | | | |
Amortization | | | | | 30 | | | | | | 34 | | |
Dilution loss in affiliates | | | | | — | | | | | | 11,231 | | |
Stock compensation expense | | | | | 4,368 | | | | | | 3,007 | | |
Equity loss in affiliates | | | | | 17,585 | | | | | | 12,865 | | |
Interest expense on convertible notes beneficial conversion terms | | | | | 3,984 | | | | | | — | | |
Other | | | | | 329 | | | | | | — | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | |
Receivables from related-party | | | | | (4,752) | | | | | | (5,078) | | |
Accounts payable and other accrued liabilities | | | | | 2,027 | | | | | | 549 | | |
Other current assets | | | | | (3,479) | | | | | | 22 | | |
Operating cash flows from discontinued operations | | | | | (3,453) | | | | | | (4,017) | | |
Net cash used by operating activities | | | | | (18,388) | | | | | | (12,295) | | |
INVESTING ACTIVITIES | | | | | | | | | | | | | |
Transfers of restricted cash to cash | | | | | 151 | | | | | | — | | |
Investment in affiliates | | | | | (12,298) | | | | | | (21,371) | | |
Investing cash flows from discontinued operations | | | | | 18 | | | | | | (534) | | |
Net cash used by investing activities | | | | | (12,129) | | | | | | (21,905) | | |
FINANCING ACTIVITIES | | | | | | | | | | | | | |
Issuance of common stock | | | | | 160,436 | | | | | | 40,465 | | |
Related-party convertible notes | | | | | 15,000 | | | | | | — | | |
Deferred financing costs | | | | | (4,039) | | | | | | (637) | | |
Other | | | | | 260 | | | | | | — | | |
Financing cash flows from discontinued operations | | | | | 807 | | | | | | — | | |
Net cash provided by financing activities | | | | | 172,464 | | | | | | 39,828 | | |
Net increase in cash and cash equivalents | | | | | 141,947 | | | | | | 5,628 | | |
Cash and cash equivalents, beginning of period | | | | | 9,085 | | | | | | 3,457 | | |
Cash and cash equivalents, end of period | | | | | 151,032 | | | | | | 9,085 | | |
Less cash of discontinued operations | | | | | 886 | | | | | | 504 | | |
Cash of continuing operations, end of period | | | | $ | 150,146 | | | | | $ | 8,581 | | |
Supplemental disclosure of noncash transactions: | | | | | | | | | | | | | |
Director Compensation | | | | $ | 61 | | | | | $ | 491 | | |
Deferred financing costs included in accrued liabilties | | | | $ | — | | | | | $ | 1,132 | | |
Conversion of related party receivable into investment in affiliate | | | | $ | 9,448 | | | | | $ | — | | |
Conversion of convertible notes to equity | | | | $ | 15,000 | | | | | $ | — | | |
Deferred financing costs included in accounts payable and accrued liabilties | | | | $ | 1,118 | | | | | $ | — | | |
Underwriting fees recorded to deferred financing costs | | | | $ | (12,076) | | | | | $ | — | | |
Deferred financing costs charged to equity | | | | $ | 16,874 | | | | | $ | — | | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of United States dollars, except share, per share, option, and stock unit amounts)
1.
Organization and Nature of Business
Gatos Silver, Inc. (“Gatos Silver” or “the Company”) is a silver dominant production,exploration, development and exploration,production company that discovered a new silver, lead and zinc-rich mineral district in southern Chihuahua State, Mexico.
The Company’s primary efforts are focused on the operation of the Los Gatos Joint Venture (“LGJV”) in Chihuahua, Mexico. On January 1, 2015, the Company entered into the LGJV to develop the Los Gatos District (“LGD”) with Dowa Metals and Mining Co., Ltd. (“Dowa”). The LGJV operatingOperating entities consistconsisted of Minera Plata Real S. de R.L. de C.V (“MPR”), Operaciones San Jose del Plata S. de R.L. de C.V. and Servicios San Jose del Plata S. de R.L. de C.V. (“Servicios”) (collectively, the “LGJV Entities”). Effective July 15, 2021, Servicios was merged into MPR.
Dowa acquired a 30% interest in the LGJV and the right to purchase future zinc concentrate production at market rates by completing its $50,000 funding requirement on April 1, 2016. The LGJV completed an advanced definitional drilling and decline development program in 2016, a feasibility study in January 2017 and a technical update to the feasibility study in July 2020. Dowa completed its $50,000 funding requirement on April 1, 2016 thereby initially acquiring a 30% interest inOn January 25, 2022, the LGJV andCompany announced that the right to purchase future zinc-concentrate production at market rates.July 2020 technical report should not be relied upon. In May 2019, Dowa increased its ownership interest by 18.5% to 48.5% through the conversion of the Dowa MPR Loan to equity. On March 11, 2021, the Company repurchased the 18.5% interest from Dowa.Dowa for a total consideration of $71,550, including Dowa holding costs of this incremental interest, increasing the Company’s ownership in the LGJV Entities to 70.0%. These transactions resulted in a $47,400 higher basis than the underlying net assets of the LGJV Entities. This basis difference is being amortized over the LGJV Entities proven and probable reserves. See Note 10 —11 - Commitment, Contingencies and Guarantees for further discussion. The LGJV ownership is currently 70% Gatos Silver and 30% Dowa. Despite owning the majority interest in the LGJV, the Company does not exercise control over the LGJV due to certain provisions contained in the Unanimous Omnibus Partner Agreement that currently require unanimous partner approval of all major operating decisions.
On September 1, 2019, the LGJV commenced commercial production of its two concentrate products: a lead concentrate and a zinc concentrate. The LGJV’s lead and zinc concentrates are currently sold to third-partythird party customers.
The Company’s other regional Mexico exploration efforts outside of the LGJV district are conducted through its wholly-owned subsidiary, Minera Luz del Sol S. de R.L. de C.V. (“MLS”).
In December 2021, Gatos Silver Canada Corporation (“GSC”) was formed to house certain corporate employees based in Canada. No employees existed and a rehabilitation program to improve certain mining infrastructure at the Sunshine Complex. The Sunshine Complex, locatedno transactions occurred in the Coeur d’Alene Mining District in Idaho, is comprised of the Sunshine Mine and the Sunshine Big Creek Refinery. The Sunshine Mine is currently on care and maintenance, with a continued but reduced program of infrastructure improvement. GSC until 2022.
Reorganization
In conjunction with the Company’s initial public offering (“IPO”), all equity interest in the Company's wholly-owned subsidiary, SOP, who holds an interest in the Sunshine Complex, was distributed to its stockholders, creating Silver Opportunity Partners Corporation, which subsequently was renamed Sunshine Silver Mining & Refining Corporation, and is presented as discontinued operations in the Company’s consolidated financial statements for the years ended December 31, 2020 and 2019. Pursuant to the distribution and discontinued operations presentation, certain costs, assets and liabilities are removed
Pursuant to the distribution of SOP, the accounts for SOP are presented as discontinued operations in the Company’s consolidated financial statements for all periods presented. See Note 14 – Discontinued Operations for additional detail.
50
2.Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) and include the accounts of Gatos Silver and its subsidiaries, GSC and MLS. All Company subsidiaries are consolidated. All significant intercompany balances and transactions have been eliminated. All equity interest in the Company’s wholly-owned subsidiary, SOP, was distributed to its stockholders in October 2020. The accounts for SOP have been presented as discontinued operations in the accompanying consolidated financial statements. Prior year amounts have also been modified in these financial statements to properly report amounts under current operations and discontinued operations. See Note 12 —14 – Discontinued Operations for further discussion.
All common stock shares, options and deferred stock units amounts and prices in the consolidated financial statements have been adjusted for the Reverse Split.
As described in Note 3 – Restatement of Previously Issued Financial Statements, the Company’s financial statements as of December 31, 2021 and for the year then ended (“Affected Period”), are restated in this Annual Report on Form 10-K/A (Amendment No. 1) (this “Annual Report”) to correct the recording of income taxes of the Company’s investment in affiliate and the resulting adjustments to the Company’s financial statements. An additional adjustment to correct the accounting for the priority distribution due to our LGJV partner was made to exclude the priority distribution payment from the net income of the LGJV in calculating the equity income in affiliate for 2021, resulting in a change in the equity pickup and the fair value calculation and impairment amounts. The restated financial statements are indicated as “Restated” in the audited financial statements and accompanying notes, as applicable. See Note 3—Restatement of Previously Issued Financial Statements for further discussion.
Equity method investment
The Company accounts for its investment in affiliates using the equity method of accounting whereby, after valuing the initial investment, the Company recognizes its proportional share of results of operations of the affiliate in its consolidated financial statements. EquityThe value of equity method investments are reviewed periodically foradjusted if it is determined that there is an other-than-temporary decline in value. The Company’s investment in the LGJV Entities is presented as Investment in affiliates in the consolidated balance sheet. The basis difference between the carrying amount of the investment in affiliates and the Company’s equity in the LGJV Entities’ net assets is due to value of the LGJV mineral resources. This basis difference is amortized on a units of production basis as the mineral resource is produced.
The Company incursincurred certain costs on behalf of the LGJV, primarily related to a project development loan arrangement fee. The Company’s proportional share of such costs are reported as an investment in affiliate and the residual costs, related to Dowa’s proportional ownership, are reported in the statement of loss as arrangement fees.
Use of estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include mineral properties; environmental reclamation and closure obligations;are valuation of stock and stock options; valuation allowances for deferred tax assets; and the fair value of financial instruments.
Functional currency and translation of foreign currencies
The U.S. dollar is the functional currency of the Company and its subsidiaries. Monetary assets and liabilities denominated in foreign currencies are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting gains or losses reported in foreign exchange (gain) loss in the statement of operations and comprehensive loss. Non-monetary assets and liabilities are translated at historical exchange rates. Expenses and income items denominated in foreign currencies are translated into U.S. dollars at historical exchange rates.
51
Cash and cash equivalents
The Company considers all highly liquid short-term investments with a maturity of three months or less when purchased to be cash equivalents. Restricted cash, included
Other than temporary impairment - investment
A loss in other current assets, consists of cash and investments held as collateral for a letter of credit and other extensions of credit.
Stock-based compensation
The Company recognizes all employee stock-based compensation as a cost in the consolidated financial statements. Equity-classified awards are measured at the grant date fair value of the award. Stock-based compensation expense is included as a component of general and administrative expense over the requisite service period of the award based on the number of awards expected to vest.
The Company estimates grant date fair value of stock options are estimated using the Black-Scholes option-pricing model using the grant datemodel. The fair value of performance share price, estimated amounts for volatility of the Company’s stockunits (“PSUs”), which are subject to vesting based on the historical volatilityCompany’s attainment of a grouppre-established market performance goals, are estimated using a Monte Carlo simulation valuation model. The Company’s estimates may be impacted by certain variables including, but not limited to, stock price volatility, estimates of peer companies’ common stock over the expected option life, the expected life of the awards, the fair value of the underlying shares,forfeitures, the risk-free interest rate, expected dividend yields, and the expected dividend yield.Company’s performance. The Company estimates forfeitures of stock-based awards based on historical data and periodically adjusts the forfeiture rate. The adjustment of the forfeiture rate is recorded as a cumulative adjustment in the period the forfeiture estimate is changed. Stock-based compensation expense is included as a component of either exploration or general and administrative expense over the requisite service period of the award.
Net loss per share
Basic and diluted loss per share are presented for net loss attributable to common shareholders. Basic net loss per share is computed by dividing the net loss available to common stockholders by the weighted-average number of common stock shares outstanding, including deferred stock units
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
52
Recently issued and adopted accounting standards
In February 2016,December 2019, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) followed by ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), issued in January 2021, to provide clarifying guidance regarding the scope of Topic 848. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. Generally, the guidance is to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. ASU 2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022. The Company has not elected to use the optional guidance and continues to evaluate the options provided by ASU 2020-04 and ASU 2021-01. The Company is still assessing the impact of the standardstandards but does not expect there will bethe standards to have a material impact on its financial statements.
As of December 31, 2021, there are no additional recently issued or adopted accounting standard that could have a material impact on our financial statements.
3.Restatement of Previously Issued Financial Statements
In accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”), the following items are treated as errors and are material to the 2021 consolidated financial statements, and, therefore, require that the consolidated financial statements be restated. The restatement adjustments in 2021 only impacted the fourth quarter of 2021 with no impact to the first, second, and third of 2021 interim condensed consolidated financial statements filed.
Investment in affiliates – Income Taxes recorded by affiliates
During the preparation of the 2022 annual financial statements the Company identified that the investment in affiliates and equity income in affiliates were not correct in prior periods. The Company identified that its investment in affiliate, the LGJV, did not recognize certain current deferred tax assets and deferred tax liabilities in accordance with ASC 740, Income Taxes. The Company identified that there were errors in the calculation of the deferred tax assets related to property plant and equipment, mine development and historical net operating losses. In certain cases, the tax basis was not calculated in accordance with the Mexican tax regulations. The LGJV understated the value of the deferred tax assets at December 31, 2021, and, as a result, the investment in affiliates was understated before accounting for the impairment. In accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”), these items are treated as errors and are material to the 2021 consolidated financial statements and, therefore, require that these consolidated financial statements be restated.
The impact of the error on the financial statements of the LGJV was (i) an increase in net deferred tax assets of $8,181, (ii) a decrease in the current income tax liability of $6,315 at December 31, 2021, (iii) a decrease in foreign exchange loss of $1,356, and (iv) an increase in income tax recovery of $13,140.
The impact of the LGJV tax errors on the Company’s financial statements.
Investment in affiliates – Priority distribution payment
The Company also identified that the accounting for the priority distribution payment to our partner in the LGJV was not recorded in accordance with ASC 970 –323-35, Equity Method and Joint Ventures. The priority distribution payment was required to be excluded from the initial equity income in affiliates and equity income should have been recognized after the priority distribution payment was accounted for. This is considered an error in accordance with ASC 250 and is material to the consolidated financial statements for 2021 and, therefore, require that these consolidated financial statements be restated.
53
The impact of the error described above on the Company’s financial statements for the year ended December 31, 2021, was a decrease in the investment in affiliates and equity income in affiliates of $2,579.
Investment in affiliates – impairment
During the process of correcting the deferred tax assets and liabilities discussed above the Company identified that the fair value financial model used to calculate the impairment of the investment in affiliate overstated the amount of VAT receivable that was available to offset against future income taxes payable in Mexico. In addition, the net operating losses and future tax depreciation amounts were incorrectly calculated and the Company incorrectly included the value of future management fees receivable in the fair value calculation. These errors resulted in a decrease of $21,863 in the fair value of the cash flows used to determine the amount of the impairment of the investment in affiliate. As a result of the changes to the timing and recognition of deferred tax assets and liabilities, the priority distribution payment accounting explained above, and the resulting impact on the basis amortization of the investment in affiliates, the book value of the investment in affiliates increased by $6,921. The net result of these items was an increase in the impairment of $28,784.
The impact of these items was (i) a decrease in the investment in affiliates of $28,784 at December 31, 2021 (ii) an increase in equity income in affiliates of $6,921, and (iii) an increase in impairment of investment in affiliates of $28,784 for the year ended December 31, 2021.
These are considered errors in accordance with ASC 250 and are material to the consolidated financial statements for 2021 and require that the consolidated financial statements be restated. Restatement adjustments in 2021 only impacted the fourth quarter of 2021 period with no impact to the first, second and third quarters of 2021 filed financial statements. There is no impact on the financial statements for 2020.
Impact of the Restatement
The aggregate impact of the above-noted changes, along with the increase of $647 in the basis amortization of the investment in affiliates resulting from the above-noted changes and other previously uncorrected immaterial misstatement to general and administrative and paid in capital ($554 respectively), are included in the total adjustments described in the tables below. The cumulative impact of these items was (i) an increase in equity income in affiliates of $6,921, (ii) an increase in impairment of the investment in affiliates of $28,784, (iii) an increase in net loss of $22,417, and (iv) a decrease in shareholders’ equity of $21,863 at December 31, 2021. These adjustments related to non-cash items, accordingly there were not changes to cash flows from operations, cash flows from investing activities or cash flows from financing activities or to the cash balance for the year ended December 31, 2021.
| | | | | | |
|
| Year Ended |
| |
| Year Ended |
| | December 31, 2021 | | | | December 31, 2021 |
Consolidated Balance Sheet |
| As previously reported |
| Adjustment |
| As restated |
Investment in affiliates |
| 355,310 |
| (21,863) |
| 333,447 |
Total Assets | | 367,111 | | (21,863) | | 345,248 |
Paid -in capital | | 543,829 | | 554 | | 544,383 |
Accumulated deficit | | (190,861) | | (22,417) | | (213,278) |
Total shareholders’ equity | | 353,085 | | (21,863) | | 331,222 |
Total liabilities and shareholders’ equity |
| 367,111 |
| (21,863) |
| 345,248 |
| | | | | | |
|
| Year Ended |
| |
| Year Ended |
| | December 31, 2021 | | | | December 31, 2021 |
Consolidated Statement of Operations |
| As previously reported |
| Adjustment |
| As restated |
General and administrative | | 20,893 | | 554 | | 21,447 |
Equity income in affiliates | | 35,883 | | 6,921 | | 42,804 |
Impairment of investment in affiliates | | (51,564) | | (28,784) | | (80,348) |
Total other expense | | (20,799) | | (21,863) | | (42,662) |
Net loss from continuing operations | | (43,438) | | (22,417) | | (65,855) |
Net loss | | (43,438) | | (22,417) | | (65,855) |
Net loss per share | | | | | | |
Basic and diluted | | (0.68) | | (0.35) | | (1.03) |
54
| | | | | | |
|
| Year Ended |
| |
| Year Ended |
| | December 31, 2021 | | | | December 31, 2021 |
Consolidated Statement of Shareholders’ Equity (Deficit) |
| As previously reported |
| Adjustment |
| As restated |
Net loss | | (43,438) | | (22,417) | | (65,855) |
Accumulated Deficit Balance at December 31, 2021 | | (190,861) | | (22,417) | | (213,278) |
Total shareholders’ equity |
| 353,085 | | (21,863) |
| 331,222 |
Paid -in capital | | 543,829 | | 554 | | 544,383 |
| | | | | | |
|
| Year Ended |
| |
| Year Ended |
| | December 31, 2021 | | | | December 31, 2021 |
Consolidated Statement of Cash Flows |
| As previously reported |
| Adjustment |
| As restated |
Net loss |
| (43,438) |
| (22,417) |
| (65,855) |
Equity income in affiliates | | (35,883) | | (6,921) | | (42,804) |
Stock based compensation | | 7,184 | | 554 | | 7,738 |
Impairment of investment in affiliates | | (51,564) | | (28,784) | | (80,348) |
4.Other Current Assets
| | | December 31, 2020 | | | December 31, 2019 | | ||||||
Value added tax receivable | | | | $ | 318 | | | | | $ | 213 | | |
Restricted cash | | | | | — | | | | | | 151 | | |
Prepaid expenses | | | | | 3,560 | | | | | | 157 | | |
Deposits and other | | | | | 1 | | | | | | 31 | | |
Total other current assets | | | | $ | 3,879 | | | | | $ | 552 | | |
| | | | | | |
|
| December 31, |
| December 31, | ||
| | 2021 | | 2020 | ||
Value added tax receivable | | $ | 575 | | $ | 318 |
Prepaid expenses | | | 2,976 | |
| 3,560 |
Other | | | 7 | | | 1 |
Total other current assets | | $ | 3,558 | | $ | 3,879 |
5.Property, Plant and Equipment, net
Mineral Properties
Mining Concessions
In Mexico, mineral concessions from the Mexican government can only be held by Mexican nationals or Mexican-incorporated companies. The concessions are valid for 50 years and are extendable provided the concessions are kept in good standing. For concessions to remain in good standing a semi-annual fee must be paid to the Mexican government and an annual report describing the work accomplished on the property must be filed. These concessions may be cancelled without penalty with prior notice to the Mexican government. MLS is the concession holder of a series of claims titles granted by the Mexican government. The rights to certain concessions are held through exploration agreements with purchase options, as discussed below:
Santa Valeria Concession
The Company was required to make monthly payments through 2020 to continue exploration activities and obtain ownership of the Santa Valeria concessions, andconcessions. If production commences, the Company is required to make a production royalty payment of 1% of the net smelter returns on production.returns. The Company may terminate the agreement upon prior notice.
The Company made and expensed mineral lease payments of $414$24 and $409$414 for the years ended December 31, 2021 and 2020, and 2019, respectively.
55
| | | December 31, 2020 | | | December 31, 2019 | | ||||||
Accounts payable | | | | $ | 560 | | | | | $ | 60 | | |
Accrued expenses | | | | | 1,240 | | | | | | 1,488 | | |
Accrued compensation | | | | | 1,964 | | | | | | 1,269 | | |
Other | | | | | 260 | | | | | | — | | |
Total accounts payable and other accrued liabilities | | | | $ | 4,024 | | | | | $ | 2,817 | | |
| | | | | | |
|
| December 31, |
| December 31, | ||
| | 2021 | | 2020 | ||
Accounts payable | | $ | 196 | | $ | 560 |
Accrued expenses | |
| 623 | |
| 1,240 |
Accrued compensation | |
| 587 | |
| 1,964 |
Other | | | — | | | 260 |
Total accounts payable and other current liabilities | | $ | 1,406 | | $ | 4,024 |
7.Related Party Convertible Notes
During the second quarter of 2020, the Company entered into a convertible note purchase agreement with Electrum Silver US LLC, an affiliate and large shareholder, for the issuance of an aggregate of $15,000 of convertible notes. The convertible notes incurincurred an annual interest of 5%. On October 30, 2020, the outstanding $15,000 in convertible notes and $187 in accrued interest were converted into 2,712,003 shares of common stock of the Company as a result of the IPO in accordance with the conversion terms, and the Company incurred non-cash interest expense of $3,984.
8.Related-Party Transactions
LGJV
Under the Unanimous Omnibus Partner Agreement,
SSMRC
The Company entered intohad a Management Services Agreement with SOP,Sunshine Silver Mining & Refining Corporation (“SSMRC”) (f.k.a. SOP), pursuant to which the Company providesprovided certain limited executive and managerial advisory services to SOPSSMRC until terminated by either party. SOP reimbursesSSMRC reimbursed the Company for costs of such services. The Company earned $16 and $41 from SOPSSMRC under this agreement in 2020, all of which was receivable as ofduring the years ended December 31, 2020.
9.Stockholders’ Equity
The Company is authorized to issue 700,000,000 shares of $0.001 par value common stock and 50,000,000 shares of $0.001 par value preferred stock. As of December 31, 2020, 59,183,0762021, 69,162,223 shares of common stock are outstanding, and no shares of preferred stock are outstanding.
Common Stock Transactions
On July 19, 2021, the Company completed a follow-on public offering of 8,930,000 shares of common stock at a price of $14.00 per share, resulting in net proceeds of $118,894, after deducting underwriting discounts and commissions. On August 18, 2021, the Company issued an additional 286,962 shares of common stock at a price of $14.00 per share, through the exercise of the over-allotment option, with net proceeds from the additional issuance of $3,837, after deducting underwriting discounts and commissions. Additionally, the Company incurred an additional $1,700 in other costs related to the offering.
During October 2020, in connection with the Reorganization, each share of common stock was exchanged for approximately 0.39406 shares of the Company’s common stock (subject to rounding to
56
stock shares through the underwriters’ over-allotment option, each at $7.00 per share raising an aggregate of $172,512. Underwriting fees incurred in conjunction with the IPO and issuance of additional common stock are recorded as a reduction to Paid-in Capital. In October 2020, the Company also issued 47,061 common stock shares to executive officers for deferred salary compensation incurred in 2020 and converted the outstanding convertible notes into 2,712,003 common stock shares, each at $7.00 per share.
Stock-Based Compensation
Equity Compensation Plan
The Company has a Long-Term Incentive Plan under which options and shares of the Company’s common stock are authorized for grant or issuance as compensation to eligible employees, consultants, and members of the Board of Directors. Awards under the plan include stock options, stock appreciation rights, stock awards, deferred stock units, and performance awards. Stock options, performance awards and deferred stock units have been granted by the Company in different periods. As of December 31, 2020,2021, approximately 9.48.1 million shares of common stock were available for grant under the plan. Stock-basedThe Company recognized stock-based compensation expense for the years ended December 31, 2020 and 2019 was $4,368 and $3,007, respectively.
| | | | | | |
| | Years ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (restated) | | | ||
Stock Options | | $ | 7,716 | | $ | 4,368 |
PSUs | |
| 22 | |
| — |
| | $ | 7,738 | | $ | 4,368 |
Stock Option Transactions
The Company’s stock options have a contractual term of 10 years and entitle the holder to purchase one share of the Company’s common stock. The options granted to the Company’s employees and LGJV personnel prior to 2020 have a requisite service period of four years and vest in equal annual installments. Starting in 2020, the options granted to the Company’s employees and LGJV personnel have a requisite service period of three years. The sign on options granted to the Company’s President in June 2021 vest in three equal tranches, the first of which vested immediately, and the remainder on the first and second anniversaries of employment with the Company, subject to continued employment on such vesting dates. The options granted to non-employee directors prior to 2020 have a requisite service period of one year and vest in equal monthly installments. The options granted to non-employee directors in January 2020 have a requisite service period of one and a half years and vest in monthly installments. The options granted to non-employee directors in June 2021 have a requisite service period of one year and vest in semi-annual installments. On December 31, 2020,2021, there was $9,377$10,346 of unrecognized stock-basedstock based compensation expense which is expected to be recognized over a weighted-average period of 2.22.1 years.
The following table summarizes the respective vesting start dates and number of options granted to employees and directors in 20202021 and 2019:
| | | | | | | |||||
Recipient | Options Granted | Vesting Start Date | Grant Date | ||||||||
Directors | 197,666 | | |||||||||
January 20, 2020 | | January 20, 2020 | |||||||||
Employees | 416,000 | | January 20, 2020 | | January 20, 2020 | ||||||
Employees | 164,000 | | January 30, 2020 | | January 30, 2020 | ||||||
Directors | 20,667 | | March 1, 2020 | | March 1, 2020 | ||||||
Employees | 12,000 | | July 31, 2020 | | July 31, 2020 | ||||||
Employees | 1,127,500 | | October 27, 2020 | | October 27, 2020 | ||||||
Employees | | 100,000 | | March 31, 2021 | | May 14, 2021 | |||||
Directors | | 7,253 | | May 14, 2021 | | May 14, 2021 | |||||
Directors | | 32,466 | | June 1, 2021 | | June 22, 2021 | |||||
Employees | | 283,333 | | June 1, 2021 | | June 22, 2021 | |||||
Employees | | 66,667 | | June 22, 2021 | | June 22, 2021 | |||||
Employees | 589,500 | | December 27, 2021 | | December 27, 2021 |
57
The following assumptions were used to compute the fair value of the options granted using the Black-Scholes option valuation model:
| | | Grant Date | | |||||||||||||||||||||||||||
| | | May 2019 | | | Jan. 2020 | | | Mar. 2020 | | | Jul. 2020 | | | Oct. 2020 | | |||||||||||||||
Risk-free interest rate | | | | | 2.38% | | | | | | 1.63% | | | | | | 1.63% | | | | | | 1.63% | | | | | | 0.51% | | |
Dividend yield | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Estimated volatility | | | | | 66.80% | | | | | | 62.20% | | | | | | 62.20% | | | | | | 62.20% | | | | | | 62.50% | | |
Expected option life | | | 6 years | | | 6 years | | | 6 years | | | 6 years | | | 6 years | |
| | | | | | | | | | | | | | | |
|
| Grant Date |
| ||||||||||||
| | Jan. | | Mar. | | Jul. | | Oct. | | May | | Jun. | | Dec. | |
|
| 2020 |
| 2020 |
| 2020 |
| 2020 |
| 2021 |
| 2021 |
| 2021 |
|
Risk-free interest rate | | 1.63 | % | 1.63 | % | 1.63 | % | 0.51 | % | 1.06 | % | 1.05 | % | 1.34 | % |
Dividend yield | | — |
| — |
| — |
| — |
| — | | — | | — | |
Estimated volatility | | 62.20 | % | 62.20 | % | 62.20 | % | 62.50 | % | 62.59 | % | 62.53 | % | 60.88 | % |
Expected option life | | 6 years |
| 6 years |
| 6 years |
| 6 years |
| 6 years | | 6 years | | 6 years | |
The weighted average grant date fair value per share was $5.65$7.54 and $7.00$5.65 for the years ended December 31, 2021 and 2020, and 2019, respectively.
The following assumptions were used to compute the fair value of the LGJV Personnel options using the Black-Scholes option valuation model as of December 31, 20202021 and 2019:
| | | December 31, | | |||
| | | 2020 | | | 2019 | |
Risk-free interest rate | | | 0.51% | | | 1.76% | |
Dividend yield | | | — | | | — | |
Estimated volatility | | | 62.09% | | | 63.60% | |
Expected option life | | | 6 years | | | 6 years | |
| | | | | |
|
| December 31, |
| ||
|
| 2021 |
| 2020 |
|
Risk-free interest rate |
| 1.35 | % | 0.51 | % |
Dividend yield | | — |
| — | |
Estimated volatility | | 60.86 | % | 62.09 | % |
Expected option life | | 6 years | | 6 years | |
The Company’s estimated volatility computation was based on the historical volatility of a group of peer companies’ common stock over the expected option life and included both exploration stage and development stage companies. The peer information was used because the CompanyPrior to our IPO in October 2020, our common stock was not publicly traded and therefore did not havetraded. As a result, the expected volatility assumption was based on peer information due to insufficient market trading history required to calculate a meaningful volatility factor. The computation of the expected option life was determined based on a reasonable expectation of the option life prior to being exercised or forfeited. The risk-free interest rate assumption was based on the U.S. Treasury constant maturity yield at the date of the grant over the expected life of the option. No dividends arewere expected to be paid.
The following tables summarize the stock option activity for the yearsyear ended December 31, 2020:2021:
| | | | | | | | | | |
| | | | Weighted‑ | | | | | Weighted‑ | |
| | | | Average | | Aggregate | | Average | ||
| | | | Exercise | | Intrinsic | | Remaining | ||
Employee & Director Options |
| Shares |
| Price |
| Value |
| Life (Years) | ||
Outstanding at December 31, 2020 |
| 5,411,930 | | $ | 12.52 | | | — | | — |
Granted |
| 1,079,219 | | $ | 13.30 | | | — | | — |
Exercised |
| (602,181) | | $ | 8.30 | | | — | | — |
Forfeited |
| (15,000) | | $ | 7.00 | | | — | | — |
Outstanding at December 31, 2021 |
| 5,873,968 | | $ | 13.11 | | $ | 8,107 | | 5.70 |
Vested at December 31, 2021 |
| 3,817,271 | | $ | 14.27 | | $ | 4,560 | | 4.11 |
| | | | | | | | | | |
| | | | Weighted‑ |
| | | | Weighted‑ | |
| | | | Average | | Aggregate | | Average | ||
| | | | Exercise |
| Intrinsic | | Remaining | ||
LGJV Personnel Options |
| Shares |
| Price |
| Value |
| Life (Years) | ||
Outstanding at December 31, 2020 | | 43,676 | | $ | 7.23 | | | — | | — |
Exercised |
| (11,283) | | $ | 7.00 | | | — | | — |
Outstanding and vested at December 31, 2021 |
| 32,393 | | $ | 7.31 | | $ | 99 | | 4.27 |
The total fair value of stock options vested during the year ended December 31, 2021, was $5,712. The total intrinsic value of stock options exercised during the year ended December 31, 2021, was $4,548. For the year ended December 31, 2021, the Company received cash payments from the exercise of stock options totaling $4,996.
Employee & Director Options | | | Shares | | | Weighted- Average Exercise Price | | | Aggregate Intrinsic Value | | | Weighted- Average Remaining Life (Years) | | ||||||||||||
Outstanding at December 31, 2019 | | | | | 3,551,186 | | | | | $ | 14.39 | | | | | | | | | | | | 5.96 | | |
Granted | | | | | 1,937,833 | | | | | $ | 9.09 | | | | | | | | | | | | | | |
Exercised | | | | | — | | | | | $ | — | | | | | | | | | | | | | | |
Forfeited | | | | | (77,089) | | | | | $ | 12.46 | | | | | | | | | | | | | | |
Outstanding at December 31, 2020 | | | | | 5,411,930 | | | | | $ | 12.52 | | | | | $ | 17,516 | | | | | | 6.62 | | |
Vested at December 31, 2020 | | | | | 3,251,211 | | | | | $ | 14.71 | | | | | $ | 9,292 | | | | | | 4.87 | | |
LGJV Personnel Options | | | Shares | | | Weighted- Average Exercise Price | | | Aggregate Intrinsic Value | | | Weighted- Average Remaining Life (Years) | | ||||||||||||
Outstanding at December 31, 2019 | | | | | 54,595 | | | | | $ | 7.37 | | | | | | | | | | | | 6.11 | | |
Granted | | | | | — | | | | | $ | — | | | | | | | | | | | | | | |
Exercised | | | | | — | | | | | $ | — | | | | | | | | | | | | | | |
Forfeited | | | | | (10,919) | | | | | $ | 7.92 | | | | | | | | | | | | | | |
Outstanding at December 31, 2020 | | | | | 43,676 | | | | | $ | 7.23 | | | | | $ | 253 | | | | | | 4.91 | | |
Vested at December 31, 2020 | | | | | 43,676 | | | | | $ | 7.23 | | | | | $ | 253 | | | | | | 4.91 | | |
58
Performance Share Unit Transactions
Performance share units granted are reported as equity awards at fair value using a Monte Carlo simulation valuation model. On December 17, 2021, 119,790 PSUs were granted to the Company’s employees with a weighted average grant date fair value per share of $14.22. The PSUs are based on the Company’s total shareholder return (“TSR”) relative to a peer group over a three-year performance period. The number of PSUs awarded can range from 0% to 200% of the initial award granted, depending on the TSR percentile rank of the Company relative to the peer group, and are payable in common stock or cash, at the Company’s discretion, at the end of their performance period.
Compensation expense is recognized ratably from the grant date over the requisite three-year vesting period. On December 31, 2021, unrecognized compensation expense related to the PSUs was $1,682 which is expected to be recognized over a weighted-average period of 3.0 years.
The following assumptions were used to compute the fair value of PSUs granted during 2021:
| | | |
Risk-free interest rate | 0.95 | % | |
Dividend yield | — | | |
Estimated volatility | 63.0 | % |
Deferred Stock Unit Transactions
Deferred stock units (“DSUs”) are awarded to directors at the discretion of the Board of Directors. The DSUs are fully vested on the grant date and each DSU entitles the holder to receive one share of the Company’s common stock upon departurethe director’s cessation of continuous service. In addition, senior executives are eligible to elect to defer receipt of any portion of cash compensation or equity compensation awards other than from the Company.exercise of stock options and take payment in the form of DSUs. Non-employee directors are eligible to elect to defer receipt of any portion of annual retainers or meeting awards and take payment in the form of DSUs. The DSU entitles the holder to receive one share of the Company’s common stock at either a date specified in the deferral election or cessation of service, whichever comes first. The fair value of DSUs are equal to the fair value of the Company’s common stock on the grant date.
The following table summarizes the DSU activity for the year ended December 31, 2021:
| | | | | |
| | | | Weighted-Average | |
| | | | Grant Date Fair | |
Director DSUs |
| Shares |
| Value | |
Outstanding at December 31, 2020 |
| 182,714 | | | — |
Granted |
| 112,803 | | $ | 11.45 |
Converted |
| (148,721) | | $ | 8.67 |
Outstanding at December 31, 2021 |
| 146,796 | | $ | 10.88 |
The total fair value of DSUs vested for the year ended December 31, 2021, was $1,292, and 2019, there were 182,714 and 177,611the total intrinsic value of DSUs outstanding, respectively.
10.Fair Value Measurements
The Company establishes a framework for measuring the fair value of financial assets and liabilities and nonfinancial assets and liabilities which are measured at fair value on a recurring (annual) basis in the form of a fair value hierarchy that prioritizes the inputs into valuation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1
: Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.59
Level 2: Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.
Level 3
: Unobservable inputs due to the fact there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.Assets and Liabilities
At December 31, 20202021 and 2019,2020, the Company’s other financial instruments consist ofincluding cash and cash equivalents, receivables, accounts payable and other current liabilities. The carrying amounts of these financial instrumentsliabilities are carried at amortized cost, which approximate fair value due to their short maturities.
Assets and Liabilities
The Company discloses and recognizes its non-financial assets and liabilities at fair value on a non-recurring basis. The estimatedbasis and makes adjustments to fair value, for these non-financial liabilities are classified as Level 3needed (for example, when there is evidence of the fair value hierarchy, as the valuation was determined based on internally developed assumptions that market participants would use in the pricing of such assets without observable inputs and no market activity.
The Company recorded its initial investment in affiliates at fair value. The estimated fair value for this non-financial asset is classified aswithin Level 3 of the fair value hierarchy, as the valuation was determined based on internally developed assumptions with few observable inputs and no market activity.
11.Commitments, Contingencies and Guarantees
In determining its accruals and disclosures with respect to loss contingencies, the Company will charge to income an estimated loss if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Legal expenses associated with the commitments and contingencies are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the combined financial statements when it is at least reasonably possible that a material loss could be incurred.
Environmental Contingencies
The Company’s mining and exploration activities are subject to various laws, regulations and permits governing the protection of the environment. These laws, regulations and permits are continually changing and are generally becoming more restrictive. The Company has made, and expects to make in the future, expenditures to comply with such laws, regulations and permits, but cannot predict the full amount of such future expenditures.
Legal
On February 22, 2022, a purported Gatos stockholder filed a putative class action lawsuit in the United States District Court for the District of Colorado against the Company, certain of our former officers, and several directors (the “U.S. Class Action”). An amended complaint was filed on August 15, 2022. The amended complaint, allegedly brought on behalf of certain purchasers of Gatos common stock and certain traders of call and put options on Gatos common stock from December 9, 2020 through January 25, 2022, seeks, among other things, damages, costs, and expenses, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 as well as Sections 11 and 15 of the Securities Act of 1933. The amended complaint alleges that certain individual defendants and Gatos, pursuant to the control and authority of the individual defendants, made false and misleading statements and/or omitted certain material information regarding the mineral resources and reserves at the Cerro Los Gatos mine. Gatos and all defendants filed a motion to dismiss this action on October 14, 2022. That motion was fully briefed as of December 23, 2022. On
60
April 26, 2023, following a joint motion, the Court ordered that mayit will postpone a ruling on defendants’ motion to dismiss until on or after June 26, 2023.
On June 13, 2023, we entered into an agreement in principle to settle the U.S. Class Action. Subject to certain conditions, including class certification by the District Court, the execution of a definitive stipulation of settlement and approval of the settlement by the District Court, the settling parties have agreed to resolve the U.S. Class Action for a payment by us and our insurers of $21,000 to a settlement fund. We are in the process of finalizing the amount of defense expenses incurred that are covered under the directors’ and officers’ insurance policy which will be requireddeducted from the $10,000 retention held by the Company. We expect to fund no more than $7,900 of the settlement, with the balance of the settlement payment to be paid by reason thereofinsurance. We and the other defendants will have a material adverse effectnot admit any liability as part of the Company’s financial conditionsettlement. Since the settlement of the U.S. Class Action is subject to conditions, there can be no assurance that the U.S. Class Action will be finally resolved pursuant to the agreement in principle that has been reached.
By Notice of Action issued February 9, 2022 and subsequent Statement of Claim dated March 11, 2022 Izabela Przybylska commenced a putative class action against Gatos Silver, Inc. (“Gatos”), certain of its former officers and directors, and others in the Ontario Superior Court of Justice on behalf of a purported class of all persons or resultsentities, wherever they may reside or be domiciled, who acquired securities of operations.
There can be no assurance that any of the foregoing matters individually or in aggregate will not result in outcomes that are materially adverse for us.
Dowa Debt Agreements
In July 2017, the LGJV Entities entered into a loan agreement (the “Term Loan”) with Dowa whereby the LGJV Entities could borrow up to $210,000 for LGD development, with a maturity date of December 29, 2027. Interest on the Term Loan accruesaccrued daily at LIBOR plus 2.35%, with the interest to be added to the amount borrowed until commencement of production. During 2018, the LGJV paid Dowa a $4,200 closing fee. Commencing June 30, 2021, 14 consecutive semi-annual equal payments of the aggregate principal and capitalized interest begin.began. The Company iswas required to pay an arrangement fee on the borrowing, calculated as 2% per annum of 70% of the outstanding principal balance, payable in semi-annual installments, on that date, which iswas two business days prior to June 30 and December 31 each fiscal year until maturity, commencing after the initial drawdown, which occurred in July 2018. The Term Loan also requiresrequired additional principal payments equal to 70% of excess cash flows (as defined). As of December 31, 2020,
On July 26, 2021, the Term Loan was repaid in full through capital contributions made to the LGJV had $222,783 outstanding underby the Term Loan.
On January 23, 2018, the LGJV entered into a loan agreement (the “Dowa MPR Loan”) with Dowa whereby the LGJV could borrow up to $65,700 to continue LGD development. Interest on this loan accrued daily at LIBOR plus 1.5% and was added to the amount borrowed. The amount borrowed plus accrued interest was due the earlier of June 30, 2019, or upon LGD’s substantial completion. If the Dowa MPR Loan was not repaid in full on or before the due date, Dowa could elect to convert all or a portion of the principal amount into additional LGJV ownership at a favorable conversion rate.
In connection with entering into the WCF (as defined below), the Company contributed $18,200 to the LGJV in May 2019 to provide funding for a partial repayment of principal and interest related to the Dowa MPR Loan. In late May 2019, the Dowa MPR Loan was fully extinguished with a cash payment of $18,200 and the conversion of the remaining $50,737 of principal and interest for an approximate 18.5% of the equity interest of the LGJV.interest. The conversion of the remaining principal and interest increased Dowa’s ownership in the LGJV entities by 18.5% to 48.5%. Due to the LGJV ownership dilution, the Company recognized a dilution loss on affiliates of $11,231 in May 2019. At December 31, 2020, the ownership of the LGJV entities was 51.5% the Company and 48.5% Dowa. On March 11, 2021, the Company repurchased the 18.5% interest from Dowa, for a total consideration of $71,550, including a 70% penalty and any Dowa holding costs of this incremental interest, increasing ourthe Company’s ownership in the LGJV to 70.0%. These transactions resulted in a $47,400 higher basis than the underlying net assets of the LGJV Entities. This basis difference is being amortized as the LGJV Entities’ proven and probable reserves are processed.
61
On May 30, 2019, the LGJV entered into a working capital facility agreement (the “WCF”) with Dowa whereby the LGJV could borrow up to $60,000 to fund the working capital and sustaining capital requirements of the LGD. Interest on this loan accruesaccrued daily at LIBOR plus 3.0% and all outstanding principal and interest matureswas to mature on June 28, 2021. The Company iswas required to pay an arrangement fee on the borrowing, calculated as 15.0% per annum of 70.0% of the average daily principal amount outstanding under the WCF during such fiscal quarter. As of December 31, 2020,On March 11, 2021, the LGJV had $60,000 outstanding under the WCF. On March 11, 2021, weWCF was extinguished our portion of the WCF of $42,000.
The Company has guaranteedguarantees the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of December 31, 2021, the LGJV had $6,011 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $14, with varying maturity dates through August 2023.
12.Debt
On July 12, 2021, the Company entered into a Credit Facility. The Credit Facility provides for a revolving line of credit in a principal amount of $50,000 and had an accordion feature which at the time allowed for an increase in the total line of credit up to $100,000, subject to certain conditions. Loans under the Credit Facility bore interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% or the U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined in accordance with the Company’s consolidated net leverage ratio as of the end of the applicable period. The Credit Facility contains affirmative and negative covenants that are customary for credit agreements of this nature. The affirmative covenants consist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, among other things, limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. Obligations under the Credit Facility may be accelerated upon the occurrence of certain customary events of default. The Company complied with all covenants under the Credit Facility as of December 31, 2021.
On July 19, 2021, the Company borrowed $13,000 under the Credit Facility at a rate of LIBOR plus 3%. Debt issuance costs of $442 were to be amortized through July 31, 2024, prior to the amended and restated Credit Facility (see terms below). The current balance outstanding on the Credit Facility is $9,000, following a $4,000 principal repayment in December 2022.
The Company recognized interest expense of $185 and $62 for amortization of debt issuance cost, for the year ended December 31, 2021. The Company paid interest of $168 for the year ended December 31, 2021.
On March 7, 2022, the Company amended the Credit Facility with the lender, Bank of Montreal (“BMO”), to address potential loan covenant deficiencies. The amendment included the following revisions:
● | audited financial statements were to be provided prior to November 15, 2022; |
● | the credit limit was reduced to $30,000, until the Company delivered a new LOM CLG financial model with updated mineral reserves; |
● | upon assessment of the new CLG financial model, BMO, in its sole discretion, may increase the credit limit up to the original $50,000; |
● | requirement to provide updated financial projections for the CLG by September 30, 2022. The financial projections were provided by the required date and it was used as the basis for the amendment entered into on December 19, 2022 discussed below; and |
● | waivers of certain defaults, events of default, representations and warranties and covenants arising out of the facts that led to the potential reduction in metal content of the Company’s previously stated mineral reserve figures. |
On December 19, 2022, the Company entered an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of $50,000, with an accordion feature providing up to an additional $25,000. Key terms of the amended Credit Facility include:
62
● | audited financial statements for fiscal years 2021 are to be provided no later than April 15, 2023, and audited financial statements for fiscal year 2022 and unaudited financial statements for the first three fiscal quarters in fiscal year 2022 are to be provided no later than April 30, 2023. A waiver was subsequently extended for the aforementioned financial statements and the unaudited financial statements for the three months ended March 31, 2023, to be provided no later than July 15, 2023; |
● | $50,000 revolving line of credit with an accordion feature, which allows for an increase in the total line of credit up to $75,000, subject to certain conditions; |
● | The maturity date is extended from July 31, 2024 to December 31, 2025; |
● | A change in the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”); and |
● | Loans under the Revolver bear interest at a rate equal to either a term SOFR rate plus a margin ranging from 3.00% to 4.00% or a U.S. base rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company. |
The components of loss from continuing operations before income taxes were as follows for the years ended December 31:
| | | 2020 | | | 2019 | | ||||||
U.S. | | | | $ | (32,964) | | | | | $ | (28,761) | | |
Mexico | | | | | (2,063) | | | | | | (2,146) | | |
Total | | | | $ | (35,027) | | | | | $ | (30,907) | | |
| | | | | | |
|
| 2021 |
| 2020 | ||
| | (restated) | | | ||
U.S. | | $ | (61,976) | | $ | (32,964) |
Mexico | | | (3,879) | |
| (2,063) |
Total | | $ | (65,855) | | $ | (35,027) |
The consolidated income tax benefit from continuing operations consisted of nil and nil, for the years ended December 31, 2021 and 2020, and 2019, respectively.
A reconciliation of the actual income tax benefit and the tax computed by applying the applicable U.S. federal rate of 21% to the loss before income taxes is as follows for the years ended December 31:
| | | | | | |
| | 2021 | | 2020 | ||
|
| (restated) |
| | ||
Tax benefit from continuing operations | | $ | 13,830 | | $ | 7,356 |
State tax benefit from continuing operations | | | 136 | |
| 1,577 |
Nondeductible Expenses | | | — | |
| (773) |
Change in Valuation Allowance | | | (6,000) | |
| (8,707) |
Effect of Change in Tax Rates | | | (9,223) | |
| 2,991 |
US/Foreign Tax Rate Differential | | | 398 | | | 49 |
Current Year NOL Utilization | | | — | | | (2,186) |
Other | | | 859 | |
| (307) |
Total income tax benefit | | $ | — | | $ | — |
| | | 2020 | | | 2019 | | ||||||
Tax benefit from continuing operations | | | | $ | 7,356 | | | | | $ | 6,491 | | |
State tax benefit from continuing operations | | | | | 1,577 | | | | | | 1,052 | | |
Nondeductible expenses | | | | | (773) | | | | | | (2) | | |
Change in valuation allowance | | | | | (8,707) | | | | | | (10,111) | | |
Effect of tax rate change | | | | | 2,991 | | | | | | 666 | | |
Effect of foreign tax rate differential | | | | | 49 | | | | | | 125 | | |
Effect of reorganization on net operating loss | | | | | (2,186) | | | | | | 2,100 | | |
Other | | | | | (307) | | | | | | (321) | | |
Total income tax benefit | | | | $ | — | | | | | $ | — | | |
63
The components of the net deferred tax assets (liabilities) are summarized as follows for the year ended:
| | | 2020 | | | 2019 | | ||||||
Deferred tax assets | | | | | | | | | | | | | |
Accrued compensation | | | | $ | 457 | | | | | $ | 259 | | |
Deferred share unit awards | | | | | 218 | | | | | | 172 | | |
Other accrued liabilities | | | | | 26 | | | | | | 24 | | |
Mineral properties | | | | | 2,487 | | | | | | 2,332 | | |
Exploration | | | | | — | | | | | | 48 | | |
Operating loss carryforward | | | | | 30,729 | | | | | | 29,068 | | |
Foreign deferred tax assets | | | | | 14,091 | | | | | | 8,736 | | |
Stock options | | | | | 8,182 | | | | | | 6,605 | | |
Loan fees | | | | | 1,303 | | | | | | 592 | | |
Other | | | | | 27 | | | | | | 26 | | |
Valuation allowances | | | | | (56,320) | | | | | | (47,600) | | |
Total deferred tax assets | | | | | 1,200 | | | | | | 262 | | |
Deferred tax liabilities | | | | | | | | | | | | | |
Property, plant and equipment | | | | | (276) | | | | | | (253) | | |
Exploration and development | | | | | (16) | | | | | | — | | |
Prepaid expenses | | | | | (908) | | | | | | (9) | | |
Total deferred tax liabilities | | | | | (1,200) | | | | | | (262) | | |
Net deferred income tax assets (liabilities) | | | | $ | — | | | | | $ | — | | |
| | | | | | |
| | 2021 | | 2020 | ||
|
| (restated) |
| | ||
Deferred tax assets | | | | | | |
Accrued compensation | | $ | 29 | | $ | 457 |
Deferred share unit awards | | | 427 | |
| 218 |
Other accrued liabilities | | | 22 | |
| 26 |
Mineral properties | | | 2,057 | |
| 2,487 |
U.S. operating loss carryforward | | | 22,340 | | | 30,729 |
LGJV equity investment | | | 7,395 | |
| 14,091 |
Mexico operating loss carryforward | | | 3,049 | | | — |
Stock Options | | | 8,518 | |
| 8,182 |
Loan Fees | | | — | |
| 1,303 |
Other | | | 22 | | | 27 |
Valuation allowances | | | (43,026) | |
| (56,320) |
Total deferred tax assets | | $ | 833 | | $ | 1,200 |
Deferred tax liabilities | | | | |
| |
Property, plant and equipment | | | (229) | | | (276) |
Exploration and Development | | | (19) | |
| (16) |
Prepaid expenses | | | (585) | |
| (908) |
Total deferred tax liabilities | | $ | (833) | | $ | (1,200) |
Net deferred income tax assets (liabilities) | | $ | — | | $ | — |
Based upon the level of taxable income (loss) and projections of future taxable income (loss) over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences, and thus has recorded a valuation allowance from continuing operations against the United States and Mexico net deferred tax asset balances of $56,320. $43,026. If the Company is profitable for a number of years, and the prospects for the realization of the deferred tax assets become more likely than not, the Company will then reverse all or a portion of the valuation allowance that could result in a reduction of future reported income tax expense.
At December 31, 20202021, the Company had $118,049$103,796 of net operating loss carryforwards from continuing operations in the United States. Of the total net operating loss from continuing operations, $101,279$84,866 expire at various dates through 2037, and $16,769$18,930 may be carried forward indefinitely. There are also $5,572$10,164 (restated) of net operating loss carryforwards (net of inflation adjustments) in Mexico related to MLS which expire at various dates through 2030.2031. No assets have been recognized for net operating loss carryforwards where the Company believes it is more likely than not that the net operating losses will not be realized.
The Company has adopted the provisions of ASC 740-10,
Income Taxes. The Company files income tax returns in the U.S., Mexico, Colorado, Idaho, Montana andAs of December 31, 2020,2021, the Company has not recognized any increases or decreases in unrecognized tax benefits, as it is more likely than not that all tax positions will be upheld by the taxing authorities. The Company reports tax penalties in income tax expense. No such penalties were recognized during the periods presented.
64
On October 30, 2020, in conjunction with the IPO, Gatos Silver, Inc. (named(f.k.a. Sunshine Silver Mining & Refining Corporation prior to October 30, 2020) completed the distribution of its reportable U.S. segment, which was comprised of SOP. SOP holds an interest in the Sunshine Complex located in the Coeur d’Alene Mining District in Idaho and is comprised of the Sunshine Mine and the Sunshine Big Creek Refinery. To effect the distribution, the Company distributed, on a pro rata basis, all equity interest of SOP to its stockholders of record immediately prior to completion of the IPO. Shareholders received approximately 0.10594 shares of common stock of SOP for every share of the Company’s common stock held. SOP became a wholly owned subsidiary of a newly created Delaware corporation named Silver Opportunity Partners Corporation, subsequently renamed to Sunshine Silver Mining & Refining Corporation.
| | | December 31, 2019 | | |||
Current Assets of Discontinued Operations | | | | | | | |
Cash and cash equivalents | | | | $ | 504 | | |
Restricted Cash | | | | | 315 | | |
Materials and supplies inventory | | | | | 103 | | |
Prepaid expenses | | | | | 201 | | |
Total current assets of discontinued operations | | | | $ | 1,123 | | |
Non-Current Assets of Discontinued Operations | | | | | | | |
Metals inventory | | | | $ | 250 | | |
Property, plant and equipment, net(1) | | | | | 30,102 | | |
Total non-current assets of discontinued operations | | | | $ | 30,352 | | |
Current Liabilities of Discontinued Operations | | | | | | | |
Accounts payable and other accrued liabilities | | | | $ | 341 | | |
Other | | | | | 307 | | |
Total current liabilities of discontinued operations | | | | $ | 648 | | |
Non-Current Liabilities of Discontinued Operations | | | | | | | |
Reclamation obligations | | | | | 1,439 | | |
Total non-current liabilities of discontinued operations | | | | $ | 1,439 | | |
| | | December 31, 2019 | | |||
Mineral properties | | | | $ | 18,203 | | |
Plant and equipment | | | | | 13,621 | | |
Land | | | | | 1,814 | | |
Buildings, infrastructure and improvements | | | | | 16,798 | | |
Furniture, fixtures and computers | | | | | 556 | | |
Property, plant and equipment at cost | | | | | 50,992 | | |
Less accumulated amortization | | | | | (20,890) | | |
Property, plant and equipment, net | | | | $ | 30,102 | | |
The results of discontinued operations are presented separately in the consolidated statements of operations and comprehensive loss.operations. The results of operations for this entity for the period ended October 30, 2020, and year ended December 31, 2019 have been reflected as discontinued operations in the consolidated statements of operations and comprehensive loss for the yearsyear ended December 31, 2020, and 2019, and consist of the following:
| | | |
|
| December 31, | |
| | 2020 | |
OPERATING EXPENSES OF DISCONTINUED OPERATIONS | | | |
Exploration | | $ | 352 |
Pre-development | | | 1,700 |
General and administrative | | | 1,431 |
Amortization | | | 1,935 |
Total expenses | | | 5,418 |
| | | |
Other Income of Discontinued Operations | | | |
Other income | | | (4) |
Net Loss of Discontinued Operations | | $ | 5,414 |
| | | December 31, 2020 | | | December 31, 2019 | | ||||||
Operating Expenses of Discontinued Operations | | | | | | | | | | | | | |
Exploration | | | | $ | 352 | | | | | $ | 325 | | |
Pre-development | | | | | 1,700 | | | | | | 2,317 | | |
General and administrative | | | | | 1,431 | | | | | | 1,943 | | |
Amortization | | | | | 1,935 | | | | | | 2,335 | | |
Total expenses | | | | | 5,418 | | | | | | 6,920 | | |
Other Income of Discontinued Operations | | | | | | | | | | | | | |
Other income | | | | | (4) | | | | | | (10) | | |
Net Loss of Discontinued Operations | | | | $ | 5,414 | | | | | $ | 6,910 | | |
Other Comprehensive Gain of Discontinued Operations | | | | | | | | | | | | | |
Unrealized gain on securities, net of tax | | | | | — | | | | | | (32) | | |
Comprehensive Loss of Discontinued Operations | | | | $ | 5,414 | | | | | $ | 6,878 | | |
65
The Company has separately reported the cash flow activity of the discontinued operations in the consolidated statements of cash flows. The cash flow activity from discontinued operations for the period ended October 30, 2020, and year ended December 31, 2019 have been reflected as discontinued operations in the consolidated statements of cash flows for the yearsyear ended December 31, 2020, and 2019, and consist of the following:
| | | |
| December 31, | ||
| | 2020 | |
Discontinued Operating Activities | | | |
Net loss | | $ | (5,414) |
| | | |
Adjustments to reconcile net loss to net cash used by operating activities: | | | |
Amortization | | | 1,935 |
Stock compensation expense | | | 195 |
Accretion expense | | | 91 |
Other | | | — |
Changes in operating assets and liabilities: | | | |
Accounts payable and other accrued liabilities | | | (256) |
Materials and supplies inventory | | | (2) |
Other current assets | | | (2) |
Net cash used by operating activities of discontinued operations | | | (3,453) |
| | | |
Investing Activities of Discontinued Operations | | | |
Purchase of property, plant and equipment | | | (22) |
Transfers of restricted cash to cash | | | 40 |
Net cash provided by investing activities of discontinued operations | | | 18 |
| | | |
Financing Activities of Discontinued Operations | | | |
Related-party convertible notes | | | 500 |
PPP Loan proceeds | | | 307 |
Net cash provided by financing activities of discontinued operations | | | 807 |
| | | December 31, 2020 | | | December 31, 2019 | | ||||||
Discontinued Operating Activities | | | | | | | | | | | | | |
Net loss | | | | $ | (5,414) | | | | | $ | (6,910) | | |
Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | | | | | | | |
Amortization | | | | | 1,935 | | | | | | 2,335 | | |
Stock compensation expense | | | | | 195 | | | | | | 212 | | |
Accretion expense | | | | | 91 | | | | | | 102 | | |
Other | | | | | — | | | | | | 63 | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | |
Accounts payable and other accrued liabilities | | | | | (256) | | | | | | 97 | | |
Materials and supplies inventory | | | | | (2) | | | | | | 67 | | |
Other current assets | | | | | (2) | | | | | | 17 | | |
Net cash used by operating activities of discontinued operations | | | | | (3,453) | | | | | | (4,017) | | |
Investing Activities of Discontinued Operations | | | | | | | | | | | | | |
Purchase of property, plant and equipment | | | | | (22) | | | | | | (534) | | |
Transfers of restricted cash to cash | | | | | 40 | | | | | | — | | |
Net cash provided by (used by) investing activities of discontinued operations | | | | | 18 | | | | | | (534) | | |
Financing Activities of Discontinued Operations | | | | | | | | | | | | | |
Related-party convertible notes | | | | | 500 | | | | | | — | | |
PPP Loan proceeds | | | | | 307 | | | | | | — | | |
Net cash provided by financing activities of discontinued operations | | | | | 807 | | | | | | — | | |
The Company operates in a single industry as a corporation engaged in the acquisition, exploration and development of primarily silver mineral interests. The Company has mineral property interests in Mexico. The Company’s reportable segments are based on the Company’s mineral interests and management structure and include Mexico and Corporate segments. The Mexico segment engages in the exploration, development and operation of the Company’s Mexican mineral interests and includes the Company’s investment in its LGJV. Financial information relating to the Company’s segments is as follows:
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 (restated) | | Year Ended December 31, 2020 | ||||||||||||||
|
| Mexico |
| Corporate |
| Total |
| Mexico |
| Corporate |
| Total | ||||||
Exploration | | $ | 1,657 |
| $ | — |
| $ | 1,657 |
| $ | 785 |
| $ | — |
| $ | 785 |
General and administrative | | | 1,424 |
| | 20,023 |
| | 21,447 |
| | 549 |
| | 7,216 |
| | 7,765 |
Amortization | | | — |
| | 89 |
| | 89 |
| | — |
| | 30 |
| | 30 |
Arrangement fees | | | — |
| | 195 |
| | 195 |
| | — |
| | 4,843 |
| | 4,843 |
Interest expense | | | — | | | 185 | | | 185 | | | — | | | 4,047 | | | 4,047 |
Equity (income) loss in affiliates | | | (42,604) |
| | — |
| | (42,804) |
| | 17,585 |
| | — |
| | 17,585 |
Impairment of investment in affiliates | | | — | | | 80,348 | | | 80,348 | | | — | | | — | | | — |
Other (income) expense | | | 40 |
| | 4,698 |
| | 4,738 |
| | 9 |
| | (37) |
| | (28) |
Total assets | | | 84,277 |
| | 260,971 |
| | 345,248 |
| | 38,326 |
| | 227,084 |
| | 265,410 |
| | | Year Ended December 31, 2020 | | | Year Ended December 31, 2019 | | ||||||||||||||||||||||||||||||
| | | Mexico | | | Corporate | | | Total | | | Mexico | | | Corporate | | | Total | | ||||||||||||||||||
Exploration | | | | $ | 785 | | | | | $ | — | | | | | $ | 785 | | | | | $ | 923 | | | | | $ | — | | | | | $ | 923 | | |
General and administrative | | | | | 549 | | | | | | 7,216 | | | | | | 7,765 | | | | | | 296 | | | | | | 2,607 | | | | | | 2,903 | | |
Amortization | | | | | — | | | | | | 30 | | | | | | 30 | | | | | | — | | | | | | 34 | | | | | | 34 | | |
Arrangement fees | | | | | — | | | | | | 4,843 | | | | | | 4,843 | | | | | | — | | | | | | 2,988 | | | | | | 2,988 | | |
Interest expense | | | | | — | | | | | | 4,047 | | | | | | 4,047 | | | | | | — | | | | | | — | | | | | | — | | |
Equity loss in affiliates | | | | | 17,585 | | | | | | — | | | | | | 17,585 | | | | | | 12,865 | | | | | | — | | | | | | 12,865 | | |
Dilution loss on affiliates | | | | | — | | | | | | — | | | | | | — | | | | | | 11,231 | | | | | | — | | | | | | 11,231 | | |
Net other loss (income) | | | | | 9 | | | | | | (37) | | | | | | (28) | | | | | | 31 | | | | | | (67) | | | | | | (36) | | |
Capital expenditures | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Total assets | | | | | 38,326 | | | | | | 227,084 | | | | | | 265,410 | | | | | | 55,372 | | | | | | 67,448 | | | | | | 122,820 | | |
66
16.Investment in Affiliates
During the years ended December 31, 20202021 and 2019,2020, the Company recognized income of $42,804 and a loss of $17,585, and $12,865 loss, respectively, on its investment in the LGJV Entities, representing its ownership share of the LGJV Entities’ operational results. The combined balance sheets and combined statementsequity income or loss in affiliate includes amortization of lossthe carrying value of the investment in excess of the underlying net assets of the LGJV EntitiesEntities. The difference between these amounts is being amortized as the LGJV Entities’ proven and probable reserves are processed.
On November 10, 2022, the Company provided an updated technical report, the Los Gatos Technical Report. The Los Gatos Technical Report indicated a significant decrease in the mineral reserve and mineral resource from the previously issued technical report in 2020. The Company considered this reduction in the mineral reserve and mineral resources as an indicator of a possible other-than-temporary impairment and as a result compared the carrying value of the LGJV on December 31, 20202021, to the fair value of the LGJV.
On May 30, 2019 the Company entered into a priority distribution agreement with MPR, OSJ and 2019,Dowa, pursuant to which we directed the LGJV to contribute dividend payments to an escrow account until an aggregate amount equal to $20,000 has been deposited into the account, which was payable to Dowa as a priority dividend. The priority dividend is payable out of retained earnings from either MPR, OSJ or both. Since the $20,000 priority dividend is payable to Dowa before retained earnings can be distributed to the Company the first $20,000 of LGJV (or MPR and OSJ) net income is excluded from the net income recognized by the Company. MPR and OSJ had an accumulated loss up to the fourth quarter of 2021 at which time OSJ turned from an accumulated loss to retained earnings of $3,685. As a result, the Company reduced the equity pick-up calculation of the LGJV by the $2,579 retained earnings.
The fair value of the LGJV was estimated based on the net present value (“NPV”) of the expected cash flows to be generated by the LGJV on 70% basis. The discount rate used was 5.00%. The fair value of the investment in the LGJV was estimated to be $333,447 (restated) and the carrying value at December 31, 2021 was $413,795. Since the carrying value is exceeding the fair value, an impairment charge of $80,348 (restated) was recorded during the fourth quarter of 2021. See Note 10 – Fair Value Measurements for additional detail of the yearsassumptions used in the determination of the fair value of the long-lived assets tested for impairment.
For the year ended December 31, 20202021, the Company contributed $260,039 to the LGJV to repurchase 18.5% of the ownership of the LGJV, to retire the WCF and 2019 are as follows:
| | | December 31, 2020 | | | December 31, 2019 | | ||||||
ASSETS | | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | | |
Cash and cash equivalents | | | | $ | 1,676 | | | | | $ | 1,302 | | |
Receivables | | | | | 3,988 | | | | | | 5,655 | | |
Inventories | | | | | 10,315 | | | | | | 11,374 | | |
VAT receivable | | | | | 50,732 | | | | | | 50,184 | | |
Other current assets | | | | | 2,891 | | | | | | 1,672 | | |
Total current assets | | | | | 69,602 | | | | | | 70,187 | | |
Non-Current Assets | | | | | | | | | | | | | |
Mine development, net | | | | | 202,874 | | | | | | 182,602 | | |
Property, plant and equipment, net | | | | | 196,942 | | | | | | 216,131 | | |
Total non-current assets | | | | | 399,816 | | | | | | 398,733 | | |
Total Assets | | | | $ | 469,418 | | | | | $ | 468,920 | | |
LIABILITIES AND OWNERS’ CAPITAL | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | | $ | 35,767 | | | | | $ | 43,287 | | |
Related party payable | | | | | 1,703 | | | | | | 6,875 | | |
Accrued interest | | | | | 101 | | | | | | 885 | | |
Unearned revenue | | | | | 3,276 | | | | | | — | | |
Equipment loans | | | | | 7,084 | | | | | | 6,948 | | |
Dowa Term Loan | | | | | 31,826 | | | | | | — | | |
Working Capital Facility | | | | | 60,000 | | | | | | — | | |
Total current liabilities | | | | | 139,757 | | | | | | 57,995 | | |
Non-Current Liabilities | | | | | | | | | | | | | |
Dowa Term Loan | | | | | 187,767 | | | | | | 217,796 | | |
Working Capital Facility | | | | | — | | | | | | 60,000 | | |
Equipment loans | | | | | 6,120 | | | | | | 12,916 | | |
Reclamation obligations | | | | | 12,162 | | | | | | 11,314 | | |
Total non-current liabilities | | | | | 206,049 | | | | | | 302,026 | | |
Owners’ Capital | | | | | | | | | | | | | |
Capital contributions | | | | | 271,368 | | | | | | 237,905 | | |
Paid-in capital | | | | | 16,366 | | | | | | 7,400 | | |
Accumulated deficit | | | | | (164,122) | | | | | | (136,406) | | |
Total owners’ capital | | | | | 123,612 | | | | | | 108,899 | | |
Total Liabilities and Owners’ Capital | | | | $ | 469,418 | | | | | $ | 468,920 | | |
| | | Twelve Months Ended December 31, | | |||||||||
| | | 2020 | | | 2019 | | ||||||
Sales | | | | $ | 121,470 | | | | | $ | 36,508 | | |
Expenses | | | | | | | | | | | | | |
Cost of sales | | | | | 65,005 | | | | | | 30,339 | | |
Royalties | | | | | 2,148 | | | | | | 184 | | |
Exploration | | | | | 841 | | | | | | 208 | | |
General and administrative | | | | | 9,718 | | | | | | 2,587 | | |
Depreciation, depletion and amortization | | | | | 44,904 | | | | | | 15,460 | | |
Other | | | | | 3,416 | | | | | | — | | |
| | | | | 126,032 | | | | | | 48,778 | | |
Other (income) expense | | | | | | | | | | | | | |
Interest expense | | | | | 12,484 | | | | | | 5,107 | | |
Arrangement fee | | | | | 8,888 | | | | | | 3,524 | | |
Accretion expense | | | | | 849 | | | | | | 789 | | |
Other (income) expense | | | | | (109) | | | | | | 239 | | |
Foreign exchange loss | | | | | 1,042 | | | | | | 174 | | |
| | | | | 23,154 | | | | | | 9,833 | | |
Net Loss | | | | $ | (27,716) | | | | | $ | (22,103) | | |
In April 2022, July 2022 and November 2022, the Company received dividends from the LGJV in the amount of $5,935, $9,975 and $13,300, respectively, net of withholding taxes.
The LGJV entities’ combined balance sheets as of December 31, 2021 (restated) and 2020, and combined statements of income (loss) for the years ended December 31, 2021 (restated) and 2020, are as follows:
67
LOS GATOS JOINT VENTURE
COMBINED BALANCE SHEETS
(in thousands)
| | | | | | |
|
| December 31, |
| December 31, | ||
| | 2021 | | 2020 | ||
| | (restated) | | | | |
ASSETS |
| |
|
| |
|
Current Assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 20,280 | | $ | 1,676 |
Receivables | |
| 11,263 | |
| 3,988 |
Inventories | |
| 11,062 | |
| 10,315 |
VAT receivable | |
| 46,242 | |
| 50,732 |
Other current assets | |
| 4,515 | |
| 2,891 |
Total current assets | |
| 93,362 | |
| 69,602 |
Non‑Current Assets | |
|
| |
|
|
Mine development, net | |
| 229,076 | |
| 202,874 |
Property, plant and equipment, net | |
| 190,896 | |
| 196,942 |
Deferred tax assets | | | 17,407 | | | — |
Total non‑current assets | |
| 437,379 | |
| 399,816 |
Total Assets | | $ | 530,741 | | $ | 469,418 |
LIABILITIES AND OWNERS’ CAPITAL | |
|
| |
|
|
Current Liabilities | |
|
| |
|
|
Accounts payable and accrued liabilities | | $ | 33,179 | | $ | 35,767 |
Related party payable | |
| 1,609 | |
| 1,703 |
Accrued interest | |
| 51 | |
| 101 |
Unearned revenue | |
| 1,714 | |
| 3,276 |
Equipment loans | |
| 5,534 | |
| 7,084 |
Term Loan | | | — | | | 31,826 |
Working Capital Facility | | | — | | | 60,000 |
Total current liabilities | |
| 42,087 | |
| 139,757 |
Non‑Current Liabilities | |
|
| |
|
|
Term Loan | |
| — | |
| 187,767 |
Equipment loans | |
| 478 | |
| 6,120 |
Asset retirement obligation | |
| 14,706 | |
| 12,162 |
Total non‑current liabilities | |
| 15,184 | |
| 206,049 |
Owners’ Capital | |
| | |
| |
Capital contributions | |
| 540,638 | |
| 271,368 |
Paid‑in capital | |
| 18,370 | |
| 16,366 |
Accumulated deficit | |
| (85,538) | |
| (164,122) |
Total owners’ capital | |
| 473,470 | |
| 123,612 |
Total Liabilities and Owners’ Capital | | $ | 530,741 | | $ | 469,418 |
68
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF CONTENTSINCOME (LOSS)
(in thousands)
| | | | | | |
| | Years Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | (restated) | | | | |
Revenue |
| $ | 249,194 |
| $ | 121,470 |
Expenses | |
| | |
| |
Cost of sales | |
| 97,710 | |
| 65,005 |
Royalties | |
| 4,781 | |
| 2,148 |
Exploration | |
| 5,383 | |
| 841 |
General and administrative | |
| 13,345 | |
| 9,718 |
Depreciation, depletion and amortization | |
| 52,402 | |
| 44,904 |
Other | |
| — | |
| 3,416 |
Total expenses | |
| 173,621 | |
| 126,032 |
Other income (expense) | |
|
| |
|
|
Interest expense | |
| (5,542) | |
| (12,484) |
Loss on Term Loan extinguishment | | | (4,359) | | | — |
Arrangement fee | |
| (2,090) | |
| (8,888) |
Accretion expense | |
| (924) | |
| (849) |
Other income | |
| 222 | |
| 109 |
Foreign exchange (loss) gain | |
| 607 | |
| (1,042) |
Total other expense | |
| (12,086) | |
| (23,154) |
Income (loss) before taxes | | | 63,487 | | | (27,716) |
Income tax recovery | | | 15,097 | | | — |
Net income (loss) | | $ | 78,584 | | $ | (27,716) |
17.Subsequent Events
The LGJV paid its first dividend of $20,000 to its partners in April 2022. After withholding taxes and payment of the initial $10,300 priority dividend to Dowa, we received $5,935. In July 2022 and November 2022, the LGJV paid additional dividends in the amount of $15,000 and $20,000, respectively, to its partners. The Company’s share, after withholding taxes, was $9,750 and $13,300, respectively, for the July 2022 and November 2022 dividend payments.
On December 19, 2022, we entered into an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of $50,000, with an accordion feature, as further described above.
Except as disclosed above there are no events or transactions requiring recognition in these consolidated financial statements through June 26, 2023, the date which the financial statements were issued.
69
To Board of Managers
Opinion
We have audited the accompanying combined financial statements of Los Gatos Joint Venture and its subsidiaries,, which comprise the combined balance sheetssheet as of December 31, 2020 and 2019,2021, and the related combined statements of loss,income (loss), of owners’ capital and cash flows for the yearsyear then ended, and the related notes (collectively referred to as the “combined financial statements”).
In our opinion, the accompanying combined financial statements present fairly, in all material respects, the financial position of Los Gatos Joint Venture at December 31, 2021, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Combined Financial Statements section of our report. We are required to be independent of Los Gatos Joint Venture and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Restatement of 2021 combined financial statements
As discussed in Note 3 to the combined financial statements.
Other Matter
The combined financial statements of the Los Gatos Joint Venture for the year ended December 31, 2020, were audited by another auditor who expressed an unmodified opinion on those combined financial statements on March 29, 2021.
Responsibilities of Management for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of thesethe combined financial statements in accordance with U.S.accounting principles generally accepted accounting principles; this includesin the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free fromof material misstatement, whether due to fraud or error.
In preparing the combined financial statements, based on our audits. We conducted our audits in accordance with auditing standards generally acceptedmanagement is required to evaluate whether there are conditions or events, considered in the United Statesaggregate, that raise substantial doubt about Los Gatos Joint Venture’s ability to continue as a going concern for one year after the date that the combined financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of America. Those standards require that we plan and perform the auditCombined Financial Statements
Our objectives are to obtain reasonable assurance about whether the combined financial statements as a whole are free of material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material misstatement.
70
In performing an audit in accordance with GAAS, we:
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and its subsidiaries astiming of December 31, 2020the audit, significant audit findings, and 2019,certain internal control-related matters that we identified during the audit.
/s/ Ernst and the resultsYoung LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
June 26, 2023
71
| | | 2020 | | | 2019 | | ||||||
ASSETS | | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | | |
Cash and cash equivalents | | | | $ | 1,676 | | | | | $ | 1,302 | | |
Receivables | | | | | 3,988 | | | | | | 5,655 | | |
Inventories | | | | | 10,315 | | | | | | 11,374 | | |
VAT receivable | | | | | 50,732 | | | | | | 50,184 | | |
Other current assets | | | | | 2,891 | | | | | | 1,672 | | |
Total current assets | | | | | 69,602 | | | | | | 70,187 | | |
Non-Current Assets | | | | | | | | | | | | | |
Mine development, net | | | | | 202,874 | | | | | | 182,602 | | |
Property, plant and equipment, net | | | | | 196,942 | | | | | | 216,131 | | |
Total non-current assets | | | | | 399,816 | | | | | | 398,733 | | |
Total Assets | | | | $ | 469,418 | | | | | $ | 468,920 | | |
LIABILITIES AND OWNERS’ CAPITAL | | | | | | | | | | | | | |
Current Liabilities | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | | $ | 35,767 | | | | | $ | 43,287 | | |
Related party payable | | | | | 1,703 | | | | | | 6,875 | | |
Accrued interest | | | | | 101 | | | | | | 885 | | |
Unearned revenue | | | | | 3,276 | | | | | | — | | |
Equipment loans | | | | | 7,084 | | | | | | 6,948 | | |
Dowa Term Loan | | | | | 31,826 | | | | | | — | | |
Working Capital Facility | | | | | 60,000 | | | | | | — | | |
Total current liabilities | | | | | 139,757 | | | | | | 57,995 | | |
Non-Current Liabilities | | | | | | | | | | | | | |
Dowa Term Loan | | | | | 187,767 | | | | | | 217,796 | | |
Working Capital Facility | | | | | — | | | | | | 60,000 | | |
Equipment loans | | | | | 6,120 | | | | | | 12,916 | | |
Reclamation obligations | | | | | 12,162 | | | | | | 11,314 | | |
Total non-current liabilities | | | | | 206,049 | | | | | | 302,026 | | |
Owners’ Capital | | | | | | | | | | | | | |
Capital contributions | | | | | 271,368 | | | | | | 237,905 | | |
Paid-in capital | | | | | 16,366 | | | | | | 7,400 | | |
Accumulated deficit | | | | | (164,122) | | | | | | (136,406) | | |
Total owners’ capital | | | | | 123,612 | | | | | | 108,899 | | |
Total Liabilities and Owners’ Capital | | | | $ | 469,418 | | | | | $ | 468,920 | | |
| | | | | | | | |
|
| Notes |
| 2021 |
| 2020 | ||
| | | | (restated) | | | | |
ASSETS | | | | | | | ||
Current Assets |
| | | |
|
| |
|
Cash and cash equivalents | | | | $ | 20,280 | | $ | 1,676 |
Receivables | | | |
| 11,263 | |
| 3,988 |
Inventories | | 5 | |
| 11,062 | |
| 10,315 |
VAT receivable | | | |
| 46,242 | |
| 50,732 |
Other current assets | | 6 | |
| 4,515 | |
| 2,891 |
Total current assets | | | |
| 93,362 | |
| 69,602 |
Non-Current Assets | | | |
|
| |
|
|
Mine development, net | | | |
| 229,076 | |
| 202,874 |
Property, plant and equipment, net | | 7 | |
| 190,896 | |
| 196,942 |
Deferred tax assets | | 16 | | | 17,407 | | | — |
Total non-current assets | | | |
| 437,379 | |
| 399,816 |
Total Assets | | | | $ | 530,741 | | $ | 469,418 |
LIABILITIES AND OWNERS’ CAPITAL | | | |
|
| |
|
|
Current Liabilities | | | |
|
| |
|
|
Accounts payable and accrued liabilities | | 8 | | $ | 33,179 | | $ | 35,767 |
Related party payable | | | |
| 1,609 | |
| 1,703 |
Accrued interest | | | |
| 51 | |
| 101 |
Unearned revenue | | 4 | |
| 1,714 | |
| 3,276 |
Equipment loans | | 15 | |
| 5,534 | |
| 7,084 |
Term Loan | | 10 | |
| — | |
| 31,826 |
Working Capital Facility | | 10 | |
| — | |
| 60,000 |
Total current liabilities | | | |
| 42,087 | |
| 139,757 |
Non-Current Liabilities | | | |
|
| |
|
|
Term Loan | | 10 | |
| — | |
| 187,767 |
Equipment loans | | 15 | |
| 478 | |
| 6,120 |
Asset retirement obligation | | 12 | |
| 14,706 | |
| 12,162 |
Total non-current liabilities | | | |
| 15,184 | |
| 206,049 |
Owners’ Capital | | | |
|
| |
|
|
Capital contributions | | | |
| 540,638 | |
| 271,368 |
Paid-in capital | | | |
| 18,370 | |
| 16,366 |
Accumulated deficit | | | |
| (85,538) | |
| (164,122) |
Total owners’ capital | | | |
| 473,470 | |
| 123,612 |
Total Liabilities and Owners’ Capital | | | | $ | 530,741 | | $ | 469,418 |
See accompanying notes to the combined financial statements.
72
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
| | | 2020 | | | 2019 | | ||||||
Sales | | | | $ | 121,470 | | | | | $ | 36,508 | | |
Expenses | | | | | | | | | | | | | |
Cost of sales | | | | | 65,005 | | | | | | 30,339 | | |
Royalties | | | | | 2,148 | | | | | | 184 | | |
Exploration | | | | | 841 | | | | | | 208 | | |
General and administrative | | | | | 9,718 | | | | | | 2,587 | | |
Depreciation, depletion and amortization | | | | | 44,904 | | | | | | 15,460 | | |
Other | | | | | 3,416 | | | | | | — | | |
| | | | | 126,032 | | | | | | 48,778 | | |
Other (income) expense | | | | | | | | | | | | | |
Interest expense | | | | | 12,484 | | | | | | 5,107 | | |
Arrangement fee | | | | | 8,888 | | | | | | 3,524 | | |
Accretion expense | | | | | 849 | | | | | | 789 | | |
Other (income) expense | | | | | (109) | | | | | | 239 | | |
Foreign exchange loss | | | | | 1,042 | | | | | | 174 | | |
| | | | | 23,154 | | | | | | 9,833 | | |
Net Loss | | | | $ | (27,716) | | | | | $ | (22,103) | | |
| | | | | | | | |
|
| Notes |
| 2021 |
| 2020 | ||
| | | | (restated) | | | | |
Revenue | | 3 | | $ | 249,194 | | $ | 121,470 |
Expenses | | | |
|
| |
|
|
Cost of sales | | | |
| 97,710 | |
| 65,005 |
Royalties | | | |
| 4,781 | |
| 2,148 |
Exploration | | | |
| 5,383 | |
| 841 |
General and administrative | | 9 | |
| 13,345 | |
| 9,718 |
Depreciation, depletion and amortization | | | |
| 52,402 | |
| 44,904 |
Other | | | | | — | | | 3,416 |
Total expenses | | | |
| 173,621 | |
| 126,032 |
| | | |
| | |
| |
Other income (expense) | | | |
|
| |
|
|
Interest expense | | | |
| (5,542) | |
| (12,484) |
Loss on Term Loan extinguishment | | 10 | | | (4,359) | | | — |
Arrangement fee | | | |
| (2,090) | |
| (8,888) |
Accretion expense | | 12 | |
| (924) | |
| (849) |
Other income | | | |
| 222 | |
| 109 |
Foreign exchange (loss) gain | | | |
| 607 | |
| (1,042) |
Total other expense | | | | | (12,086) | | | (23,154) |
| | | |
| | |
| |
Income (loss) before taxes | | | | | 63,487 | | | (27,716) |
Income tax recovery | | | | | 15,097 | | | — |
Net income (loss) | | | | $ | 78,584 | | $ | (27,716) |
See accompanying notes to the combined financial statements.
73
| | | Capital Contributions | | | Paid-in Capital | | | Accumulated Deficit | | | Total | | ||||||||||||
Balance at December 31, 2018 | | | | $ | 168,967 | | | | | $ | 1,358 | | | | | $ | (114,303) | | | | | $ | 56,022 | | |
Contributions | | | | | 68,938 | | | | | | — | | | | | | — | | | | | | 68,938 | | |
Other | | | | | — | | | | | | (116) | | | | | | — | | | | | | (116) | | |
Costs paid by investor | | | | | — | | | | | | 6,158 | | | | | | — | | | | | | 6,158 | | |
Net loss | | | | | — | | | | | | — | | | | | | (22,103) | | | | | | (22,103) | | |
Balance at December 31, 2019 | | | | $ | 237,905 | | | | | $ | 7,400 | | | | | $ | (136,406) | | | | | $ | 108,899 | | |
Contributions | | | | | 33,463 | | | | | | — | | | | | | — | | | | | | 33,463 | | |
Costs paid by investor | | | | | — | | | | | | 8,966 | | | | | | — | | | | | | 8,966 | | |
Net loss | | | | | — | | | | | | — | | | | | | (27,716) | | | | | | (27,716) | | |
Balance at December 31, 2020 | | | | $ | 271,368 | | | | | $ | 16,366 | | | | | $ | (164,122) | | | | | $ | 123,612 | | |
| | | | | | | | | | | | |
|
| Capital |
| | |
| Accumulated |
| | | ||
| | Contributions | | Paid-in Capital | | Deficit | | Total | ||||
Balance at December 31, 2019 | | $ | 237,905 | | $ | 7,400 | | $ | (136,406) | | $ | 108,899 |
Contributions | |
| 33,463 | |
| — | |
| — | |
| 33,463 |
Costs paid by investor | |
| — | |
| 8,966 | |
| — | |
| 8,966 |
Net loss | |
| — | |
| — | |
| (27,716) | |
| (27,716) |
Balance at December 31, 2020 | | $ | 271,368 | | $ | 16,366 | | $ | (164,122) | | $ | 123,612 |
Contributions | |
| 269,270 | |
| — | |
| — | |
| 269,270 |
Costs paid by investor | |
| — | |
| 2,004 | |
| — | |
| 2,004 |
Net income (restated) | |
| — | |
| — | |
| 78,584 | |
| 78,584 |
Balance at December 31, 2021 (restated) | | $ | 540,638 | | $ | 18,370 | | $ | (85,538) | | $ | 473,470 |
See accompanying notes to the combined financial statements.
74
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
| | | 2020 | | | 2019 | | ||||||
Cash flows from operating activities: | | | | | | | | | | | | | |
Net loss | | | | $ | (27,716) | | | | | $ | (22,103) | | |
Adjustments to reconcile net loss to net cash provided by (used by) operating activities: | | | | | | | | | | | | | |
Depreciation, depletion and amortization | | | | | 44,905 | | | | | | 15,460 | | |
Arrangement fee | | | | | 8,888 | | | | | | 3,524 | | |
Accretion | | | | | 849 | | | | | | 789 | | |
Unrealized loss on foreign currency rate change | | | | | 4,696 | | | | | | 272 | | |
Interest expense | | | | | 111 | | | | | | — | | |
Other | | | | | 77 | | | | | | (116) | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | |
VAT receivable | | | | | (6,071) | | | | | | (19,569) | | |
Receivables | | | | | 1,667 | | | | | | (5,655) | | |
Inventories | | | | | 5,055 | | | | | | (7,027) | | |
Unearned revenue | | | | | 3,276 | | | | | | — | | |
Other current assets | | | | | (1,781) | | | | | | (977) | | |
Accounts payable and other accrued liabilities | | | | | 9,569 | | | | | | 13,368 | | |
Payables to related parties | | | | | 4,276 | | | | | | 3,281 | | |
Accrued interest | | | | | 71 | | | | | | 2,745 | | |
Net cash provided by (used by) operating activities | | | | | 47,872 | | | | | | (16,008) | | |
Cash flows from investing activities: | | | | | | | | | | | | | |
Deposits | | | | | — | | | | | | 1,005 | | |
Other current assets | | | | | — | | | | | | 2,568 | | |
Mine development | | | | | (50,618) | | | | | | (74,630) | | |
Purchase of property, plant and equipment | | | | | (14,249) | | | | | | (53,727) | | |
Materials and supplies inventory | | | | | 431 | | | | | | — | | |
Accrued interest | | | | | — | | | | | | (513) | | |
Transfers from restricted cash | | | | | — | | | | | | 2,219 | | |
Net cash used by investing activities | | | | | (64,436) | | | | | | (123,078) | | |
Cash flows from financing activities: | | | | | | | | | | | | | |
Capital contributions | | | | | 5,000 | | | | | | 18,200 | | |
Dowa MPR Loan paydown | | | | | — | | | | | | (17,336) | | |
Equipment loan payments | | | | | (6,966) | | | | | | (6,485) | | |
Working Capital Facility advances | | | | | — | | | | | | 60,000 | | |
Dowa Term Loan borrowings | | | | | — | | | | | | 75,000 | | |
Related party borrowings | | | | | 18,904 | | | | | | — | | |
Deferred financing costs | | | | | — | | | | | | (222) | | |
Net cash provided by financing activities | | | | | 16,938 | | | | | | 129,157 | | |
Net increase (decrease) in cash and cash equivalents | | | | | 374 | | | | | | (9,929) | | |
Cash and cash equivalents, beginning of period | | | | | 1,302 | | | | | | 11,231 | | |
Cash and cash equivalents, end of period | | | | $ | 1,676 | | | | | $ | 1,302 | | |
Interest paid | | | | $ | 7,406 | | | | | $ | 3,940 | | |
Supplemental dislosure of noncash transactions: | | | | | | | | | | | | | |
Accrued interest | | | | $ | — | | | | | $ | 8,535 | | |
Equipment loan borrowings | | | | $ | — | | | | | $ | 7,679 | | |
Conversion of related party payables to equity | | | | $ | 9,448 | | | | | $ | — | | |
Conversion of related party borrowings to equity | | | | $ | 18,904 | | | | | $ | — | | |
Conversion of MPR Loan to equity | | | | $ | — | | | | | $ | 50,737 | | |
Conversion of related party accrued interest to debt | | | | $ | 854 | | | | | $ | 10,179 | | |
Depreciation expense included in mine development | | | | $ | — | | | | | $ | 4,589 | | |
Materials and supplies included in accrued liabilities | | | | $ | 4,428 | | | | | $ | — | | |
Mine development costs included in accrued liabilities | | | | $ | 11,229 | | | | | $ | 10,720 | | |
Property, plant and equipment included in accrued liabilities | | | | $ | 8,917 | | | | | $ | 10,290 | | |
Deferred finacning costs included in PPE and mine development | | | | $ | — | | | | | $ | 495 | | |
Equity method investee portion of arrangement fee | | | | $ | — | | | | | $ | 2,634 | | |
| | | | | | | | |
| | | | Twelve Months Ended December 31, | ||||
|
| Notes |
| 2021 |
| 2020 | ||
| | | | (restated) | | | | |
Cash flows from operating activities: |
| | | |
|
| |
|
Net income (loss) | | | | $ | 78,584 | | $ | (27,716) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
|
| |
|
|
Depreciation, depletion and amortization | | | |
| 51,969 | |
| 44,905 |
Accretion | | | | | 924 | | | 849 |
Increase in asset retirement obligation | | | | | 1,620 | | | — |
Arrangement fee | | | |
| 2,090 | |
| 8,888 |
Deferred taxes | | | | | (16,051) | | | — |
Unrealized loss on foreign currency rate change | | | |
| 1,519 | |
| 4,696 |
Term Loan closing fee | | 10 | | | 1,585 | | | — |
Loss on Term Loan extinguishment | | 10 | |
| 2,775 | |
| — |
Interest Expense | | | | | — | | | 111 |
Other | | | |
| 347 | |
| 77 |
Changes in operating assets and liabilities: | | | |
|
| |
|
|
VAT receivable | | | |
| 2,077 | |
| (6,071) |
Receivables | | | |
| (7,275) | |
| 1,667 |
Inventories | | | |
| (2,055) | |
| 5,055 |
Unearned revenue | | | |
| (1,562) | |
| 3,276 |
Other current assets | | | |
| (1,918) | |
| (1,781) |
Accounts payable and other accrued liabilities | | | |
| 5,318 | |
| 9,569 |
Payables to related parties | | | |
| (109) | |
| 4,276 |
Accrued interest | | | |
| (51) | |
| 71 |
Net cash provided by operating activities | | | |
| 119,787 | |
| 47,872 |
Cash flows from investing activities: | | | |
|
| |
|
|
Mine development | | | |
| (58,125) | |
| (50,618) |
Purchase of property, plant and equipment | | | |
| (20,052) | |
| (14,249) |
Materials and supplies inventory | | | |
| (868) | |
| 431 |
Net cash used by investing activities | | | |
| (79,045) | |
| (64,436) |
Cash flows from financing activities: | | | |
|
| |
|
|
Capital contributions | | | |
| 207,209 | |
| 5,000 |
Equipment loan payments | | | |
| (7,040) | |
| (6,966) |
Working Capital Facility extinguishment | | 10 | |
| (60,000) | |
| — |
Term Loan closing fee | | 10 | | | (1,585) | | | — |
Term Loan payment | | 10 | |
| (15,913) | |
| — |
Term Loan retirement | | 10 | | | (144,809) | | | — |
Related party borrowing | | | |
| — | |
| 18,904 |
Net cash (used by) provided by financing activities | | | |
| (22,138) | |
| 16,938 |
Net increase in cash and cash equivalents | | | |
| 18,604 | |
| 374 |
Cash and cash equivalents, beginning of period | | | |
| 1,676 | |
| 1,302 |
Cash and cash equivalents, end of period | | | | $ | 20,280 | | $ | 1,676 |
Interest paid | | | | $ | 6,189 | | $ | 7,406 |
Supplemental disclosure of noncash transactions: | | | |
|
| |
|
|
Conversion of capital advances to equity | | | | $ | — | | $ | 9,448 |
Conversion of related party capital advances to equity | | | | $ | — | | $ | 18,904 |
Conversion of Term Loan to equity | | | | $ | 62,061 | | $ | — |
Conversion of related party accrued interest to debt | | | | $ | — | | $ | 854 |
Materials and supplies included in accrued liabilities | | | | $ | 2,177 | | $ | 4,428 |
Mine development costs included in accrued liabilities | | | | $ | 6,191 | | $ | 11,229 |
Property, plant and equipment included in accrued liabilities | | | | $ | 943 | | $ | 8,917 |
See accompanying notes to the combined financial statements.
75
(In thousands of United States dollars, except share, per share and option amounts, tonnes or as otherwise noted)
1. | Description of Business and Basis of Preparation |
These combined financial statements represent the combined financial position and results of operations of the Los Gatos Joint Venture (“LGJV” or “the Company”). Unless the context otherwise requires, references to LGJV or the Company mean the Los Gatos Joint Venture.
On January 1, 2015, the LGJV was established to develop the Cerro Los Gatos Project (LGP)Mine (“CLG”) in northern Mexico. The LGJV consists of Minera Plata Real S. de R.L. de C.V. (“MPR”(‘‘MPR’’), Operaciones San Jose de Plata S. de R.L. de C.V.C.V (“OSJ”). and Servicios San Jose de Plata S. de R.L. de C.V. (collectively the “LGJV Entities”‘‘LGJV Entities’’)., until Servicios was merged into MPR, effective July 15, 2021. Upon completion of their $50,000 funding to the LGJV, Dowa Metals & Mining, Ltd. (“Dowa”) acquired a 30% interest in the LGJV Entities and the right to purchase future zinc-concentrate production at market rates. The remaining 70% interest in the LGJV entities was owned by Gatos Silver, Inc. (“Gatos Silver”) (Sunshine Silver Mining & Refining Corporation prior to October 30, 2020). Gatos Silver contributed $18,200 to OSJ in May 2019 to provide funding for a partial repayment of principal and interest related to the Dowa MPR Loan. In late May 2019, the Dowa MPR Loan was fully extinguished with a cash payment of $18,200 and the conversion of the remaining $50,737 of principal and interest. The conversion of the remaining principal and interest increased Dowa’s ownership in the LGJV entities by 18.5% to 48.5%. On March 11, 2021, Gatos Silver repurchased the 18.5% interest from Dowa. The current ownership of the LGJV Entities is 70% Gatos Silver and 30% Dowa.
On September 1, 2019, the LGPCLG commenced commercial production of its two concentrate products;products: a leadlead-silver concentrate and a zinczinc-silver concentrate. The Company’s lead and zinc concentrates are currently sold to third-party customers.
On January 25, 2022, we announced that during our mineral resource and mineral reserve update process for the LGJV, we concluded that there were errors in the technical report for the Cerro Los Gatos Mine (“CLG”) with an effective date of July 1, 2020, as well as indications that there may be an overestimation in the existing resource model. On November 10, 2022, a new technical report was filed updating the mineral reserve, mineral resource, and life of mine plan of the CLG.
2.
As described in Note 3 – Restatement of Previously Issued Financial Statements, the LGJV financial statements as of December 31, 2021 (“Affected Period”), are restated in this Annual Report on Form 10-K/A (Amendment No. 1) (this “Annual Report”) to correct the recording of income taxes, net deferred tax assets and current taxes payable of the LGJV and the resulting adjustments to the LGJV financial statements. The restated financial statements are indicated as “Restated” in the audited financial statements and accompanying notes, as applicable. See Note 3—Restatement of Previously Issued Financial Statements for further discussion.
Risks and uncertainties
As a mining company,business, the Company’sLGJV’s revenue, profitability and future rate of growth are substantially dependent on prevailing prices for silver, zinc, lead and gold. Historically, the commodity markets have been quite volatile, and there can be no assurance that commodity prices will not be subject to wide fluctuations in the future. A substantial or extended decline in commodity prices could have a material adverse effect on the Company’sLGJV’s financial position, results of operations, cash flows, and the quantities of reserves the CompanyLGJV can economically produce. The carrying value of the Company’sLGJV’s property, plant and equipment, mine development, inventories and stockpiles are particularly sensitive to the outlook for commodity prices. A substantial or extended decline in the Company’sLGJV’s price outlook could result in material impairment charges related to these assets. Additionally, changes in other factors such as changes in mine plans, increases in costs, geotechnical failures, and changes in social, environmental or regulatory requirements can adversely affect the Company’sLGJV’s ability to recover its investment in certain assets and result in impairment charges.
Calculations of mineral reserves are only estimates and depend on geological interpretation and statistical inferences or assumptions drawn from drilling and sampling analysis, which might prove to be materially inaccurate. There is a degree of uncertainty attributable to the calculation of mineral reserves and mineral resources. Until mineral reserves and mineral resources are
76
actually mined and processed, the quantity of metal and grades must be considered as estimates only and no assurance can be given that the indicated levels of metals will be produced. In making determinations about whether to advance any of our projects to development, we must rely upon estimated calculations for the mineral reserves and mineral resources and grades of mineralization on our properties.
The Companyestimation of mineral reserves and mineral resources is a subjective process that is partially dependent upon the judgment of the persons preparing the estimates. The process relies on the quantity and quality of available data and is based on knowledge, mining experience, statistical analysis of drilling results and industry practices. Valid estimates made at a given time may significantly change when new information becomes available.
Estimated mineral reserves and mineral resources may have to be recalculated based on changes in metal prices, further exploration or development activity or actual production experience. This could materially and adversely affect estimates of the volume or grade of mineralization, estimated recovery rates or other important factors that influence mineral reserves and mineral resources estimates. The extent to which mineral resources may ultimately be reclassified as mineral reserves is dependent upon the demonstration of their profitable recovery. Any material changes in volume and grades of mineralization will affect the economic viability of placing a property into production and a property’s return on capital. We cannot provide assurance that mineralization can be mined or processed profitably.
Mineral reserve and mineral resource estimates have been determined and valued based on assumed future metal prices, cut-off grades and operating costs that may prove to be inaccurate. Extended declines in the market price for silver, lead and zinc may render portions of our mineralization uneconomic and result in reduced reported volume and grades, which in turn could have a material adverse effect on our financial performance, financial position and results of operations.
The LGJV has considered and assessed the risk resulting from its concentrate sales arrangements with its customers. In the event that the Company’sLGJV’s relationships with its customers are interrupted for any reason, the CompanyLGJV believes that it would be able to locate another customerother customers to purchase its metals concentrates; however, any interruption could temporarily disrupt the Company’sLGJV’s sale of its products and adversely affect operating results.
Our business could be adversely affected by the widespread outbreak of a health epidemic, communicable disease or any other public health crisis. For example, the outbreak of COVID-19 in the United States, Mexico and elsewhere has created significant business disruption and adversely affected our business and operations. In late March 2020, the Mexican government declared a national health emergency due to increasing infection rates from the COVID-19 pandemic. Pursuant to the health emergency declaration, the Mexican government ordered a temporary suspension of all “non-essential” operations nationwide in Mexico, including mining operations, in order to help combat the spread of COVID-19. In
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. The CompanyLGJV bases its estimates on historical experience and various other assumptions that are believed to be reasonable given the specific circumstances. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include receivables; inventories; mineral properties;mine development; reclamation and closure obligations; valuation allowances for deferred tax assets; depreciation, depletion and accretion and the fair value of financial instruments.
Functional currency and translation of foreign currencies
The U.S. dollar is the LGJV’s functional currency. Monetary assets and liabilities denominated in foreign currencies are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting gains or losses reported in foreign exchange (gain) lossgain (loss) in the computation of net loss.income (loss). Non-monetary assets and liabilities are translated into U.S. dollars at
77
historical exchange rates. Expenses and other income and expense items in foreign currencies are translated into U.S. dollars at average or historical exchange rates.
Cash and cash equivalents
The CompanyLGJV considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Receivables
Trade receivables and other receivable balances are reported at outstanding principal amounts, net of an allowance for doubtful accounts, if deemed necessary. Management evaluates the collectability of receivable account balances to determine the allowance, if any. Management considers the other party’s credit risk and financial condition, as well as current and projected economic and market conditions, in determining the amount of the allowance. If management determines a receivable balance is uncollectible, the uncollectable portion will be recognized as a loss.
Metal and Materials Inventories
The Company’sLGJV’s inventories include ore, concentrate and operating materials and supplies. The classification of ore and concentrate inventories is determined by the production stage of the ore. All inventories are stated at the lower of cost or net realizable value. Cost is determined using the average cost method for all inventories and includes applicable taxes and freight. Ore inventory represents stockpiled ore that is available for processing. Concentrate inventory represents stockpiled lead or zinc concentrate that is available for shipment or in transit to customers. Ore and concentrate inventories include applicable operating and overhead costs.
Mine development
Mine development costs incurred subsequent to initial establishment of CLG’s proven and probable mineral reserves were established in early January 2017. Accordingly, subsequent development costs2017 were capitalized as mine development assets until September 1, 2019 when the LGPCLG achieved commercial production. Subsequent to September 1, 2019, costs incurred to further develop the mine including the building of access ways, ventilation shafts, lateral access, drifts, ramps and other infrastructure are capitalized to mine development assets. Upon the commencement of production, capitalized costs are charged to operations as depletion expense using the units-of-production method in the period the applicable metalmineral reserves are processed over the estimated proven and probable mineral reserve tonstonnes directly benefiting from the capital expenditures. The Los Gatos Technical Report dated November 10, 2022 provides an update to the estimated mineral reserves and mineral resources since the technical report issued in 2020. The new estimate was applied starting in the fourth quarter of 2021. The decrease in the mineral reserves and resources and the life of mine resulted in an additional $2,255 of depletion expense incurred during the fourth quarter of 2021. The LGJV incurred $19,117$25,732 and $7,291$19,117 for the years ended December 31, 20202021 and 2019,2020, respectively, in depletion expense.
Upon abandonment or sale of a mineral property, any remaining capitalized mine development costs relating to such property will be removed from the balance sheet and a gain or loss recognized.
Property, plant and equipment
Property, plant and equipment are recorded at cost and depreciation is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of plant and equipment and infrastructure range between three years and the end of the proven and probable reserves mine life. The Los Gatos Technical Report dated November 10, 2022 provides an update to the estimated mineral reserves and mineral resources since the technical report issued in 2020. The new estimate was applied starting in the fourth quarter of 2021. The decrease in the mineral reserves and resources and the life of mine resulted in an additional $1,064 of depreciation expense incurred during the fourth quarter of 2021. The estimated useful lives of furniture, fixtures and computers range from three to ten years.
Impairment of long-lived assets
Long-lived assets, such as mine development, property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the CompanyLGJV first compares undiscounted cash flows expected to be generated
78
by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. At December 31, 2021, the LGJV tested for possible impairment and determined that there was not an impairment at December 31, 2021. There were no impairments recognized for 20202021 or 2019.
Value added tax receivable and payable
Value added taxes (“VAT”) are assessed on purchases of materials, services and sales of products. The CompanyLGJV is entitled to recover the taxes they have paid related to purchases of materials and services. The CompanyLGJV collects VAT when certain products are sold to customers. VAT receivables represent refundable value-added taxes paid to the Mexican government on certain transactions in Mexico. The CompanyLGJV records the VAT cash flows as operating activities in the combined statement of cash flows, given the short-term, refundable and operating characteristics of these cash flows.
Reclamation and remediation costs (asset retirement obligations)
The CompanyLGJV has asset retirement obligations (“ARO”) arising from regulatory requirements to perform certain property and asset reclamation activities at the end of the respective asset life. An ARO is recognized when incurred and is initially measured at fair value and subsequently adjusted for accretion expense and changes in the amount or timing of the estimated cash flows. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and amortized over the asset’s remaining useful life. The ARO is based on timing of expected spending for an existing environmental disturbance. The CompanyLGJV reviews on an annual basis, unless otherwiseits ARO every reporting period or when deemed necessary, its reclamation obligation.
Revenue Recognition
The CompanyLGJV generates revenue by selling silver-bearing lead and zinc concentrates. Concentrate sales are initially recorded based on 100% of the provisional sales prices, net of estimated treatment and refining charges, when it satisfies the performance obligation of transferring control of the concentrate to the customer. Concentrate revenue is initially recorded on a provisional basis based on historical prices and provisional assays. Final settlement is based on the final assays and an applicable price as determined by a futurethe quotational period at the time of sale, typically one to three months. Market changes in the prices of metals between the delivery and final settlement dates will result in adjustments to revenues related to previously recorded sales of concentrate.
Income taxes
The Company’sLGJV’s income tax jurisdiction is Mexico. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
Recently issued accounting standards
In February 2016, the FASBFinancial Accounting Standards Board issued ASUAccounting Standards Update (“ASU”) 2016-02 which will require lessees to recognize assets and liabilities for the rights and obligations created by most leases on the balance sheet. These changes become effective for the Company’sLGJV’s fiscal year beginning January 1, 2021.after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The CompanyLGJV is still assessing the impact of the standard but does not expect there will be a material impact to the Combined Balance Sheet, Combined Statement of Income (Loss) or the Combined Statements of Cash Flows as a result of the adoption of ASU 2016-02. The Companyimpact of this change is innot material to the process of assessingLGJV’s financial statements for the required disclosures of the new standard and expects to provide additional qualitative and quantitative disclosures related to its leasing arrangements upon adoption.
In December 2019, ASU No. 2019-12 was issued to simplify and enhance accounting for income taxes. This update is effective in fiscal years, beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, and early
79
adoption is permitted. The Company is completing its assessment of the impact and anticipated adoption date of this guidance.
3.Restatement of Previously Issued Financial Statements
In accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”), the following items are treated as errors and are material to the Company’s2021 combined financial statements.statements, and, therefore, require that the combined financial statements be restated.
During the preparation of the 2022 annual financial statements the LGJV identified that it did not recognize certain current and deferred tax assets and deferred tax liabilities in accordance with ASC 740, Income Taxes. As a result, the Company determined that there were errors in the calculation of the deferred tax assets related to property plant and equipment, mine development and historical net operating losses. In certain cases, the tax basis was not calculated in accordance with the Mexican tax regulations. The LGJV understated the value of the deferred tax assets at December 31, 2021.
The impact of the error on the financial statements of the LGJV was (i) an increase in deferred tax assets of $8,181 and (ii) a decrease in the current income tax liability of $6,315 at December 31, 2021, (iii) a decrease in foreign exchange loss of $1,356 and (iv) an increase in income tax recovery of $13,140. There is no impact on the financial statements for 2020.
The impact of the errors on income tax benefit and net income was an increase in income tax recovery and net income of $14,496. The impact of the restatement on the Combined Balance Sheet, Combined Statement of Income (Loss), Combined Statements of Owners’ Capital and Combined Statement of Cash Flows for the Affected Period is presented below. These adjustments related to non-cash items, accordingly there were not changes to cash flows from operations, or cash flows from investing activities or cash flows from financing activities or to the cash balance for the year ended December 31, 2021.
Additional disclosure on impact on income taxes is discussed in Note 16, Income Taxes.
| | | | | | |
|
| Year Ended |
| |
| Year Ended |
| | December 31, 2021 | | | | December 31, 2021 |
Consolidated Balance Sheet | | As previously reported | | Adjustment | | As restated |
Deferred tax assets |
| 9,226 |
| 8,181 |
| 17,407 |
Total non-current assets | | 429,198 | | 8,181 | | 437,379 |
Total assets | | 522,560 | | 8,181 | | 530,741 |
Income tax liability | | 6,315 | | (6,315) | | — |
Total current liabilities | | 48,402 | | (6,315) | | 42,087 |
Accumulated deficit | | (100,034) | | 14,496 | | (85,538) |
Total owners’ capital | | 458,974 | | 14,496 | | 473,470 |
Total liabilities and owners’ capital |
| 522,560 |
| 8,181 |
| 530,741 |
| | | | | | |
| | Year Ended | | | | Year Ended |
|
| December 31, 2021 |
| |
| December 31, 2021 |
Consolidated Statement of Income (loss) |
| As previously reported |
| Adjustment |
| As restated |
Foreign exchange (loss) gain |
| (749) | | 1,356 | | 607 |
Total other expense | | (13,442) | | 1,356 | | (12,086) |
Income (loss) before taxes | | 62,131 | | 1,356 | | 63,487 |
Income tax recovery |
| 1,957 |
| 13,140 |
| 15,097 |
Net income (loss) | | 64,088 |
| 14,496 | | 78,584 |
| | | | | | |
|
| Year Ended |
| |
| Year Ended |
| | December 31, 2021 | | | | December 31, 2021 |
Consolidated Statement of Shareholders’ Equity (Deficit) | | As previously reported | | Adjustment | | As restated |
Net income (loss) | | 64,088 | | 14,496 | | 78,584 |
Accumulated Deficit Balance at December 31, 2021 |
| (100,034) |
| 14,496 |
| (85,538) |
Total shareholders’ equity | | 458,974 | | 14,496 | | 473,470 |
80
| | | | | | |
|
| Year Ended |
| |
| Year Ended |
| | December 31, 2021 | | | | December 31, 2021 |
Consolidated Statement of Cash Flows |
| As previously reported |
| Adjustment |
| As restated |
Net income (loss) | | 64,088 |
| 14,496 | | 78,584 |
Deferred taxes | | (2,911) |
| (13,140) | | (16,051) |
Unrealized loss on foreign currency rate change | | (2,875) | | 1,356 | | (1,519) |
4.Revenue
The Company’sLGJV’s concentrate sales for the year ended December 31, are summarized below:
| | | 2020 | | | 2019 | | ||||||
Lead Concentrate | | | | $ | 90,883 | | | | | $ | 28,437 | | |
Zinc Concentrate | | | | | 30,587 | | | | | | 8,071 | | |
| | | | $ | 121,470 | | | | | $ | 36,508 | | |
| | | | | | |
|
| 2021 |
| 2020 | ||
Lead Concentrate | | $ | 181,949 | | $ | 90,883 |
Zinc Concentrate | |
| 67,245 | |
| 30,587 |
| | $ | 249,194 | | $ | 121,470 |
During 2021, the LGJV entered into an agreement with a customer for a $9,000 prepayment on future sales, to be satisfied through the delivery of concentrate through December 31, 2021. The remaining balance of the $9,000 prepayment was repaid in August 2021. During 2020, the CompanyLGJV entered into an agreement with a customer for a $6,000 prepayment on future sales, to be satisfied through the delivery of concentrate through March 31, 2021. Interest on the prepayment iswas incurred at 7% per annum, due monthly. The prepayment balance, presented as unearned revenue on the balance sheet, iswas $3,276 at December 31, 2020.
As silver, zinc and lead can be sold through numerous market traders worldwide, the LGJV is not economically dependent on a limited number of customers for the sale of its products. As of December 31, 2021, our total accounts receivable was concentrated with the following customers: Ocean Partners USA, Inc. (41%), Trafigura Mexico (34%) and MK Metals (18%). The Company’sLGJV enters into contracts with institutions management deems credit worthy. The Company does not anticipate non-performance by any of its counterparties.
5.Inventories
The LGJV’s inventories as of December 31, are summarized below:
| | | 2020 | | | 2019 | | ||||||
Ore stockpiles | | | | $ | 1,178 | | | | | $ | 4,863 | | |
Concentrate stockpiles | | | | | 590 | | | | | | 1,096 | | |
Material & supplies | | | | | 8,547 | | | | | | 5,415 | | |
| | | | $ | 10,315 | | | | | $ | 11,374 | | |
| | | | | | |
|
| 2021 | | 2020 | ||
Ore stockpiles | | $ | 777 | | $ | 1,178 |
Concentrate stockpiles | |
| 1,308 | |
| 590 |
Material & supplies | |
| 8,977 | |
| 8,547 |
| | $ | 11,062 | | $ | 10,315 |
6.Other Current Assets
The Company’sLGJV’s other current assets as of December 31, are summarized below:
| | | 2020 | | | 2019 | | ||||||
Prepaid expenses | | | | $ | 2,179 | | | | | $ | 1,432 | | |
Deposits and other | | | | | 712 | | | | | | 240 | | |
| | | | $ | 2,891 | | | | | $ | 1,672 | | |
| | | | | | |
|
| 2021 | | 2020 | ||
Prepaid expenses | | $ | 4,169 | | $ | 2,179 |
Deposits and other | |
| 346 | |
| 712 |
Total other current assets | | $ | 4,515 | | $ | 2,891 |
81
The Company’sLGJV’s property, plant and equipment as of December 31, are summarized below:
| | | 2020 | | | 2019 | | ||||||
Mineral properties | | | | $ | 853 | | | | | $ | 853 | | |
Plant & equipment | | | | | 69,297 | | | | | | 64,469 | | |
Land | | | | | 14,422 | | | | | | 14,422 | | |
Infrastructure & improvements | | | | | 152,942 | | | | | | 152,290 | | |
Furniture, fixtures & computers | | | | | 509 | | | | | | 508 | | |
Property, plant & equipment at cost | | | | | 238,023 | | | | | | 232,542 | | |
Less accumulated amortization | | | | | (41,081) | | | | | | (16,411) | | |
| | | | $ | 196,942 | | | | | $ | 216,131 | | |
| | | | | | |
|
| 2021 | | 2020 | ||
Mineral properties | | $ | 853 | | $ | 853 |
Plant & equipment | |
| 72,574 | |
| 69,297 |
Land | |
| 14,422 | |
| 14,422 |
Infrastructure & improvements | |
| 169,756 | |
| 152,942 |
Furniture, fixtures & computers | |
| 609 | |
| 509 |
Property, plant & equipment at cost | |
| 258,214 | |
| 238,023 |
Less accumulated amortization | |
| (67,318) | |
| (41,081) |
Property, plant & equipment, net | | $ | 190,896 | | $ | 196,942 |
Mineral Properties
The CompanyLGJV conducts exploration activities under mining concessions in Mexico.
The CompanyLGJV is required to make mineral and concession lease payments to various entities to secure its claims or surface rights. One of these agreements also requires royalty payments based on the production and sale of minerals.
Mining Concessions and Agreement
In Mexico, mineral concessions from the Mexican government can only be held by Mexican nationals or Mexican-incorporated companies. The concessions are valid for 50 years and are extendable provided the concessions are kept in good standing. For concessions to remain in good standing, a semi-annual fee must be paid to the Mexican government and a report must be filed each year which covers the work accomplished on the property during the previous year. These concessions may be cancelled without penalty with prior notice to the Mexican government.
MPR is the concession holder of a series of mineral concessions granted by the Mexican government. The rights to certain concessions are held through exploration agreements with purchase options or a finder’s fee agreement, as discussed below:
La Cuesta International S.A. de C.V. (La Cuesta)
The CompanyLGJV is required to pay a production royalty of a) 2% net smelter return on production from the concession until all payments reach $10,000 and b) 0.5% net smelter return on production from the concession after total payments have reached $10,000 and c) 0.5% net smelter return on production from other property within a one-kilometer boundary of the Los Gatos concession. After total payments reach $15,000, the Los Gatos concession ownership will be transferred to the Company.LGJV. The agreement has no expiration date; however, the CompanyLGJV may terminate the agreement upon a 30-day notice. The agreement was revised in 2019 to allow a portion of production royalty payments to be deferred. Under the terms of the revised agreement, the LGJV was to pay $500 quarterly through 2021, while incurring interest at 4.5% annually on the outstanding balance, with the balance of the production royalty due in the first quarter of 2022. The Companyagreement was revised further in September 2021, which allowed for payment of the production royalty due and elimination of the interest on the unpaid portion of the production royalty. Following the payment of the balance due in September 2021, the LGJV made its first quarterly payment of the production royalty in October 2021. The LGJV paid $600$5,312 and $45$600 for this obligation for the years ended December 31, 20202021 and 2019,2020, respectively, resulting in $1,135$6,447 paid through December 31, 2020.
As of December 31, 2020,2021, the Company’sLGJV’s minimum remaining production royalty obligation is summarized in the table below:
| 2021 | | | | $ | 2,000 | | |
| 2022 | | | | | 575 | | |
| 2023 | | | | | 100 | | |
| 2024 | | | | | 100 | | |
| 2025 | | | | | 100 | | |
| Thereafter | | | | | 10,990 | | |
| Total | | | | $ | 13,865 | | |
| | | |
2022 |
| $ | 100 |
2023 | |
| 100 |
2024 | |
| 100 |
2025 | |
| 100 |
2026 | |
| 100 |
Thereafter | |
| 8,053 |
Total | | $ | 8,553 |
82
The Company’sLGJV’s accounts payable and other accrued liabilities as of December 31, are summarized below:
| | | 2020 | | | 2019 | | ||||||
Accounts payable | | | | $ | 25,022 | | | | | $ | 29,669 | | |
Accrued expenses | | | | | 9,408 | | | | | | 12,580 | | |
Accrued payroll & taxes | | | | | 1,337 | | | | | | 1,038 | | |
| | | | $ | 35,767 | | | | | $ | 43,287 | | |
| | | | | | |
|
| 2021 | | 2020 | ||
Accounts payable | | $ | 18,641 | | $ | 25,022 |
Accrued expenses | |
| 11,253 | |
| 9,408 |
Accrued payroll & taxes | |
| 3,285 | |
| 1,337 |
Total accounts payable and accrued liabilities | | $ | 33,179 | | $ | 35,767 |
9.Related-Party Transactions
Under the LGJV has a management services agreement with Gatos Silver whereby,Unanimous Omnibus Partner Agreement Gatos Silver provides certain consultingmanagement and administrative services.services to the LGJV. The LGJV incurred $3,900 and $5,100$5,000 for the yearsyear ended December 31, 2020 and 2019, respectively,2021, for these services.services, and paid $5,367 to Gatos Silver for the year ended December 31, 2021. The LGJV had payables under this agreement of $833 as of December 31, 2021. Certain expenses incurred by the owners on behalf of the LGJV are reimbursed.
On July 11, 2017, the CompanyLGJV entered into a loan agreement (“Term Loan”) with Dowa whereby the Company canLGJV could borrow up to $210,000 for LGPCLG development, with a maturity date of December 29, 2027. Interest on this loan accruesaccrued daily at LIBOR plus 2.35%, butwith the interest is added to the amount borrowed for repayment monthly until the LGP commencescommencement of concentrate production. A $4,200 fee was paid to Dowa during 2018 upon the loan closing. Commencing June 30, 2021, 14 consecutive semi-annual equal payments of the aggregate principal plus accrued interest on the payment date begin.began. The Term Loan also requiresrequired accelerated principal payments equal to 70% of excess cash flows (as defined) from the LGP. As of December 31, 2020, the Company had $222,783 outstanding, including $12,783 of interest, under the Term Loan. Prior to production commencing in September 2019, $7,100 interest was capitalized to Mine Development or Property, Plant and Equipment.CLG. Subsequent to the commencement of production, interest was expensed. Interest expense for the years ended December 31, 2021 and 2020 was $3,292 and 2019$8,007, respectively. On July 26, 2021, the Term Loan was repaid in full through capital contributions made to the LGJV by Gatos Silver and Dowa in pro-rata amounts equal to their ownership in the LGJV of 70% and 30%, respectively. In conjunction with the repayment, the LGJV paid a closing fee to Dowa of $1,585. The closing fees paid to Dowa, along with $2,775 of remaining Term Loan deferred financing costs are $8,007 and $3,400, respectively.
On January 23, 2018, the CompanyLGJV entered into a loan agreement (“Dowa MPR Loan”) whereby the CompanyLGJV could borrow up to $65,000 for LGPCLG development. Interest on this loan accruesaccrued daily at LIBOR plus 1.5%. but the interest is and was added to the amount borrowed. All interest was capitalized to Mine Development or Property, Plant and Equipment. The amount borrowed, including accrued and unpaid interest, was due the earlier of June 30, 2019, or upon substantial completion of the LGPCLG development. If the Dowa MPR Loan was not repaid by the maturity date, Dowa could elect to convert all or a portion of Gatos Silver’s portion of the outstanding Dowa MPR Loan, including accrued interest, to additional equity in the LGJV Entities at 170% of Gatos Silver’s portion of the outstanding balance (“Additional Equity”). If Gatos Silver’s ownership in the LGJV Entities was diluted, for two years from the maturity date, Gatos Silver cancould repurchase the Additional Equity for 170% of such value plus all costs and expenses incurred by Dowa to acquire and hold the Additional Equity. In May 2019, Gatos Silver contributed $18,200 to OSJ to provide funding for a partial repayment of principal and interest related to the Dowa MPR Loan. In May 2019, the
On May 30, 2019, the LGJV entered into a working capital facility agreement (“WCF”) with Dowa whereby the LGJV could borrow up to $60,000 to fund the working capital and sustaining capital requirements of the LGP.CLG. Interest on the WCF accruesaccrued daily at LIBOR plus 3.0%. The maturity date of the WCF iswas June 28, 2021. As of December 31, 2020, theThe LGJV had $60,000 of principal and $5 of accrued interest outstanding under this facility. The Company paid interest of $2,530$369 and $1,419$2,530 under this facility for the years ended December 31, 2021 and 2020, and 2019, respectively.
83
Gatos Silver incurred certain fees on behalf of the LGJV entities related to the Term Loan and WCF. Prior to production, these fees were capitalized. Subsequent to production, these fees were expensed.
11.Owners’ Capital
During 2021, Gatos Silver and Dowa, Gatos Silver repurchased an additional 18.5% interest from Dowa, increasing Gatos Silver’s interestcontributed $188,489 and $80,781, respectively, as owners’ capital to 70% andthe LGJV to retire the WCF was extinguished with partner capital contributions.
| 2021 | | | | $ | 98,910 | | |
| 2022 | | | | | 37,474 | | |
| 2023 | | | | | 32,298 | | |
| 2024 | | | | | 31,826 | | |
| 2025 | | | | | 31,826 | | |
| Thereafter | | | | | 63,652 | | |
| | | | | $ | 295,986 | | |
In 2015, the CompanyLGJV recognized an ARO related to the work performed at the LGP.CLG. The CompanyLGJV estimated the present value of the estimated future cash flows required to revegetate the disturbed areas and perform any required monitoring. The CompanyLGJV used a discount rate and interestinflation rate of 9% and 1%, respectively, to calculate the present value of this obligation, related to the disturbance of land around the mine portal, waste rock dump and road to the explosives storage area.
In 2018, the CompanyLGJV recognized an ARO related to the additional development work performed at the LGP.CLG. The CompanyLGJV estimated the present value of the estimated future cash flows required to reclaim the disturbed areas and perform any required monitoring. The CompanyLGJV used a discount rate and interestinflation rate of 7.5% and 3%, respectively, to calculate the present value.
The following table summarizes activity in the Company’sLGJV’s ARO as of December 31:
| | | 2020 | | | 2019 | | ||||||
Balance, beginning of period | | | | $ | 11,314 | | | | | $ | 10,525 | | |
Accretion expense | | | | | 848 | | | | | | 789 | | |
ARO additions | | | | | — | | | | | | — | | |
Balance, end of period | | | | $ | 12,162 | | | | | $ | 11,314 | | |
| | | | | | |
|
| 2021 | | 2020 | ||
Balance, beginning of period | | $ | 12,162 | | $ | 11,314 |
Increase in ARO liability | | | 1,620 | | | — |
Accretion expense | |
| 924 | |
| 848 |
Balance, end of period | | $ | 14,706 | | $ | 12,162 |
13.Fair Value Measurements
The CompanyLGJV establishes a framework for measuring the fair value of financial assets and liabilities and nonfinancial assets and liabilities which are measured at fair value on a recurring (annual) basis in the form of a fair value hierarchy that prioritizes the inputs into valuation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1:
Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.Level 2:
Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.Level 3:
Unobservable inputs due to the fact there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.84
Financial Assets and Liabilities
At December 31, 20202021, the Company’sLGJV’s financial instruments consist of cash and cash equivalents, receivables, restricted cash, other current assets, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate fair value due to their short maturities.
The following table details the fair value of the Company’sLGJV’s debt obligations as of December 31, 2021 and 2020 and 2019 and are included inclassified within Level 2 of the fair value hierarchy. The Term Loan iswas carried at amortized cost. The fair value of the WCF approximatesapproximated carrying value as the liability iswas secured, hashad a variable interest rate, and lackslacked credit concerns. The carrying value of the equipment loans approximate fair value as the liability is secured by the underlying equipment, guaranteed by Gatos Silver, and lacks significant credit concerns. The fair value of the Term Loan was estimated using inputs directly related to the obligations. The following table summarizes the fair value as of December 31:
| | | 2020 | | | 2019 | | ||||||
Term Loan(1) | | | | $ | 219,593 | | | | | $ | 217,796 | | |
WCF | | | | | 60,000 | | | | | | 60,000 | | |
Equipment Loans | | | | | 13,204 | | | | | | 19,864 | | |
| | | | $ | 292,797 | | | | | $ | 297,660 | | |
| | | | | | |
|
| 2021 | | 2020 | ||
Term Loan 1 | | $ | — | | $ | 219,593 |
WCF | |
| — | |
| 60,000 |
Equipment Loans | |
| 6,011 | |
| 13,204 |
| | $ | 6,011 | | $ | 292,797 |
1) | Net of unamortized debt discount of $3,190 as of December 31, 2020. |
In determining accruals and disclosures with respect to loss contingencies, the CompanyLGJV will charge to income an estimated loss if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Legal expenses associated with the commitments and contingencies are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss
The Company’sLGJV’s mining, development and exploration activities are subject to various laws, regulations and permits governing the protection of the environment. These laws, regulations and permits are continually changing and are generally becoming more restrictive. The CompanyLGJV has made, and expects to make in the future, expenditures to comply with such laws, regulations and permits, but cannot predict the full amount of such future expenditures.
From time to time, the CompanyLGJV may be involved in legal proceedings related to its business. Management does not believe that adverse decisions in any pending or threatened proceeding or that amounts that may be required to be paid by reason thereof will have a material adverse effect of the Company’sLGJV’s combined financial condition or results of operations.
During 20202021 and 2019,2020, the LGJV Entities entered into equipment loan agreements, with repayment over four years at interest rates ranging from 5.76% to 8.67%, to finance a portion of mining equipment purchases. As of December 31, 2021, and 2020, and 2019, the CompanyLGJV had outstanding loans of $13,237$6,025 and $19,915,$13,237, respectively, net of unamortized debt discount of $33$14 and $51,$33, respectively. For the years ended December 31, 2021, and 2020, the LGJV incurred $738 and 2019, we incurred $1,289 and $1,647 of interest on these loans, respectively. Prior to production in September 2019 all interest was capitalized to Property, Plant and Equipment. Subsequent to production, all interest on equipment was expensed. Gatos Silver has guaranteed the payment of all obligations, including accrued interest, under the equipment loan agreements.
The combined lossincome (loss) before income taxes in Mexico is $27,716was $63,487 (restated) and $22,103$(27,716) for the years ended December 31, 20202021 and 2019,2020, respectively. The combined current and deferred income tax expense (benefit) for the years ended December 31, 2021 and 2020 were a benefit of $15,097 and 2019 was nil.nil, respectively. The combined current and deferred income tax expense (benefit) for the year ended December 31, 2021, comprises deferred tax benefit of $16,051 and current tax expense of $954.
85
A reconciliation of the actual income tax expense (benefit) and the tax computed by applying the Mexico federal rate (30%) to the loss before income taxes for the year ended December 31, is as follows:
| | | 2020 | | | 2019 | | ||||||
Tax benefit from continuing operations | | | | $ | (8,315) | | | | | $ | (6,631) | | |
Nondeductible expenses | | | | | 6,049 | | | | | | 2,244 | | |
Change in valuation allowance | | | | | 543 | | | | | | 3,772 | | |
NOL inflation adjustment | | | | | 8,876 | | | | | | 41 | | |
NOL expiration | | | | | 1,454 | | | | | | 574 | | |
NOL utilization | | | | | (1,785) | | | | | | — | | |
Other | | | | | (6,822) | | | | | | — | | |
| | | | $ | — | | | | | $ | — | | |
| | | | | | |
|
| 2021 |
| 2020 | ||
| | (restated) | | | ||
Tax provision (benefit) from continuing operations | | | 19,046 | | | (8,315) |
Nondeductible Expenses | |
| 3,605 | |
| 6,049 |
Change in Valuation Allowance | |
| 36,367 | |
| 543 |
Deferred Mexico Mining Tax | | | (200) | | | — |
Current Mexico Mining Tax | | | 954 | | | — |
NOL inflation adjustment | |
| (2,135) | |
| 8,876 |
MX NOL expiration | | | — | | | 1,454 |
NOL Utilization | |
| — | |
| (1,785) |
True-up Items | |
| — | |
| (6,822) |
Income tax recovery | | $ | (15,097) | | $ | — |
The net operating loss (NOL) inflation rate adjustment relates to historical net operating loss carryforwards in Mexico from 20102012 to 2019.2020. These historical carryforwards have been inflation-adjusted based upon an inflation factor published by the central bank of Mexico, as any inflationary adjustment will impact the Company’sLGJV’s basis in the net operating losses during the carryforward period.
A summary of the components of the net deferred tax assets for the year ended December 31, is as follows:
| | | 2020 | | | 2019 | | ||||||
Deferred tax assets | | | | | | | | | | | | | |
Accrued expenses | | | | $ | 2,468 | | | | | $ | 112 | | |
Unearned revenue | | | | | 990 | | | | | | — | | |
Fixed assets | | | | | 3,033 | | | | | | — | | |
Reclamation obligations | | | | | 3,649 | | | | | | — | | |
Exploration and development | | | | | 9,958 | | | | | | 8,451 | | |
Operating loss carryforward | | | | | 26,422 | | | | | | 35,589 | | |
NOL, inflation adjustment | | | | | 4,675 | | | | | | 5,838 | | |
Valuation allowances | | | | | (50,110) | | | | | | (49,567) | | |
| | | | | 1,085 | | | | | | 423 | | |
Deferred tax liabilities | | | | | | | | | | | | | |
Prepaid expenses | | | | | (1,085) | | | | | | (103) | | |
Fixed assets | | | | | — | | | | | | (320) | | |
| | | | | (1,085) | | | | | | (423) | | |
Net deferred income tax assets (liabilities) | | | | $ | — | | | | | $ | — | | |
| | | | | | |
|
| 2021 |
| 2020 | ||
| | (restated) | | | ||
Deferred tax assets |
| |
|
| |
|
Accrued expenses | | | 3,798 | | | 2,468 |
Unearned revenue | |
| 514 | |
| 990 |
Fixed assets | |
| 8,399 | |
| 3,033 |
Reclamation obligations | |
| 4,412 | |
| 3,649 |
Exploration and development | |
| — | |
| 9,958 |
Operating loss carryforward | |
| 19,956 | |
| 26,422 |
NOL, inflation adjustment | |
| — | |
| 4,675 |
Deferred Mexico Mining Tax | | | 200 | | | — |
Valuation allowances | |
| (4,412) | |
| (50,110) |
| | $ | 32,867 | | $ | 1,085 |
Deferred tax liabilities | |
| | |
| |
Prepaid expenses | |
| (1,251) | |
| (1,085) |
Asset Retirement Costs | | | (2,956) | | | — |
Unbilled revenue | |
| (691) | |
| — |
Exploration and Development | | | (10,562) | | | — |
| |
| (15,460) | |
| (1,085) |
Net deferred income tax assets | | $ | 17,407 | | $ | — |
As of December 31, 2021, the LGJV’s deferred tax assets primarily consist of net operating losses, fixed assets, and accrued expenses not currently deductible and net operating losses. Management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. Based upon the level of taxable income (loss)in 2021 and projections of future taxable income (loss) over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the CompanyLGJV will not realize the benefits of these deductible differences,the asset retirement obligation deferred tax asset of $4,412, and thus has recorded a full valuation allowance against this deferred tax asset.
The change in the net deferred tax asset balancein the year of $50,110. If the Company is profitable for$17,407 includes a numberdeferred tax recovery of years$16,051 and prospects for the realization offoreign currency translation on the deferred tax assets are more likely than not, the Company will then reverse its valuation allowance and credit income tax expense.
At December 31, 2020,2021 the CompanyLGJV had $103,656$68,181 of net operating loss carryforwards in Mexico (including(net of inflation adjustments) which expire at various dates through 2030.2031.
86
The owners of the Joint Venture file income tax returns in the U.S and Mexico. Effective January 1, 2017, the Company’s foreign assets and operations are owned by entities that have elected to be treated for U.S. tax purposes as corporations and, as a result, the taxable income or loss and other tax attributes of such entities are not included in the owners of the Company’s U.S. federal consolidated income tax return. The statute of limitations for tax returns filed in Mexico is five years from the date of filing. The tax returns of the CompanyLGJV are no longer subject to examinations by Mexican tax authorities for years prior to 2016.
As of December 31, 2020,2021, the CompanyLGJV has not recordedrecognized any increases or decreases in unrecognized tax benefits, as it is more likely than not that all tax positions have a high probability of being upheld by the taxing authorities. The CompanyLGJV recognizes penalties and accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized.
In April 2022, the LGJV paid its first dividend of $20,000 to its partners. After withholding taxes and payment of the initial $10,300 priority dividend to Dowa, Gatos Silver received $5,935. In July 2022 and November 2022, the LGJV paid additional dividends in the amount of $15,000 and $20,000, respectively, to its partners. Gatos Silver’s share, after withholding taxes, was $9,750 and $13,300, respectively, for the July 2022 and November 2022 dividend payments.
Except as disclosed above there are no other events or transactions requiring recognition or disclosure in these combined financial statements through March 29, 2021.June 26, 2023, the date which the financial statements were issued.
87
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintainhave established disclosure controls and procedures, (asas such term is defined in RulesRule 13a-15(e) and 15d-15(e) under the Exchange Act)Act, that are designed to assureensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms,forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officerprincipal executive and Chief Financial Officer,principal financial officers as appropriate, to allow timely decisions regarding required disclosures. disclosure.
Our management, with the participation of our Chief Executive Officerprincipal executive officer and Chief Financial Officer,principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b).as of December 31, 2021. Based on this evaluation, our Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2020.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Additionally, our independent registered public accounting firm will not be required to issue an attestation report on our internal control over financial reporting until we are no longer an emerging growth company (as defined in the JOBS Act) and no longer a smaller reporting company that is a non-accelerated filer.
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on this assessment, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2021, due to the identification of the material weaknesses discussed below.
A “material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with our review of the internal control structure related to the preparation of the financial statements for the fiscal year ended December 31, 2021, we identified the following material weaknesses in our internal controls over financial reporting:
● | We did not demonstrate the appropriate tone at the top including failing to design or maintain an effective control environment commensurate with the financial reporting requirements of a public company in the United States and Canada. In particular, we did not design control activities to adequately address identified risks or operate at a sufficient level of precision that would identify material misstatements to our financial statements and did not design and maintain sufficient formal documentation of accounting policies and procedures to support the operation of key control procedures. |
● | We failed to design and maintain effective controls relating to our risk assessment process as it pertained to the assessment of key assumptions, inputs and outputs contained in our 2020 Technical Report. |
88
In connection with our review of the internal control structure related to the preparation of the restated financial statements for the fiscal year ended December 31, 2021, we have identified the following additional material weaknesses in our internal controls over financial reporting:
● | We failed to design and maintain effective controls over accounting for current and deferred income taxes. This material weakness resulted in a material misstatement of our previously issued financial statements for the year ended December 31, 2021. Specifically, the financial statements of the LGJV at December 31, 2021 did not accurately reflect the current and deferred tax assets and liabilities at December 31, 2021 which resulted in an overstatement of the current income tax expense. Consequently, the impairment of investment in affiliates, the investment in affiliates and the equity income in affiliates were also not accurately presented in the Company’s financial statements at December 31, 2021. |
● | We did not have adequate technical accounting expertise to ensure that complex accounting matter such as the impact of the priority distribution payment due to our joint venture partner and the impairment charge was recognized in accordance with GAAP. These material weaknesses resulted in a material misstatement of our previously issued financial statements for the year ended December 31, 2021. The financial statements did not accurately reflect the investment in affiliates and the equity income in affiliates. Additionally, this caused the impairment of investment in affiliates to be misstated. |
After giving full consideration to these material weaknesses, and the additional analyses and other procedures that we performed to ensure that our consolidated financial statements included in this Annual Report on Form 10-K/A were prepared in accordance with U.S. GAAP, our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. GAAP.
Remediation Efforts
We are in the process of implementing measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses described above. To date, we have:
● | engaged a third-party expert to assist management in documenting key processes related to our internal control environment, designing and implementing an effective risk assessment and monitoring program to identify risks of material misstatements and ensuring that the internal controls have been appropriately designed to address and effectively monitor identified risk; |
● | hired a new executive leadership team, including a new CEO, CFO and senior executive responsible for technical services, each of which has appropriate experience and has demonstrated a commitment to improving the Company’s control environment; |
● | hired additional personnel with accounting and technical expertise, including hiring new accounting staff in connection with the relocation of the Company’s headquarters to Vancouver; |
● | enhanced the procedures and functioning of our disclosure committee relating to the appropriate reporting of information and review and approval of the Company’s public disclosures; |
● | engaged a new independent third-party subject matter specialist to perform a technical review of the 2022 mineral resource and mineral reserve estimates; |
● | enhanced our procedures, including implementing appropriate controls, relating to management verification of the inputs and assumptions for our Technical Reports; |
● | engaged an independent third-party tax specialist to perform a review of the tax provision calculation at the LGJV and the recognition of deferred tax assets and liabilities; and |
● | enhanced procedures to identify complex technical accounting matters that would require technical accounting analysis by a technical accounting expert in a timely manner. |
89
Management of the Company and the Board of Directors take the control and integrity of the Company’s financial statements seriously and believe that the remediation steps described above are essential to maintaining a strong internal controls environment. We have identified and implemented, and continue to identify and implement, actions to improve the effectiveness of our internal control over financial reporting and to review such actions and progress with the Audit Committee. In addition, we have taken, and continue to take, the actions described above to remediate the identified material weaknesses. As we continue to evaluate and work to improve our internal controls over financial reporting, our senior management may determine to take additional measures to address control deficiencies or determine to modify the remediation efforts described in this section. Management, with the oversight of the Audit Committee of the Board of Directors, has made progress to enhance our internal control over financial reporting and to address these material weaknesses as further described above.
Changes in Internal Control over Financial Reporting
Except as described above, there were no changes in our internal control over financial reporting that occurred during the quarter endedquarter-ended December 31, 20202021, that have materially affected, or that are reasonably likely to materially affect the Company’sour internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect resource constraints, which require management to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
90
PART IV